International Journal of Business and Management; Vol. 10, No.

12; 2015
ISSN 1833-3850 E-ISSN 1833-8119
Published by Canadian Center of Science and Education

Organizational Governance, Board of Directors, and the Influence of

Context in Emerging Markets
Madi M Almadi1
1
Madi Almadi, Melbourne, VIC, Australia
Correspondence: Madi M Almadi, Madi Almadi, Melbourne, VIC, Australia. E-mail: madi.almadi@rmit.edu.au

Received: August 3, 2015 Accepted: October 23, 2015 Online Published: November 25, 2015
doi:10.5539/ijbm.v10n12p116 URL: http://dx.doi.org/10.5539/ijbm.v10n12p116

Abstract
This paper aims to build corporate governance theory to inform company success in the context of emerging
markets. Success for a company listed in an emerging market is contingent on being able to effectively manage a
range of business, economic, social and political considerations unique to that emerging country. This paper
explains the significance of incorporating context with corporate governance systems to inform how can
organizational governance and board of directors affect firm performance. Theory developed in the context of
emerging markets provides the basis for more widely applicable emerging stock market insight into theory of
context and practice of corporate governance.
Keywords: organizational governance, board of directors, theory in context, firm performance, emerging
markets
1. Introduction
There has been substantial focus in recent years on the topic of corporate governance, especially in emerging
markets. Much of the interest has been on how well corporate governance systems in functioning in emerging
markets countries. Is the two-tiered board of directors corporate governance system best? or the Anglo–
American single-tiered board of directors? Nevertheless, much less discussion of corporate governance
institutions in emerging markets has taken place (Allen et al., 2005; Marquis & Raynard, 2015). Hence, this
paper assesses some of the issues that occur regarding corporate governance systems, focusing particularly on
the influential institutional settings relevant to developing nations. Essential to any debate of corporate
governance is the subject of how a particular set of institutions mitigates any Western developed form of
corporate governance. Indeed, emerging markets economies, governments, businesses and societies have unique
characteristics defer significantly from their advanced counterparts. Notably difference in market freedom and
competition which usually in the hand of few wealthy commercially active families, lack of economic diversity,
an influential public service, concentration on infrastructure projects, the socially and/or politically driven
derived influence exploited commercially (The World Bank, 2009). These unique characteristics in emerging
markets have an influence on past, and still current, and predicted to be affect future corporate governance
practices. To make the matter more complex – hence interesting to investigate –, there are no standard practices
on corporate governance and board of directors in emerging markets, as there are different social, cultural, and
political elements in each particular country context (Wright et al., 2005). In comparison with advanced markets,
emerging markets do not have well–established and mature business institutions, legal statutes, legal systems and
infrastructure to help to manage corporate governance challenges (Claessens & Yurtoglu, 2013).
Against this background, the purpose of this conceptual paper is to better understand corporate governance
theory and practice in the unique business, economic and social context of emerging markets (Note 1). Much of
the corporate governance research conducted within that context has so far mainly focused on investigating
corporate governance practices from a Western Anglo–American perspective, neglecting the institutional settings
unique to emerging markets (Xu & Meyer 2013). Producing theory feedback loops through advanced–market
developed imperatives together with discounting or limitedly acknowledging the influence of weakly and largely
dysfunctioning formal institutions would result in invalid and misleading diagnosis of corporate governance in
emerging markets (Fan et al., 2011; Krause et al., 2014). Therefore, this paper advances knowledge of corporate
governance in emerging markets by making two critical contributions. First, drawing on agency, hegemony,
institutional, resource dependence and stewardship theory, a multi–theoretic perspective is given to explaining

116
www.ccsenet.org/ijbm International Journal of Business and Management Vol. 10, No. 12; 2015

the relationship between key aspects of organizational governance, board of directors and their impact on firm
performance in emerging markets context. A series of research propositions are developed. Second, reflecting on
the insights gained from connecting a multi–theoretical corporate governance perspective to theory development
in emerging markets, the discussion considers theoretical and practical implications to emerging markets that
may be relevant and insightful to policy makers and practitioners. Thereby contributing to the practice of
corporate governance worldwide.
The research questions that inform this paper are as follows: What are the most favourable choices for board of
director with a view to financial performance in emerging markets? What are the implications of insights on
governance organization, board of directors, and firm performance in emerging markets and how they defer
among emerging markets? The remainder of this manuscript is organised as follows. The second section reviews
related literature in corporate governance and emerging markets. In the third section the paper develops research
propositions and a conceptual model, followed fourth by the discussion and conclusion section including
theoretical implications, practical implications, limitations, future research, and concluding remarks.
2. Theoretical Background
Corporate governance scholars have acknowledged that there has been little systematic evidence of board
composition effect on firm performance. Withers et al. (2012) and Johnson et al. (2013) argue that those
conclusions are probably the result of reliance on a single or two theoretical approaches. To gain broader insights
into this phenomenon in the emerging markets context, the theoretical background of this paper will draw on
agency, hegemony, resource dependence, and stewardship theory. This will be supplemented with other insights
related to the emerging markets context including trends in business, economy and society.
Agency theory posits that directors are agent representing the shareholders, responsible for overseeing and the
activities of management (Jensen and Meckling 1976; Johnson et al., 1996; Boyd et al., 2011). The theory
primarily recognizes that independent directors as a key control instrument that prevent the principal–agent
conflicts to occur (Karolyi, 2012). An additional view of agency theorists is that the main value of institutional
investors (e.g. government departments, insurance companies) is to improve the board’s monitoring mechanisms.
Johnson et al. (1996) suggest that many private institutional investors, such as private banks and insurance
companies can face potential conflicts of interest however public pension funds ‘are virtually free of such
conflicts’ (p. 415). Board composed of active independents and institutional investors, especially public ones,
would strengthen the control mechanisms of the board, thereby enhancing firm performance (Withers et al.,
2012). However, Johnson et al. (2013) argue that the theory suffers from the lack of considerations to significant
social and behavioural elements, importantly relevant to emerging markets. Thus development of research
insight supported by other theoretical approaches is recommended.
In addition, Hegemony theory implies that individuals with prestigious status in society dominate the board of
the directors (Burris, 2005). Such domination means the elimination or reduction of the influence of other social
groups, and hence the interests of the elites are protected (Useem, 1984). The theory further advocates that
directorial interlock is the main instrument for these directors to maintain and extend their power and status
(Burris, 2005). Given their influence, the theory suggests that these directors can benefit the firm and have a
mutual benefit with the rest of shareholders. Precisely, Huse et al. (2011) specify that outside directors with
prestige or status can reduce market risks by horizontal integration (i.e. when some competitors are connected
together through interlocking directorates), or vertical coordination (i.e. when suppliers or customers are invited
to be board members). Moreover, due to their influential interlocks, outside directors with high status can
provide access to vital resources with favourable financial consequences for the firm (Davis et al., 2003).
However, hegemony theory is criticized for ignoring the changing structure of firm ownership. Zahra and Pearce
(1989) argue that the fact that some individual investors still own a sizable share of company equity, private and
public institutional investors have become the leading force in modern markets. Therefore, exclusive reliance on
the theorized power of the elite in the board is not justified given the increasing influence of public and private
institutional investors. Other governance theories would have the potential to yeild further insights.
Furthermore, where outside directors have experience and linkages relevant to the firm’s external environment,
resource dependency theory suggests that these directors can assist the board in securing favourable access to
resources for their employers (Pfeffer, 1972; Peng, 2004). Due to their expertise and influence with the public
service, institutional representative directors can assist the company in preventing costly missteps when its
activities may unintentionally conflict with the interests of these agencies (Bazerman & Schoorman, 1983).
Increasing coordination with the central authorities and other businesses gives access to critical information,
increases the firm’s legitimacy, and improves firm performance (Hillman et al., 2000). Although resource

117
www.ccsenet.org/ijbm International Journal of Business and Management Vol. 10, No. 12; 2015

dependence theory and hegemony theory have similar views on how directorial interlocks can benefit the firm,
the resource dependence theory emphasizes that the board member is being selected by the corporation rather
than a social class (Zahra & Pearce, 1989). Outside directors can also offer advice and counsel regarding general
management and strategic choices (Pfeffer & Salancik, 1978). Outside directors with strong human capital affect
how board members consider and evaluate management decisions. While resource dependence theory has
become accepted and used in many studies, the resource role of the board has not been as thoroughly examined
as it could be (Johnson et al., 2013). Accompanying resource dependence theory with other relevant theoretical
approaches would enable a better understanding of the value of this theory.
It has to be noted that agency, hegemony and resource dependence are organizational theories built upon
economic rationality (Perrow, 1986). On the other hand, stewardship theory largely ignores that and rather
emphasises the behavioural aspects of the agent (Donaldson & Davis, 1991). Stewardship theory proposes that
executives and managers are good stewards whose motivations are aligned with the interests of shareholders
(Davis et al., 1997). These executives and managers are assumed to be trustworthy, committed, well informed,
are good monitors and will not misuse firm resources, and the theory advocates that one or more company
executives should be appointed to the board (Coles et al., 2001; Nicholson & Kiel, 2007). Stewardship theory
opposes agency theory view in relation to the value of a majority of independent directors; stewardship theory
views the presence of independent directors as neither critical nor essential (Dalton et al., 1998).
Moreover, most of the relevant literature on corporate governance has been based on advanced market studies.
Mueller (2006) and Fan et al. (2011) suggest that agency, hegemony, resource dependence, and stewardship
theories have been developed in the context of advanced economies, leaving little or no consideration of the
unique social, political, and economic contexts presented in emerging stock markets. More importantly, previous
research has largely neglected bundling contextual considerations of emerging markets with theory, and rather
have deployed in parallel with it (Xu & Meyer 2013). The lack of integration between theory and context means
an accurate diagnosis of a phenomenon in emerging markets would not be achieved. According to Huse et al.
(2011, p. 12), understanding the relationship between board structure and firm performance in emerging markets
‘requires an explicit involvement of context that underline the premise of the research’. Such alignment remains
relatively scarce (Kearney, 2012), with China taking most of the interest.
In this regard, institutional theory has become the leading theory to be aligned with when studying corporate
governance issues in the context of emerging countries (Hoskisson et al., 2000). Institutions such as political,
economic, social, and educational bodies affect the stock market and company practice, and influence the
strategic direction of these organizations. In emerging economies, firms are often led by informal institutions
such as influential families and business groups (Peng, 2004). These business arrangements can result inefficient
governance standards, thereby creating weak governance environments (Wright et al., 2005). Laws that that
regulate fundamental elements of corporate governance such as transparency of management to shareholders,
accounting standards, and board structure are either absent or ineffective (Millar et al., 2005). Hence, firms in
emerging countries tend to rely on reputation and trust as a substitute for absence of effective regulations (Allen,
2005; Xu & Meyer, 2013).
Another consideration is that as the institutional context in emerging markets makes the enforcement of business
contracts more challenging and expensive, concentrated ownership occurs as a response. Yet, this strategy can
fuel the development of principal–principal conflicts (Young et al., 2008). The principal–principal problems
occur when the controlling shareholders oppress minority shareholders through their presence on the board of
directors (Phan, 2001). Principal–principal conflicts can negatively impact firm strategy choices, dividend policy,
stock prices, and lead to the high chance of expropriation of minority shareholders (Young et al., 2008).
Moreover, Peng (2004) suggests that listed companies in emerging countries are likely to be under pressure to
maintain legitimacy and transparency as a response to political and public demands. As a response, he clarifies
that these firms would appoint independent directors for only symbolic purposes. While these firms strategically
comply with these demands, they usually subtly limit the independence of those directors (Khanna & Thomas,
2009). For instance directors may formally appear to be independent, but their independence can be reduced for
example by social links with other board members (Claessens & Yurtoglu, 2013).
As institutions, management and learning processes in emerging countries are improving, Hoskisson et al. (2000)
and Xu and Meyer (2013) recommend furthering corporate governance theories that were tested in advanced
economies by explicitly aligning them with the distinctive social, political, and economic contexts of emerging
markets. Such an approach would make a significant contribution to corporate governance literature, and could
improve corporate governance practices in emerging markets (Whetten, 2009; Kearney, 2012; Mallin, 2013).
Table 1 below provides a summary of representative studies that underpin the theoretical background presented

118
www.ccsennet.org/ijbm Internnational Journall of Business andd Management V
Vol. 10, No. 12; 2015

here.
3. Researcch Proposition
ns
Certain addministrative and
a sociocultuural elements have influencced the shapinng of organizaational govern nance
practices ffor emerging markets listedd companies. For instant, G Government RRepresentative Directors (GR RDs)
frequentlyy populate thhe boards off companies with major infrastructure developmentt contracts. Since S
theoreticallly–context inttegrated and prractical framew
works that havve examined thhe relationshipp between boa
ard of
directors aand firm perfformance withhin emerging markets limitted, this paper proposes a series of rese earch
propositionns (refer Figurre 1 below) to make a theoreetical contributtion.

Figure 1.. Multi-Theoreetical model off the effect of bboard of directtors on firm peerformance in eemerging mark
kets

It has beeen long docum mented that thhe members off the political ruling class hhave an influeence initiating g and
implementting laws and regulations in emerging marrkets (Bray & Darlow, 20133). Reed (20099) argues that given g
that emergging countries are largely onne–party states,, in which onee single establiishment directlly or indirectly y and
yet effectivvely dominatee the political ddecision, it hass been observeed that the pollitical ruling cllass has engaged in
t years somee of which thrrough participaating in multi––billion dollar public projects. As
business aactivities over the
a result off their influennce on the political scene annd involvemennt in the locall economies, A Al-Rasheed (22010)
argues thaat the many off those have ggained a majorr position in tthe business ccommunity in emerging marrkets.
Applying hegemony theeory having ooutside directoors with politiical status in the boardroom m with sociall and
political innfluence wouldd provide somme influence to a company in relation to government deciisions on allocating
public projjects to the business communnity for implem mentation.
Further, reegionality or/annd ethnicity haas a significannt influence in society acrosss emerging couuntries (Ali, 2008).
Generally, social structuures in those coontexts have been influencedd by social stattus, which hennce yield in gra anted
business pprivileges. Alsso high sociaal status frequuently allied w with political rulers, hencee occupying senior
positions iin ministries and
a economicaally dominant state firms. N Niblock and M Malik (2007) suuggest that soc cially
privileged individuals often
o come seecond after thhe political class as dominant players inn the politicall and
business sscenes due to the fact thatt socially influuential figuress represent a vital legitimaacy and credib bility
mechanism m to at best described
d conntroversial pollitical rule. Heence, the pressence of outside directors from
influential social class inn a firm can inffluence the government to grrant that firm mmore favourabble treatment.
In keepingg with hegemoony theory andd institutional theory views on the ruling elite and the vvalue of statuss and
influence in emerging countries
c businness and socieety (Davis et al., 2003; Huuse et al., 2011) we propose the
following:
P1a: Outsside directors with from the ruling politiccal class are ppositively assoociated with firrm performance in

119
www.ccsenet.org/ijbm International Journal of Business and Management Vol. 10, No. 12; 2015

emerging markets.
P1b: Outside directors from influential social class are positively associated with firm performance in emerging
markets.
Since vast majority of listed firms in emerging markets are largely controlled by founding families (Solomon,
2011), most of the owners are reluctant to hand over control to non–family members due to concerns related to
trust. In a study made by Oukil and Khalifah (2012) on emerging markets in the Middle East, 60 per cent of
outside directors were appointed due to family connection with the major stockholders or the chairperson. As the
institutional context in emerging countries makes the enforcement of business contracts more challenging and
expensive, relying on trusted family members through informal social contracts can help to minimise such risk
(Phan, 2001). However, agency theory argues that a majority of independent outside directors helps to avoid the
principal-agent problem emerging in executive decision–making. On the other hand, family–affiliated outside
director objectiveness, input to board deliberation and overall performance can be compromised due to their
closeness to founding family majority shareholders (Young et al., 2008). This situation can lead to the
development of principal–principal problems with minority stockholders disadvantaged compared with majority
stockholders due to a lack of effective representation and influence at board level (Young et al., 2008). On
balance this suggests the following:
P2a: Outside directors as the founding family with major stockholders is negatively associated with firm
performance in emerging markets.
P2b: Appointment of one or more outside directors with family relationships with the firm’s major stockholders is
negatively associated with firm performance in emerging markets.
Agency theorists have long argued that independent directors provide more objective monitoring of management
actions (Dalton et al., 1998). However, we question the independence of these directors in emerging markets
firms. The reason for this scepticism is that the ‘most of the controlling shareholders effectively selects directors
in emerging markets’ (Ezzine, 2012, p. 30). Since the owners would most likely appoint directors to help them
maintain their control, the independence of those directors will be restricted and compromised. Indeed, Davies
(2012) has reported that it is difficult to find independent directors across firms in emerging markets, although
there has been progress in this area. He indicates that large investors strongly influence the appointment of their
social and business affiliates to sit in the boardroom as independent directors. Those directors would officially
appear independent but in fact they are rather delegates for the controlling shareholders. This limited
independence of these directors could clear the way for the major shareholders to gain total control, resulting in
the expropriation of value from minority shareholders to the majority. This situation would negatively affect the
quality of board of director thinking and deliberation, limiting objective review of management performance by
these directors. This compromised position for independent directors would limit their ability to perform their
role (Phan, 2001). Hence:
P3: Independent directors are negatively associated with firm performance in emerging markets.
The debate on the value of inside directors on the boards of emerging markets companies is intriguing, reflecting
a tension between the local business environment and more internationally accepted Anglo–American developed
economy insights on the importance of the value of having one or more inside directors on the board reflecting
agency, stewardship and institutional theory. A study made by Ezzine (2012) revealed that less than 10 per cent
of board members in some emerging markets are insiders. This low ratio indicates controlling shareholders do
not see great value in the presence of inside directors on firm board. There is an argument reflecting local
business and society that inside directors have very little influence in companies due to their low representation
in boardrooms. As corporate governance in vast majority of emerging markets is largely influenced by cultural
norms and customs, and since founding families are extensively in control of many listed firms (The World Bank,
2009), Sarayrah (2004) argues that company boards have for a long time perceived managers as merely reporters
and ‘servants’ (p. 68). Following this line of argument inside directors in emerging markets listed companies
would add little value to organization performance.
However stewardship theorists suggest that because inside directors are better informed about the “day-to–day”
work of the firm and the detail of the strategic plan they can play a more effective role in shaping the strategic
direction of the firm compared with other categories of director (Coles et al., 2001; Krause et al., 2014). Foreign
inside directors can also bring significant human and social capital through their business education, business
training, experience, professional networks and performance track record. Foreign inside directors are valued for
their developed economy business experience. Stewardship theory accepts a majority of inside directors on the
board as workable due to their common objective with shareholders of the betterment of the firm. Committed

120
www.ccsenet.org/ijbm International Journal of Business and Management Vol. 10, No. 12; 2015

inside directors also bring the value of their expert knowledge plus social connection to their employer (Johnson
et al., 1996; Boyd et al., 2011). Agency theorists also see a role for a minority of inside directors on the board,
arguing that they can add value to board deliberations through their detailed knowledge of the strategic plan and
their area of executive expertise. Inside directors also have knowledge of their “day–to–day” work and
interaction with the chief executive officer (CEO) on which they can keep the board advised (Johnson et al.,
1996). This view reflects Anglo–American institutional expectations, which this paper argues on balance
overrides local business and society views. A quality steward in an inside director role can make a difference,
hence:
P4: The presence of one or more inside directors, without a voting majority of inside directors on the board, is
positively associated with firm performance in emerging markets.
The value of the presence of GRDs on company boards and the quality of their contribution to board deliberation
is a matter of debate.
The public sector in emerging markets is known to be highly bureaucratic. In 2012, government effectiveness
among emerging countries came at the bottom of the global effectiveness list (The World Bank, 2013). This high
level of bureaucracy can constrain the role and strategic insight of GRDs. An empirical study by Al-Hussain
(2009) reported that banks in some emerging markets with a high level of government representation recorded
the lowest return on assets and stock return ratios. This gives an indication that those directors do not play an
effective nor efficient role in monitoring management and improving board deliberations in the banking industry.
Hence:
P5a: The presence of GRDs is associated with below average performance in emerging markets listed banking
sector companies.
In emerging countries, governments tend to own large proportion of equity in the listed firms (CMA, 2012).
Governments have the power to allocate lucrative major projects. The presence of GRDs on the board does give
legitimacy to the firm tendering for these lucrative contracts. Agency theorists have indicated that government
representative directors can also improve control mechanisms due to their presumably high level of
independence (Withers et al., 2012). Through its representative directors, the government plays a major role in
monitoring management and spending on major projects. According to Al-Majed (2008) ‘the state's influence is
more perceptible when considering that many corporate chairmen and CEOs of companies in which the state
invests have been appointed by the government’ (p. 296). In this context GRDs would have a positive effect on
financial performance, hence:
P5b: GRDs are positively associated with firm performance in industries with major infrastructure projects
allocated to emerging markets listed companies.
There is the opportunity for a synergy between inside directors and GRDs working jointly together. This paper
has seen that listed firms in industries with major projects can benefit from the presence of GRDs reflecting
resource dependence and institutional theory. Directors with government influence and access is important for
companies, not just for their information and potential access, but also for the legitimacy they give (Pfeffer &
Salancik, 1978). According to Hillman et al. (2000, p. 246) ‘Regulation is, at its most basic level, a tie with the
government-a link to legitimacy’. Complimentary to GRDs presence on the board, inside directors are an
important source of firm–specific knowledge applying stewardship theory. This paper has noticed that inside
director presence in the boardroom can enhance the overall effectiveness of the board of directors (Nicholson &
Kiel, 2007). Agency theorists see inside directors in the voting and numerical minority on the board as being a
valuable firm resource (Boyd et al., 2011). By aligning the assumption of resource dependence and institutional
theory in relation to the role of government representative directors (Hillman et al., 2000) with stewardship
theory views on the value of inside directors (Krause et al., 2014) there is the opportunity for a joint
multiplicative effect. Hence:
P6: The presence of one or more inside directors in the minority on the board working jointly with GRDs in
companies in industries with major infrastructure projects predict firm performance in emerging markets listed
companies in a positive relationship.
4. Discussion and Conclusion
This paper has been inspired by the knowledge that applying advanced stock market corporate governance
theory in an emerging markets context without considering the unique business and social aspects of those
countries can limit the quality of the theoretical contribution (Wright et al., 2005). Sensitivity to context is
particularly crucial for theory development in this corporate governance context in an emerging market area (Fan

121
www.ccsenet.org/ijbm International Journal of Business and Management Vol. 10, No. 12; 2015

et al., 2011). According to the contextualist approach (Gergen, 2001) pattern of meaning is rooted in the context,
with a need to appreciate the importance of where and when the practice of corporate governance happens.
Whetten (1989) has explained that ‘observations are embedded and must be understood within a context’ (p.
492). So the context of a country is an important consideration when developing theory on corporate governance
in a particular emerging market country. What may work in a corporate governance context such as Australia or
the United Kingdom may not necessarily apply in an emerging country with different business, economic, social
and legal conditions. So the propositions developed here are informed by agency, hegemony, institutional,
resource dependence and stewardship theory specific to the situation for the unique emerging markets business,
economic, social and legal context.
On balance considering the arguments presented here agency theory has a limited role in emerging markets
business practice, limited to the use of government representatives on listed company boards. The issue of trust
has more impact on work practices in emerging markets societies than in Western Anglo–American countries
(Floyd, 1999). To limit this risk of a breach of trust, large proportion of the listed firms those markets are owned
and controlled by the founding families with independent and outside directors often owing their position to
some family affiliation. This set of circumstances in emerging markets business and society limits the value of
agency theory and has relevance to other emerging markets where legal statutes and legal precedent established
in law courts is not mature and doing business with family affiliates encourages trust (Phan, 2001).
Hegemony theory (Davis et al., 2003) is prominent and influential in the emerging markets business context
given the practical role of the ruling elites in enhancing firm performance. Considering that the vast majority of
emerging countries are ruled or effectively controlled by a single political party in partnership with socially
influential individuals, the paper has seen that firms with outside directors from the those categories benefit from
the privileged political and social status of those directors, and are able to lobby for access to major projects
allocated by the government. So theoretically by extension countries with a single political party and/or a
privileged section or region of society active in business and economic life, holding board positions on
companies will be able to use their high social esteem to lobby for access to major government or perhaps
private sector funded projects. This will result in favourable financial performance when major government
funded projects are allocated to these socially well–connected companies.
Institutional theory has a vital position in corporate governance practices in emerging markets. The ruling class
and founding families are a notable, esteemed and influential institution in emerging countries with much
influence in all walks of life. In practice, the government is an important institution and its representatives have
an important role monitoring government funded investments and projects. Their influence on the economic,
business and social scene cannot be underestimated. Government representative directors can provide
information, potential access to key public servants and politicians, and lend legitimacy to firms (Hillman et al.,
2000,). Equity markets also have a new and important institutional role in the emerging countries business and
economic scene. The evolution of the legal system and legal precedent in courts of law, regulation of the stock
exchange and oversight of director’s duties will be interesting to watch in future years. In theory these
observations are applicable in across emerging market contexts where there is a single–party rule, major
government funded projects and/or investment in listed companies, an emerging stock market supported by an
emerging legal system of statutes and courts (Whetten, 2009).
Resource dependence theory has been evidenced to apply in relation to the role of government representatives on
boardrooms who can provide a useful source of information and advice. The resource dependence role of outside
directors and independent directors remains in practice, despite the inclination for founding families to make
family affiliated appointments. This family affiliation does not preclude outside and independent directors
assisting the organization in accessing financial, legal or consulting resources. In an emerging market context,
this resource dependence role could reasonably be expected to apply (Xu & Meyer, 2013).
Stewardship theory also has a positive place in corporate governance practice in emerging markets. On balance
in theory and practice the paper argues that both native and foreign inside directors have an important positive
role as effective stewards of company resources whose interests align with shareholders with majority ownership.
Well trained and experienced inside directors are trustworthy, well informed on company strategy, good stewards
of resources and gain much personal satisfaction from their contribution and commitment to the firm (Donaldson
and Davis, 1991; Krause et al., 2014). The paper argues that considering the evidence stewardship theory applies
equally to inside directors in advanced stock market and the emerging stock market context.
4.1 Limitations
A potential limitation of this paper is that the insights presented have been informed by corporate governance

122
www.ccsenet.org/ijbm International Journal of Business and Management Vol. 10, No. 12; 2015

literature generally applied to emerging markets context, leaving some of the propositions presented here helpful
to many national settings in emerging markets but not necessarily to all. For example the proposition in relation
to outside directors from influential region or ethnicity with social, economic and political status is not
applicable for countries where those status do not have an influence on the political or economic scenes.
However, regional or ethnic status can be substituted by other social stratifications such as religious or gender
status as applicable. Hence, the propositions presented here need to be carefully considered in combination with
the context of emerging countries when seeking to adapt the theory presented in this paper to theory
development or practice.
4.2 Future Research
Withers et al. (2012) and Johnson et al. (2013) have observed that a multi–theoretic approach will lead to a more
comprehensive understanding of the relationship between board composition and firm performance. The value of
inside directors to stock exchange listed companies in particular is under researched in advanced and emerging
markets and requires more empirical insight. Most theory development in corporate governance has been
conducted in the advanced economies context, leaving little or no consideration for emerging markets unique
social, political, and economic contexts (Phan, 2001; Xu & Meyer, 2013). The theory development presented
here takes a step towards conducting an empirical investigation based on multiple theoretical approaches in an
emerging market drawing on agency, hegemony, resource dependence, and stewardship theories. This has the
potential to lead to a useful empirical contribution to the literature with future research, examining the research
propositions presented here perhaps by developing an archival quantitative data set, qualitative interviews and/or
a case study. These research propositions can also be adapted to other emerging markets (Whetten, 2009;
Kearney 2012). This is a substantial future research agenda.
4.3 Conclusion
Emerging countries are fascinating with their unique business, economic, legal and social context generally
impacting strategy and management and specifically corporate governance practices on their emerging stock
markets. This paper has set out to better understand the relationship between organizational governance, board of
directors and firm performance in emerging markets context and then extend that insights to vital incorporation
between contexts with their own unique business, economic, legal, social conditions with corporate governance
codes and standards.
Note
Note 1. The focus of this paper is on the emerging markets of the BRICS (Brazil, Russia, India, China and South
Africa), MINT (Mexico, Indonesia, Nigeria and Turkey), the Next Eleven, or markets in Latin America, Eastern
Europe, Asia and Africa.
References
Al-Hussain, A. (2009). Corporate Governance Structure Efficiency and Bank Performance. Phoenix: University
of Phoenix Press.
Ali, A. (2008). Business and Management Environment: Challenges and Opportunities for Multinational
Corporations. Routledge, London.
Allen, F. (2005). Corporate Governance in Emerging Economies. Oxford Review of Economic Policy, 21,
164-177. http://dx.doi.org/10.1093/oxrep/gri010
Al-Majed, F. (2008). A Conceptual Framework for Reforming the Corporate Governance of Publicly Held
Companies: a Comparative and Analytical Study from a Legal Perspective. SABIC Publications, Riyadh.
Al-Matari, Y., Al-Swidi, A., & Fadzil, F. (2012). Corporate Governance and Performance of Saudi Arabia Listed
Companies. British Journal of Arts & Social Sciences, 9, 1-30.
http://dx.doi.org/BJASS_9_1/BJASS_09_01_01
Al-Rasheed, M. (2010). A History of Saudi Arabia. Cambridge: Cambridge University Press.
Al-Twaijry, A. (2007). Saudi Stock Market Historical View and Crisis Effect: Graphical and Statistical Analysis.
Journal of Human Science, 5, 1-31. http://dx.doi.org/10.1111/1467-8683.00293
Bazerman, M., & Schoorman, F. (1983). A Limited Rationality Model of Interlocking Directorates. Academy of
Management Review, 8, 206-217. http://www.jstor.org/stable/257747
Boyd, B., Haynes, K., & Zona, F. (2011). Dimensions of CEO–Board Relations. Journal of Management Studies,
48, 1892-1923. http://dx.doi.org/10.1111/j.1467-6486.2010.00943.x

123
www.ccsenet.org/ijbm International Journal of Business and Management Vol. 10, No. 12; 2015

Bray, B., & Darlow, M. (2013). Ibn Saud: The Desert Warrior Who Created the Kingdom of Saudi Arabia. New
York: Skyhorse Publishing.
Burris, V. (2005). Interlocking Directorates and Political Cohesion among Corporate Elites. American Journal of
Sociology, 111, 249-283. http://dx.doi.org/10.1086/428817
Claessens, S., & Yurtoglu, B. (2013). Corporate Governance in Emerging Markets: A Survey. Emerging Markets
Review, 15, 1-33. http://dx.doi.org/10.1016/j.ememar.2012.03.002
CMA. (2012). Annual Report –2012. Capital Market Authority Publications, Riyadh.
Coles, J., McWilliams, V., & Sen, N. (2001). An Examination of the Relationship of Governance Mechanisms to
Performance. Journal of Management, 27, 23-50. http://dx.doi.org/10.1177/014920630102700102
Dalton, D., Daily, C., Ellstrand, A., & Johnson, J. (1998). Meta-Analytic Reviews of Board Composition,
Leadership Structure, and Financial Performance. Strategic Management Journal, 19, 269-290.
http://dx.doi.org/10.1002/(SICI)1097-0266(199803)19:3<269::AID-SMJ950>3.0.CO;2-K
Davies, A. (2012). The Globalisation of Corporate Governance: The Challenge of Clashing Cultures. Gower
Publishing Ltd, Surrey.
Davis, G., Yoo, M., & Baker, W. (2003). The Small World of the American Corporate Elite, 1982-2001. Strategic
Organization, 31, 301-326. http://dx.doi.org/10.1177/14761270030013002
Donaldson, L., & Davis, J. (1991). Stewardship Theory or Agency Theory: CEO Governance and Shareholder
Returns. Australian Journal of Management, 16, 49-64. http://dx.doi.org/10.1177/031289629101600103
Ezzine, H. (2012). A Cross Saudi Firm Analysis the Impact of Corporate Governance on the Stock Price
Performance during the Recent Financial Crisis. SABIC Publications, Riyadh.
Fan, J. P., Wei, K. C., & Xu, X. (2011). Corporate Finance and Governance in Emerging Markets: A Selective
Review and an Agenda for Future Research. Journal of Corporate Finance, 17, 207-214.
http://dx.doi.org/10.1016/j.jcorpfin.2010.12.001
Floyd, D. (1999). Eastern and Western Management Practices: Myth or Reality? Management Decision, 37,
628-632. http://dx.doi.org/10.1108/00251749910291596
Gergen, K. (2001). Social Construction in Context. London: Sage Publications.
Hillman, A., Cannella, A., & Paetzold, R. (2000). The Resource Dependence Role of Corporate Directors:
Strategic Adaptation of Board Composition in Response to Environmental Change. Journal of Management
Studies, 37, 235-256. http://dx.doi.org/10.1111/1467-6486.00179
Hoskisson, R., Eden, L., Lau, C., & Wright, M. (2000). Strategy in Emerging Economies. Academy of
Management Journal, 43, 249-267. http://dx.doi.org/10.2307/1556394
Huse, M., Hoskisson, R., Zattoni, A., & Vigano, R. (2011). New Perspectives on Board Research: Changing the
Research Agenda. Journal of Management & Governance, 15, 5-28.
http://dx.doi.org/10.1007/s10997-009-9122-9
Jensen, M., & Meckling, W. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership
Structure. Journal of Financial Economics, 3, 305-360. http://dx.doi.org/10.1016/0304-405X(76)90026-X
Johnson, J., Ellstrand, A., & Daily, C. (1996). Boards of Directors: A Review and Research Agenda. Journal of
Management, 22, 409-438. http://dx.doi.org/10.1177/014920639602200303
Johnson, S., Schnatterly, K., & Hill, A. (2013). Board Composition Beyond Independence Social Capital, Human
Capital, and Demographics. Journal of Management, 39, 232-262.
http://dx.doi.org/10.1177/0149206312463938
Karolyi, G. A. (2012). Corporate Governance, Agency Problems and International Cross-Listings: A Defense of
the Bonding Hypothesis. Emerging Markets Review, 13, 516-547.
http://dx.doi.org/10.1016/j.ememar.2012.08.001
Kearney, C. (2012). Emerging Markets Research: Trends, Issues and Future Directions. Emerging Markets
Review, 13, 159-183.
Khanna, T., & Thomas, C. (2009). Synchronicity and Firm Interlocks in An Emerging Market. Journal of
Financial Economics, 92, 182-204. http://dx.doi.org/10.1016/j.ememar.2012.01.003
Klapper, L., & Love, I. (2004). Corporate Governance, Investor Protection, and Performance in Emerging

124
www.ccsenet.org/ijbm International Journal of Business and Management Vol. 10, No. 12; 2015

Markets. Journal of Corporate Finance, 10, 703-728. http://dx.doi.org/10.1016/j.jfineco.2008.03.005

Krause, R., Semadeni, M., & Cannella, A. (2014). CEO Duality-A Review and Research Agenda. Journal of
Management, 40, 256-286. http://dx.doi.org/10.1177/0149206313503013
Mallin, C. (2013). Corporate Governance. Oxford University Press, Oxford.
Marquis, C., & Raynard, M. (2015). Institutional Strategies in Emerging Markets. The Academy of Management
Annals, 9, 291-335. http://dx.doi.org/10.1080/19416520.2015.1014661
Millar, C., Eldomiaty, T., Choi, C., & Hilton, B. (2005). Corporate Governance and Institutional Transparency in
Emerging Markets. Journal of Business Ethics, 59, 163-174. http://dx.doi.org/10.1007/s10551-005-3412-1
Mueller, D. (2006). The Anglo Saxon Approach to Corporate Governance and its Applicability to Emerging
Markets. Corporate Governance: An International Review, 14, 207-219.
Niblock, T., & Malik, M. (2007). The Political Economy of Saudi Arabia. Routledge, New York.
Nicholson, G., & Kiel, G. (2007). Can Directors Impact Performance? A Case-Based Test of Three Theories of
Corporate Governance. Corporate Governance: An International Review, 15, 585-608.
http://dx.doi.org/10.1111/j.1467-8683.2007.00590.x
Oukil, M., & Al-Khalifah, H. (2012). Managerial Weaknesses and Features of Family Businesses in the Eastern
Region of Saudi Arabia. International Conference on Economics, Business and Marketing Management, 29,
49-54. http://dx.doi.org/74274180
Peng, M. (2004). Outside Directors and Firm Performance During Institutional Transitions. Strategic
Management Journal, 25, 453-471. http://dx.doi.org/10.1.1.126.2347
Perrow, C. (1986). Complex Organizations: A Critical Essay. New York: McGraw-Hill.
Pfeffer, J. (1972). Size and Composition of Corporate Boards of Directors. Administrative Science Quarterly, 17,
218-229. http://dx.doi.org/10.2307/2393956
Pfeffer, J., & Salancik, G. (1978). The External Control of Organizations: A Resource Dependence Perspective.
New York: Harper and Row.
Phan, P. (2001). Corporate Governance in The Newly Emerging Economies. Asia Pacific Journal of
Management, 18, 131-136. http://dx.doi.org/10.1023/A:1010630320396
Reed, J. (2009). The Saudi Royal Family. New York: Infobase Publishing.
Sarayrah, Y. (2004). Servant Leadership in the Bedouin-Arab Culture. Global Virtue Ethics Review, 5, 58-79.
http://dx.doi.org/1P3-1011232771
Solomon, J. (2011). Corporate Governance and Accountability. John Wiley & Sons, Sussex.
The World Bank. (2009). Corporate Governance Country Assessment-Kingdom of Saudi Arabia. Retrieved from
http://www.worldbank.org/ifa/rosc_cg.html
The World Bank. (2013). The World Bank Indicators for Economy and Growth. Retrieved from
http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD
Useem, M. (1984). The Inner Circle. New York: Oxford University Press.
Whetten, D. (1989). What Constitutes a Theoretical Contribution? Academy of Management Review, 14, 490-495.
http://dx.doi.org/10.5465/AMR.1989.4308371
Whetten, D. (2009). An Examination of the Interface Between Context and Theory Applied to the Study of
Chinese Organizations. Management and Organization Review, 5, 29-55.
http://dx.doi.org/10.1111/j.1740-8784.2008.00132.x
Withers, M., Hillman, A., & Cannella, A. (2012). A Multidisciplinary Review of the Director Selection Literature.
Journal of Management, 38, 243-277. http://dx.doi.org/10.1177/0149206311428671
Wright, M., Filatotchev, I., Hoskisson, R., & Peng, M. (2005). Strategy Research in Emerging Economies:
Challenging the Conventional Wisdom. Journal of Management Studies, 42, 1-33.
http://dx.doi.org/10.1111/j.1467-6486.2005.00487.x
Xu, D., & Meyer, K. E. (2013). Linking Theory and Context: ‘Strategy Research in Emerging Economies’ after
Wright et al. 2005. Journal of Management Studies, 50, 1322-1346.
http://dx.doi.org/10.1111/j.1467-6486.2012.01051.x

125
www.ccsenet.org/ijbm International Journal of Business and Management Vol. 10, No. 12; 2015

Young, M., Peng, M., Ahlstrom, D., Bruton, G., & Jiang, Y. (2008). Corporate Governance in Emerging
Economies: A Review of the Principal-Principal Perspective. Journal of Management Studies, 45, 196-220.
http://dx.doi.org/10.1111/j.1467-6486.2007.00752.x
Zahra, S., & Pearce, J. (1989). Boards of Directors and Corporate Financial Performance: A Review and
Integrative Model. Journal of Management, 15, 291-334. http://dx.doi.org/10.1177/014920638901500208

Copyrights
Copyright for this article is retained by the author(s), with first publication rights granted to the journal.
This is an open-access article distributed under the terms and conditions of the Creative Commons Attribution
license (http://creativecommons.org/licenses/by/3.0/).

126