Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
The Influence of Board Quality towards the Impact of Crisis on
Firm Performance: Evidence from Tourism Industry
Chai-Aun Ooi1, Chee-Wooi Hooy2, Ahmad Puad Mat Som3
This paper investigates the moderating effects of diversities in board’s human
capital (education background and working experience) and social capital
(external network ties) towards the impact of crisis on firm performance. Tourism
firms are focused. The results show significant moderating effects of the
diversities in board’s working experience and external network ties. The
moderating effects are found positive, implying that increasing the diversities
could improve firm performance during the crisis period. We further find that the
moderating effect of the diversity in board’s external network ties is relatively
more influential to improve firm performance during crisis period. Even, the
effects of the diversity in board’s external network ties are found more
pronounced during the period of sudden occurrence type of crisis, but the
moderating effect of diversity in board’s working experience is found more
pronounced during gradual occurrence type of crisis. Nonetheless, the
moderating role of diversity in board’s educational background is found
insignificant.
1. Introduction
Tourism industry is susceptible to a wide range of external crises such as natural
disasters, disease outbreaks, terrorism, war as well as economic/financial crisis. Previous
empirical studies have provided the evidences showing the negative relationship between
crises and the performance of tourism firms. In this case, does board of directors play a
role in mitigating the effect of crises striking the performance of tourism firms? The
question could be further extended to another question on how to define “good quality of
board” which could have positive implication towards the negative effect of crises on the
performance of tourism firms.
Mace (1971) defines the function of board as “a source of advice and counsel, serve as
some sort of discipline device, and act in CRISIS situations”. This implies that the role of
board of directors could be magnified during the crisis period. Literature in the area of
behavioral finance reveals that shareholders are very concerning about the quality and
structure of the board when the firms suffer from an unexpected crisis (Leung and Hortwiz,
2010). During the period of financial crisis, Francis et al. (2012) demonstrates that firms
with poorer board quality tend to suffer extensive loss. All of these evidences support the
empirical findings from Brauer and Schmidt (2008) showing significantly positive
relationship between firm performance and board quality in turbulent circumstances.
As board of directors is working as a team in sharing idea during a board meeting, the
quality of the board team instead of individual directors‟ competency should be focused.
This study attempts to shed light on the relationships between firm performance and
diversities in board‟s human capital and social capital during the period of crisis. We focus
on tourism firms, and hence the crises leading to the decline in tourism demand are used
in the investigation. Board‟s human capital is represented by board‟s educational
1
Chai-Aun Ooi, School of Management, Universiti Sains Malaysia. Email: wilson.usmfinance@gmail.com
Chee-Wooi Hooy, School of Management, Universiti Sains Malaysia. Email:cwhooy@usm.my
3
Ahmad Puad Mat Som, School of Housing, Building and Planning, Universiti Sains Malaysia.
Email: puad@usm.my
2
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
background and working experience, while board‟s social capital is represented by board‟s
external network ties via interlocking directorates.
The findings provide empirical evidences showing that board‟s social capital has greater
significance towards firm performance betterment than board‟s human capital during crisis
period, in the context of tourism firms. As tourism products are predominantly serviceoriented, board‟s social capital which could enhance the firms‟ networking power or
resource accessibility may help to expand the scope of firms‟ services so that to make the
customers‟ travelling life easier. It is said that board‟s social capital is more significant in
driving the firms to seize the competitive advantages during the critical period of crisis.
Comparatively, board‟s human capital may be out-to-date and less effective in aiding
tourism firms in setting innovative strategies to compete with the peers in the period of
crisis, particularly with respect to board‟s education by which the information/knowledge
has been known and less likely to facilitate innovative strategic planning for firm
performance betterment during crisis period. Also, we find that diversified board‟s working
experience is better to facilitate the firms to produce immediate strategies to respond
towards sudden occurrence type of crisis, compared to diversified board‟s social capital.
The information obtained via external network ties may need more time to modify for the
usage of the focal firm itself. Hence, the positive influence of diversity in board‟s social
capital has bigger magnitude towards firm performance during gradual occurrence type of
crisis.
2. Crisis and the Performance of Tourism Firms
Tourism industry has been challenged by a wide range of crisis. Chen (2011)
demonstrates that international tourist arrivals has been declined in Taiwan during the
period of SARS outbreaks, Taiwan 9/21 earthquake and the U.S. 9/11 terrorism attack.
Chen explains that tourists are reluctant to travel during the crisis period for their personal
safety, which has caused the decreasing of profitability in the hotel industry. The decline in
earnings has lead to the adoption of discount rate on to the stock due to the plunge of
expected cash flow over the crisis period, eventually constitute to the poor firm
performance. Chen et al. (2005), Chen (2007a; 2007c) consistently indicate that the three
crisis events have direct impacts on the sales or earnings performance of Taiwanese hotel
firms. Drakos (2004) instead examines the U.S. airline stock performance listed on
different international stock markets following the crisis event of 9/11 terrorism. The study
finds that 9/11 terrorism has brought significantly negative impacts on the airline industries,
including the increasing of systematic risk of airline stocks after the event. This may lead to
the U.S. airlines firms to face a bigger challenge in raising capital for advanced
development.
To develop appropriate managerial responses to cope with crisis effectively,
understanding of the nature of crisis is important (Evans and Elphick, 2005). Seymour and
Moore (2000) classify crisis into two categories according to the crisis gestation period to
occur. They name the crisis which occurs in sudden and unexpected as cobra, and the
crisis which occurs gradually, or has longer gestation period to occur as python. In fact,
cobra is inherently more difficult to manage than python. Similarly, Booth (1993) also uses
the same concept to define crisis: gradual, periodic and sudden. Seymour and Moore
(2000) and Booth (1993) find a consensus that the sudden threat/cobra triggers defensive
response with reliance on the known and trusted; while periodic threat/python which tends
to „creep‟ upon a company gradually would trigger bureaucratic response when the crisis is
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
not recognized, but the organizations would implement negotiated response when the
crisis is recognized. Nonetheless, limited empirical evidences are provided in the literature
on the impact of individual type of crisis towards the performance of tourism firms.
3. Data & Methodology
The selection of tourism firms is based on the definition of UNWTO. There is a total of 85
firms obtained, across 4 countries in Asia, i.e. Malaysia, Singapore, Hong Kong and China.
5 tourism crisis events within the analysis period of 2001-2011 have been selected as
shown in Table 1.0.
Table 1.0 Tourism Crisis Events from 2000-2010 and its Corresponding Crisis Typologies
Year
Crisis events
Crisis gestation period to occur
2001
U.S. 911 terrorism
Sudden
2003
SARS outbreaks
Gradual
2005
Bali Bombings
Sudden
2008
Financial crisis
Gradual
2009
H1N1 outbreaks
Gradual
Equation (1) in the following is the baseline model in this study. Stock return is used to act
as the proxy for firm performance. Firmsize represents for firm size which is measured by
natural logarithm of total assets of firm i at year t; Leverage represents for leverage which
is measured by the ratio of long-term debts to total assets of firm i at year t; IndepBoard is
the composition of independent board of directors of firm i at year t; BoardOwnership is the
total board ownership of firm i at year t, and BoardMeeting is the natural logarithm of the
number of board meeting of firm i at year t. CrisisSudden and CrisisGradual are the dummy
variables denoting 1 for the years of sudden occurrence type of crisis and gradual
occurrence type of crisis respectively, 0 otherwise. The variables for diversities in board‟s
educational background, working experience and external network ties are then
incorporated in equation (1). The diversity variable interacts with the crisis dummy
variable. Significant relationship found between firm performance and the interaction term
implies the existence of the moderating effects of the board diversity towards the influence
of crisis on firm performance. Pooled regression with fixed effect specification is
implemented so that to control for the unobserved firm heterogeneity problem.
FirmPerfor manceit   0  1 FirmSizeit   2 Leverageit   3 IndepBoard it
  4 BoardOwnershipit   5 LBoardMeeting it   6Crisis suddenit   7Crisis gradualit   it
(1)
Board‟s educational background is categorized into seven groups, namely business and
economics, law, liberal arts and social sciences, basic science and engineering, medical
and pharmacy, military, and lastly, arts and physical education. Directors belonging to
each category are counted and squared, and the sum of the proportion in all the
categories is ultimately taken as the board diversity. Also, the board‟s working experience
is categorized into eight groups, namely government, domestic and foreign financial,
business and administrative, accountant, professor, organization member, attorney, and
lastly, media and research institute. Similarly, the number of industries of the firms
attaching via interlocking directorates are counted and measured in the same approach. In
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
short, the board diversity is measured as
n
p
i 1
2
i
. The higher the diversity index, the lower
the diversity.
Table 2 reports the descriptive statistics of the data used in this study. The mean of stock
return is about 0.12. The positive stock return indicates the growth of tourism industry in
Asia even though it has been suffered from a number of crises. The mean of the
composition of independent directors is about 0.3755, while board ownership has mean
value of 13.65. The frequency of board meeting in average is 2. Among the board diversity
variables (Edu, Exp and Netw), the mean value of Edu is the highest, implying that board
diversity in educational background is the lowest in tourism firms. Board‟s working
experience is the most diversified with the mean value of about 0.3 diversity index. We
also present the correlation matrix of our dependent variables in Table 3.0. We can see
that the correlation is low between all pairs of the variables. Hence, we can rule out the
multicollinearity problem in the regression.
Table 2.0 Descriptive Statistics
Variable
Obs
Mean
Std. Dev.
Min
Max
Stock Return
Firm Size
Leverage
Independent Board
Board Ownership
Board Meeting
Diversity in board’s educational background
Diversity in board’s working experience
Diversity in board’s external network ties
796
838
827
751
751
607
784
792
760
0.1216
14.3257
0.1227
0.3755
13.649
1.8415
0.5078
0.289
0.3632
0.2502
1.8667
0.143
0.1336
23.776
0.5337
0.1875
0.0921
0.2808
-0.8259
8.7802
0.000
0.000
0.000
0.6931
0.1605
0.1342
0.0665
0.9836
19.1154
1.1834
0.8333
99.1447
4.2767
1.000
1.000
1.000
Table 3.0 Correlations.
1
2
3
4
5
6
1.Firm Size
1.000
2.Leverage
0.3304
1.000
3.Independent Board
-0.0735
0.1210
1.000
4.Board Ownership
-0.2540
0.1043
0.1900
1.000
5.Board Meeting
0.2912
0.1540
-0.1121
-0.3823
1.000
6.Educ
-0.3290
-0.0598
-0.0283
-0.1107
0.1430
1.000
7.Exp
-0.0820
0.0782
0.1906
0.2391
-0.2283
0.0285
7
8
1.000
8.Netw
-0.1813
-0.2020
-0.1395
-0.0367
0.1183
0.1114
0.0307
1.000
Note: Educ represents for diversity in board‟s educational background, Exp represents for diversity in board‟s
working experience, and Netw represents for diversity in board‟s external network ties.
4. The Findings
Table 4.0 presents the results of the regression. Consistent with the previous studies like
Chen (2011; 2007a; 2007c), the results in column (1) reveals that crisis significantly and
negatively affect firm performance. The negative impact of sudden occurrence type of
crisis is found larger than gradual occurrence type of crisis. Column (2) in Table 4.0
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
presents the moderating effect of diversity in board‟s human capital (educational
background and working experience) towards the influence of crisis on firm performance. It
is found that only diversity in board‟s working experience significantly moderates the
influences of gradual and sudden occurrence type of crisis towards firm performance at
5% and 10% level of significance respectively. The negative coefficients of the interaction
terms indicate that diversity in board‟s working experience could improve the firm
performance during the crisis period. In other words, the higher the diversity in board‟s
working experience, the more effective the firms mitigate the negative impact of crisis on
firm performance. However, the moderating effect of diversity in board‟s educational
background is found insignificant. It gives us the notion that diversified board‟s educational
background could not cope with crisis effectively. This may be due to the knowledge
learned via official education could be easily accessible and hence less effective in
stimulating innovative strategies to cope with crisis.
The moderating effect of diversity in board‟s external network ties are found significant
during sudden and gradual occurrence types of crisis at 1% level of significance
respectively. The negative coefficients of the interaction terms imply that diversity in
board‟s external network ties could mitigate the negative impact of crisis and instead,
improve firm performance. The moderating effect of the diversity in board‟s external
network ties has greater positive influence on firm performance, relative to the moderating
effect of the diversity in board‟s working experience. This indicates that the
knowledge/information learned through interlocking directorates is more up-to-date and
unique in aiding to improve firm performance of individual firm during the crisis period.
Table 4.0 The Effects of Board Diversity in Board‟s Educational Background, Working
Experience and External Network Ties on Firm Performance
Firm Size
Leverage
Independent Board
Board Ownership
Board Meeting
Crisissudden
Crisisgradual
Diversity in board‟s educational
background
Diversity in board‟s working
experience
Diversity in board‟s external
network ties
Diversity in board‟s educational
background*Crisissudden
Diversity in board‟s educational
background *Crisisgradual
Diversity in board‟s working
experience*Crisissudden
Diversity in board‟s working
experience *Crisisgradual
(1)
-0.1460***
(0.0000)
0.3160**
(0.0318)
0.3994**
(0.0204)
0.0014**
(0.0270)
0.0291
(0.4235)
-0.1575***
(0.0000)
-0.1246***
(0.0000)
(2)
-0.1494***
(0.0000)
0.3209**
(0.0371)
0.3752**
(0.0413)
0.0014**
(0.0500)
0.0351
(0.3230)
(3)
-0.1512***
(0.0000)
0.3482**
(0.0228)
0.3538**
(0.0323)
0.0014**
(0.0295)
0.0124
(0.7009)
-0.0273
(0.7773)
0.0299
(0.8235)
0.0380
(0.6188)
-0.0893
(0.4441)
0.0273
(0.7774)
-0.3737*
(0.1012)
-0.4119**
(0.0264)
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
Diversity in board‟s external
network ties *Crisissudden
Diversity in board‟s external
network ties *Crisisgradual
Constant
-0.3214***
(0.0000)
-0.2692***
(0.0000)
1.9122***
1.9648***
2.0084***
(0.0000)
(0.0000)
(0.0000)
Adjusted R2
0.0834
0.0685
0.0755
R2
0.0944
0.0864
0.0887
*** is significant at 1 percent level; ** is significant at 5 percent level; * is significant at 10 percent level.
5. Summary and Conclusions
This study investigates the moderating effect of diversity in board‟s human capital and
social capital towards the relationship between crisis and firm performance. Tourism firms
are selected in this study. The crisis events leading to the decline in tourism demand are
selected for the investigation of this study. We find that directors‟ educational background
do not bring significant influence to improve firm performance, but the effect of diversity in
board‟s working experiences are comparably more practical to drive the firms for firm
performance betterment during crisis period. Relative to the moderating effect of board‟s
human capital, we find that the moderating effect of the diversity in board‟s social capital is
the most critical factor to drive the firms towards better firm performance during the crisis
period. However, the moderating role of diversity in board‟s external network ties is found
relatively more pronounced during sudden occurrence type of crisis than gradual
occurrence type of crisis, while the moderating role of diversity in board‟s working
experience is more pronounced during gradual occurrence type of crisis.
In short, the findings suggest that a good quality of board of directors in tackling the
negative impact of crises on firm performance should have diversified working experience
and external network ties. This is logical in the sense that diversified human capital and
social capital should produce better quality of advice/suggestion in improving strategic
setting, especially during the turbulence. Nonetheless, diversified board‟s educational
background does not have significant positive moderating effect towards the impact of
crisis on firm performance. This indirectly implies that innovation is essential for tourism
firms to seize the competitive advantages in the market during the crisis period, as board‟s
education has less contribution towards innovative performance compared to the
knowledge learned from working experience and external network ties. This study
suggests to scholars in considering the influence of board‟s human capital and social
capital when studying crisis management. As none of the studies are found to recruit the
issue of diversity in board‟s human capital and social capital in crisis management study, it
could become a brand new research area to be explored in the future. This could certainly
enhance the sustainability of tourism firms over crisis.
Acknowledgement
The authors would like to extend their appreciation to the Universiti Sains Malaysia for the
Research University Grant RU-PRGS entitled “The Role of Board in Moderating the Impact
of Tourism Crisis on Tourism Firm Performance” [Grant No. 1001/PMGT/836025] that
makes this study and paper possible.
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
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