Corporate governance,human capital resources,and firm performance: Exploring the missing links

Abstract

This study explores the associations between human capital resources, firm performance, and corporate governance mechanisms. Based on the survey results of the “50 most attractive employers” conducted by Universum Global 2010, human resource, performance, and governance data was collected for the period from 2007 to 2011. Drawing on the strategic human capital and resource management, international governance, and organizational literature, this study examines the extent to which corporate governance mechanisms moderate the relationships between firm performance and human capital resources and posits that human resource performance is positively associated with corporate governance mechanisms that support and enhance strategic human resource management policies. Panel regression analyses are conducted to test the study’s hypotheses. The results show that human capital resources are positively related to firm performance, and that some corporate governance mechanisms may negatively affect performance when interacted with human capital variables. Furthermore, human resource performance is significantly related to some governance mechanisms, with interaction effects between human capital and other organizational attributes showing differential impacts. Overall, the results support a contingency-based view of strategic human resource management in the context of large and attractive global employers and highlight the importance of governance design in supporting investments and deploying human resources and capabilities at the firm and industry levels and across national boundaries.

Keywords

corporate governance human capital resources human resource performance international governance most attractive employer survey

Introduction

There is a general consensus among management scholars, practitioners, and regulators around the world that people or human assets represent a major driving force in wealth creation and economic growth (e.g. Aguilera and Jackson, 2010; Becker, 1962, 1993; Friedman and Lev, 1974; Hart, 1995; Lajili and Zéghal, 2006; Mahoney, 2005; Rajan and Zingales, 1998; Wright et al., 2014). However, there is less agreement among these parties about how human and organizational assets should be managed in an increasingly dynamic, globalized, and disruptive environment. This article extends the previous research on human capital management and corporate governance and contributes to the empirical research with respect to the potential associations between human resource performance indicators, corporate governance mechanisms, and firm performance in a cross-sectional, multiperiod, and global setting (e.g. Aguilera et al., 2016; Jiang and Messersmith, 2018; Lajili, 2015; Mahoney and Kor, 2015).

Building on the strategic human capital and resource management literature, this article contributes to the ongoing debate about the role of corporate governance mechanisms in facilitating (or enabling) strategic human capital development and deployment to create and sustain firm competitive advantages and leadership through a relational stakeholder approach to human capital governance (Aguilera and Jackson, 2010; Blair, 2011; Boon et al., 2018). Using the empirical setting of a global “most attractive employer” survey ranking by Universum (2010),¹ we can test the hypothesized relationships between human resources, performance, and governance in an international setting.

The literatures in corporate governance and strategic human capital resources are extensive and broad-based, spanning various management fields, with mixed evidence regarding the impact on organizational performance (e.g. Aguilera and Jackson, 2010; Aguilera et al., 2016; Boon et al., 2018; Boxall and Purcell, 2000; Crook et al., 2011; Jiang and Messermith, 2018; La Porta et al., 2000; Shleifer and Vishny, 1997). However, there has been limited research conducted at the intersection of both literature streams, with few exceptions (e.g. He and Wang, 2009; Lajili, 2015; Liu et al., 2014; Wang et al., 2009). The current study builds on this prior literature, joining the governance and strategic human capital resource approaches, and empirically investigates the moderating role of corporate governance mechanisms in the human resource management (HRM), performance, and overall firm performance links. By drawing on the resource-based view of the firm and the contingency view of strategic HRM, we argue that corporate governance mechanisms constitute a firm-specific and idiosyncratic resource (or capability) that could enable or hamper efforts to leverage strategic human capital resources in creating and sustaining knowledge-based competitive advantages in modern organizations.

As global competitiveness and economic growth are increasingly tied to information and intangibles-driven, knowledge-based resources and capabilities, firms around the world are competing for top talent and enabling technologies and processes, including HRM systems. This strategic perspective of human capital resource management requires a particular attention to the governance mechanism design and its effectiveness in achieving strategic organizational goals. For example, participative governance with scientists on the boards of high technology and/or pharmaceutical industries, in addition to executive and employee incentive compensation, illustrates some of the strategic actions that modern organizations are adopting to optimally leverage their competitive positions by recognizing the critical importance of their human and knowledge-based capital. This article contributes to both the strategic human capital and resource and the corporate governance literature by examining the role and impact of various corporate governance structures on the links between human capital, HR performance, and overall firm performance in a global, large, and most attractive employer’s context. Thus, we can test the contingency view of strategic HRM (e.g. Boxall and Purcell, 2000; Schuler and Jackson, 1987). Although the prior literature generally supports the positive links between strategic human capital and firm performance, on the one hand, and effective corporate governance and firm performance on the other, there is a lack of empirical evidence with regard to which and how governance mechanisms intervene or moderate such relationships. Thus, it remains an open empirical question. This study attempts to respond to this research gap by offering some evidence and insights on the role of corporate governance mechanisms in strategic human capital resource management, thus increasing our understanding of how to tailor governance design to strategic initiatives in human capital management, with important implications for managers, employees, investors, and policy makers.

The remainder of this article is organized as follows: first, we review the conceptual and theoretical background as it relates to human capital, performance, and governance and develop our research hypotheses, drawing on the organizational, HRM, and strategy literature. Second, we present our empirical analysis and report and discuss our main results and findings. Finally, we conclude with some limitations of our study and suggestions for future research.

Prior literature and hypotheses development

At the individual level, human capital refers to the knowledge, skills, and abilities of individuals that allow them to be productive in their work assignments, including general and firm-specific human capital, and provides an economic basis for compensation in terms of wages, salaries, and other forms of compensation or benefits (Becker, 1962, 1993). At the unit/firm level, human capital includes the set of relationships and networks developed by employees throughout their careers (i.e. social capital) and the organizational arrangements and routines (i.e. organizational capital) that allow them to be innovative and productive over time (Blair, 2011; Fulmer and Ployhart, 2014; Mahoney and Kor, 2015; Ployhart et al., 2014; Wright et al., 2001). For example, Ployhart et al., (2014: 374) define human capital resources as “individual or unit-level capacities based on individual knowledge, skills, abilities, and other characteristics that are accessible for unit-relevant purposes.” This definition of human capital resources fits well with this article’s aim and approach since we focus on firm-level human capital disclosures emphasizing the role and value of individual human capital within (or as embedded in) the firm’s production and value creation strategy. Thus, our definition of strategic human capital is built on a broad-based approach to HRM systems and policies covering the entire workforce (and not just top management teams).

Human capital resources, firm performance, and corporate governance

Scholars and practitioners in the management field have long been searching for factors that contribute to better firm performance. Strategic human capital and HRM are emerging research fields with the common objective to explore, describe, and prescribe the importance of human capital as a resource to a firm. In the past two decades, scholars sought to prove that HRM adds value to organizations. However, a number of controversies exist regarding the link between HRM and a firm’s performance (Boxall and Purcell, 2000; Guest, 2011; Jiang and Messersmith, 2018; Guest et al., 2013). Two dominant normative models exist to characterize the link: the contingency model and the best practice model. The contingency model argues that the efficiency of HRs is heavily shaped by a firm’s specific contextual contingencies, such as national, sectoral, and organizational factors (Boxall and Purcell, 2000). Therefore, each firm should adopt HR strategies that best fit their specific firm circumstances to maximize the value of HR. On the other hand, the best practice model poses that all firms will be better off if they uniformly adopt best practices in managing HR. In this case, the efficiency and value of HR can be enhanced in the same way in all firms (Boxall and Purcell, 2000).

For empirical works, Huselid’s (1995) pioneering study of more than 800 US public corporations empirically proved that a positive relationship between HRM systems and firm performance exists. He identified 13 high-performance work practices as proxies for firm-level HRM systems and used both market-based (Tobin’s q) and accounting (gross rate of return on capital) measures as proxies for corporate financial performance. Since Huselid’s (1995) study, the number of empirical studies has continued to develop and expand globally. Empirical evidence of this positive relationship has been found in studies of corporations in New Zealand, the United Kingdom, the Netherlands, Japan, and China (Boselie et al., 2003; Guest et al., 2003; Guthrie, 2001; Liao et al., 2009; Takeuchi et al., 2007).

However, reviews of the literature have shown mixed views on the aggregate research results. Although most empirical research studies showed a positive relationship between HRM and firm performance, some review studies were cautious about the strength of the association and the research design appropriateness of a number of empirical studies (Boselie et al., 2005; Combs et al., 2006; Crook et al., 2011; Newbert, 2007; Wall and Wood, 2005; Gardner et al., 2003). To explain the mixed empirical results, Crook et al. (2011) identified three factors that potentially moderate the effect of HRM on firm performance: (1) path dependence, (2) firm-specific versus general human capital, and (3) operational versus global firm performance measures. The meta-analysis by Crook et al. (2011), based on 66 prior studies, did not support the effect of the path dependence factor but did support the effect of the latter two factors. The results suggested that HRM was strongly related to firm performance; however, the relationship was influenced by the type of human capital and the firm performance measures. In particular, firm-specific human capital contributed more to firm performance than general human capital. With the increase of experience in a firm or investments in firm-specific projects, managers become better resource allocators who make better decisions and, thus, increase firm performance (Kor, 2006; Kor and Mahoney, 2005). In addition, the cost of general human capital tends to be higher because it can be traded more easily in the labor market, potentially increasing wages and turnover rates (Coff, 1997).

Conversely, operational performance measures better capture the effect of HRM than global firm performance measures because some of the value created by HRM might be first appropriated by top managers or employees before being distributed to the shareholders (Coff, 1999; Collis and Montgomery, 1995; Crook et al., 2008). Therefore, global firm performance indicators, such as return on assets (ROA) or returns on sales, may not capture the full value of human capital.

In sum, recent reviews of studies suggest that we must formulate the research design more carefully by categorizing different HRM practices, distinguishing firm-specific human capital from general human capital, rethinking the appropriateness of measurements of HRM practices, and selecting appropriate proxies for evaluating the contribution of HRM (Guest et al., 2013). Even though the current literature has made substantial progress in establishing the link between HRM and firm performance, researchers have yet to delineate the channels through which HRM affects firm performance. This article intends to fill the gap by exploring the role of corporate governance mechanisms in moderating or enhancing the effect of HRM on firm performance.

The resource-based view of the firm regards firm-specific human capital as an isolating mechanism that protects the firm’s valuable and rare resources from imitation by rival firms and thus creates a sustained competitive advantage (Barney, 1991; Chadwick, 2017; Mahoney and Pandian, 1992; Wright et al., 1994). However, developing firm-specific knowledge and skills requires not only investment by the firm but also effort and time from the employees. Therefore, employees with foresight might hesitate to build firm-specific knowledge and skills to avoid holdup by the firm ex post (Wang et al., 2009). Without effective incentives and trust-building mechanisms, firms may not be able to accumulate and realize the economic rents from firm-specific human capital (Cornell and Shapiro, 1987; Wang et al., 2009).

More recently, Chadwick (2017) extended the strategic human capital literature by delineating the conditions under which labor market frictions lead firms that are idiosyncratically advantaged, with respect to a particular friction, to appropriate human capital rents. By explicitly distinguishing between value creation and value capture strategic processes, Chadwick (2017) emphasizes the interaction (or complementarity) between firm-specific (or idiosyncratic) human capital and idiosyncratic firm resources and capabilities in the pursuit and capture of strategic human capital rents (prior literature in this area concentrated on the characteristics of human capital itself instead of on the characteristics of firms, in creating and capturing human capital rents under labor market frictions).

Drawing on this strategic human capital literature, we argue that corporate governance mechanisms and structures are firm-specific and constitute idiosyncratic firm resources and capabilities (Blair, 1995; Chadwick, 2017). We also add that corporate governance mechanisms moderate the positive relationship between human capital and firm performance. For example, the composition of the board and committee members, the share ownership structure, the existence of concentrated ownership, as well as the executive compensation packages are internally determined by the firm and thus constitute an important differentiating feature of the firm’s business and strategic profile, interacting with major assets and processes, including the HRM system. In this sense, there is no “one size fits all” approach to governance design, and a contingency view is more appropriate than a best practice approach. Corporate governance mechanisms could serve as a medium to help employees build trust and confidence in firms and to encourage employees to build firm-specific knowledge and skills. Therefore, it is important to consider corporate governance systems when ascertaining the effect of HRM on firm performance (García-Castro et al., 2008; Gottschalg and Zollo, 2007; Kim and Mahoney, 2005; Lajili, 2015; Mahoney and Kor, 2015; Makadok, 2003).

Following this discussion, we formulate our first research hypothesis as follows.

Hypothesis 1: Corporate governance mechanisms moderate the links between human capital resources and firm performance.

Human resource performance and corporate governance mechanisms

The prior research has established that firms that possess, create, and adapt resources, and capabilities can generate value and sustain competitive advantages (Barney, 1991; Penrose, 1959). Firms that better govern and manage these strategic investments and resources will realize higher economic gains (Kor and Mahoney, 2005; Mayer and Salomon, 2006). Since investments in firm-specific resources represent an important channel to enhance capabilities, this study hypothesizes that investments in firm-specific HR and employee-friendly corporate governance structures would positively contribute to firm performance. In particular, this study considers the mediating effects of relevant governance mechanisms on the value creation of firm-specific human capital investments.

Wang et al. (2009) studied the moderating effect of employee-related governance measures on the relationship between firm-specific knowledge resources and economic performance. They used the patent self-citation rate as a proxy for firm-specific knowledge resources, the employee stock option for the economic-based governance measure, and KLD Research & Analytics Inc. firm–employee relationship data for the relationship-based governance measure. The empirical results supported the positive effect of both economic-based and relationship-based governance measures on economic performance, suggesting that effective governance measures help the firm realize the potential economic rents from firm-specific HR. The study extended the resource-based view of the firm and holds that firm-specific resources and the effectiveness of governance measures jointly impact a firm’s performance.

He and Wang (2009) further refine the study and separate governance measures into two categories: monitoring-based and incentive-based. Monitoring measures refer to board independence, outside block holders, and CEO duality, and incentive measures refer to CEO contingency pay and shareholding. The authors hypothesize that in highly innovative firms, there is often a high degree of information asymmetry between owners and managers with regard to efficient ways to create value from a firm’s resources. Substantial managerial discretion is needed to make decisions about the deployment of innovative knowledge assets. Therefore, monitoring-based corporate governance measures are less effective than incentive-based corporate governance measures in helping firms create value from firm-specific resources. The results suggest that providing managers with proper incentives can encourage them to accumulate firm-specific HR and thus positively contribute to innovative firms’ performance. On the other hand, employing monitoring corporate governance measures, such as independent directors, would negatively impact the performance of highly innovative firms.

Furthermore, Chadwick (2017) conceptually offers various ways for firms to decrease the cost of human capital and/or create and sustain human capital rents while leveraging idiosyncratic firm capabilities and resources, potentially leading to an increase in the value-in-use. Such idiosyncratic firm capabilities include the acquisition and retention of inherently scarce human capital and talent and developing and offering firm’s complementary resources and capabilities to increase the value-in-use. From a cost control perspective, Chadwick (2017) highlights the human capital administration cost capability and the ability to leverage labor market frictions, which are firm-specific and cannot be easily imitated by rivals. In this article, we argue that such firm-specific human capital resources capabilities are embedded in governance and firm-level institutional structures intended to promote firm performance and sustained competitive advantage with respect to the governance of strategic human capital.

In parallel to the strategic human capital and resource management literatures reviewed above, scholars are beginning to pay more research attention to the potential links between corporate governance choice and strategic human capital. For example, Liu et al. (2014) examined whether capital structure, as measured by share turnover, shareholder ownership concentration, and financial leverage, affects firms’ investments in strategic human capital. Based on the survey and secondary financial data from 221 establishments in the United States and Canada, they found that firms with higher share turnover, higher shareholder concentration, and higher levels of financial leverage are less likely to invest in strategic human capital through firm-specific HR practices and systems. This result highlights the importance of external governance mechanisms (i.e. capital markets and financing structures) in affecting the level and extent of investments in human capital development. The shareholder (outsider) type of governance is contrasted with the stakeholder (insider)-type governance model, and the potential conflicts between these two models, particularly when a mixed type of governance is adopted, could potentially lead to lower performance or short-termism on the part of management and/or shareholders, at the expense of employees and other stakeholders (e.g. Bae et al., 2011; Edmans, 2011; García-Castro et al., 2008).

Building on the prior literature, this article uses firm-specific HR and corporate governance measures to capture firms’ investment and commitment to human capital in an effort to enhance capabilities and achieve higher economic gains (rents) for the firm (Chadwick, 2017; Kor and Mahoney, 2005; Mayer and Salomon, 2006). The prior literature used organizational tenure and patent self-citations as proxies for firm-specific HR (He and Wang, 2009; Wang et al., 2009). However, both are subject to criticism as either being too crude or too narrow (Coff and Raffiee, 2015; Crook et al., 2011). This article instead uses executive compensation and pension paid to employees to capture a firm’s investments in and commitment to strategic human capital. Indeed, we argue that compensation and benefits packages reflect an organizational strategic commitment to human capital development and retention programs for both top management teams and the entire workforce (Kor and Leblebici, 2005; Wright et al., 2003). Consequently, firms can increase and retain firm-specific (or idiosyncratic) human capital and maintain strong firm performance relative to industry peers (Chadwick, 2017; Crook et al., 2011; Huselid, 1995; Wang et al., 2009).

For the corporate governance measures, this article includes variables that might affect the retention and development of executives and employees. Following the prior literature, we include CEO duality, board independence, and block holders and expect these monitoring-based measures to be negatively correlated with firm performance (He and Wang, 2009; Lajili and Zéghal, 2010). This article also includes other employee-friendly variables that encourage employee participation and enhance diversity, such as the two-tier board system and the percentage of women on the board. Since a two-tier board system allows employee representation on the supervisory board, we expect such an employee-friendly governance mechanism to better retain firm-specific human capital and to positively contribute to firm value. Nevertheless, prior empirical evidence on the effect of female board representation on operating performance or market value is inconclusive (Adams and Ferreira, 2009; Campbell and Mínguez-Vera, 2008). Furthermore, we include a disclosure and transparency governance-based score directly collected from the Bloomberg database to reflect the quality and effectiveness of overall corporate governance mechanisms relative to industry peers. By disclosing relevant information about HRM, development, compensation, and other benefits, firms show external stakeholders how committed they are to investing in their HR systems to increase firm performance (Guthrie, 2001; Lajili and Zéghal, 2006; Macmillan and Downing, 1999; Wheeler and Davies, 2004).

We formulate our second research hypothesis as follows.

Hypothesis 2: HR performance is positively associated with corporate governance mechanisms that support and enhance human capital resources.

The study’s conceptual framework is summarized and illustrated in Figure 1.

Figure 1.

Conceptual framework.

Methodology

To test the two research hypotheses presented in the article’s previous section, the following regression models are estimated. The first model estimates hypothesis 1 with the following specification

Y_{i, t + 1} = β_{0} + β_{1} {HC}_{i, t} + B_{2} {CG}_{i, t} + B_{3} {Controls}_{i, t} + ∊_{i, t}

where $Y_{i, t + 1}$ refers to the lead (1-year-ahead) performance measures to control for any endogeneity effects. $β_{0}$ is a constant, and $β_{1}, β_{2},$ and $β_{3}$ are the coefficients associated with the human capital (payment to executives and pension and retirement expenses), corporate governance, and control variables, respectively.

The second model testing hypothesis 2 is presented as follows

W_{i, t + 1} = β_{0} + B_{1} {CG}_{i, t} + B_{2} {Controls}_{i, t} + ∊_{i, t}

where $W_{i, t + 1}$ refers to the lead HR performance indicators. $β_{1}$ and $β_{2}$ are the regression coefficients associated with the corporate governance and control variables, respectively.

To decide whether random effects or fixed effects regression model specifications are the most appropriate, Hausman tests are performed for each regression model to ensure the estimators’ consistency and efficiency. In this test, the preferred model is a random effect (null hypothesis) and, when the null hypothesis is rejected, the fixed effects model should be used. Fixed effect models only consider the effect of time-variant variables, so the fixed variables (such as industry or country) or the variables that do not substantially change over time will be dropped from the model. Based on the test results, all the regressions are performed using random-effect models.

Data

The data for this study are collected from three different sources. First, the companies are selected from Universum Global 2010. Universum Global ranks the most attractive employers, selected by surveying students in the business, engineering, and information technology sectors in the world’s 12 largest economies (Please see Appendix).² By employing the Universum Global rankings, we acknowledge this selection’s nonrandom nature, including the potential sample selection bias issues. We are aware that the small sample size and the dominance of innovative, large, and established global firms may bias our results toward larger innovative companies. Therefore, the results of our study should be interpreted with caution and may not be generalizable to other firms and business contexts. The companies in the sample are from different sectors, such as financial institutions, information technology, oil and gas, manufacturing, and food and health products. To control for industry type, the companies are divided into two groups: service and manufacturing (or nonservice) sectors. The initial industry code was not useful due to the low number of observations for some sectors, which could inflate the regression coefficients in the empirical models.

Second, the data on the governance, financial, and accounting variables are collected from two sources: the Compustat and Bloomberg databases. The Compustat data mainly covers the financial and accounting variables, whereas the Bloomberg data cover the corporate governance information. However, the information from both databases was matched for consistency. The study’s sample is a panel data covering 44 companies from 2007 to 2011.

Independent variables

Following the prior literature (e.g. Chen, 2014; He and Wang, 2009), firm performance is measured by two variables: the market value and earnings before interest, tax, depreciation and amortization (EBITDA) margin. These variables were derived from the Bloomberg database, and their log values are incorporated into the regression analyses testing hypothesis 1.

In testing the second hypothesis, HR performance is approximated by productivity-based measures, following the work of Huselid (1995) and Lajili and Zéghal (2006). Therefore, the following are selected as dependent variables in the regression models testing hypothesis 2: net income per employee, sales per employee, and EBITDA per employee.

Human capital variables

Executive compensation (fixed and short-term as well as long-term incentive compensation) is measured as a proxy for firm-specific human capital (e.g. He and Wang, 2009; Kor and Mahoney, 2005). The following variables are collected from the Bloomberg database: “salary and bonuses paid to executives” and “all other compensation paid to executives.” Another human capital variable is added, pension and postretirement expenses, to adopt a broader strategic HRM policy including all employees and not only top management teams, as mentioned earlier in the current article (e.g. Lajili and Zéghal, 2006).

Corporate governance variables

Several corporate governance variables are included in the model to test the moderating effect of corporate governance. “CEO duality,” “percentage of independent directors,” “governance disclosure score,” and “percentage of women on the board” are retrieved from the Bloomberg database. “Block holders” is a binary variable equal to 1 if the firm has a shareholder who holds more than 5% of the shares. By referring to firms’ annual reports, it has been identified whether a firm has a supervisory board. Accordingly, a “two-tier board” is equal to 1 if a firm has a two-tier board system.

Control variables

Following the prior literature (e.g. Lajili and Zéghal, 2006; Liu et al., 2014; Wang et al., 2009), firm-, industry-, and country-specific variables are included in the regression models to control for firm size, degree of innovation (e.g. R&D expenses), and complementary assets used in production (e.g. intangible and tangible assets). Dummy variables distinguishing between US and non-US firms as well as the service and manufacturing sectors are also included as control variables in the panel regressions.

Research results

Descriptive statistics

Table 1 presents the sample’s descriptive statistics. The firms in our sample are large, with an average market value of US$329 billion and total assets of US$333 billion. On average, these companies hold over US$22 billion in intangible assets and employ 152,000 workers, with a US$6.6 billion net income during the study’s time period. With respect to the corporate governance structures and, on average, 17% of the boards of directors’ members are women, and 77% of the members are independent directors, while the board size consists of 13 persons. The executives are compensated US$10 million each year (on average) through salary and bonuses and receive US$44 million as all other compensation.

Table 1.

Sample descriptive statistics.

Variables	Total sample (n=220)
Variables	N	Mean	Standard deviation	Min	Max	Median
Market value	212	329,584.2	457,990.1	15,248.5	2,203,700.0	161,501.8
Net income	215	6694.3	8507.2	−27,612.0	45,220.0	5434.8
EBITDA margin	211	24.160	15.830	−35.247	74.926	20.929
Net income per employee	207	66,040.3	115,125.0	−472,000.0	565,957.4	42,353.8
EBITDA	177	15,208.0	13,042.5	64.0	78,669.0	11,777.0
Intangibles	209	22,473.5	27,858.9	0.0	129,413.0	12,102.4
Sales per employee	212	741,263.4	841,488.1	113,206.3	5,320,037.5	492,985.4
Number of employees	211	151,808	109,976	6650	501,956	108,000
Salary and bonus paid to executives	185	10,896,750.4	12,134,001.6	1,122,529.0	122,927,370.0	7,320,196.0
All other compensation paid to executives	161	43,936,470.8	49,436,579.2	114,846.6	435,299,333.0	36,291,812.0
Pension and postretirement expenses	202	679.6	804.7	19.9	5892.0	413.9
Governance disclosure score	205	60.810	7.760	30.360	85.710	60.714
% of Independent directors on the board	193	77.121	19.857	0.000	100.000	83.333
% of Women on the board	205	16.870	8.731	0.000	45.450	16.670
Net property, plant & equipment	215	22,226.3	33,992.6	92.0	214,664.0	8975.0
Total assets	216	333,677.4	571,234.8	10,747.2	3,073,000.0	109,273.0

Note: PP&E: property, plant & equipment. Market value is Number of Shares Outstanding × Last Closing Price at the End Period. EBITDA margin is trailing 12-month EBITDA divided by trailing 12-month sales, times 100. Governance disclosure score is based on the disclosure of environmental, social, and governance data. Board size is the number of directors on the board. CEO duality is equal to 1 if the CEO of the company is the chairman of the board. A company has block holding if 5% of its shares or more belongs to one company or individuals. Two-tier boards are coded 1 if the firm is controlled by two-tier board systems: supervisory board and management board. The intangibles, PP&E, and total assets variables are collected from the Compustat database.

Table 2 presents the Pearson correlation matrix based on the study variables’ average values over four years (2007–2011). All the results are presented at a 1% significance level. For instance, all other compensation paid to executives is positively correlated with the EBITDA margin and the net income per employee. It is also positively correlated with the percentage of independent directors on the board. Pension and postretirement expenses are positively related to board size, property, plant and equipment, intangibles, and the logs of total assets and number of employees. Board size is also positively related to property, plant and equipment, intangibles, and the logs of total assets, number of employees, and research and development expenses. The results of the correlation matrix further guide our model specifications to minimize the risk of multicollinearity and produce robust estimators in the regression analysis.

Table 2.

Matrix of correlations.

		1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16
1	Market value	1
2	EBDITDA margin	0.384*	1
3	Salary and bonus to executive	0.184	−0.075	1
4	All other compensation paid to executive	0.106	0.350*	0.164	1
5	Pension expenses	0.209	−0.11	0.404*	0.043	1
6	Governance disclosure score	0.029	0.03	−0.030	0.029	0.286	1
7	% of Independent director	0.099	0.258	0.133	0.557*	−0.012	0.234	1
8	% of Women on board	0.041	0.128	−0.102	0.247	−0.025	−0.023	0.202	1
9	Board size	0.363*	−0.232	0.238	−0.323*	0.509*	−0.158	−0.623*	−0.175	1
10	Log asset	0.843*	0.333*	0.434*	0.059	0.438*	0.082	0.022	−0.067	0.490*	1
11	Log number of employees	−0.176	−0.361*	0.220	0	0.638*	0.127	−0.054	0.008	0.510*	0.12	1
12	Income per employee	0.436*	0.5620*	−0.068	0.360*	−0.133	0.12	0.205	0.074	−0.303	0.204	−0.638*	1
13	Sale per employee	0.507*	0.154	0.146	0.063	0.09	0.162	−0.023	−0.19	0.016	0.465*	−0.481*	0.755*	1
14	EBITDA margin per employee	0.617*	0.630*	−0.101	0.33	0.017	0.116	0.086	0.116	−0.193	0.236	−0.560*	0.928*	0.738*	1
15	Net PP&E	0.139	0.010	0.285	0.114	0.724*	0.319*	−0.066	−0.148	0.441*	0.361*	0.507*	0.189	0.297	0.307	1
16	Intangibles	0.262	0.188	0.195	0.152	0.426*	0.129	0.070	0.248	0.315*	0.283	0.391*	0.026	−0.106	0.294	0.451*	1
17	Log R&D	0.204	0.158	0.124	−0.043	0.257	−0.02	−0.266	−0.203	0.346*	0.460*	0.298	−0.017	0.03	0.022	0.2	0.109

Note: PP&E: property, plant & equipment.

Regression results

Tables 3 to 5 present the main results of the panel data regressions testing the study’s research hypotheses 1 and 2. Having performed the Hausman test, all the regression models are random effects.

The results indicate that block holders, diversity on the board, a two-tier board structure, as well as executive compensation (both fixed, short-term and long-term incentives) seem to have important and significant effects on human capital and firm performance. For example, the results from Table 3 (testing hypothesis 1 using lead market value) show that block holding ownership (where one shareholder, individual, or institutional holds 5% or more of the firm’s shares) has a positive and significant main effect on market value, whereas the percentage of women on the board surprisingly indicates a consistent and significantly negative association with market value. As mentioned, prior empirical studies have shown mixed results on the effect of female board representation on firm performance. Adams and Ferreira (2009) found that, on the one hand, female directors can increase board participation and better align employees’ and shareholders’ interests. On the other hand, female directors are tougher monitors and are more likely to be assigned to a monitoring committee. On average, Adams and Ferreira (2009) found a negative relation between female board representation and firm performance, suggesting that a gender-diverse board may lead to over monitoring. Our result seems to support the over-monitoring hypothesis of a gender-diverse board. This finding could also be explained by “tokenism” or gender bias and discrimination toward women directors due to their low number in proportion to their male counterparts (Elstad and Ladegard, 2012; Gabaldon et al., 2016). Having a relatively low proportion of women directors (17% in this study’s sample) may have a negative effect on firm performance either through over monitoring and/or through isolation and internal gender bias, leading to reduced opportunities for women to fully participate in top management positions and key decision-making processes, including strategic human capital development and retention. Future research could shed more light on this important issue of governance diversity.

Table 3.

Human capital resources, corporate governance, and firm performance (dependent variable: Lead log market value).

Models	a1		a2		a3		a4		a5
Models	Coef.	S.E	Coef.	SE	Coef.	SE	Coef.	SE	Coef.	SE
CEO duality	0.0891	0.082	0.0747	0.080	0.0873	0.082	0.0885	0.084	0.0797	0.083
% of Independent directors on the board	0.000619	0.004	0.00269	0.005	0.000888	0.005	−0.00992	0.023	0.000129	0.007
Block holding shares	0.642	0.517	37.67***	13.602	3.415**	1.446	0.676	0.572	−0.826	0.994
Governance disclosure score	0.00418	0.007	0.00228	0.007	0.00618	0.007	0.00507	0.007	0.00267	0.007
% of Women on the board	−0.0163***	0.006	−0.0109*	0.006	−0.0151***	0.006	−0.0167***	0.006	−0.0131**	0.006
Two-tier board		0.000	0.0722	0.450	−0.0327	0.451	−0.0768	0.461	−0.0216	0.459
Service firms	0.347	0.237	0.331	0.251	0.358	0.254	0.312	0.261	0.322	0.258
HQ in United States	0.349	0.255	0.284	0.304	0.353	0.307	0.319	0.312	0.283	0.312
Log asset	0.622***	0.081	0.635***	0.081	0.616***	0.081	0.624***	0.083	0.631***	0.083
Log salary and bonus paid to executives	−0.073	0.052	−0.0731	0.050	1.211*	0.628	−0.0722	0.052	−0.124	0.251
Log other compensation to executives	0.0209	0.045	0.0301	0.044	0.0139	0.045	0.0183	0.046	−0.496*	0.282
Log pension expenses	0.0261	0.058	5.783***	2.117	0.0227	0.058	−0.114	0.323	0.0246	0.058
Log number of employees	−0.0896	0.126	−0.104	0.125	−0.0722	0.127	−0.081	0.131	−0.104	0.129
Block Holding × Log PP&E Expenses			−5.761***	2.117
Block Holding × Log Salary and Bonus Paid to Executives					−1.287**	0.628
% of Independent Director × Log Pension Expenses							0.0016	0.004
% of Independent Director on the Board × Log Salary and Bonus Paid to Executives									0.000652	0.003
Block Holding × Log Other Compensation to Executives									0.526*	0.284
Constant	4.653***	1.422	−32.45**	13.740	1.628	2.089	5.409**	2.150	6.302***	1.710
R ²	78.3		79.5		78.7		78.4		79.0
Number of observations	104		104		104		104		104

Note: PP&E: property, plant & equipment; SE: standard error.

***p < 0.01; **p < 0.05; *p < 0.1.

Among the human capital variables proxies, both executive fixed and short-term compensation as well as pension and benefits expenses are positively associated with firm value but not consistently across the models, as presented in Table 3 (models a2 and a3 show significant positive relationships, whereas the other models show no significance). The long-term incentive executive compensation (in model a5) seems to be negatively associated with firm market value. The interaction effects between the governance and human capital variables show interesting results and seem to offer support for our first hypothesis. In particular, the interaction between the block holding ownership structure and executive compensation illustrates some of the agency conflicts (e.g. Aguilera et al., 2016) between shareholders and firm-specific human capital at the executive level (top management teams). Indeed, the moderating effects of block holder ownership in the firm value–human capital relationship seems to favor long-term incentive executive compensation and limits fixed and short-term compensation for top executives. This finding could have important implications for governance design, suggesting that block holding could be an efficient and effective way to mitigate corporate short-termism by top management and help reduce the agency costs of dispersed ownership. Given the international sample we have in this study, it would be interesting to see if this ownership characteristic is efficient across national boundaries, sectors, and firms.

Interestingly, the moderating and interaction effects of governance on the firm/human capital relationship in our study do not show significant results (although the signs are consistent) when the operating performance measured by the EBITDA margin is considered (see Table 4). This could be due to our study’s small sample size. The main effects of the governance and human capital variables show some interesting results, including a consistently negative association of CEO duality with the EBITDA margin and a negative and significant relationship between pension and benefits expenses and the EBITDA margin. Future research could further test for these associations between both market and operating performance and corporate governance direct and moderating effects as well as human capital proxies using both single-sector and country and/or multisector and across-country studies.

Table 4.

Human capital resources, corporate governance, and firm performance (dependent variable: Lead EBITDA margin).

Models	c1		c2		c3		c4		c5
Models	Coef.	SE	Coef.	SE	Coef.	SE	Coef.	SE	Coef.	SE
CEO duality	−2.656*	1.454	−2.904**	1.477	−2.807*	1.478	−2.684*	1.466	−3.015**	1.469
% of Independent director on the board	−0.0204	0.074	−0.032	0.090	−0.0457	0.088	−0.602	0.416	0.0784	0.125
Block holding shares	6.27	10.150	286	248.400	31.18	26.260	8.515	11.240	−0.88	18.210
Governance disclosure score	0.0696	0.127	0.0565	0.128	0.0883	0.128	0.115	0.130	0.0435	0.128
% of Women on the board	0.0135	0.100	0.0611	0.107	0.0292	0.101	−0.00669	0.101	0.0331	0.104
Two-tier board		0.000	−4.632	8.698	−5.417	8.663	−4.933	8.754	−5.615	8.817
Service firms	11.73**	4.626	10.63**	4.947	10.87**	4.971	9.659*	5.092	10.33**	5.095
HQ in United States	8.199*	4.866	5.686	5.934	6.254	5.958	6.103	6.022	5.865	6.090
Log asset	2.810*	1.556	2.964*	1.571	2.807*	1.575	3.002*	1.592	3.076*	1.608
Log salary and bonus paid to executives	0.965	0.920	0.951	0.920	11.38	11.230	0.993	0.911	7.409	4.703
Log other compensation to executives	0.524	0.798	0.617	0.801	0.486	0.802	0.392	0.798	−2.949	4.942
Log pension expenses	−1.994*	1.042	41.1	38.640	−2.041*	1.044	−9.811*	5.857	−2.045**	1.035
Log number of employees	−3.825	2.399	−3.994*	2.422	−3.721	2.436	−3.23	2.483	−4.021	2.470
Block Holding × Log Pension Expenses			−43.14	38.650
Block Holding × Log Salary and Bonus Paid to Executives					−10.45	11.230
% of Independent Director × Log Pension Expenses							0.088465	0.066
% of Independent Director on the Board × Log Salary and Bonus Paid to Executives									−0.0812	0.058
Block Holding × Log Other Compensation to Executives									3.53	4.962
Constant	29.44	26.800	−246.4	251.100	6.801	38.700	69.58*	39.680	32.45	31.860
R ²	50.12		51.38		50.77		50.18		51.04
Number of observations	104		104		104		104		104

Note: SE: standard error.

***p < 0.01; **p < 0.05; *p < 0.1.

The validation results of the study’s second hypothesis are given in Table 5. There is a negative and significant association between two-tiered board structures and HR performance (productivity) indicators (models d1, d2, d5, and d6). This is another puzzling result in the sense that companies and countries with such dual board structures usually provide institutional and internal firm governance mechanisms to facilitate and promote labor-related concerns and interests. Could such board structures be hampering employee productivity, and how does this mechanism compare with labor unions, for example, as a governance mechanism? Future research could empirically and conceptually examine these questions. In model d3 in Table 5, board independence seems to potentially affect HR performance, but this construct’s signs and significance are not consistent across the models. The HR performance indicators seem to be significantly related to complementary assets, such as intangible and tangible assets and research and development expenses. This empirical finding indicates that both human capital attributes and governance mechanisms should be jointly considered in corporate decision-making inside the firm and outside by investors interested in leveraging and promoting strategic human capital.

Table 5.

Human resource performance indicators and corporate governance.

Models	d1		d2		d3		d4		d5		d6
Dependent variable	Log income per employee				Log sales per employee				Log EBITDA per employee
Dependent variable	Coef.	S.E	Coef.	S.E	Coef.	S.E	Coef.	S.E	Coef.	S.E	Coef.	S.E
Board size	−0.0263	0.04	0.00399	0.03	−0.00779	0.01	0.00118	0.01	−0.0508	0.04	0.0328	0.03
Two-tier board	−1.364***	0.41	−0.805**	0.33	−0.429	0.29	−0.33	0.27	−0.986**	0.43	−0.532**	0.26
CEO duality	0.0779	0.13	−0.021	0.13	0.0611	0.04	−0.00853	0.03	0.0258	0.15	0.00879	0.13
Governance disclosure score	0.00144	0.01	0.0111	0.01	−0.00624*	0.00	0.000698	0.00	0.00215	0.01	0.00954	0.01
% of Independent directors on the board	−0.0031	0.01	−0.00268	0.01	−0.000703	0.00	0.0011	0.00	−0.00892	0.01	−0.00718	0.01
% of Women on the board	−0.0115	0.01	−0.00993	0.01	−0.000863	0.00	−0.00228	0.00	−0.00715	0.01	−0.00662	0.01
Log PP&E net expenses	0.234*	0.12	4.320***	1.20	0.175***	0.07	0.892**	0.43	0.167	0.13	6.862***	1.05
Log intangibles	−0.0288	0.08	−2.565**	1.18	−0.0404	0.04	0.417	0.38	0.103	0.09	−4.966***	1.05
Log R&D		0.00	0.194**	0.09		0.00	0.174***	0.05		0.00	0.118	0.07
Service firm		0.00	0.562**	0.25		0.00	−0.0719	0.23		0.00	0.566***	0.21
United States		0.00	0.209	0.22		0.00	−0.233	0.17		0.00	0.305*	0.17
Log Number of Employee × Log PP&E Net Expenses		0.00	−0.333***	0.10		0.00	−0.0453	0.03		0.00	−0.555***	0.09
Log Number of Employee × Log Intangibles		0.00	0.225**	0.10		0.00	−0.0339	0.03		0.00	0.440***	0.09
Constant	9.745***	1.14	4.362***	1.19	12.43***	0.555	8.308***	0.58	−3.584***	1.25	−8.804***	1.07
R ²	25.59		76.22		17.19		66.28		26.7		75.57
Number of observations	163		130		177		139		151		138

Note: PP&E: property, plant & equipment; SE: standard error.

***p < 0.01; **p < 0.05; *p < 0.1.

Discussion

Building on the resource-based view of the firm with regard to human capital resources (e.g. Barney, 1991; Chadwick, 2017; Coff, 1997) and recent developments in the areas of strategic human capital and resource management (e.g. Boon et al., 2018; Boxall and Purcell, 2000; Jiang and Messersmith, 2018), this study investigated the links between human capital, corporate governance mechanisms, and firm performance. The findings lend general support to the previous research, joining strategic HRM and governance (e.g. He and Wang, 2009; Mahoney and Kor, 2015; Lajili, 2015; Liu et al., 2014; Wang et al., 2009). Specifically, and as hypothesized in this study, corporate governance mechanisms appear to moderate the relationship between strategic human capital and firm performance. Consistent with the prior research (e.g. He and Wang, 2009; Liu et al., 2014), concentrated ownership (i.e. the existence of block holders), when interacted with HR variables such as pension expense and executive compensation, seems to negatively and significantly impact firm market performance. This suggests that ownership concentration may limit the effectiveness of strategic HR policies, such as those targeted to attract and retain scarce and valuable human capital. Our results complement and support the theoretical framework advanced by Chadwick (2017) by highlighting the importance of corporate governance in building and sustaining rare and inimitable idiosyncratic, organizational-level capabilities. In this article, we argue that corporate governance is embedded into the firm-specific HRM system and thus should be aligned with its main strategies to facilitate the creation and realization of human capital-based competitive advantages (e.g. Chadwick, 2017). Our empirical analysis seems to support this premise. Furthermore, and in terms of the strategic HRM debate around the contingency view in contrast to the best practice view, the findings tend to support the contingency view (e.g. Boxall and Purcell, 2000; Jiang and Messersmith, 2018; Schuler and Jackson, 1987). The moderating role of corporate governance is significant, particularly for concentrated ownership, where block holders could have more influence and voting power and could affect firms’ HR policies and practices. For instance, large institutional investors could have a salient and important role in executive compensation design, particularly the long-term incentive component, which is consistent with strategic HR retention policies. Our results support such positive interactions on firm value and performance while showing negative impacts when concentrated ownership is coupled with a high fixed salary and short-term incentives (see Table 4). Future studies could shed more light on the interaction between ownership structure and other corporate governance mechanisms and strategic human capital in driving organizational value, performance, and growth.

Similarly, the impact of board diversity and the percentage of female directors in particular deserve more research attention in the future. Our findings seem to point to “tokenism,” where female directors appear to be unable to contribute fully and efficiently to the firm’s decision-making simply because they form a minority on the board (Elstad and Ladegard, 2012; Gabaldon et al., 2016). Future studies could extend this research and further examine the roles and committee memberships assigned to female directors, with respect to strategic HRM, to help explain the role of board diversity on the implementation and validity of strategic HR systems.

The findings with respect to our second hypothesis linking HR performance indicators to corporate governance and organizational attributes also raise some interesting questions. The two-tiered board structures, which are perceived as employee-friendly and consistent with a relational stakeholder engagement governance structure typical of civil law regimes in continental Europe and parts of Asia, for example, seem to negatively impact HR performance (see Table 5). This result should be further validated in larger samples and in various contexts, preferably in homogeneous national and cultural settings. Could this form of governance be replaced with a unitary board with some employee representation, such as in high technology and in start-up or private firms? This would violate the board independence recommendation for best practice or effective governance. However, on a global scale, and even within the boundaries of one jurisdiction and industry, best practice could be less relevant than a contingency view of governance and strategic HRM (Boxall and Purcell, 2000; Jiang and Messersmith, 2018). Future work could shed further light on this important normative debate.

Conclusion

This article aims at examining the relationships between human capital resources, firm performance, and corporate governance practices using a sample of the most attractive employers by Universum Global 2010. Drawing on strategic human capital and resource management, international governance, and organizational literatures, we empirically tested the hypotheses according to which corporate governance mechanisms moderate the relationships between firm performance and human capital resources, and whether HR performance is positively associated with corporate governance mechanisms that support and enhance human capital resources. The results indicate that human capital is positively related to firm performance as measured by market and operating performance proxies and that some corporate governance mechanisms may negatively impact performance when interacted with human capital variables. Moreover, HR performance is positively and significantly related to some governance mechanisms, while some of the interaction effects between human capital and governance variables could have differential impacts on HR performance. Our results are consistent with prior work in this area, reviewed earlier in this article. Our study further extends this prior literature to include cross-national firms and governance mechanisms and can be a first step toward integrating international governance design into strategic human capital resource management research in the future. For example, are supervisory two-tiered board structures more efficient and effective than single boards in investing in and deploying strategic human assets and related intangibles? Are certain ownership structures (such as block ownership) beneficial or harmful to human capital development? How can firms cope with and manage shareholder/employee agency potential conflicts to maximize overall firm value and ensure survival and competitive advantage persistence? These questions and others await systematic and more fine-grained research, such as case analysis and longitudinal studies, in the future.

This study has several limitations, including a small yet global (or international) sample, which may potentially limit the conclusions and implications drawn from it. Future research could extend our study to include a larger number of firms and cover various industries and geographic regions. Furthermore, our study focused on some of the most successful and highly innovative global companies and thus the results should be interpreted with caution. Although we found enough variability and cross-sectional differences in this sample to test and validate our research hypotheses, future research could use a matching sampling procedure to also examine the differences between the most attractive employers/firms and their closest industry counterparts, which are not listed as such in the employer ranking surveys. More direct tests of differences in HRM policies, practices, and outcomes could then be conducted across the control sample and the most attractive firms’ sample, using qualitative or mixed-methods research methodologies.

In summary, this study points to a rich and potentially fruitful area of governance design research, where strategic human capital could be explicitly recognized and structurally embedded into firm, industry, and country governance mechanisms and models. Empirical and conceptual research at the intersection of strategy, governance and law, sociology, finance and accounting, among other fields, should be encouraged in the future to deal with this complex and multifaceted construct and help organizations and their stakeholders create and sustain economic and social values within cooperative and long-term perspectives.

Footnotes

Acknowledgement

The authors thank the editor and two anonymous reviewers for their valuable comments.

Declaration of conflicting interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The authors disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: The authors gratefully acknowledge the financial support of the Research Office at the Telfer School of Management at the University of Ottawa and the Research Grants Council of the Hong Kong Special Administrative Region, China Project No. CityU 11606017.

ORCID iD

Lauren Yu-Hsin Lin

Notes

Appendix

Table 1A.

List of the sample companies (based on Universum Global top 50 most attractive employers 2010).

1	3M Co	26	Kraft Foods Group
2	ABB Ltd	27	L’Oréal SA
3	AT&T Inc.	28	Merrill Lynch
4	Accenture PLC	29	Microsoft Corp.
5	Apple Inc.	30	Morgan Stanley
6	BP PLC	31	Nestle SA
7	Bank of America	32	Nokia OYJ
8	Cisco Systems In	33	Oracle Corp
9	Coca-Cola Co/The	34	PepsiCo Inc.
10	Credit Suisse Gr	35	Pfizer Inc.
11	Daimler AG	36	Procter & Gamble
12	Dell Inc.	37	Schlumberger Ltd
13	Deutsche Bank AG	38	Siemens AG
14	Exxon Mobil Corp	39	Sony Corp
15	Ford Motor Co	40	Telefonaktiebola
16	General Electric	41	Toyota Motor Corp
17	Goldman Sachs Gr	42	UBS AG
18	Google Inc.	43	Unilever NV
19	HSBC Finance Corp.	44	Volkswagen AG
20	Heineken NV
21	Hewlett-Packard
22	Intel Corp
23	International Bu
24	Johnson & Johnson
25	Koninklijke Philips

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