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Board of directors’ effectiveness and monitoring costs: The role of family control. Malaysian evidence

Waddah Kamal Hassan Omer (Department of Accounting, Faculty of Business Administration, Northern Border University, Arar, Saudi Arabia and Department of Accounting, Faculty of Administrative Science, University of Aden, Aden, Yemen)
Adel Ali Al-Qadasi (Department of Accounting, College of Science and Humanities in Al-Dawadmi, Shaqra University, Al-Dawadmi, Saudi Arabia and Department of Accounting, Hodeidah University, Hodeidah, Yemen)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 29 October 2019

Issue publication date: 1 April 2020

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Abstract

Purpose

Responding to the call for research into the behavior of family companies to provide better understanding of corporate governance, this paper aims to examine the impact of boards’ effectiveness on the investment in monitoring costs (i.e. audit fees, internal audit function budget and executive remuneration) and how this relationship is moderated by family control.

Design/methodology/approach

A sample of 2,176 firm-year observations of Malaysian listed companies is used. The ordinary least square regression is used to examine the associations. Additional sensitivity tests are performed.

Findings

The study finds that there is no relationship between boards’ effectiveness and the demand for monitoring costs for the full sample. However, the findings of sub-samples (family and non-family companies) indicate that a family company with an effective board is less likely to invest more in monitoring, suggesting that the complementary association between the board’s effectiveness and investment in monitoring is a more dominant relationship than the substitution relationship in non-family companies. These findings show that the boards of directors of Malaysian family companies perform a deficient monitoring role, where the presence of family controlling shareholders in management may reduce their independence and efficiency in performing their monitoring role. The findings remain robust after performing additional sensitivity tests.

Originality/value

This paper contributes to the literature on corporate governance in a unique setting (family companies), where conflict of interest is created between controlling insiders and minority shareholders (Type II agency problem). It provides insight for Malaysian policymakers in assessing the issue of expropriation in family companies and enhancing the policy related to its boards.

Keywords

Citation

Omer, W.K.H. and Al-Qadasi, A.A. (2020), "Board of directors’ effectiveness and monitoring costs: The role of family control. Malaysian evidence", Managerial Auditing Journal, Vol. 35 No. 4, pp. 477-497. https://doi.org/10.1108/MAJ-01-2019-2153

Publisher

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Emerald Publishing Limited

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