impact of corporate governance on firm performance published

Impact of Corporate Governance on Firm Performance

September 5

2016 A key objective of a corporate governance system should be the enhancement of shareholder wealth Abstract

By: Muhammad Usman *

Masters: Human Resource Management

Department of Management and sciences

COMSATS Institute of Information and Technology

*Corresponding author: 0320-6640581 or [email protected]

International Journal of New Technology and Research (IJNTR)

ISSN: 2454-4116, Volume-1, Issue-15, Oct 2016

© 2016. Muhammad Usman This is a research/review paper, distributed under the terms of the Creative Commons Attribution-Noncommercial 3.0 Unported License permitting all non-commercial use, distribution, and reproduction in any medium, provided the original work is properly cited

COMSATS Institute of Information and Technology | Corporate Governance

1

Impact of Corporate Governance

On Firm Performance

Mr. Shahzad Ghafoor

PhD: International Business (Continue)

Lecturer, Department of Management Sciences

COMSATS University Lahore, Pakistan

Co Authors:

Saba Amanat

Masters: Human Resource Management

COMSATS Institute of Information and Technology Lahore

Management and Sciences

Asima Akram

Masters: Accounting & Finance

COMSATS Institute of Information and Technology Lahore

Management and Sciences

Under The Supervision of

Respected Teacher:

:


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Abstract

In the light of corporate financial scandals, there is an increasing attention on corporate

governance issues. The investors look for emerging economies to diversify their investment

portfolios to exhaust the possibilities of returns. This paper examines the impact of

corporate governance variables on firms’ performance. This Research found that there is a

direct positive relationship between profitability measured either by Earnings per share

(EPS) or Return on assets (ROA) and corporate governance, also have a positive direct

relationship between each of liquidity, dividend per share, and the size of the company with

corporate governance, finally the study found a positive direct relationship between

corporate governance and corporate performance. Various studies have been conducted in

developing countries including Pakistan to investigate the relationship among corporate

governance and firm performance. This study indicates that corporate governance can be

measured through the following elements.

(1) board size (2) Female Member (3) CEO duality (4) Education of Directors (5) Board

working experience(6) independent directors (7) board compensation (8) Board ownership

(9) Audit committee (10) Board composition(11)Leadership Structure.

Key words: Corporate governance, firm performance,

conceptual framework, financial performance, Independent

directors, block holders, duality.


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INTRODUCTION

he corporate scandals of the early 2000s, including Enron, WorldCom, Tyco and

others, led to a wave of regulation aimed at anticipation similar problems in the

future. The culmination of every financial crisis academicians, regulators,

governments tend to focus on the corporate governance more dynamically in order to

enhance investors’ confidence that would attract investments. Corporate governance

measures like board structure, compensation structure and ownership structure are

determined by one another, and by variables such as risk, cash flows, firms’ size and

principles etc. These variables also strongly affect a firm’s performance (Jensen and

Mackling, 1976).

Firm risk play an important role in the firm performance because firms that take more risk

generally have higher returns. Due to their volatile nature, firm-specific risks hinder the firm’

s policy makers and planning department’ s ability to forecast and plan their cash flows and

related activities, etc. These risks are generally related to the returns on the firm’s stocks

(Bloom and Milkovich,-1998).But, firm-specific risks are also directly related to the

performance of the firm (Nguyen, 2011).Corporate governance is an important research

area, which deals with the many governance arrangements used to control the corporation

within the objective of maximizing shareholders wealth. A literature review discloses this

importance, and highlights problems with conflict of interest between shareholders and the

management (Jensen and Mackling, 1976). Effectiveness of corporate governance

essentially guarantees shareholders value and make sure the appropriate usage of firms'

resources, allowing access to capital and improving investor confidence (Denis and

McConnell, 2003).

Corporate governance depends on internal organization and external market conditions;

firm‘s responsiveness to external conditions is largely dependent on the way the firm is

managed as well as the effectiveness of the firm‘s governance structure (Gregory and

Simms, 1999). Several authors (e.g. Rwegasira, 2000; Nam et al., 2004) have debated that

good corporate governance prevents the expropriation of company resources by managers,

ensuring better decision making and efficient management. This results in better allocation

of company resources and, ultimately, improved performance. In the light of corporate

financial scandals, there is an ever increasing attention on corporate governance issues.

Investor’s always aspect for emerging economies to diversify their investment portfolios to

maximize Returns they are equally worried about governance factors to decrease risks in

these economies. Corporate social responsibilities are one of the aspects of this governance

framework which is voluntary and softer in nature. The compulsory governance issues are

enforced by the lawsuit or compliance with the legal provisions. Softer social issues are

T


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required by stakeholders‟ pressure, boycotts, compliance with the self-regulatory codes of

conduct.

LITERATURE REVIEW

Superior corporate governance leads to healthier operating performance (Drobetz,

Schillhofer and Zimmermann, 2003) Firms with inferior governance ratings are observed to

have produced higher returns because of more exposure to risk Pakistan is a country where

the field of corporate governance is up till now at early stages and a lot of work is still

needed to be done for the effective corporate governance and control. Securities and

Exchange Commission of Pakistan is the regulatory authority that supervises the

performance of corporate sector. Emphasis of the past researches in this field especially in

Pakistan has been mostly upon the quantitative and conservative measures like Ownership

concentration, board size, board composition, CEO/Chair duality, role of audit and other

committees. However the objective of this study is to develop a conceptual model by

including the factors of corporate governance which are related to instructions that govern

the board of director, executives of the firms and other stakeholders. The implementation

of these regulatory measures along with the conventional tools will strengthen the

corporate governance system which will increase the firm performance.

Corporate governance plays a major role in macroeconomic stability provide the suitable

environment for economic growth as well as society welfare, therefore international

institutions give major attention and concerns to this issue at the level of macro and micro

parts, because of the importance of corporate governance at both the country and the

corporate levels. Corporate Governance is “a set of relationships between a company’s

management, its board, its shareholders, and other stakeholders. Corporate governance

provides the structure through which the companies set their objectives, and the means of

achieving those objectives and monitoring performance are determined. Good corporate

governance should provide proper motivations for the board and management to follow

objectives that are in the interests of the company and shareholders and should facilitate

effective monitoring, in that way boosting firms to use resources more efficiently.”

(OECD Principles of Corporate Governance 1999).

Corporate governance deals with the behaviors in which suppliers of finance corporations

reassures themselves of getting a return on their investment and is about promoting

corporate fairness, clearness and accountability. And establishes how the several

participants’ shareholders and other stakeholders, management, the board of directors

interact in determining the direction and performance of corporations. Good governance

holds management accountable to boards and boards accountable to the owners and other

stakeholders. In the case of banks, significant stakeholders contain depositors and the

banking supervisor such as the Central Banks. (2003). Internal corporate governance factors

are interrelated to the effectiveness of the collaboration among a company’s management,


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board, shareholders and stakeholders. Good corporate governance is not an end in itself,

but instead facilitates a company’s capacity to define and achieve its purposes. The board

must agree on the company’s values (what it stands for), and the strategy to achieve its

purpose. It must account to shareholders and be responsible for relations with its other

stakeholders, Denis, D. and J. McConnell (2002).

Family and non-family companies’ performance also effect on CG the family companies

controlled by the formation family have greater value, operated more efficiently and carry

less debt than other companies. Miller and Breton-Miller (2006).That family Companies

perform better than non-family companies when the family companies have the intention

to keep the business for next generations. A study by Maury (2006) in 13 Western European

countries found that active family control continued to outperform non-family control in

terms of profitability in different legal regimes. In 2008, a survey conducted by Pakistan

Institute of Corporate Governance (PICG) indicated that 80% of firms cannot reach the third

generation of their founders in Pakistan. Family companies have several incentives to

reduce agency costs (Fama& Jensen, 1983; Demsetz & Lehn, 1985; Anderson & Reeb, 2003)

Research also claims that executives who are agents are motivated to act in the best

interests of their principals (Donaldson & Davis, 1991) it is very difficult for family companies

to avoid the misalignment between principal and agents. The agency cost in family

companies can take place between minority owners and the major family owners.

Board Size: The Different Researchers have

different point of view about the size of board a

too small or too large board size have negative

impact on firm performance. Guest (2009)Board

size was measured by the number of directors on

the board and firm performance was measured by

profitability, return on equity and Tobin’s The first

school of thought claims that a smaller board size

will contribute more to the success of a firm

(Lipton and Lorsch, 1992; Jensen, 1993; Yermack,

1996). However, the second school of thought

considers that a large board size will improve a

firm’s performance (Pfeiffer, 1972; Klein, 1998;

Coles and ctg, 2008). This research indicate that a

large board will support and advise firm

management more efficiently because of a

complex of business environment and an

organizational culture (Klein, 1998).Garg (2007)

investigated the influence of board size and board on firm performance on a sample of

Indian firms. Firm performance was measured by Tobin’s Q, return on assets and total

However from the Asian countries

perspective Watering’s and

Swagerman ( 2011) conducted a

study to trace out the impact of

board size on firm value using a

sample of 155 property firms and

real estate investment trust listed

in the exchanges of Singapore,

Hong Kong and Malaysia. A

positive relationship was

observed between board size and

firm value form the property

firms. However the results forreal

estate investment trust was

insignificant.


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assets turnover the research results recommend that there is an inverse relationship

between board size and firm performance.

CEO Duality: If the firm Chief executives are also

the chairman of the board this represents the CEO

chair duality. CEO duality will weaken the control

mechanism and negatively influence the role of

board members evaluating the activities of firm

managers. The Research of Ujunwa (2012)

Heenetigala & Armstrong (2007), Yasser et al.

(2011) found that CEO chair duality have a negative impact upon the performance of the

firm. According to Hewa-Wellalage and Locke 2011 study, in Sri Lanka, the Sri Lankan code

of best practice on corporate governance give emphasis to the balance of power within a

firm to minimize any one individual’s influence to the decision making process.

Frequency Table

CEO duality has a negative impact on firm performance.

Frequency Percent Valid Percent Cumulative

Percent

Valid Strongly Agree 14 23.3 23.3 23.3

agree 25 41.7 41.7 65.0

Partially Agree 11 18.3 18.3 83.3

disagree 9 15.0 15.0 98.3

Strongly Disagree 1 1.7 1.7 100.0

Total 60 100.0 100.0

In Europe, 84 per cent of firms separate the roles of a chair of a board and a CEO

of a firm (Hedrick and Struggles, 2009)


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These rules provided recommendation that when there is a duality in a firm, a number of

independent directors on a board should be a majority to provide balance and an effective

and efficient operation of a board.

Education Level of Board Members:

A board is also called a control system in a business (Fama and Jensen, 1983) the basic role

of a board is the internal corporate governance of a firm (Fama, 1980). so we have need of

each board member to be fully equipped with management knowledge such as finance,

accounting, marketing, information systems, legal issues and other interrelated areas to the

decision making process. This requirement suggests that the quality of each board member

will contribute significantly and positively to management decisions which is then translated

into the firm’s performance (Nicholson and Kiel, 2004; Fairchild and Li, 2005; Adams and

Ferreira, 2007).so if the firm’s directors have related professional education and have

acquired professional training they can perform much better as compared to those

members who does not have the related education and skills.


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Board Working Experience: Competency of Directors is essential factors as they

contribute positively to the working of the Companies (Johannisson

andHuse,2000).Experience is expected to positively contribute to boost the performance of

a firm. However, older-age board member seems to be more aggressive with decisions.

These characteristics of board members may result in risky decision making, which may

undermine a firm’s performance (Carlson and Karlsson, 1970)The board of director must

establish the regulations regarding executives of the firm especially about the Firm CEO to

ensure that executives are pursuing the goal of shareholders. Directors play a significant role

in deciding the strategic direction and overall policy making of the firm so the corporate

regulatory authority must establish some important regulation in order to confirm the

better functioning of the governance mechanism.

Table 1 Summary of Role of Board of Directors

Theory Role of Board Implications for board

Agency Managerial control Independent boards mechanism for shareholders to preserve ownership, control rights and monitor performance

Stewardship Managerial empowerment The board controlled by management is empowered and manages.

Resource Dependence

Search for external resources Board with strong external links is a

co-optation tool for firms to access external resources.

Board members with a higher age average may face more limited pressures to a changing

business environment and this may hinder the implementation of more strategic decisions

[Note]

Every firm must establish a defined rules and

regulation regarding the retirement age of a board

member so that older members could be replaced by

energetic directors that can contribute better than

their elder counterparts.


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(Child, 1975).Moreover Berube (2005) notes that companies can no longer be deal with

directors who simply put in a token of appearance. Companies search for qualified directors,

with their expertise. A report from Christian & Timbers in New York also reflects the tough

competition for qualified outside directors (Bates, 2003).A survey conducted in America by

Ernst & Young reports that a lot of companies in Europe and America they are worried and

complaining that they struggle to find qualified directors for their boards but it’s very

difficult to get a board according to your requirements (The Economist, 2006). Hendry

(2002).

Board Compensation: shareholders should attach their financial benefits to

compensation which is paid to a firm’s management. Once management behavior is not

favorable, then compensation is a corporate governance mechanism to encourage

management to run a firm in the interest of shareholders. Board Compensation solves

agency issue between shareholders and management and contributes positively to a firm’s

performance (Jensen and Murphy, 1990; Mehran, 1995).

Board Ownership: Brickley et al. (1988) concluded that the board’s ownership is an

encouragement for board members to do best efforts. This encouragement will help board

members administrate management in a more efficient way. Consistent with this view,

Jensen and Murphy (1990), Chung and Pruitt (1996) considered that, board’s ownership will

improve firm’s performance. Mehran (1995) Presented empirical evidence that there is a

positive correlation between board ownership and firm’s performance. Fama and Jensen

(1983) argued that contribution of board’s ownership is measured as a “two-edged knife” in

which there is an optimal level of board ownership which contributes positively to a firm’s

performance.

Independent Directors :Non-executive directors on the board of directors, performing

on the part of external shareholders, are generally expected to monitor firm’ s strategy and

decision-making in this regard. (Fama, 1980) and Mak and Kusnadi (2005) disclose that a

higher fraction of independent directors on the board is linked to greater firm

value.Yammeesri, J., &Herath, S. K. (2010) said at their research that it is still debatable

whether non-executive directors will perform well in monitoring firm management and

whether their performance could reflect an increase or decrease in corporate performance.

Elloumi and Gueyié (2001) concluded that firms with high ratio of independent directors in a

board face less financial pressure. In addition, when a business environment go downhill,

firms with many independent directors have had lower probability of filing for bankruptcy

(Daily et al., 2003)


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Frequency Table

Non-executive directors’ performance could reflect an increase in corporate performance.


Percent


agree 32 53.3 53.3 68.3


disagree 6 10.0 10.0 96.7


Total 60 100.0 100.0

But another side also can be discuss in which the chief executive officer (CEO) may feel

uncomfortable to discuss all the strategic matters with the non-executive directors, which

will create a gap between the firm’s decisions and the participation of its independent board

members. So, a negative relationship may be expected in this situation

Block Holders: Small shareholders will bear serious consequences from block holders who

may abuse the power how to run a business. Second, strict control from block holders to a

firm’s management will hinder the firm’s performance due to restriction in work and

decisions. If firm’s management will become inflexible with business environment. The


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decision making process is no longer an initiative from the firm’s management and this

results in lowered firm performance (Burkartet. Al., 1997; Myers, 2000). Denis and

McConnell (2003) and Becker et al. (2011) considered that, centralizing managerial power in

block holding individuals will generally positively affect the performance of the firm.

Female Member: The female board members Shows a diversified characteristic of the

board (Dutta và Bose, 2006).Female board members will convey better images in the

perception of the community for a firm and this will contribute positively to firm’s

performance.

Frequency Table

Female members have a positive impact on firm performance.


Percent


agree 22 36.7 36.7 70.0


disagree 5 8.3 8.3 95.0


Total 60 100.0 100.0


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Other board members will have improved understanding of the business environment

when female board members are appointed.

Audit Committee: Directors and audit committees that are independent from

management can improve the firms' reporting system and the quality of reported earnings.

Siagian and Tresnaningsih (2011). Generally, independent directors also serve as

experienced professionals in other large organizations and therefore, care about their

reputation (Nguyen and Nielsen, 2010).The committee should contains independent board

of director along with other members. Islam, M. Z., Islam, M. N., Bhattacharjee, S., & Islam,

A. Z. (2009).Independent audit committee is one of the important mechanisms. It is

expected to satisfy the need of both internal and external users of financial statements, and

previous studies have documented the importance of the independence of audit committee

members for maintaining the integrity and quality of the corporate financial reporting

process. Auditors play a important role in their clients’ disclosure practices and procedures.


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Concerns regarding the quality of financial information and its association with the quality

of the auditing process have grown with the time, given the rising incidence of fraud in big

businesses, failures, and litigation (Chambers, 1999; Tie, 1999)

Frequency Table

The audit committee oversees management’s procedures for enforcing company’s code of conduct.

Frequency Percent Valid Percent Cumulative Percent


agree 35 58.3 58.3 70.0


disagree 3 5.0 5.0 100.0

Total 60 100.0 100.0


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Thus, auditing may reduce misreporting and mispricing in financial reporting and control

managerial discretion with respect to earnings management. There are some proxies for

measuring audit quality, including the size of the auditing firm (DeAngelo, 1981), the

auditor’s contract with its clients (Johnson, Khurana, & Reynolds, 2002), and the presence of

an industry-specific auditor. However, there is sufficient evidence Received that the size of

the auditing firm is a good representation for audit quality (see Francis, Maydew, & Sparks,

1999; Becker, DeFond, Jiambalvo, &Subramanyam, 1998; Chia, Lapsley, & Lee, 2007).

Board Composition: Existence of outside board member has a positive relationship with

firm performance. The board develops the mission, policies, and overall track for an

organization. People with distinct values, opinions, and relationships to different people and

communities comprise the board of directors and it follows that the individual

characteristics of the people who serve on the board will influence the mission, policies, and

overall direction of an organization. Therefore, having representatives of diverse

populations on a board of directors will have a direct impact on the mission, policies, and

overall direction of a nonprofit organization.


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Some Alternation made By SECP in 2002 code and introduced 2012 code of corporate

governance

Table 2 2002 and 2012 Code Of CG

Particulars

Code 2002

Code 2012

Independent Director Encouraged a least of one independent director on the board of a listed company.

One independent director is compulsory while preference is for 1/3rd of the total members of the board to be independent directors.

Criteria for assessment of independence

Very small criteria provided Criteria has been significantly expanded

Executive Directors Number of Executive Directors not to be more than 75% of elected directors including CEO

Maximum number of Executive Directors cannot be more than 1/3rd of nominated directors including CEO.

Number of directorships

A director can be on the board of no more than 10 listed companies at same time.

A director can be on the board of 7 listed companies at one time. However, the limit does not include directorship in listed subsidiaries of a listed holding company

Board evaluation

Within two years of the execution of the Code 2012, the Board has to put in place a mechanism for undertaking annual evaluation of the performance of the Board.

The Chairman of a listed company shall preferably be selected form among the

The Chairman and CEO shall not be the same person, unless specifically provided


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Office of Chairman and CEO

nonexecutive directors of the listed company.

in any other law. The Chairman shall be elected from the non-executive directors of the listed company.

Training of the Board of Directors

It is compulsory for directors of listed companies to attain certification. In the beginning, the PICG was to provide the training but later it was opened to other institutions, provided they met the criteria specified by the SECP.

It will be mandatory for directors of listed companies to attain certification under any director training program (DTP) offered by any institution (local or foreign), which meets the criteria specified by the SECP. The criteria are available at the websites of the stock exchanges and the SECP.

Appointment and removal and qualification criteria for Chief Financial Officer (CFO) and Company Secretary (CS)

Appointment, remuneration and terms and conditions of employment of CFO and CS determined by CEO and approved by Board. The same mechanism followed for removal.

The appointment, remuneration and terms and conditions of employment of the CFO, CS and the Head of Internal Audit (IA) of listed companies shall be determined by the Board. The removal will also be by the Board for CS and CFO.

The Head of Internal Audit (IA)

Qualification introduced for Head of IA. The removal of Head of IA is with the approval of the Board only upon recommendation of the Chairman of the Audit Committee.

“Corporate governance principles and recommendations with 2010 amendments”

Board Meetings: Boards meet officially at least four times per year, supplemented by

additional monthly executive committee meetings attended by directors, the chairman, the

CEO and senior managers (Ward, 1991).The board should decide the number of board

meetings held in a year and the details of attendance of each individual director. They

should also maintain minutes of meetings. Pakistani Code of Corporate Governance (2002)


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proposes that the board should meet regularly, with due notice of issues to be discussed but

should meet at least once in a quarter.

Leadership Structure: The corporate governance perspective views the CEO duality to

arise when the post of the CEO and Chairman are managed by one person. The agency

theory claims that there must be a separation between ownership and control. The separate

leadership structure can control agency problems, and enhance the firm’s value (Fama&

Jensen, 1983).In contrast, duality leadership is common among family companies (Chen,

Cheung, Stouraitis & Wong, 2005). The founder CEOs as more alarmed about the survival of

their companies are willing to protect their inheritance for future generations. In the US,

Moore (2002) finds that some companies have the CEO as the board chairman in order to

focus the company’s’ leadership. In addition, by splitting the role of the chairman and CEO,

it reduces the CEO’s freedom of action (Felton & Watson, 2002). Other researchers find that

stewards who hold the positions of a board executive and a chairman concurrently have

significantly higher corporate performance (Donaldson & Davis, 1991; Finkelstein & D’Aveni,

1994).

The board‘s role is to display entrepreneurial leadership of the company within a frame

work of prudent and effective controls which allows risk to be assessed and managed. The

board should set the company‘s strategic aims, make sure that the necessary financial and

human resources are in place for the company to meet its objectives and evaluation of

management performance. The board should set the company‘s values and standards and

ensure that its obligations to its shareholders and others are understood and met‖. (UK

Combined Code, 2006, p. 3) and Directors ‘responsibilities have been classified into three

groups: control, services and resource dependence. Because the managers ‘responsibility is

to work in the best interest of shareholders, the control role demands the directors to be

liable to hire and fire the managers and the CEO and to ensure that managers are working in

the best interests of the shareholders (Monks and Minow, 1995).


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Conceptual Frame work

Figure 1 Conceptual Model

The purpose of an effective governance system is securing the rights of the shareholders. So

the shareholders must have right to call special meeting on the matters which they

considers that its importance. Furthermore the firm must reply properly towards the rights

of the society and must fulfill its social responsibility. A socially responsive firm will be able

to develop its image in front stakeholders. The code of ethics must be clearly defined that m

framework the rights and responsibilities of various stakeholders of the firm. The firm must

have a policy to rotate the external auditor to make sure the true and fair view of financial

information. On other hand the firm must disclose the compensation paid to the directors

and executives of the firm.so performance of the firms is the independent variables which

Effe

ctiv

e C

orp

ora

teG

ove

rnan

ce

Female Member

Independent Director

Leadership Structure

Board Compensation

Education of Directors

CEO duality

Board working Experience

Audit Committee

Board ownership

Board Composition

Board size


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depend on other factors which includes the board compensation, female board members,

education and experience of Directors.

Role of Effective Corporate Governance:

Figure 2 Role of the corporate governance

Role of corporate governance start from investment of the shareholders when

shareholders invest their money they want to get the profit and to protect the shareholder

corporate governance plays an important role to make the superior performance of firm so

when the performance of firm is superior so we can say that it will earn highest profit and

obviously he will pay higher profit to shareholders so it’s become the reason of satisfaction

of shareholders and stakeholders so when all shareholder are satisfy so its encourage them

to invest more money in the firm.


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Descriptive Statistics

Model Summary

Model R R Square Adjusted R

Square

Std. Error of the

Estimate

1 .414a .172 -.062 .61395

This table provides the R and R2 values. The R value represents the simple correlation and is

0.414 (the "R" Column), which indicates a high degree of correlation. The R2 value (the "R

Square" column) indicates how much of the total variation in the dependent variable, can be

explained by the independent variable. In this case, 17.2% can be explained.

a. Predictors: (Constant), CEO duality has a negative impact on firm performance.

Because its goes towards the favoritism and become the cause of fraudulent activities

and Female members have a positive impact on firm performance. Because its create

competiveness between the members of the board of directors. The role of internal

auditors and audit committee is much important for good corporate governance and

Independent director has a positive impact on audit committee because they create

check and balance on them

b. Dependent Variable: Good Corporate Governance increase firm performance.

The above stated findings revealed that there is a significance relationship between Role

of corporate governance and variables. The value of R is less than one and round to .414

which shows very strong positive relationship of our variable with the corporate

governance and shows that our research The overall P value of the model is < 5% & 1%

which shows that the overall model is significant (Smith, 1996; Huson, 1997; Nesbitt,

1994; Carleton et al., 1998; Strickland et al., 1996). P-value of board size and number of

meetings < 5% show that both are significantly positively and negatively related to return

on equity respectively (Alexander, Fennell, & Halpern, 1993; Goodstein, Gautam, &

Boeker, 1994).


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ANOVA

Female member’s representation in board is pressing for more diversity and

good governance

Sum of Squares df Mean Square F Sig.

Between Groups 20.259 4 5.065 5.686 .001

Within Groups 48.991 55 .891

Total 69.250 59

This is the table that shows the output of the ANOVA analysis and whether we have a statistically

significant difference between our group means. We can see that the significance level is 0.001 (p =

.001), which is below 0.05. This shows positive result of study. CEO duality has a negative impact on firm performance. * Good Corporate Governance increase firm performance

Crosstab

Good Corporate

Governance increase firm

performance

Total

Strongly

Agree

agr

ee

Partiall

y

Agree

CEO duality has a

negative impact

on firm

performance.

Strongly Agree Count 8 6 0 14

Expected Count 7.2 6.1 .7 14.0

agree Count 14 11 0 25

Expected Count 12.9 10.

8

1.3 25.0

Partially Agree Count 5 4 2 11


disagree Count 3 5 1 9


Strongly

Disagree

Count 1 0 0 1

Expected Count .5 .4 .1 1.0

Total Count 31 26 3 60

Expected Count 31.0 26. 3.0 60.0


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Chi-Square Tests

Value df Asymp. Sig. (2-

sided)

Pearson Chi-Square 27.708a 16 .034

Likelihood Ratio 23.643 16 .098

Linear-by-Linear

Association .066 1 .797

N of Valid Cases 60

a. 21 cells (84.0%) have expected count less than 5. The minimum expected

count is .03.

Chi square test is used to check the validity of relationship between dependent and

independent variables. If the value of Pearson chi-square is less than 0.05 then the

relationship between dependent and independent variables proves to be valid. Here in our

research the value of chi-square is .034 which is less than 0.05 which shows that the Positive

relationship.

Research Focus and Methodology

The research undertaken is interpretive in nature (Gephart, 2004), capitalizing on in-depth

interviews with researchers of Corporate governance to explore their interpretations and

perceptions of central role of Corporate Governance in Pakistan. Interpretive research is

qualitative seeking to unearth collective frames of reference, or construed realities that

guide the attribution of meaning and help account for how Corporate governance give

benefits to its stake holders. A purposeful sample comprising 5 researchers’ corporate

governance was used for this research. According to Patton (2002), qualitative inquiry

usually focuses in-depth on relatively small samples, selected purposefully (whereas

quantitative methods focus on larger samples selected randomly). “The logic and power of

purposeful sampling lie in selecting information rich cases to study in depth; Information

rich cases are those from which one can learn a lot about issues of central importance to the

purpose of the inquiry” (Patton, 2002, p. 230).

Under this logic, this study selectively included five researchers who have vast experience

and knowledge about corporate governance. Sampling was intentional in the sense that

only researchers of corporate governance who had accumulated relevant experience were


23

selected. As illustrated in Table, researchers were taken from different age groups (e.g., 25

to 65 years old). All researchers are expert in their own research area and have valuable

information regarding corporate governance.

Researchers Area of research

Qualification Past Experience Work Status

1 Management sciences

PHD HOD

2 Human Resource Management

MBA in HR, MS in Project management

Lecturer

3 Management and corporate governance

Master in management science

4 years experienced at corporate sector

Industrial Manager

4 Marketing Masters in Marketing

lecturer

5 Management and corporate governance

Master in management science

3 years experienced at corporate sector

Industrial Manager

An interview guide was prepared based on the literature review presented above. The

interview guide addressed the factors and central role of corporate governance on the

firm’s performance as reflected in Table II. The interview guide served the purpose of

steering discussions around common themes (relating for example to opportunity

identification, motivation, financing strategies, performance, role, legal environment,),

while also leaving the interviewer to decide on the sequence and wording of questions in

the course of the interview. All interviews were conducted in English and Urdu, lasted on

average 10 min, and was tape recorded and transcribed.

Table II

Factors Dimension Description Role Of the Corporate

Governance Central role central role of Corporate governance is the

protection of shareholders and stake holders wealth

Corporate Social Responsibilities

Corporate governance also work for CSR which is most important for development

of the country


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Government role

Current Governments Make it difficult to Operate

Role of government is to provide code of

corporate governance

Independent Director

Ratio of Directors

One independent director is

compulsory while preference is for 1/3rd of the total members of the

board to be independent directors.

Power of take Decisions It’s necessary that they Must have power

of decisions for making fair and free working

Director in others companies A director can be on the board of 7 listed companies at one time. However, the limit does not include directorship in listed subsidiaries of a listed holding company

Contribution in the internal affairs

Positive affect Positive affect in sense that they have a lot of experience in other companies so their

decisions will be more accurate

Negative affect Negative in sense that its Dangerous and can become the cause of leakage

information and loosing competitive advantage

Research Findings

This research shows the role of the independent director he is no less than as stated in the preceding section, and to recommend otherwise would be inaccurate. What, however, is clear is that non-executive directors are not involved in and not expected to be involved in the day-to-day management of the company. Instead, they are expected to be observant guardians of the activities of the board as a whole these are some important points that’s discuss during the interviews by highly professionals.

The main task of independent directors is to accept an oversight role and to ensure that the corporate assets are used only for the company. This task includes:

a. become aware with the fundamentals of the business in which the company is involved and continue to be informed about the activities of the company,

b. revising the accounts of the company, c. calling for further information where the accounts show less than the full picture, d. acting as a check on planned corporate strategy bearing in mind the economics of any

potential transaction, e. regular appearance at board meetings to ensure ability to generally monitor of corporate

affairs and policies


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f. Contributing in the selection, assessment and remuneration of directors generally.

g. Where an error or carelessness is discovered, whether on the part of the board or otherwise, the independent director cannot hide behind a coat of ignorance. Independent directors cannot close his eyes to what is happening in the company and assume that the executive directors are accomplishment their responsibilities to the company.

h. The independent director's main role is not to protect the interest of the minority shareholders, but to act as a check and balance on the performances of the board and management of the company. His duty is to investigation and queries anything which has the appearance of being inappropriate in the company. Indirectly, of course, the role the independent director plays has the impression that it is promoting the best interests of minority shareholders; when in fact the reality is that it is encouraging the interest of all shareholders as a whole.

Conclusion This paper shows the association between corporate governance and performance of the firms, converging on possible differences in results before and after 2012. A significant part of SECP and other exchange requirements tried to increase the role of independent board members. The impact of corporate governance on firm performance and firm risk has been broadly discussed. corporate governance, containing female board members, board’s working experience Education of the Directors, Board composition and board’s compensation etc. all have positive correlations with firm’s performance. Female board members show a diversification of board membership and this diversified nature will contribute positively to firm’s performance.

There should not be large number of members on the board because a larger board’s size will contribute negatively to firm’s performance.

Board should appoint female board members because these females will make a

Vital contribution to firm’s performance. This study proves that female board

members Shows a diversified characteristic of the board. Female board members will

convey better images in the perception of the community for a firm and this will contribute

positively to firm’s performance. Other board members will have improved understanding

of the business environment when female board members are appointed.

This study also Shows that board’s compensation will positively

Contribute to firm’s performance. Accordingly, it is necessary for listed firms to consider an appropriate and competitive compensation level of board’s members. Once management behavior is not favorable, then compensation is a corporate governance mechanism to encourage management to run a firm in the interest of shareholders. Board


26

Compensation solves agency issue between shareholders and management and contributes positively to a firm’s performance

The compensation will provide association between shareholders and firm’s Management and this association will enhance firm’s performance to maximize Shareholders value.

Education level of board members contributes positively because professional

education will make them able to use their professional techniques and minimize the risk and protect the shareholder and timely decisions. we have need of each board member to be fully equipped with management knowledge such as finance, accounting, marketing, information systems, legal issues and other interrelated areas to the decision making process. This requirement suggests that the quality of each board member will contribute significantly and positively to management decisions which is then translated into the firm’s performance

Experience is expected to positively contribute to boost the performance of a firm. However, older-age board member seems to be more aggressive with decisions. These characteristics of board members may result in risky decision making, which may undermine a firm’s performance

It is concluded that the board’s ownership is an encouragement for board members

to do best efforts. It’s confirmed that contribution of board’s ownership is measured

as a “two-edged knife” in which there is an optimal level of board ownership which

contributes positively to a firm’s performance.

It’s concluded that CEO duality will weaken the control mechanism and negatively influence the role of board members evaluating the activities of firm managers. And it is found that CEO chair duality have a negative impact upon the performance of the firm.

Board working experience also contribute a lot in the highest performance of the firms because the experience will make them able to make highly accurate decisions at critical situations.

It’s also found that Role of corporate governance start from investment of the shareholders

when shareholders invest their money they want to get the profit. And for protection the

shareholder corporate governance plays an important role to make the superior

performance of firm so when the performance of firm is superior then we can say that he


27

will be able to earn highest profit and obviously when he will pay higher profit to

shareholders so it’s become the reason of satisfaction of shareholders and stakeholders

when all shareholder are satisfy so its encourage them to invest more money in the firm.

The above stated findings revealed that there is a significance relationship between Role of

corporate governance and variables. The value of R is less than one and round to .414 which

shows very strong positive relationship of our variable with the corporate governance and

shows that our research The overall P value of the model is < 5% & 1% which shows that the

overall model is significant (Smith, 1996; Huson, 1997; Nesbitt, 1994; Carleton et al., 1998;

Strickland et al., 1996). P-value of board size and number of meetings < 5% show that both

are significantly positively and negatively related to return on equity respectively

(Alexander, Fennell, & Halpern, 1993; Goodstein, Gautam, & Boeker, 1994).

IMPLICATIONS The study has some important implications for firms in order to improve their performance. Firms should aim at non-family directors on the board and should not permit banks to be their major shareholders since both negatively impact the firm’s risk-taking abilities and its performance. Firms should also motivate its directors to have more ownership in its stocks since that would encourage them to make decisions catering for their incentives also.

FUTURE DIRECTIONS Future research should be directed at exploring more corporate governance variables for their relations with firm risk and firm performance using the dynamic panel approximation techniques. Also, an effort should be made to increase the sample size in this regard. Sector-wise analysis may also be done in order to explore the sector specific firm risk metrics. Researchers should try to implement modern econometric techniques in order to establish causality between the corporate governance variables. Future research should also try to include more firms into the analysis so that the issues like selective sampling bias could be catered for which at present is not possible because of the data unavailability. And explore the other factors which contribute to increase the performance of the firm and protection of stakeholders and shareholders.


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