The Impact of Corporate Governance on Firm Performance - Research Proposal Example

The Impact of Corporate Governance on Firm Performance Name of the student Name of the Professor Name of the institution Course Date Key Words: Board size, performance, Impact Corporate governance ABSTRACT Corporate governance also portrays the relationship amongst both the internal and external stakeholders of the firm. The main internal stakeholders in most cases are the board of directors, executive management and the staffs employed in the firm whereas the main external stakeholders are the shareholders of the firm, debt holders, customers, suppliers, trade creditors and government among others. This paper investigated the impact of corporate governance on firm’s performance where various variables were analyzed. The study found that the board structure, board size is essentially and adversely identified with firm performance, inferring that, in a huge size board, the differences of insiders' sentiment negatively affects deciding, which is unfavorable to firm performance. By and by, board freedom is emphatically and essentially identified with firm performance, proposing that the freer the board is, the better firm performance would. INTRODUCTION The goal behind this study is to establish the impact of the corporate governance on a firm’s performance in Australia and UK (Rohail, Maran & Satirenjit 2015). Corporate governance is an important aspect of any given managerial function entailing various governance provisions that are often helpful in controlling corporation’s operations in such a way to increase its output in terms of profit (Nini, Smith and Sufi 2012). Ideally, effective corporate governance should be one that will essentially guarantee a firm’s investors value from their investment through ensuring that the firm’s resource utilization is within the agreed measure (Arfan & Saad 2015). According to economists, a firm’s responsiveness to the internal as well as external market conditions is largely dependent on the management criteria of the firm and the ability of the specific firm’s governing structure. Corporate governance also portrays the relationship amongst both the internal and external stakeholders of the firm (Nini, Smith and Sufi 2012). The main internal stakeholders in most cases are the board of directors, executive management and the staffs employed in the firm whereas the main external stakeholders are the shareholders of the firm, debt holders, customers, suppliers, trade creditors and government among others (Arfan & Saad 2015). Purpose of the study According to Francis, Hasan and Wu (2015), any given business entity aspires to do well in its business operations within the industry it operates and to do so, corporate governing strategies have to be in place to lead the entity towards their goal. The objective of the study is to explore the effects of corporate governance on the financial performance and efficiency of a firm. Objectives of the study 1. To determine if corporate governance affects a firm’s financial performance and efficiency 2. To identify and measure the negative implications of poor governance on a firm’s financial performance and efficiency 3. To demonstrate the impacts of ineffective and effective corporate governance practices on a firm’s financial performance Research questions In order to achieve above mentioned objectives, the study will investigate and try to find the solutions for the following research questions which are formulated in line with research objectives. 1. Is the corporate governance affects a firm’s financial performance and efficiency? 2. What is the effect of negative implications of poor governance on a firm’s financial performance and efficiency? 3. What is the impacts of ineffective and effective corporate governance practices on a firm’s financial performance HYPOTHESIS 1. H1: Corporate governance does not influence firm’s performance 2. H2: Poor governance positively influence firms performance 3. H3: Board size does not influence firm’s performance Literature review While a firm’s ultimate goal is to increase its investments through venturing in foreign markets or allowing foreign investors to invest with it, there tend to be both positive and negative outcomes associated with such moves (Lawrence 2015). Ideally, companies in Australia are resource-rich and have highly skilled work force in addition to enjoying a global reputation for their advanced innovations. Therefore, to make proper use of such privileges, these companies needs international capital to act as a supplement to their domestic investment (Daily and Dalton 2015). Foreign investors are often helpful to Australian companies in terms of enabling them to reach their economic potential by injecting capital to increase firm’s investment while enhancing the existing business units, boosting a firm’s depleted infrastructure, upgrading the production capacity and providing increased employment opportunities in the process (Daily and Dalton 2015). In addition, the higher growth that is normally spearheaded by foreign investment often increases dividends payable to the shareholders as well as tax revenues to Australia’s Federal and State Government hence enhancing economic growth in the form of availability of enough funds to be injected in hospitals, schools, roads and enhancing security services among other essential services (Bill, Iftekhar & Qiang 2015). Foreign investment also has other benefits such as bringing in new businesses with connections to other markets hence opening up additional opportunities for exporting and importing goods and services. The introduction of new business opportunities will increase competition, which eventually lead to advanced innovation in the market (Daily and Dalton 2015). Despite the positive aspects related to foreign investment, there are some setbacks that in handy with such investments, for instance upon exploration of the foreign market as a result of open market opportunities, the implications of the foreign exchange rate may occasionally be severe on the new entrants into the foreign market. The significance of concentrated ownership on the performance of the firm Concentrated ownership entails high private control of a firm by its insiders, that is, executive management and the board of directors. This move is often regarded to be beneficial in the sense that there is always shared benefit of control in the firm hence enabling collective decision making on issues pertaining firm’s growth prospects (Walls et al . 2012). Likewise, if a firm’s manager happens to be a dominant shareholder, he/she will try to entrench he/she while blocking any attempted hostile takeover of the firm (Esra & Allam, 2015). However, given the fact that a controlling shareholder may also be the manager or even a directly of the company, he/she may be tempted to pay himself/herself high salaries hence crippling the firm’s performance due to lack of enough financial resources. The influence that the board of directors and the firm’s executive management have on the firm’s performance The board of directors and the executive management are always the pillar of a firm’s business operations based on their decision making function (Pankaj 2015). The board of directors have the mandate to make decisions, which are then implemented by the executive management. In fact, larger board of directors’ team with higher percentage of outsiders have higher likelihood to exert influence over a firm’s top executive management due to their wider range of functional experience. For instance, they may decide to compel the executive management to increase the number of shares the firm sells in the stock market, this would eventually enhance the firm’s business expansion due to increased accumulated equity that will be realized from increased the sale of shares(Walls et al. 2012). On the contrary, the board may decide to increase rate of dividend per share payable to shareholders, this may end up affecting the performance of the firm in away since there would be reduction in the amount of retained earnings to be ploughed backed into the business. The implications of the identity of the shareholder, that is, individual/family, companies and government on the firm’s well-being. The identity of the shareholder may implicate the performance of the firm in a number of ways. For instance a firm that is owned by an individual or family, they might want to be involved in the decision-making process thus preventing the experts contracted on behalf of the company from making rightful decisions that would be paramount to the growth of the company (Walls et al ., 2012). Likewise, a firm that has family members has the shareholders is unlikely to be corrupt since every individual will be concerned with growth of the company. As discussed above, the corporate governing body of the company should have adequate corporate governing strategies to oversee the operations of the company (Haseed, Yussoff & Che 2015). The management of the firm should be allowed to operate freely without influence from third parties. Research Methodology The research will take a quantitative approach and will be based on secondary data that will be retrieved from annual reports of UK listed companies and DataStream from 2010-2014. Data stream is a detailed database of financial, economic and company data around the globe. Data regarding corporate governance will be retrieved from companies’ annual reports while information concerning firm’s financial performance will be gathered from data stream. Stratified random sampling of 250 listed firms will be conducted. Measures The dependent variables involve firm’s performance while independent variables involve corporate governance. The financial performance variables will include dependent variables, Return on Assets (ROA) and Return on Equity (ROE). The corporate governance (independent) variables will entail the board size, meetings, committees and composition. The control variables will include the firm size and firm age. Descriptive statistics will be used to identify the fundamental features of the data. Multiple regression analysis will be performed to provide proof of the impact of corporate governance and firm’s performance. This can be presented in the conceptual framework below; Independent variable Dependent variable Research Hypothesis H1: There is a negative relationship between corporate governance and a firm’s financial performance and efficiency. H2: There is a negative relationship between corporate governance and a firm’s financial performance and efficiency The following regression equation will be used in the analysis 1. ROA =α +β1BZ +β2Mts +β3Cmps 2. ROE = α +β1BZ +β2Mts +β3Cmps Data Analysis and Discussion Descriptive data Mean Std. Deviation N ROE 20.90 19.823 369 ROA 3.96 6.514 333 BSIZE 10.87 2.268 369 MEETINGS 8.45 2.806 369 Bcmp .24 .430 369 The descriptive results above shows the different characteristics of the study variables with board size having the largest variation in the study. While committee composition having the smallest deviation. ROE is having largest mean followed by board size Table 2.0: Correlation ROE BSIZE MEETINGS Bcmp ROA Pearson Correlation ROE 1.000 .039 -.187 -.043 0 BSIZE .039 1.000 .159 -.096 -.091 MEETINGS -.187 .159 1.000 .001 -.134 Bcmp -.043 -.096 .001 1.000 -.038 ROA 1 .038 -.134 -0.091 1 Sig. (1-tailed) ROE . .226 .000 .207 . BSIZE .226 . .001 .033 .049 MEETINGS .000 .001 . .491 .007 Bcmp .207 .033 .491 . .245 N ROE 369 369 369 369 333 BSIZE 369 369 369 369 333 MEETINGS 369 369 369 369 333 Bcmp 369 369 369 369 333 ROA 333 333 333 333 333 From the correlation analysis above in table 2.0, ROE is positively correlated with board size while negatively correlated with meetings and committee composition indicating that with huge board meetings, the financial performance of the firms reduces while small board committee improves the performance of the firms. This is also replicated in the in ROA. The study by Lawrence (2015) states that small board committee are more effective in decision making hence this study findings is supported by this previous study. Makki & Aziz (2014) finds that the larger board of directors’ team with higher percentage of outsiders have higher likelihood to exert influence over a firm’s top executive management due to their wider range of functional experience proving the positive relationship between board size and the financial performance of firms. In running the multiple regression the first was the impact of firms management on return on equity and the results are shown in table 3.0 below Table 3.0: Impact on ROE Model Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 (Constant) 26.702 5.578 4.787 .000 BSIZE .587 .456 .067 1.287 .199 MEETINGS -1.393 .367 -.197 -3.797 .000 Bcmp -1.659 2.374 -.036 -.699 .485 Table 4.0: Impact on ROA Model Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 (Constant) 8.869 1.931 4.592 .000 BSIZE -.214 .156 -.076 -1.366 .173 MEETINGS -.280 .126 -.122 -2.214 .028 Bcmp -.687 .825 -.046 -.833 .405 The two regression reports shows varied results with the first model indicating that committee composition and board size are not statistically significance same as the second model. The meetings are statistically significance in both cases hence we can go ahead and do the analysis. Therefore the two hypothesis will be rejected and make a conclusion on the influence of the meetings. From the results, there is inverse relationship between meetings and firms efficiency performance. Conclusion The board structure, board size is essentially and adversely identified with firm performance, inferring that, in a huge size board, the differences of insiders' sentiment negatively affects deciding, which is unfavorable to firm performance. By and by, board freedom is emphatically and essentially identified with firm performance, proposing that the freer the board is, the better firm performance would be. Then again, CEO composition is contrarily and altogether identified with firm performance, deducing that, under the condition that CEOs serve as administrators, the board would likely neglect to be a goal chief, correspondingly putting firms off guard. Concerning composition, insider ownership has a positive and huge connection with firm performance, proposing that higher insider ownership may accommodate powers' and outside shareholders' interests, therefore making firm performance better. The deviation between voting right and income right is contrarily and essentially identified with firm performance, suggesting that the bigger gap between voting rights and income rights, the more motivations controlling shareholders could have; along these lines they may steal firm resource, creating harm to little shareholders' advantage and breaking down firm performance. Financially, the better the governance the better the performance with smaller team. Reference Arfan, A & Saad, B.N 2015, ‘Impact of board characteristics and audit committee on financial performance: A study of manufacturing sector of Pakistan’, IBA Business Review, vol.10, no.1, pp. 102-114. Bill, F, Iftekhar, H & Qiang, W 2015, ‘Professors in the boardroom and their impact on corporate governance and firm performance’, Financial Management (Wiley-Blackwell), vol .44, no.3, pp. 547-581. Daily, C.M. and Dalton, D.R., 2015. Corporate governance in the small firm: Prescriptions for CEOs and directors. 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Corporate governance and environmental performance: is there really a link?. Strategic Management Journal, 33(8), pp.885-913. Read More