1 Are East Asian companies benefiting from Western board practices? John Nowland Discussed by Joseph P.H. Fan Centre of Economics & Finance Chinese University of Hong Kong

2 What the paper does?  Examining whether East Asian companies adopt more western board of director practices after the financial crisis  What kinds of companies have made more significant changes to their board governance?  Testing whether the adoption of more western board practice lead to improvement of operating performance and firm value in Asian countries?

3 Main Findings  Companies from Hong Kong, Malaysia and Singapore, except Taiwan, have actively improved their board practices  Family-owned companies were less likely to improve their board quality  Growing, non-family-owned firms with smaller board and less concentrated ownership were more likely to improve their board governance  Limited evidence was found to support that adoption of western board practice are associated with improvement of performance and firm value.

4 Overall  A good topic  Excited to find out how Asian companies adapt their governance mechanism to new institutional environments after the crisis.  Whether the adoption of western board governance in the emerging economies lead to better operating performance and firm value  Time-serial data different from most prior cross- sectional studies  My comments focus on  Board functions in Asia  Endogeneity  Research design

5 What does a board of directors do in Asia?  Potential board functions  Monitoring  Consulting  Reputation bonding  Networking (political, social, business)  We know that Asian boards probability don’t do much textbook style monitoring, …  Therefore important to collect more data to proxy for the remaining three potential functions

6 Endogeneity of Boards  Not surprised by the lack of relation between board and firm value  The board regression model should include a set of “non- traditional” variables that fundamentally shape board function, such as network, bonding, etc.  Inspired by the reported strong relation between board and ownership  Family firms and firms with highly concentrated ownership are less likely adopting western board practices  Likely related to their modes of competition – relationship based  Worth to dig deeper into it

7 More on Endogeneity Issues  Reverse causality  Table 7 – better governance lead to higher Tobin ’ s Q or lower Tobin ’ s Q drive companies to have better governance?  Table 8 – better governance lead to higher ROA or lower ROA drive companies to have better governance?  Table 9 – better governance lead to higher sales growth or vice versa?  Spurious correlations  Table 6 – do board size affect change of other board practices? Are they jointly determined by controlling owners?  Multi-collinearlity  In your models, some highly correlated variables are present, such as, firm size and board size. You can provide some more basic statistics to show that you addressed the multi-collinearlity issues.  Quite a few results in the paper are difficult to interpret, possibly due to model mis-specification and endogeneity issues

8 Research Design  Asian Crisis is not a useful motivation of your paper  The selected economies were not among the hard hit  Institutional factors (such as the degree of market liberalization) were not considered in empirical analysis, because of lack of variations  Neither is Asian CG reform a useful motivation  No direct evidence that changes in governance codes change corporate governance practices  Can we explore firm level variations?  Are governance changes associated with changes in  Ownership (types and concentration)?  Competing strategies (e.g., from relationship to market based, domestic based versus export oriented)?

9 Others  Are the ownership variables ultimate ownership?  What does separate chairman and CEO tell us? We know chairman always call the shot, even with separate CEO  Should you also de-mean the dependent variable in board regressions?  Do you need country dummies given country averages are deducted for all variables?  Why include board size in the board regressions?  Should the independent variables in the governance change regressions be also change (instead of static) variables?  Why is it necessary to include lagged CG variables in the CG change regressions, and lagged performance measures in the performance change regressions?

10 Overall  Good effort: time-series approach is a good way to go  Rampant endogeneity problem  Focus on one key factor that shapes corporate governance