Investigating the benefits of corporate governance has been given significant attention over the past decade (Cheung et al., 2008; Ertugrul & Hegde, 2009). Hence, many studies now shed light on the relationship between corporate governance and firm performance in developed countries (Bhagat & Black, 2001; Bauer et al., 2008; Lehn, Patro & Zhao, 2007; Schmidt, 2003; Brown & Caylor, 2004; Black et al., 2006). However, less research has been conducted on the relationship between corporate governance and firm performance in developing countries (e.g., Kajola, 2008; Haat, Rahman & Mahenthiran, 2008; Lamport Seetanahah & Sannassee, 2011).
In addition, empirical studies have mainly focused on specific dimensions or attributes of corporate governance, including: board size (Yasser, Entebang & Mansor, 2011; Anderson, Mansi & Reeb, 2004; Brown & Caylor, 2004; Yermack, 1996), board composition (Javid & Iqbal, 2008; Chung, Wright & Kedia, 2003; Hutchinson & Gul, 2003; Coles, McWilliams & Sen, 2001; Weir, Laing & McKnight, 2002; Hermalin & Weisbach, 2003; Bhagat & Black, 2002), audit committees (Klein, 2002a,b; Anderson,
Mansi & Reeb, 2004; Ho, 2005; Brown & Caylor, 2004; Abbott, Park & Parker, 2000) and leadership structure (Heenetigala & Armstrong, 2011; Coles, McWilliams & Sen, 2001; Weir, Laing & McKnight, 2002; Weir & Laing, 2000; Brickley, Coles & Jarrell, 1997).
In reviewing previous research that has investigated one aspect or feature of corporate governance, Ho (2005) asserts that the appraisal of corporate governance based on one element or feature may not explain the same overall corporate governance effect on firm performance. In addition, some scholars have argued that the investigation of a special or particular attribute of corporate governance might not reflect the influence of governance, and they have tried to evaluate the overall relationship between corporate governance and firm performance (Ødegaard & Bøhren, 2003; Bauer et al., 2008). This view is supported by Cheung, Evans and Nagarajan (2008, p. 461), whose research reveals that while the findings of previous studies are still inconclusive, much has been learned from them: ‘One potential explanation is that these corporate governance attributes are working simultaneously. In some cases, they may substitute for each other, while in other cases they may be complementary’.
Given this, some researchers have tried to test the relationship between the overall corporate governance elements as one index and firm performance since the last decade. For instance, Black’s (2001) study constructs a CGI as a proxy for the quality of corporate governance in Russian companies and finds a positive relationship between corporate governance behaviour and market valuation firms among a small sample of 21 Russian firms. Klapper and Love (2004) use the Credit Lyonnais Securities Asia governance index to evaluate the differences in the governance practices of 14 companies in emerging markets. They reveal that there is a positive correlation between market value and ROA, and that the corporate governance in countries is related to efficient legal systems. Gompers, Ishii and Metrick (2003) investigate the relationship between corporate governance and performance by using 24 different provisions as an index of governance among 1,500 firms. The authors report that governance has a positive effect on stock returns.
Brown and Caylor (2004) study 51 factors in eight categories: audit, board of directors, charter/bylaws, director education, executive and director compensation, ownership, progressive practices, and state of incorporation, based on a dataset of the Institutional
Shareholder Service for 2,327 US firms. The results indicate that better-governed firms are relatively more profitable, more valuable and pay more cash to their shareholders. De Toledo (2007) constructs a governance index for a sample of 97 Spanish non- financial public companies to test corporate governance with performance. The results show a significant relationship between governance and performance. Further, the author concludes that Spanish firms could reduce the low level of investor protection holdings in the country by implementing better standards of governance.
Carvalhal-da-Silva and Leal (2005) used a broad CGI for Brazilian listed companies divided into four categories: disclosure, board composition, ownership structure and shareholder rights, with firms with good corporate governance having a higher valuation (Tobin’s Q) and higher performance (ROA). Black, Jang and Kim (2006) create a CGI for 515 Korean companies listed on the Korea Stock Exchange. The authors offer evidence that is consistent with the relationship between an overall governance index and higher share prices in emerging markets. The study finds that corporate governance is a vital aspect for predicting the market value of South Korean firms.
Bauer et al. (2008) examine the relationship between corporate governance and corporate performance by using six different categories as ratings for 225 companies in Japan in June 2003 and January 2004, and 356 companies in 2004. They find that governance provisions that deal with financial disclosure, shareholder rights and remuneration affect stock price performance. Lamport, Seetanah and Sannassee (2011) examine the relationship between the quality of corporate governance and firm performance among a sample of top 100 Mauritian companies. The authors utilise an index of governance, including 17 factors from the literature and the Code of Corporate Governance that is applicable to Mauritius. Analysis from the results shows that there is no overall difference in the performance of companies that have poor and excellent quality of governance.
4.6.1Board size and firm performance
Kiel and Nicholson (2003) investigate the relationships between board structure and corporate performance in 348 of Australia’s largest publicly listed companies. They find a positive relationship between board size and firm performance for large firms. Adams and Mehran (2005) find a positive relationship between board size and performance in
the US banking industry. Latif et al. (2013) examine the effect of corporate governance mechanisms, such as board size, on firm performance from 2005 to 2010 in Pakistan, and they also find a significant positive relationship between firm performance and board size. These results support Zahra and Pearce’s (1989) conclusion that there is a relationship between board size and firm performance.
However, Aljifri and Moustafa (2007) study the effect of some internal and external corporate governance mechanisms on firm performance (Tobin’s Q) in a sample of 51 firms in 2004. The research indicates that board size has a non-significant effect on performance. Chaghadari (2011) examines the importance of one corporate governance aspect—namely, board size of companies listed on Bursa Malaysia—and applies linear multiple regression as the underlying statistical test. The author does not find a significant relationship between board size and firm performance in a sample of selected listed companies in Malaysia. This result is supported by Kajola (2008), who studies the association between the corporate governance mechanisms and firm performance of a sample of 20 Nigerian listed firms between 2000 and 2006. He does not find a significant relationship between the board size and firm performance of the listed companies in the Nigerian Stock Exchange. This supports other research, which finds that a large board size can lead to the free-rider problem (Yermack, 1996; Eisenberg, Sundgren & Wells, 1998; Conyon & Peck, 1998; Loderer & Peyer, 2002).
4.6.2Leadership structure and firm performance
Several studies examine the relationship between CEO duality and firm performance, but the results lack consistency. For instance, Jackling and Johl (2009) investigate the relationship between internal governance structures and the financial performance of Indian companies. They find that the combined position of CEO and chairman has a negative effect on firm performance. Previous research findings are also supported by Ujunwa (2012), who finds that the duality of the CEO and the chairman is negatively linked with the firms’ financial performance in Nigeria. In addition, the result of these studies (see Rahman & Haniffa 2005; Abdullah 2004; Elsayed 2007; Mashayekhi & Bazaz 2008; Rashid et al. 2010; Coskan & Syiliar 2012; Chaghadari, 2011) were in line with prior research on the relationship between firm performance and a separate leadership structure.
Rechner and Dalton (1991) conduct a study on a sample of Fortune 500 companies, finding that the CEO duality has a strong effect on a firm’s financial performance because it paces up the decision-making process and removes unnecessary bureaucracy, hence leading to stronger financial performance. Kiel and Nicholson (2003) report a significant positive relationship between a combined leadership structure and Tobin’s Q, finding that having a separate leadership structure has no effect on market value. Haniffa and Hudaib (2006) study the relationship between the corporate governance structure and performance of 347 companies listed on the Kuala Lumpur Stock Exchange between 1996 and 2000, finding that a separate leadership structure is not significantly related to firm value measured by Tobin’s Q. Chen, Lin and Yi’s (2008) empirical results do not show a significant relationship between CEO duality and firm performance.
4.6.3Board composition and firm performance
Khan and Awan (2012) find a positive relationship between non-executive directors and firm performance measured by ROA and ROE using a sample of 91 listed firms in the Karachi Stock Exchange. Heenetigala and Armstrong (2011) examine the relationship between board structure and firm performance of a sample of 37 companies selected from the top 50 listed companies in the Lanka Monthly Digest 50 for the years 2003 and 2007. They make similar findings in relation to non-executive director representation on the board and Tobin’s Q from the viewpoint of the stock markets. Rashid et al. (2010) examine the relationship between independent board composition and firm performance of Bangladeshi firms and discover that independent board directors add value to firm performance. Likewise, Mashayekhi and Bazaz (2008), Ehikioya (2009) and Uadiale (2010) find a significant positive correlation between board independence and firm performance.
In contrast, Kajola (2008) does not find a significant relationship between board composition and firm performance for a sample of 20 non-financial listed firms in Nigeria. Kiel and Nicholson (2003) find a negative relationship between board composition and firm performance for a sample of 348 Australian firms. This negative relationship is confirmed by Yusoff and Alhaji (2012), who examine the relationship between corporate governance and firm performance for a sample of 813 listed companies of Bursa Malaysia from 2009 to 2011. Kumar and Singh (2012) investigate
the efficacy of outside directors on the corporate boards of 157 non-financial Indian companies in 2008, finding that the independent director’s proportion has an insignificant positive effect on firm value.
4.6.4Audit committee independence and firm performance
An audit committee is an important corporate governance mechanism in firms to protect the interests of shareholders and oversee financial reporting (Mallin, 2007). Chan and Li (2008) find a significant positive relationship between Tobin’s Q and audit committee independence. Hamdan, Sarea and Reyad (2013) examine the relationship between audit committee independence and firm performance of 106 financial firms listed on the Amman Stock Exchange Market from 2008 to 2009, finding that audit committee independence has a significant influence on firm performance. Triki and Bouaziz (2012) investigate the effect of the audit committee’s characteristics on financial performance, measured by ROA and ROE, of a sample of 26 Tunisian firms listed on the Tunis Stock Exchange from 2007 to 2010. The results show the essential role of the audit committee in protecting the interests of shareholders, as well as the effect of the audit committee’s characteristics on the financial performance of Tunisian companies. Similarly, Tornyeva and Wereko (2012) investigate the relationship between corporate governance and the financial performance of insurance companies from 2005 to 2009 in Ghana. The findings show that audit committee independence is positively associated with the financial performance of insurance companies in Ghana.
Nevertheless, Al-Matari et al. (2012) argue that although a positive relationship between audit committee independence and firm performance is expected, and that an independent audit committee can reduce agency problems, there is no relationship between audit committee independence and marketing performance. Using a sample of 20 non-financial listed companies in Nigeria, Kajola (2008) does not find a significant association between audit committee composition and firm performance. The author also finds that having a majority of independent non-executive directors in the audit committee does not have a significant influence on firm performance. Ghabayen (2012) investigates the relationship between audit committee composition and firm performance using the annual reports of 102 listed non-financial firms in the Saudi market in 2011. The results reveal that audit committee composition has no effect on firm performance in the selected sample. This result is supported by Klein (1998),
whose research fails to find any significant relationship between the proportion of independent directors on the audit committee and firm performance.
4.6.5Corporate governance principles and firm performance
The implementation of the OECD Principles of Corporate Governance enables effective monitoring, helps firms attract investment, raises funds with a low capital cost, generates long-term economic value and enhances firm performance (Sengur, 2011). Previous research has used elements of the OECD Principles to examine the relationship between corporate governance and firm performance. For instance, Cheung et al. (2011) examine how changes in the quality of corporate governance practices relate to changes in future market valuations in Hong Kong. They construct a CGI to evaluate the quality of corporate governance practices of the largest non-financial companies in Hong Kong in 2002, 2004 and 2005 based on the OECD Principles of Corporate Governance. They find that regression analyses indicate a positive and statistically significant relationship between changes in the quality of corporate governance practices as measured by the CGI score and subsequent changes in market valuation.
Dao (2008) focuses on two related aspects of corporate governance in relation to the management of the equitised companies. First, the author examines the current state of corporate governance practice in Vietnam’s companies. Second, Dao investigates the relationship between corporate governance practice and firm performance to identify how corporate governance works in 183 companies in Vietnam. The author indicates that there is a relationship between corporate governance and company performance. Cheung et al. (2010) assess the progress of corporate governance reform among Chinese listed companies using the OECD Principles of Corporate Governance and their effect on firm market valuation in the 100 largest listed firms in China’s equity markets. The results show a positive relationship between market valuation and corporate governance practices.
Similarly, Sunityo-Shauki and Siregar (2007) study the understanding of the OECD Principles of Corporate Governance and firm performance in 192 Indonesian listed companies. The results show a positive effect of corporate governance principles on firm performance in Indonesian listed companies. Kalezić (2012) assesses the quality of corporate governance practice in light of the basic OECD Principles of Corporate
Governance and their effect on firm performance in Montenegro and finds that the quality of corporate governance practice is positively associated with corporate performance. Li and Tang (2007) investigate the relationship between corporate governance and firm performance of listed companies in China in 2003 based on shareholders’ behaviours, information disclosure and stakeholders’ rights. The empirical results show that corporate governance positively affects the performance and value of the listed companies.