There’s an abundance of work on U.S. companies that shows, on balance, less-experienced (hereafter ‘Rookie’) directors have a positive influence on a firm’s performance.
In China though firms are different in that in nearly all cases there’s a majority owner and here the ‘.. main governance issue [in China] is controlling shareholder wealth expropriation from a firm’s minority shareholders.’; a process sometimes referred to as ‘tunneling’.
The paper highlighted today, from Zonghao Chen and Michael O’Konnor Keefe of the Guangdong University of Foreign Studies and the Victoria University of Wellington respectively claims to be the first of its kind to look at the effect of Rookie directors on the performance of Chinese companies.
The bottom line is Rookie directors attend more Board Meetings than more experienced peers and do have a positive effect on company performance; but there’s a big ‘but’ here.
Their effect is most pronounced on younger, non-state-owned and less-complex entities. The more complex companies become the harder it is for Rookies to influence outcomes and when it comes to SOEs their presence is barely discernible.
Director’s experience (and who they are) has long been an item on my due diligence tick-list with a red-flag going up when ‘coziness’ (or character is an issue) is manifest, especially in smaller entities. Seems like I now have substance to the intuitive hunch that less friends-of-the-Chairman on the board is good thing.
You can access the paper in full via the following link Rookie Directors.
Happy Sunday.