B. L ITERATURE
4. Multiple Directorship
The need for multiple directors is explained using a simple demand- supply relationship posited by Fama and Jensen (1983). They raised a point on the nature of director‘s market which continues to search for the best talent available for any directorship position. With that signal and given the scarcity of those talents, it is only sensible that one talent will be valued and sought after highly by many companies. The individual will see this demand as recognition of his work and thus is willing to take up offers from more than one entity to boost his reputation. In that sense, multiple directorship signals directors‘ quality.
16 Aside from the reputation factor, multiple directorships can be triggered by the intensity of firm‘s transaction and size. In the first place, as firms make use of resources to conduct its business, directors have a role in bridging the resource holders and the firm‘s owners (Pfeffer and Salancik, 1978). It is therefore important for them to have strong relationship with external environment while being able to minimise the risk of environmental uncertainty and the presence of environment- dependent transaction cost involved in such arrangements (Hillman, Canella, and Paetzold, 2000). Other than strong relationship, tackling the two issues necessitates the need of directors/agents with informational network, justifying the possibility of appointing busy managers who have stronger informational network (Yusoff and Alhaji, 2012).
Booth and Deli (1995) cited in Ferris, Jagannathan, and Pritchard (2003) stated that when a particular company experience more transactions with external parties, directors with diverse connection to these parties are required in managing the more complex contracting activities. Applying the same logic, as a business entity grows, its businesses expand, thus requiring agents/directors who have skills and vast knowledge of acquiring sources of capital for the benefit of the firm and thus its shareholders. Busy managers are perceived as possessing such characteristics and it is in the company‘s interest to use them. For instance, one busy manager is actually close with a potential business partner because the latter has been in business with another company that is served by this same manager. The social/networking skill that this
17 manager has can help to smoothen company transactions, possibly bringing good deals for the company itself.
The case of multiple directorships presents some advantages for the firm. Chen, Lai, and Chen (2015) contend that with busy managers, the company will incur lower agency costs because the said managers are high- flyer individuals with proven capabilities to lead or monitor a company as the executive or non-executive directors respectively. Their self-interest digresses little from shareholders‘ since they want to ensure the company performs well to improve their expertise, hence their selling points in the market. These selling points will further encourage the use of their skills in other companies, thus benefiting the managers themselves in the future. Other than that, the firm will gain from the perspective of strategic management (Chen et al., 2015).
This is especially important when the firm should resort to major corporate actions, such as merger and acquisition (MandA) or raising capital. With multiple directors, their connections and networks fill in the gap on available strategies that the company can be used. The directors can compare and contrast practices from all the firms they are assigned to, giving them the advantage of choosing best practices and benchmark for the firm‘s performance.
Despite the advantages, the presence of busy directors can be detrimental to the company. Firstly, the agency cost rises as a result of them being overwhelmed by the monitoring and supervision workload as they serve different companies. In a study conducted by Core, Holthausen, and Larcker
18 (1999) for example, it showed that at the presence of multiple directors, the company‘s CEO received higher compensation packages even though the firm performance was lower. In this regard, the less supervised managers use the golden opportunity to serve themselves at the expense of shareholders‘ needs (Chen et al., 2015). Secondly, the company faces the impact from multiple directors‘ learning cost as they have to adjust and gain skills required conducting proper governance in the company. It is expected that at the beginning of their term, their performance is weak before improving rapidly later on. With lower efficacy of governance after the appointment of multiple directors, the company faces the risk of an increase in undesirable management activities that are attributed to weak governance (Chen et al., 2015).
Finally, multiple directors who usually are seen as outside directors face the challenge of obtaining information from the executive directors, especially CEO of the different company they serve into (Adams and Ferreira, 2007; Raheja, 2005). The assumption here is that the directors serve in companies of different industry than where they come from originally. This is quite relevant in Indonesia, as the implementation of Commission for the Supervision of Business Regulation No. 7/2009 regarding the Guidelines of Interlocking Directorate prohibits any director to serve in companies of the same industry. It creates information gap for the multiple directors as they may come from one industry they are familiar of, only to serve another company in an unfamiliar industry. With the presence of asymmetric
19 information, multiple directors cannot achieve the best outcome of governance they hope for. Thus their supervisory and oversight role is not optimal.