The role of the CEO - Essay Example

INTRODUCTION Corporate Governance is nothing but a system of maintaining proper checks on the activities of an organization. These systems make sure that the firm acts responsibly and meets the aims and objectives of its stakeholders. The checks and balances that are focused in corporate governance are both internal and external. They apply to all facets of an organization. For example, they apply to finance, sales, marketing and technical operations of an organization. They are also used for external industry assessment to make sure that the organization’s practices are in line with the practices of firms engaged in the same business and following a similar business model.

There has been increased emphasis on corporate governance after the fall of Enron and Arthur Anderson. These organizations were looking very profitable, but as it turned out the foundations of these organizations were so weak, that they fell in a matter of few months. Corporate governance is used to detect that there are no errors in the financial reports of an organization and it is reflecting its true picture. Corporate governance practices ask for reducing family control from business and reducing the CEO’s duality.

All of these measures prevent the organization from false reports regarding its financial position and performance. 2-THEORY AND LITERATURE REVIEW: 1-Agrawal and Knoeber’s (1996) study This study tried to find out the correlation between the financial performance of a firm and number of independent directors. There were varying results obtained from the research. The study showed that there is no link between the financial performance of the firm and number of independent directors. Later when the theory was further elaborated it was found that there is no link between the performance of the firm and board composition.

The result why dependent directors are better the independent directors is because they will have same aspirations as other shareholders and this will be reflected in the firm’s policies. 2. Goyal and Park (2002) study This study focused CEO’s turnover in an organization and came to a conclusion that in combined organizations CEO turnover is less when there are combined positions then when there are separate positions. In case where the positions are separate there is a 5.3% chance that the CEO will leave the organization if the stock’s performance declines.

However, in a combined position, the chance of CEO leaving the organization goes down to only 2.5%. The study further elaborates that there is no chance the combined leadership structure of a firm will lead to poorer performance than a structure where leadership positions are separated. 3- Ownership Structure and Firm Performance There have been negating studies done on this issue. One study actually proves that there is link between the ownership structure and firm performance. The results of the study stated that as ownership structure increases there are chances of firm’s success because the organizational will be dealt by professional people who will try to meet shareholder’s interests as a priority.

As a result, the firm’s performance is going to increase. In another study, it was found out that ownership structure can be a negative factor in firm’s performance. Because as a firm grows, management and employees ask for more lucrative packages and compensation which results in low profitability of the organization and hence the firm’s value declines as a firm grows in size. 3. Research Methodology 3.2. Data measurement 1- Board of directors Board of Directors is an important factor of the study.

Board of Directors is dependent on the size of the board, executive director and CEO duality. Executive director is the dummy variable in the research. The size of the board will be represented by a number digit to find out the ideal size for the board. CEO duality will take variable 1 or 0. 1 will mean that CEO and Chairman are same, 0 will mean that CEO and Chairman are different people. 2- Research method The research is going to describe the relationship between the firm’s performance and the composition of the board.

The dependent variable is Tobin’s Q. The independent variables are size of the boards, CEO duality and executive directors. This will be a regression test with outcomes being a1, a2, a3, a4. The second model in the research will try to define the links between the ownership structure and firm’s performance. Just like in the previous model, the dependent variable will be the firm’s performance represented by Tobin’s Q. The independent variables in the model will be represented by z1, z2, z3, z4.

Z1 will represent institutional ownership. Z2 will represent government ownership and z3 will represent the shareholder’s holding more than 5% of the firm’s stock. The outcomes of the regression will be coefficients b1, b2 and b3. The last model will link corporate governance to the firm’s performance. The board of director’s variables will be represented by c1, c2, c3, c4. The ownership variables will be represented by c5, c6, c7 and c8. Alphabet “m” will represent the controlling variable of leverage, n will also be a controlling variable representing the firm’s assets base.

Both control variables will be added to the model to give it a better picture.