Nominee representatives of financing institutions in the board of directors: Implications on firm internationalization strategy

Abstract

Extant literature on Corporate Governance predominantly examines the characteristics of Anglo-Saxon system of corporate governance. Characteristics of board of directors, such as board independence are the outcomes of primary agency problems, observed in this model of corporate governance. However, there is a need to examine the role of board across distinct corporate governance systems arising out of their unique economic and regulatory regimes. For instance, countries with higher ownership concentration and weaker investor protection, face a secondary agency problem and rely more on debt financing for growth. In this study, we examine a specific feature in the Indian Corporate Governance context i.e. representatives of financing institutions on the board of the directors, also known as nominee directors. We combine agency perspective with the specific institutional context of emerging markets to understand the preferences of these groups of board member. On a sample of 764 unique firms and 4216 firm year observations spanning the period 2006-2017, we find that the nominee directors are negatively associated with internationalization of emerging economy firms. In addition, we also find that the nominee directors have a moderating role in the relation between different ownership groups and internationalization in firms. We find that the presence of nominee directors negative moderate the relation between institutional investors such as banks, foreign institutional investors and mutual funds and international investments in firms. At the same time, their moderation effect on the association between family ownership and internationalization is positive.