Asia Pacific Journal of Management, 18, 223–244, 2001c© 2001 Kluwer Academic Publishers. Manufactured in The Netherlands.

The Resource Dependence, Service and ControlFunctions of Boards of Directors in Hong Kongand Taiwanese Firms

MICHAEL N. YOUNGDAVID AHLSTROMDepartment of Management, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong,People’s Republic of China

GARRY D. BRUTONM. J. Neeley School of Business, Texas Christian University, Box 298530, Fort Worth, TX 76129 USA

EUNICE S. CHANDepartment of Management, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong,People’s Republic of China

Abstract. Since the Asian financial crisis of the late 1990’s, there have been numerous calls for the reform ofEast Asian corporate governance. Without reform, fears abound that the crisis will return. However, a baselineunderstanding of corporate governance in East Asia needs to be established before reform efforts can begin. Inthe West, three major functions of boards are commonly recognized: resource dependence, service, and control.These functions have yet to be examined in the context of boards of directors of Overseas Chinese firms inEast Asia. In this exploratory study, we examine the extent to which these functions are performed, primarilyby outside board members, in Overseas Chinese firms in Hong Kong and Taiwan. We find that the service andcontrol functions are less pronounced for East Asian boards than what would be expected in the West, while theresource dependence function is more pronounced. We also find that the governance of the region is being movedcloser to international practices by a new generation of leaders that have been exposed to Western influencesand intense global competition. The implications of our findings for managers, educators, and researchers arediscussed.

1. Introduction

The recent economic crisis in East Asia struck after more than two decades of nearly un-interrupted economic growth, surprising many observers who expected growth to continue(e.g., Clifford and Engardio, 2000; Johnson, 1982, 1984; Magaziner and Patinkin, 1989).Today as the crisis recedes, policymakers and researchers are seeking explanations for whyso many robust economies could suffer such an abrupt downturn (Arogyaswamy, 1998;Backman, 1999; Claessens, Djankov, and Lang, 2000; Krugman, 1999). One area that isstarting to draw more attention is the corporate governance of Asian firms, particularly thefunctions of boards of directors (Au, Peng, and Wang, 2000; Backman, 1999; Claessens,Djankov, and Lang, 2000; Phan and Yoshikawa, 2000).

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Evidence from the West indicates that the functions performed by boards of directorsare important for firm success. Boards of directors impact the strategy of a firm as wellas its implementation (Baysinger and Hoskisson, 1990; Phan, 2000; Phan and Yoshikawa,2000; Westphal, 1999). If boards are ineffective, this can impede an organization’s per-formance (Phan, 2000). Furthermore, some have suggested that corporate governancemay have played a substantial role in the Asian financial crisis (Claessens, Djankov, andLang, 2000). However to date, much is not known about corporate governance in East Asiain general, nor the function of East Asian boards in particular (Backman, 1999; Tam, 1999).Au, Peng, and Wang (2000) opened an important line of inquiry in this area by asserting thatexploratory studies are needed to further establish a baseline understanding of boards ofdirectors in Asia. Thus, this article extends the work of Au, Peng, and Wang (2000) by explor-ing the functions of boards in two important East Asian economies: Hong Kong and Taiwan.

Research on Western boards has revealed two primary categories of functions: externaland internal (Finkelstein and Hambrick, 1996; Phan, 2000). In the external function, oftenreferred to as resource dependence, boards act as buffers and boundary spanners, linkingorganizations to critical resources in the environment and to valuable information residingin a network via director interlocks (Pfeffer and Salancik, 1978). In the internal categoryof functions, boards provide both service and control since they assist in developing andsetting policy goals and monitoring management’s implementation of strategies to meetthose goals (Jensen and Meckling, 1976; Pound, 1995). Although it is possible for one firmto be more proficient in one of these categories than the other, ideally firms will work tocultivate both sets of functions (Finkelstein and Hambrick, 1996).

Boards of directors in East Asia are seemingly patterned after their counterparts in theWest. Yet although they may appear similar, they execute their functions differently (Allen,2000). This is because the institutional and regulatory environments of East Asia differgreatly from those in the West (Orru, Biggart, and Hamilton, 1997; Peng, 2000), which, inturn impacts corporate governance (Au, Peng, and Wang, 2000; Chan, 1999; Peng, Luo,and Sun, 1999). In particular, the Overseas Chinese population dominates most economiesof East Asia (Backman, 1999; Weidenbaum and Hughes, 1996).1 There are powerful, well-documented institutional structures that shape business behavior among Overseas Chinese(Hofstede and Bond, 1989; Weidenbaum and Hughes, 1996), which also leads board mem-bers to fulfil their functions differently from their counterparts in the West. Thus, there is aneed to better understand the functions of board members in the context of the East Asianinstitutional environment as a prelude to broader investigation of corporate governance inthis region.

In exploring the functioning of boards in Overseas Chinese firms, we focus on: (1) Howthe resource dependence, service and control functions, well-documented in the West, arefulfilled by boards of directors in Overseas Chinese firms in Hong Kong and Taiwan? (2)In what ways do these functions (and requisite actions) differ from boards in the West andwhat are the implications of these differences? In addressing these questions, we extendprevious research from the West and link it with practices in East Asia by interviewingboard members and senior consultants in East Asian firms.

The extant literature provides some direction in addressing these research questions. Forexample, the strong culture of networking present in the Overseas Chinese community

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(Kao, 1993; Peng and Luo, 2000) will likely affect the resource dependence function as itinvolves boundary spanning (Au, Peng, and Wang, 2000). These strong interconnectionsmay also affect the service function of advice and counsel to the CEO inside the firm. It isnot clear, however, if board member connections with the CEO will result in more or lessadvice being offered. It is possible that connections between a board member and the CEOcan make that board member feel more comfortable in providing such advice. Alternativelythe closeness of the board member to the CEO and the desire to maintain group harmonycan make the board member less likely to provide constructive criticism (Hofstede andBond, 1989). For similar reasons, it is unclear if the culture of the Overseas Chinese businesscommunity results in more or less control being exerted by boards of directors in East Asianfirms.

Given the state of knowledge of governance in East Asia, a qualitative investigationis an effective way to explore board functions in East Asian Overseas Chinese firms(Au, Peng, and Wang, 2000; Lee, 1999; Madhok, 1996). Therefore, we interviewed forty-sixboard members from Overseas Chinese businesses in two of the largest economies in EastAsia—Hong Kong and Taiwan—and one senior Hong Kong-based consultant from one ofthe “Big Five” consulting firms.2 Through these interviews we investigate the manner andextent to which boards in East Asia fill the resource dependence, service and control func-tions outlined by Johnson, Daily, and Ellstrand (1996), summarizing the results in narrativefashion.

2. Literature review on functions of boards of directors

To examine the functioning of boards of directors of Overseas Chinese Firms in HongKong and Taiwan, the functions of boards in the West were first examined to establish abasis for comparison. The functioning of corporate boards is a heavily studied topic in theWestern strategic management literature (cf. Forbes and Milliken, 1999; Johnson et al.,1996; Zahra and Pearce, 1989). In a comprehensive review of the literature on boards ofdirectors, Johnson, Daily, and Ellstrand (1996) outlined three widely recognized functionsof boards of directors in the West: resource dependence, service and control. These functionshave become a standard for viewing various board functions and each is summarized brieflybelow.

Resource dependence. The first function of boards is often referred to as the resourcedependence function. The resource dependence function of boards of directors was firstdeveloped in the seminal works of Pfeffer (1972, 1973) and Pfeffer and Salancik (1978).Essentially, the resource dependence perspective views boards as an instrument for sourc-ing critical resources and information (Dalton and Daily, 1999). Although the resourcedependence perspective first became popular in the 1970s, it received renewed attentionin the 1990s as many scholars began emphasizing the role of unique resources in creatingsustainable competitive advantage (Conner and Prahalad, 1996). The valuable, rare, andsocially complex connections developed by board members are difficult for other firms toimitate, and thus may be a potential source of competitive advantage (Barney, 1991).

For example, through contacts of the individual members, boards may assist in acquir-ing favorable terms on financing (Johnson, Hoskisson, and Hitt, 1993; Mizruchi and

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Stearns, 1994). They may also provide information on competitors and industry throughcontacts or interlocking directorates (Lang and Lockhart, 1990). In addition, a prestigiousboard member may add legitimacy to newly established firms (Au, Peng, and Wang, 2000;Dalton and Daily, 1999). As evidence of the resource dependence function, Boyd (1990)also discovered that boards play a role in managing environmental uncertainty. He foundthat boards tended to be smaller with a larger number of interlocks in more uncertainenvironments, and that this relationship was stronger in high-performing firms.

Service. The second function of the board of directors is referred to as the servicefunction. Board members commonly provide advice and counsel to the CEO (Dalton andDaily, 1999; Lorsch, 1995; Westphal, 1999). Lorsch and MacIver’s (1989) interview-basedstudy found that directors’ advisory roles dominated their board activities. Emphasizing theservice role of the board, Dalton and Daily (1999:30) stated “the expertise/counsel role ofboard service suggests that directors may provide a quality of service to the CEO that wouldotherwise be largely unavailable.”

Board members may have expertise in a particular area, and thus can provide valuableadvice in strategy formulation (Fama and Jensen, 1983). For example, Westphal (1999)found that social ties between the CEO and boards of directors enhance the provision ofadvice and counsel from outside directors on strategic issues. He went on to suggest thatsuch strategic advice should have a positive impact on firm performance. Likewise, Judgeand Dobbins (1995) found that profitability is higher when board members are aware ofthe CEO’s decision style because, in such cases, board members are more likely to offeradvice and counsel to the CEO. The service function is likely to be more prevalent in firmswhere there are strong alternative monitoring forces, such as highly competitive productmarkets and managerial labor markets (Johnson et al., 1996).

Control. Another part of the internal role of the board of directors is the control function-the function most commonly associated with boards (Johnson et al., 1996). Most literatureon the control function of the board draws on agency theory, which emphasizes the sep-aration of ownership (stockholders) from control (professional managers) inherent in themodern corporate form (Berle and Means, 1934; Eisenhardt, 1989a). From an agency the-ory perspective, boards represent the primary internal mechanism for controlling man-agers’ opportunistic behavior, thus helping to align shareholders’ and managers’ interests(Jensen, 1993). Boards exercise their monitoring and control function over CEOs byeither altering incentive structures, or in extreme cases, dismissal (Walsh and Seward, 1990).However, it should be noted that support for the agency position is mixed. For example,Dalton et al. (1998) in a meta-analysis of 54 studies of board composition found no supportfor the agency proposition that a board consisting of a greater proportion of outside boardmembers improves performance. Thus, although boards of directors monitor and controlthe actions of managers, there is debate in the literature as to both the effectiveness anddesirability of the control function (Buchholtz, Young, and Powell, 1998; Lipton, 1987).

3. The institutional and regulatory environments of Overseas Chinese firms

While the above functions are performed to some extent by Overseas Chinese firms in HongKong and Taiwan, the cultural milieu is likely to alter the manner in which they are fulfilledby shaping the board culture and behavior (Backman, 1999). In particular, the East Asian

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institutional and regulatory environments create a number of differences in the way thatfirms and their boards function (Boisot and Child, 1996; Orru, Biggart, and Hamilton, 1997;Peng, 2000).

Institutional environment facing Overseas Chinese firms

Broadly stated, institutions represent socially constructed patterns of behavior that providestability and consistency to the interactions of individuals and organizations (Berger andLuckman, 1967; DiMaggio and Powell, 1991; Scott, 1995). In a more narrow, economicdesignation, institutions are the socially accepted rules of engagement by which individu-als and organizations engage in transactions (North, 1990; Williamson, 1985). Institutionshave been shown to shape the beliefs and actions taken by individuals and organizationsin many diverse settings (DiMaggio and Powell, 1991). Institutions can also be concep-tualized along a formal/informal continuum (Peng and Heath, 1996). Formal regulatoryinstitutions enforce behavior through legal sanction and are well codified (North, 1990).For example, laws and sanctions can regulate the behavior of firms and individuals. Norma-tive institutions also place well-defined constraints on individuals and organizations but areusually less formal and codified than are regulatory institutions. To illustrate, the medicaland accounting professions have developed strong norms of behavior through the educationprocess for their respective professions. These norms guide the actions of members, and aresometimes represented in codified rules, though not always (Freidson, 1986; Mezias, 1990;Starr, 1982). Finally, the most informal constraints emanate from cognitive institutions(Peng and Heath, 1996; Scott, 1995). Cognitive institutions are most closely associatedwith culture (Jepperson, 1991), and include informal constraints embodied in traditions,taken-for-granted conventions, and subconsciously accepted rules and customs (Berger andLuckman, 1967).

Cognitive institutions exert a particularly strong influence over Overseas Chinese businesscommunities (Carney, 1998; Weidenbaum and Hughes, 1996). This is evident in factors suchas the importance in building and maintaining the connections and mutual obligations thatstill exert much influence in Chinese societies (Backman, 1999; Bond, 1996; Kao, 1993).This means that, for example, in a business setting, doing business with relatives or friendsis often expected, even if those firms do not provide the best price and service. This em-phasis on family business by Overseas Chinese is consistent with the role of the familywithin Chinese culture. Family is placed before individuals or the state in the hierarchyof the Confucian-based culture of the Chinese (Backman, 1999). Thus, many East Asianfirms operate much as family businesses run in a paternalistic fashion (Carini, Palich, andParrack, 1998). Decision making is in turn facilitated by a simple organization structurewhere nearly all key decisions are made by the family patriarch who is at the centerof the structure (Carney, 1998; Weidenbaum and Hughes, 1996). Additionally, OverseasChinese firms commonly include hierarchical organization structures, centralized top-downdecision-making, and limited transparency (Backman, 1999). These characteristics are truefor the majority of Overseas Chinese firms, and result in these firms exhibiting similarpatterns of behavior across the region as shaped by these cognitive institutions (Backman,1999; Carney, 1998; Kao, 1993; Weidenbaum and Hughes, 1996).

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Collectively, these attributes yield an organization style that has been characterized as off-limits to outside scrutiny, thus minimizing outsider contributions to the governance process(Au, Peng, and Wang, 2000; Backman, 1999; Economist, 2000). One senior Asia-basedconsultant reflected on the limited influence of outsiders:

These firms’ founders are not very open to outside scrutiny. Although they talk aboutbringing in outside directors and providing information to the finance community andconsultants, I don’t think they are really serious about this. You always get the feelingthat they are withholding key information—things that need to be known for effectiveallocation of resources and strategic decision-making. It seems I always have to piecetogether important information [about the firm] from many sources.

In summary, it is likely that such institutions may cause existing functions of the board tobe carried out in a different fashion than those in the West.

Regulatory environment of Hong Kong and Taiwan

Institutional theory holds that not only do less formal cognitive and normative institutionsimpact individual and organizational actions but so do regulatory institutions (Scott, 1995).Thus, before a thorough investigation of board of director functions can begin, the regulatoryinstitutions with the potential to impact board functions must also be reviewed.

Regulations in Hong Kong. As of 2000, the Stock Exchange of Hong Kong (SEHK)required all publicly listed firms to have a minimum of two independent, non-executivedirectors on their boards. The SEHK has also begun to require greater disclosure andaccountability (McGuinness, 1999); as of January 1999 every listed company was askedto have an audit committee (Tsui, 1999). While not compulsory, the stock exchange listingrules require that noncomplying firms explain, in their interim and annual reports, why theyare not in compliance. Hong Kong’s second equity market, the Growth Enterprise Market(GEM), is more lax in its regulations than is the SEHK main board. The GEM is modeledafter the NASDAQ Exchange in the U.S. in that it is targeted toward startups.

The stock of most Hong Kong listed companies is not widely held. This is primarilybecause of their family origins, but it is also a byproduct of the listing rules as the minimumpublic float for listed companies is still only 25% (Allen, 2000). Given that controllingshareholders in most companies own at least 35% of the firm, it is very difficult for a hostileminority shareholder action to succeed (McGuinness, 1999). Another impact of this regu-lation is that investors in Hong Kong equities are unlikely to be proactive in utilizing theirproxy mechanism if they are dissatisfied with a firm’s management. Instead, they are morelikely to sell their shares if they are unhappy with firm performance (Economist, 2000).While the regulatory environment effectively minimizes financial fraud, it does not encour-age proactive investor action (Claessens, Djankov, and Lang, 2000; McGuinness, 1999).

Regulations in Taiwan. The corporate governance regulations of Taiwan are not as strictas those of Hong Kong (Allen, 2000). There have been some recently introduced reformmeasures, yet real reform faces several deeply entrenched obstacles. The primary regula-tory bodies in Taiwan are the Securities and Futures Commission and the Taiwan Stock

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Exchange, whose joint aim is to enhance market integrity by the strengthening of theirregulatory and market-monitoring functions. Groups of lawyers and academics are assist-ing in this effort by rewriting the Company Law and the Securities and Exchange Law.Some professional associations, notably the Institute of Internal Auditors of Taipei, alsoare becoming active in this area. Despite these efforts, regulatory protections usually asso-ciated with the Anglo-American model of corporate governance—such as minority share-holder rights and board independence (Phan, 2000)—have not penetrated Taiwan’s typicallyfamily-controlled firms (Allen, 2000).

The result is that regulatory institutions in Hong Kong and Taiwan, and in East Asiain general, are not the principal guiding institutions for individual board function andmember behavior. While Western Europe and North America have refined their regulatoryframeworks and enforcement mechanisms, East Asia is more likely to rely on less formalnormative and cognitive institutions to affect board functions.

4. Methodology

To investigate the extent to which Hong Kong and Taiwanese boards fulfilled these functions,we conducted forty-seven semi-structured interviews largely with board members fromboth publicly-traded and privately-held corporations in Hong Kong and Taiwan. One seniorHong Kong-based consultant who works closely with Overseas Chinese firms was alsointerviewed.3 Overall, representative board members from twenty-four Hong Kong firms,twenty-two Taiwanese firms and the Hong Kong-based consultant comprised the sample.Board members from Hong Kong and Taiwan were chosen because of the clear dominanceof Overseas Chinese firms in the economy of East Asia. Outside board members wereemphasized because they are considered the most critical for the operations of the board ofdirectors in the West (Judge and Dobbins, 1995). Their firms represented a mix of both “oldeconomy” and “new economy” firms with approximately half of the sample being relativelyyoung high-technology firms, and the other half more mature, established manufacturingand service firms. One board member was interviewed from each firm. Table 1 summarizesthe characteristics of the firms interviewed.

To ensure a range of observations on board functions, firms were selected from a diversegroup of industries ranging from real estate and construction to consumer products andelectronics. This helped to ensure that observations of board functions were not idiosyncraticto any particular industry. The interviews averaged about one hour each. All but three of theinterviews were conducted in English and at least two investigators were present at eachinterview. All interviews were transcribed and the transcriptions were compared to oneanother to ensure consistency.4 If any discrepancy or ambiguity occurred, the intervieweewas contacted for clarification. We continued our interviews until it became evident thatadditional interviews were producing little additional insight. This is consistent with thework of Glaser and Strauss (1967) and Lincoln and Guba (1985) who argue that datacollection should be stopped when incremental learning from additional cases declinessignificantly.

The use of semi-structured, case-based interviews is appropriate when examining a con-temporary phenomenon that is difficult to separate from its real-life context and is not

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Table 1. Profile of firms involved in interviews.a

Number offirm interviews Industry Average firm size Average firm age

15 Light equipment Approximately US $30 million 4 yearsmanufacturing average annual revenue

11 Light consumer Approximately US $15 million 8 yearsmanufacturing average annual revenue(toys, consumer products)

16 Computer, information Approximately US $3 million 2 yearstechnology average annual revenue

4 Building materials, property Approximately US $40 million 14 yearsand agriculture average annual revenue

1 Management consulting Approximately US $1 billion 38 yearsannual revenue

aIn our sample, there were twenty-four Hong Kong firms, twenty-two Taiwanese firms and one Hong Kong-basedconsultant. We conducted one interview per firm. The average percentage of outside equity held is approximately40 percent. Approximately twelve firms declined to provide this information.

well-understood (Lee, 1999). It is also appropriate when studying phenomena that are con-textualized and systemic such that they are difficult to divorce it from their context (Yin,1981). As the functioning of boards in Overseas Chinese firms fits these criteria, interview-ing key participants in the governance process is an effective way to examine their functions(Yin, 1994).

An additional advantage to using interviews is that they can help to gather informationon the internal workings of an opaque system such as the function of East Asian boards(Au, Peng, and Wang, 2000). Interviews can also help in identifying patterns as part of theexplanatory process (Campbell, 1975). Thus the interviews helped us to accomplish twomain objectives. First, the interviews were used to better understand the inner workings ofboards in Hong Kong and Taiwan primarily through the eyes of outside board members. Thisprovides a rich description of the mechanisms of governance by uncovering beliefs, actionsand events, many of which occur out of public view. Second, the interview subjects providedsome sense of how boards in Hong Kong and Taiwan fulfil their roles differently from thosein the West. This enabled a stylized “inside account” and enhanced understanding of thekey differences between the two systems.

The well-accepted procedures of gathering and analyzing interview data in a relativelynew research site were followed (Eisenhardt, 1989b; Glaser and Strauss, 1967; Straussand Corbin, 1990). First, the data were gathered and organized via interviews that weretaped and subsequently transcribed and checked for accuracy. Three interviews were nottape-recorded.5 In those cases, write-ups were based on the detailed notes taken by twointerviewers and subsequently reconciled. Interview write-ups as well as company datawere carefully studied. The focus of the interviews was on comparing and contrasting thesituation presented based on the collected information with the Western conceptualizationof the functions of boards—resource dependence, service, and control functions outlined

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earlier. The function of the standard Anglo-American model of board governance wasdiscussed with the subjects. They were then asked about their respective functions on theboard and to contrast the board of directors in their firm with the Anglo-American model.Retrospective rationality was not seen as a problem as they were describing recent andon-going events.6 In general, the respondents were familiar with developments in the West,and provided insight as to how their experiences with Overseas Chinese firms differed fromtheir perceptions of Western governance. The method used to gather and analyze such richmultidimensional insight is referred to as replication logic (Yin, 1994).7

By interviewing these board members, we sought to uncover information about thefunction of boards in general and its outside board members in particular in OverseasChinese firms in East Asia. We had several general objectives when conducting interviews,including: (1) having the interviewees explain the function of the board with respect tothe resource dependence function, service and control functions, (2) determining how theinterviewees believed these functions in their firms differ from those discussed in the AngloAmerican model, (3) determining the interviewees’ views on the reasons for the differences,and (4) discovering anything else important about the board functions in the interviewees’firms and how they address challenges presented by the governance style in their firms.

In addition, follow-up questions were asked as necessary for clarification and verificationpurposes. Finally, results were summarized and integrated in narrative fashion with repre-sentative quotes from the interviews to illustrate patterns of board roles in Hong Kong andTaiwan (c.f. Madhok, 1996). There was a high degree of consistency in the interview results.Governance differences between Taiwan and Hong Kong firms as well as disagreementsamong interviewees were also highlighted.

5. Findings

Evidence regarding the resource dependence function

Through the resource dependence function, the board of directors assists the firm in acquiringresources and obtaining legitimacy, such as financing and contracts. The legitimacy aspectcould also help the firm build alliances with key companies in the industry and establishlinks to key government agencies. Procedures, structures and personnel can send a signalto key constituencies that an organization is legitimate and that it conforms to certain rules.Some of the outside directors in particular reported that they believed they were put on theboard strictly for legitimacy purposes. This was especially the case when the firm was doingbusiness internationally, particularly in China. This is consistent with the findings of Au,Peng, and Wang (2000).

The interviewees also typically asserted that it was common for firms in East Asia to alignthemselves closely with organizations that have greater legitimacy. Boards may attempt toadopt their procedures and structures through their interlocking board memberships. Thispattern of behavior is also consistent with guanxi, or the reciprocal relationship betweenindividuals so important in Chinese communities (Luo, 2000). Guanxi is often thought ofas a resource that can be traded when needed (Wank, 1996), although it can also represent aliability if a favor is owed (Yeung and Tung, 1996). The presence of guanxi with key people

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can contribute to the process of legitimacy building and the security of resources such aslines of credit, as guanxi is useful for obtaining access to people and resources in OverseasChinese business communities (Luo, 2000; Tsang, 1998). One long-time board member ofseveral Hong Kong firms explained:

In Overseas Chinese firms, boards usually do not do the same things as they do in Westernfirms. One main difference is connections to other key companies and individuals. Forexample, when doing business with organizations in China, board members may have touse their influence to open doors that would otherwise stay closed. We had some complexnegotiations over land rights [over a new rail system] that were made much easier by oneboard member’s presence.

Evidence of this type of situation appeared in some of the other interviews. It may bethat what has been called guanxi in Chinese business circles manifests in the resourcedependence function: both are boundary-spanning activities that assist the organizationin building legitimacy and obtaining valuable resources. In fact, the resource dependencefunction may be more pronounced in boards of directors of Overseas Chinese firms thanin Western firms. In an area where contract enforcement laws are not well developed, andmarkets are less efficient, it is generally agreed that personal contacts become ever moreimportant (Luo, 2000; Peng and Heath, 1996; Xin and Pearce, 1996). Thus, the boardmembers can become an asset for the firm helping to ensure that contracts are fulfilled andresources can be regularly obtained.

Evidence regarding the service function

On Western boards, a considerable amount of board members’ time is typically spentadvising and supporting the CEO (Lorsch and MacIver, 1989). In the Overseas ChineseCEO we studied however, this was not the typical case. Board members are often appointedby the CEO and have close ties to him (there were no female CEOs in our sample). Inthis regard, these board members often lacked the ability to provide advice or counsel orthey felt uncomfortable doing so. Remarked one outside board member who invested inOverseas Chinese firms in Taiwan:

When we invest in a firm, we almost always get a board seat. Most often, we are the onlyoutside member on the board. The rest will be insiders appointed by the founder—oftenhis relatives and cronies. Although we insist on veto power over certain decisions, boardsdo not play a very strong advisory role, [and] this makes it harder for us to exercise asmuch advisory capacity as we do in the West.

In addition, Confucian cultural values are such that there is great respect paid to one’selders. This means that in many ethnic Chinese communities, younger or less senior businessassociates are uncomfortable offering advice to ‘all-knowing’ founders for fear of appearingto question their judgement. Similarly, the Chinese notion of one source of power meansthat advice that goes against the founder might be taken as a challenge to the founder’s

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‘mandate to rule.’ Commented a senior official of a major banking association in East Asiaand an outside board member of several Overseas Chinese firms:

They [outside board members] are wary to give the founder much advice—often they justsit and listen. Board members do not challenge decisions very often. If the CEO says thatthe firm should be doing business with this uncle [a business associate], even if his priceis too high or he is not paying on time, the firm will keep doing it. The board will not bewilling to challenge established practice; they will not jeopardize their relationship withthe firm founder.

On a similar note, an outside board member in the banking industry who often works withtechnology-related private equity placement around East Asia added:

The problem is that these guys [Overseas Chinese business owners] do not like to includethose outside of the family in significant business matters. This is partly a trust issue, butthere is a practical side to it. If the owner wants to call a board meeting at the dinner tableon Sunday night, he can do so.

Agreed a Hong Kong based financier:

Things do not work the same . . . as in the West. You may be on the board for show only.You do not have any real power outside of what is specifically written down. People liketo have rules written down that they can refer to. Beyond that, the sponsor [firm founder]and the firm lieutenants will make their own decisions about things. The spirit of anagreement is not something that you can appeal to in trying to give advice or assertingsome influence.

Thus, our interview subjects said in general that the service function attributed to boardsdoes not appear to operate in the same manner for Overseas Chinese firms, as advisingthe CEO and top management can prove difficult for outside board members to work with,especially in the formal board setting. Some did add, however, that advice offered in aninformal, less public setting could be effective, such as meeting a CEO for lunch to talkabout the business.

Evidence regarding the monitoring and control function

It has often been argued that Western boards serve to protect shareholders’ interests and thusprovide some control over managerial opportunism, particularly among the top manage-ment team (Jensen and Meckling, 1976). In East Asia this is less common. The cognitive,cultural institutions encourage the board and CEO to focus on maintaining harmony amongthe various parties. Thus, rather than being a strong mechanism for control of manage-ment actions, much of the independent board members role is ceremonial in nature.8 Ourinterviewees consistently referred to this emphasis of form over substance. The consultantsummarized the problem:

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The problem is these guys [Overseas Chinese firm founders] have staffed the firm and theboard with their relatives and friends, and they are all loyal [to the owner]. Outsiders havevery little influence and are constantly searching for information that would normally begiven to them if they were in the West. This can be very frustrating . . . So much is donefor show here, board meetings are ceremonial and simply serve to distribute informationthat is either not detailed enough or is already known.

To complicate matters, many firms in Hong Kong and Taiwan are highly diversifiedconglomerates, making it difficult to get a clear picture of their many unrelated activities thatmake monitoring and control more difficult.9 Thus, beyond a core group of companies thatare subject to international standards of governance—those listed overseas—the similarityof governance of Hong Kong and Taiwan boards appears to be in form rather than spiritwhen compared to that of their Western counterparts.

The most common explanation for this lack of control is that the business environmentis populated by family companies over which dominant shareholders have control, and thisoffsets the system of checks and balances. One founding owner of a Hong Kong computersecurity firm succinctly summarized this point of view:

They [investors] want to come in and take a seat or two on our board in return for injectinga few million [dollars] or so into our firm. I am not ready to give up that much controlover our operations to outsiders.

It is common for the board to consist of family members, close friends, and close busi-ness associates. In addition, the key management positions are also often filled with familymembers, and it is unlikely that they will go against the patriarch’s wishes. They oftendemonstrate little autonomy in their decisions or show little evidence of managerial discre-tion. Again, this is consistent with Confucian values, which trace authority and power backto a single source (Backman, 1999).

In the Western model of corporate governance, sovereignty rests with shareholders, andtherefore one of the boards of directors’ major responsibilities is to replace the chairman orCEO of a firm if all else fails (Walsh and Seward, 1990). However, publicly traded firms inEast Asia are not as widely held as firms in the U.S. Rather, a strong Asian owner/managermaintains high levels of stock ownership, often over 50 percent of the outstanding shares.Outside investors seldom control more than 25 percent of stock in the typical OverseasChinese firms; this leads to resistance to change, and the replacement of top management,is difficult, if not impossible (Backman, 1999). The board may therefore recognize thatremoving the chairperson or CEO is likely not a viable option. Rather they may focus onobtaining the CEO’s full cooperation in improving firm performance and attempt to directthe CEO’s attention toward the required changes. This cooperation often proves difficult toobtain.

It should be stressed, however, that blame does not rest entirely with the board of direc-tors in terms of the control function. Because companies generally do not like the addedexpense and complication brought on by board independence, compensation for directorsis generally low. The culture of questioning or challenging a powerful chairperson or CEO

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or even seeking additional information as a board member is also uncommon in OverseasChinese firms. The net result is that East Asian countries have only a small number ofpeople capable of becoming effective, independent directors (Au, Peng, and Wang, 2000:Table 1).

6. Discussion

This study investigated the extent to which the functioning of corporate boards of directorsin Overseas Chinese firms adheres to the Western model. The focus of the study wason the resource dependence, service and control functions that are found in the strategicmanagement literature on boards of directors. Specifically, several of the findings havinginteresting implications for the actual practice of boards and those who must deal with themin East Asia.

Table 2. Summary of findings regarding differences in board functions - Western firms versus Overseas Chinesefirms in Hong Kong and Taiwan.

Consensus position ofDescription of the interviewees concerning this

Board function in the function in Hong Kong and Additionalfunction management literature Taiwanese boards observations

ResourceDependence

Board members assistin providing access tocritical firm resources.Resources can includecapital, competitiveinformation, andreputation/legitimacy.In the Westernliterature, this role isthought to be important,but it is emphasizedrelatively less than theother functions.

Given the importance of guanxi, thisbroad function is relatively morepronounced in Overseas Chinesefirms than in its Westerncounterparts. Connections ofboard members often securefinancing and ‘insider’information for firms. Prominentmembers can boost firmreputation. They also bringguanxi or connections thatlegitimize the firm and link it toimportant organizations andgovernment officials that areoften critical to business successin East Asia.

While there was generallyagreement that guanxiis valuable, someinterviewees felt that itwould decline inimportance as the legalsystems improved.Others argued thatguanxi would alwaysplay a major role incorporate governancein East Asia.

Service Board members oftenserve as sounding boardfor CEO and offervaluable counseling andadvising services.

Given the institutional context, thisfunction is less pronounced inEast Asian Boards. Managementof business in East Asiacontinues to be family-based.Additionally, the issue of“preserving face” made boardmembers reluctance to offeradvice to CEO.

Some interviewees agreedthat while the formalboard setting was notvery conducive toproviding advice andraising issues, it wasoften possible to giveadvice in private thatwould be needed.

(Continued on next page.)

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Table 2. (Continued).

Consensus position ofDescription of the interviewees concerning this

Board function in the function in Hong Kong and Additionalfunction management literature Taiwanese boards observations

Monitoringand control

Board members serveas active monitors ofshareholders interest.

Given the Asian institutionalcontext, and the poorlyenforced protection ofminority shareholders, thisfunction is less pronouncedin Overseas Chinese firms.Although there areincreasing requirements forindependent outsidedirectors, the effort is moreform than function—thereis limited monitoring andcontrol of top managers.

Several interview subjects addedthat firms run by youngerentrepreneurs, often educatedoverseas, were morereceptive to the participationof outside directors in key firmdecisions.

Board governance in Overseas Chinese firms

Although the boards of directors of Overseas Chinese firms in general and Hong Kong andTaiwanese firms in particular, are putatively based on the formal, more mechanical structureof the Western, Anglo-American model, they depart from this model in their actual function.While the Western model stresses the notion of shareholder sovereignty and transparency(Phan, 2000; Tam, 1999), the boards of directors in Hong Kong and Taiwan center around thedominant role of insiders, particularly the founder or chairperson. This results in foundingfamilies running the firm, and maintaining tight control over information with a generallack of transparency. This has a big effect on board function.

For example, given their position of being legally charged with looking after shareholders’interests, boards in Western firms are primarily noted for monitoring and controlling the topmanagement team. In addition, it is known that they spend a great deal of time providingadvice and counsel to the CEO and the top managers. However, in light of our investigation,it appears that these functions are much less pronounced for boards of directors of OverseasChinese firms in Hong Kong and Taiwan.

Boards of directors in Western firms are also known to perform boundary spanning andresource acquisition activities. This is also in line with the notion that they are looking afterthe interests of shareholders. Our investigation reveals that Hong Kong and Taiwan boardsof directors are also active in this role. In fact, given the circumstances mentioned above,this role appears to be more pronounced for Overseas Chinese boards than for their Westerncounterparts. The implication for lenders and investors who deal with firms in East Asiais that they must build solid relationships—not only with the founder—but also with keyboard members and even middle management. The lack of transparency makes it difficultto assess operations, yet through strong relationships with the founder, key board membersand management, investors and firms from outside can gain “unofficial” insight into thebusiness in question.

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Hong Kong boards versus Taiwanese boards

In addition to general ways in which boards of directors of Overseas Chinese firms differfrom the Western model, Overseas Chinese firms also have factors that may create regionaldifferences in governance functions. The possibility for differences is predicated on thenotion that while there may be similarities between Overseas Chinese firms irrespectiveof location (Carney, 1998; Kao, 1993; Weidenbaum, 1996), the varied regulatory institu-tions may create some differences in actual governance (McGuinness, 1999). Each of thesesovereign political entities has particular idiosyncratic rules and regulatory regimes withsimilarities and differences. Thus, it is not surprising that we found some differences ingovernance practices between Overseas Chinese firms in Hong Kong and Taiwan. Specif-ically, the regulatory environment and fairly aggressive, modern accounting and financialstandards in Hong Kong suggest that firms will be more transparent and receptive to outsidescrutiny (Allen, 2000). In Taiwan, however, the relative laxity of reporting standards andscanty enforcement of bankruptcy and related laws, as well as the government’s laxnessin enforcing disclosure standards and shareholder’s rights suggest that governance is lessstringent than that in Hong Kong (Allen, 2000).

The influence of the Western model of corporate governance in Taiwan remains morelimited than in Hong Kong. In addition to the factors already listed, Taiwanese CompanyLaw is also based upon German and Japanese law. This is why Taiwanese companies,nominally at least, have a two-tier system with supervisory boards. Taiwan’s Securitiesand Exchange Law was originally patterned on U.S. securities legislation; but Americanregulatory philosophy and concepts have had only marginal impact (Allen, 2000).

Yet, despite these regulatory differences, it is difficult to conclude, based on our inter-views, that boards of directors of Overseas Chinese firms in Hong Kong differ greatly fromthose in Taiwan. Boards of directors in both Taiwan and Hong Kong exhibit greater dif-ferences from the Western model than they do from each other. In informal discussionswith investors, senior bankers and Asia-based consultants, the consensus is that the corpo-rate governance in Hong Kong is generally more in-line with best practices of corporategovernance modeled after Western corporations (c.f. Allen, 2000). However, the intervie-wees generally agree that their observations are limited to large, highly visible firms listedon overseas markets or traded extensively overseas such as the Hong Kong and ShanghaiBanking Corporation (HSBC) (McGuinness, 1999; Phan and Yoskikawa, 2000). Other thanthese relatively few cases, the influence of outside directors appears minimal in both coun-tries. That is, our study suggests that Overseas Chinese firms seem to behave quite similarlyacross these two areas, which is consistent with what previous research implied concerningthe importance of normative and cognitive institutions in such commercial settings (Back-man, 1999; Boisot and Child, 1996; Carney, 1998; Peng, 2000; Weidenbaum and Hughes,1996). It also reinforces the finding that the regulatory regimes in both regions are stilllimited in their influence and in need of further reform (c.f. Claessens, Djankov, and Lang,2000). One implication for lenders, investors and managers, particularly persons and firmsfrom outside the region, is not to expect differing legal standards to greatly impact thefunctioning of boards of directors. In other words, the common cultural characteristics ofOverseas Chinese firms tend to take precedence over the regulatory structure. The culture of

238 YOUNG ET AL.

the region remains strong and consistent in spite of the legal standards in place; regulatoryinstitutions’ effects remain limited because of the strong isomorphic cultural pressures thatexist across East Asia.

Changes in the air

Overseas Chinese firms in East Asia are continuing to experience dramatic change. Withcertain exceptions, it can be argued that this area of the world has seen some of the greatestchanges in the post-war period. This is certainly true in the area of economic developmentand business practices. A region cannot experience such dramatic change in a short periodof time, without differences being observed between the generations (Abbeglen, 1994).This is also true of governance practices among Overseas Chinese firms in the region. Thusdespite a lack of significant country variance, there did appear to be a difference in thegovernance attitudes of directors across generations. That is, the younger entrepreneurs,who were often educated in the elite Western business schools, seem to be much moredisposed to the Western model of corporate governance. This is true in particular as itrelates to the functioning of the board of directors and the transparency of the governanceprocess. They also seem more likely to be receptive to advice from investors to whom theyoften provided seats on the board. They also held regular board meetings in which memberswere more likely to disclose critical information. Commented one Hong Kong financierregarding this generational difference:

We could do many more deals [in East Asia] if the business owners would give up this fearof external financing, but they are unwilling to do so. The sons [of company founders]are more open to it, however, so we are hopeful.

A number of outside board members observed that the younger generation was willingto accept outside guidance. They agreed that the “Internet” generation of entrepreneurs wasquite open to selling more than 50 percent of their firm’s equity—a major leap of faith formany Overseas Chinese businesspeople. These entrepreneurs gave outside board membersin our sample much more say than did the older generation of “old economy” firm founders.Commented one longtime Hong Kong financier and outside board member:

The older generation of [overseas] Chinese entrepreneurs was very reluctant to even allowus to go to a board meeting, let alone have any say. They would call a board meeting whenthey knew I would be out of town, and they make major strategic and capital allocationdecisions without our input.

Another individual who has director and consulting experience both with new economy hightechnology firms and with traditional economy firms argued that the younger generation ofentrepreneurs was willing to “play by the rules” in terms of governance. This was especiallytrue for those seeking a NASDAQ or GEM listing.

Many of the younger generation have been educated overseas in MBA programs in theU.S. or the UK. It is also likely that they have not experienced the upheavals of East Asia asdid their parents’ and grandparents’ generation. This generational difference is also well-understood in the PRC as the younger generation also has received much Western business

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education and thus has learned new ways of doing things while missing much of the turmoilof the first three fourths of the 20th century (Economist, 2000; Backman, 1999).

The potential impact of such changes for managers and investors will be significant.To illustrate, Acer is one of East Asia’s most successful firms and it is Taiwan’s biggestcomputer manufacturer and exporter. Acer includes a number of non-executive outsidedirectors on its board, who bring substantial external expertise. Acer is not alone; HongKong’s VTech, a major maker of computer toys and cordless phones, has taken similarsteps with similar results. VTech top management likes to strongly emphasize that theyare not a “family firm”. As the younger generation of business leaders take charge in EastAsia, the impact from the changing functions of board of directors could be significantwith substantial implications for firm governance. It may be that firm governance and trans-parency will start to converge more on best practices. In many cases, this will includefeatures from the Anglo- American system, but will be conditioned by the current culturaland legal environments in East Asia in general (Allen, 2000). For the firms there, as wellas those from the outside who wish to deal with them, the issue becomes judging wherefirms are in such a transition process, and evaluating how this might impact their behav-ior. Today, the number of East Asian firms that conform more to global best practices ofcorporate governance is still relatively small. However, the firms that are pursuing the trans-formation are among the most successful organizations in the region. Some issues future re-searchers could consider is the speed at which the region’s governance is evolving, how age,tenure, background and industry are related to governance style, and how these affect firmperformance.

7. Conclusion

Management scholars have long maintained that boards of directors perform several crucialfunctions in organizations. Most of this literature has been produced in the West, andmaintains that shareholders, including minority shareholders, are sovereign and are theprincipal stakeholders of corporations. In this conceptualization, the board has well-definedfunctions and boundaries and it serves in activities which further the shareholders’ interests.Three documented categories of activities that have been identified are resource dependence,service, and control. Our investigation into the functions of boards of Overseas Chinese firmsin Hong Kong and Taiwan suggests that while boards of directors in these countries arepatterned on this model, their actual operation differs from those in the West. It appearsthat some functions are less apparent while other functions are more strongly emphasized.Additionally, in spite of certain differences in the regulatory regimes of Taiwan and HongKong, boards seemed to be quite similar in function.

Specifically, while the service and control functions appear less pronounced in theseboards, there is sufficient evidence to suggest that the resource dependence or boundary-spanning function appears to be more pronounced. Part of this simply may be differencesin semantics, that is, what is called resource dependence or boundary spanning in Westernstrategic management literature may be referred to as guanxi in the popular parlance onChinese business culture. Institutional theory can be utilized to explain some of the otherdifferences. The legal environment in these two regions is less developed and thus, as

240 YOUNG ET AL.

adherents of guanxi would suggest, there is more business done through informal contacts(Luo, 2000; Peng and Luo, 2000). Thus while there is a gradual process of inclusion ofAnglo-American principles in several areas, the degree and manner in which the functionsare completed are likely to take on a distinctly East Asian flavor.

Countries such as Taiwan or Japan that were more influenced by German commer-cial law in the past are increasingly influenced by U.S. or U.K. regulations as their firmslist on those countries’ equity markets and comply with their standards of disclosure. Insome cases, notably China, their regulatory bodies are explicitly studying legislation andpractice in the U.S., the U.K., continental Europe and Hong Kong (Tam, 1999). Further-more, the influence of the Anglo-American model is likely to increase in Taiwan, in partbecause of the success and influence of the American economy (Allen, 2000). Given thecentral role played by New York and London in these markets, Taiwanese companies willlikely increasingly embrace elements of U.S. and U.K. corporate and securities regulation,along with corporate governance principles as well. Yet the extent and pace of this migrationis extremely difficult to gauge—substance can differ significantly from form in East Asia(Allen, 2000; Backman, 1999). In the wake of the Asian financial crisis, it appears thatseveral corporate governance practices are converging toward increasingly internationalstandards, albeit at different rates. More careful investigations are needed in the nations andindustries of East Asia to determine the extent to which the actual function of corporategovernance is complying with the apparent form of governance being presented to outsidefirms and investors.

Acknowledgment

The work in this paper was partially supported by a grant from the United College LeeHysan/Endowment Grant Scheme of The Chinese University of Hong Kong, the HongKong Special Administrative Region (1998–99).

The authors would like to thank Sharon Foley and two anonymous reviewers for theirhelpful comments and suggestions on earlier versions of this manuscript.

Notes

1. Overseas Chinese are ethnic Chinese that live outside of Mainland China and includes people in Hong Kong(Backman, 1999). In this paper, East Asia excludes Japan and Korea.

2. Given Hong Kong’s 1997 return to China, it could be argued that Hong Kong Chinese are no longer OverseasChinese. However, the People’s Republic of China (PRC) defines Hong Kong’s citizens as Overseas Chineseand treats them as such in nearly all regards. For example, for citizens of the PRC to live in Hong Kong they mustreceive the same permission they would need to live in any foreign country. Additionally, the PRC governmentlimits the number of foreign relationships that PRC universities can maintain and Hong Kong universities aredefined as foreign universities. This treatment of Hong Kong citizens is consistent with the ‘one country—twosystems’ agreement with the Hong Kong Special Administrative Region. Apart from most foreign affairs, HongKong is granted a great deal of autonomy by Beijing.

3. Forty of the forty-seven subjects were outside board members; while six were firm principles and one was asenior consultant in the region who has worked closely with top management of most of the larger OverseasChinese firms around East Asia.

4. Two native Chinese speakers were present at the non-English (Mandarin Chinese) interviews and translatedthe interviews immediately to English.

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5. This was due to subject refusal or mechanical problem.6. Retrospective interviews where subjects are asked to recall past events have tow common sources of distortion:

memory failure and attribution bias (Dougherty, 1992). To minimize the incidence of memory failure, theinterview subjects were asked to recall particulars of their thoughts on board functions. In this way, theydescribed key events along with their impressions and interpretations. To watch for any attribution bias, wechecked for consistency in sensemaking when interview subjects were familiar with the same firms and the rolesof their boards. There was a high degree of consistency in subjects’ descriptions of events and attributions.Given the subject nature and interviewee anonymity, we did not expect problems with attributions, as thesubjects were not being asked to describe major actions such as bringing a new product to market or turning afirm around. Thus the incidence of memory failure and attribution bias are likely to be minimal.

7. A grounded theory approach to data collection can be used with replication logic to establish consistency inresponses and to build new concepts and illustrate data patterns (Creswell, 1998; Strauss and Corbin, 1990).Subsequent steps can be employed to further refine these concepts into constructs and operationalize them as aprelude to formal hypothesis testing (Strauss and Corbin, 1990). In this article, we focused on the former: thedata collection steps, the identification of consistencies and contrasts and comparisons to established modelsas well as pattern identification (Eisenhardt, 1989b; Strauss, 1987; Strauss and Corbin, 1990).

8. As one anonymous reviewer pointed out, this problem of control, reflected by a lack of shareholder input overtop management decisions and investment allocation is not limited to East Asian firms but is a problem forfirms in the U.S. as well (e.g. Jensen and Meckling, 1976).

9. Many of the old Overseas Chinese firms are conglomerates. They typically progressed from light manufacturingto hotels and property development. More recently, some have gone into Internet and communications ventures.Taiwan firms in particular are known for being cash rich and often in the market for unrelated acquisition, whileHong Kong firms move into property or unrelated “China plays.”

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