Impact of Corporate Governance on Firm Performance - Research Proposal Example

Impact of Corporate Governance on Firm Performance Name Institution Date Abstract This research focuses on the important components of the governance styles adopted by major companies and their effect on firm performance. In the past, there have been several measurements of the effect that corporate governance has on the corporate sector but not on firm performance. This paper concentrated on the main styles of governance seen in the market today to find out the effect they have on firm performance. We will use a questionnaire to measure corporate governance in different aspects then we will run a pilot test to calculate the accuracy of the questionnaire. We will use banks as our sample and then calculate the effect of corporate leadership on their performance. Factor analysis was applied to compute the extreme differences accounted by best strategies of governance as the free variables. Key Words: Firm Performance, Corporate Governance, Impact Introduction Firm performance is a term used to describe how well an organization can combine its primary assets and be able to generate revenue in a competitive environment. Corporate governance refers to the decisions made by management and impacts the general operations of the firm. This paper seeks to study the connection between company governance and the performance of the firm. The governance of a company can either be decisions favoring the company’s shareholders or the board of directors as long as they affect the general performance of the organization (Chong and Lopez-de-Silanes, 2007). It is highly unlikely to find the board of directors of a firm and its shareholders coming to an agreement but the two parties are very crucial in making decisions that affect the performance of the firm. If good corporate governance leads to better organizational performance then the companies that do well in the market should be very well governed. In the 90s, the stock earnings of those companies with solid shareholder privileges performed much better than stock earnings of those companies with weak privileges of the shareholders by an estimated 8.5% p.a on a risk-adjusted basis. This gave a basis for many scholars to conclude that good governance leads to better firm performance. Sometimes decisions are made by the management that do not please shareholders but benefit both the firm and the shareholder in the long run. For example, the management might decide to pay out less dividends to the shareholders. The shareholders will not be pleased by this decision but it can increase the share price in the long run and earn the firm good capital gains and in turn the shareholders. The introduction of the Sarbanes Oxley Act led to numerous changes in order to build the assurance of the shareholders (Ferris, John and Makhija, 2014). Some argue that these reforms were made to influence investor perceptions and not to protect the shareholders but it not clear if they are linked to firm performance. Research Problem The research problem in this study is to define to what degree company governance has an effect on the company’s operations. There are several research questions for this study and they are listed below. Research Question 1: Are company governance and company performance directly connected? Research Question 2: what are the variables incorporated in company governance? Research Question 3: Do the variables encompassed in corporate governance measure firm performance? There are so many variables that can be counted under company governance. We will focus on three variables in order to determine whether they have an impact on firm performance or not. About corporate leadership style, we will incorporate aspects from diverse strategies used by firms in order to better understand the corporate leadership style and determine the effect it has on firm performance. Hypothesis We will use one major hypothesis for this study and it is listed below. H0: There is a positive relationship between corporate governance and the company’s performance H1: There is no positive relationship between corporate governance and the company’s performance LITERATURE REVIEW In this study we are going to examine the effects of the fundamentals of company governance practices on firm performances of diverse organizations with diverse governing styles. Shareholders normally fight for higher share prices so that they can earn more (Chong and Lopez-de-Silanes, 2007). We will examine the effect of governance on an organization’s performance in finances. Financial performance is the ability to maximize profits at a particular level of inputs. A good system of governance leads to high income rates and productivity ratio. There are three different styles of governance seen in the market today. They will not all work for any company but a particular style needs to match the particular operations of an organization (Kyereboah‐Coleman and Biekpe, 2006). Some firms fail to operate at their optimum level due poor selection of their governance style. Major problems experienced due to poor governance styles are under utilization of employed resources, lack of trust, and poor accountability systems making the companies poor investment places. The implementation of proper governance styles is a key feature for the development of firms and achievement of their long-term goals. If the firm has several owners, it is difficult to have proper governance styles. The owners will only be happy when the managers of the organization run the company according to their interests, working at the highest efficiency level possible to maximize the value of the firm and satisfy the owners. There are three governance styles mostly used in the corporate world today namely dictatorship, democratic, and semi-democratic styles (Khiari, Karaa and Omri, 2007). Studies in the past have shown that companies that use the democratic style of governance perform better than those under dictatorship governance. Other studies have found a negative relationship between company governance index and the firm’s market worth. A trade-off always exists between the interests of the shareholders and those of the board of directors (Larmour, 2014). Despite the fact that the shareholders are the ones who appoint the members of the board, there is always an issue when it comes to the directors’ remuneration, profit distribution, and the amount to be kept in the firm’s capital (Ferris, John and Makhija, 2014). It is often safer for the company to remunerate directors satisfactorily in order for them to guide the company in a proper way. Every organization should have a remuneration committee that is made up of nonexecutive members who come up with the firm’s remuneration structure including that of the directors and propose it to the board of directors. The board entirely decides the remunerations to be awarded to the nonexecutive members (Thye and Lawler, 2009). Studies show that employees are of different categories based on the school of thought towards governance style (Hirschey, John and Makhija, 2009). Firstly, there are those employees who believe that the role of white collar employees such as directors is to lead the others and take responsibility while the rest play a constructive role. The second school of thought is made up of employees who believe that governing instructions and principles cause fear and anxiety among the staffs. The third school of thought comprises of the employees who believe that the employees in governing positions are incompetent and mostly adopt autocracy (Guo and Kga, 2012). Most corporations run on the owner/manager model which is mostly seen in small and upcoming organizations where there is one person surrounded by several advisers. This system is not good for today’s market due to its dynamic nature, complexity of organizations, multiple owners, very stiff competition, and the need to have a continuous source of new information in order to stay competitive in the market (Masulis, Wang and Xie, 2012). The modern corporate world needs shared power and leadership. METHODOLOGY Due to reasons of the investigation methods, we will use a board, a questionnaire, and personal meetings from employees of top and lower ranks of the financial sector. The study will be conducted from different banks, how they run their firm, the leadership style used, and how company governance is affecting the performance of the company. In the first stages of the research, we will visit these institutions and interview the staffs at their work places. The employees to be interviewed were chosen based on their positions in the institutions and the remuneration scale they belong to. We will also interview some of the owners and define the effect that high or low disbursements have on their decision about future decisions on investment. The answers we get from the shareholders will help us determine how strong our topic is and the areas where further study should be applied. We will also learn the nature of our study whether exploratory or descriptive depending on whether the topic is a new concept to the employees or not. An effective measurement scale will be applied to ensure that the data collected from the respondents is accurate and ensure respondents full participation. We can apply an interval scale on the respondents in order to get the magnitude of the differences among the employees so that we get the real picture on the ground. This will enable us to compute the means and standard deviations on the reactions of the employees based on different variables. Standard deviation tests and variance tests will display to us which of the aspects listed as company governance tactics are contrary to the norm and will help us know the limitations of our research. In our approach we will also find the variables we will use to quantify the concept of company governance which consists of sub factors that all contribute to its concept. The major factors we will use to measure corporate governance in this study are the policies implemented in the financial institutions. These guidelines are created at the top executive employees but executed to affect the whole organization. Our questionnaires are formulated in such a way that we will get all employees responses to see the effect of these policies on different levels of the employees. In order to get the concept of company performance we have to show the aspects that will underwrite to the general operations of the firm. From the financial point of view we can use financial ratios such as return on equity, asset debt ratio, and return on asset among others. In a non-financial point of view we can use the firm’s goodwill, market share, and employee turnover among others. Qualitative data will be collected by use of specially formulated questionnaires which will be evaluated based on the likert scale. The results from the likert scale will then be transformed into a unit comparable to quantitative data to measure the firm’s performance. The data will be collected from the leading financial institutions in the country. The qualitative data collected in this study will be calculated by taking the average reactions of three free variables which will enable us to calculate the average score of a single respondent. The sample size of 100 respondents will be chosen from different financial institutions. The connection of our three free variables will then be completed with our dependent variable (firm performance). All the data collected here will then be analyzed using the SPSS software to get the correct results. Analysis and Conclusion A minimum of 1 and a maximum of 6 are used for the values of the variables in the descriptive statistics. The value representing the variable attitude of top executive members amid free variables is higher in the mean column while the attitude of employees is higher in the standard deviation column. This shows that the variable got a response showing maximum opinion differences among respondents from the average value of the same variable. Regression statistics implied contributory effects of free variables on company performance. According to the ideal, 20.4% of the change is triggered by all the three free variables. This is a general result and does not show how any of the three variables individually affects firm performance. The p-value of the ANOVA is below 0.05 indicating that free variables unfailingly predict the dependent variable which is the firm performance in our case. The Durbin-Watson test gave a value of 1.778 which can be rounded off to 2 indicating nonexistence of autocorrelation. Factor analysis revealed that the worth of KMO is higher than 0.514. This displays that factor analysis can be applied since it works best on a higher value of the KMO. Extraction communalities are variance estimate in every variable represented by the modules. The table shows less communalities which show that the removed components are representing the variables on a noble basis. However, if the values were higher then we would get more accurate results. The second part of the table displays the extracted components explaining about 35.9% of the inconsistency seen from the initial variables. This is a small inconsistency from the three factors which is why it is good to comprise three variables in order to get close to 100% inconsistency by the free variables as the initial variables are not many. The screen plot graph is steep indicating that all variables have a collective impact on the final variability. In the alternated constituent matrix, the focus can be on price approach of employees for further studies or better still use component scores. The iteration in the factor analysis was performed 6 times achieving maximum homogeneity between the clusters in the last stage since this is where the mean alterations between the iteration procedures have been achieved. The findings of this research show that the three variables used as free variables have a significant impact on firm performance. This does not mean that other factors do not contribute to individual employee performance. References Chong, A. and Lopez-de-Silanes, F. (2007). Investor protection and corporate governance. Washington, DC: World Bank. Ferris, S., John, K. and Makhija, A. (2014). Corporate governance in the US and global settings. Bingley, U.K.: Emerald. Guo, Z. and Kga, U. (2012). Corporate Governance and Firm Performance of Listed Firms in Sri Lanka. Procedia - Social and Behavioral Sciences, 40, pp.664-667. Hirschey, M., John, K. and Makhija, A. (2009). Corporate governance and firm performance. Bingley, U.K.: Emerald. Khiari, W., Karaa, A. and Omri, A. (2007). Corporate governance efficiency: an indexing approach using the stochastic frontier analysis. Corporate Governance: The international journal of business in society, 7(2), pp.148-161. Kyereboah‐Coleman, A. and Biekpe, N. (2006). The link between corporate governance and performance of the non‐traditional export sector: evidence from Ghana. Corporate Governance: The international journal of business in society, 6(5), pp.609-623. Larmour, P. (2014). Different Paths to Curbing Corruption: Lessons from Denmark, Finland, Hong Kong, New Zealand, and Singapore edited by Jon S.T.Quah, ed. Research in Public Policy Analysis and Management, Vol. 23. Bingley: Emerald Group Publishing Limited, 2013. 255 pp. $1.Governance, 27(3), pp.531-534. Masulis, R., Wang, C. and Xie, F. (2012). Globalizing the boardroom—The effects of foreign directors on corporate governance and firm performance. Journal of Accounting and Economics, 53(3), pp.527-554. Thye, S. and Lawler, E. (2009). Altruism and Prosocial Behavior in Groups. Bradford: Emerald Group Pub. Read More