Corporate governance plays an important role in sustainable development of economy as it enhances performance of different companies. In the developing economies, role of corporate governance is critical because it lowers level of transaction costs and financial crisis, reinforce property rights, reduces the cost of capital and results in capital market development. The fundamental concerns of corporate governance are maintaining successful relationships within board of directors, management, shareholders and other relevant stakeholders. Literature and scholarly sources reveal several definitions of corporate governance however the most accurate and simple definition is presented by Weil et al. (2004) as
“Corporate governance is the way of managing and governing the entities”
The research aims to inquire the impact of corporate governance indicators on firm’s performance. Many studies are conducted in this particular field because there are some attributes of corporate governance that can directly affect firms’ performance. Some of these are size of the firm, capital structure, compliance with Accounting standards and situation of financial crisis. In this regard, it becomes important for the analysts to acknowledge the factors that are most critical to manage for assuring success of firms in the long-run.
In order to inquire the relationship among target variables, there is a need to inquire what the key corporate governance indicators are that might have impact on the performance of the firm. Therefore the problem statement is
“What are the relevant corporate governance indicators that might impact firm’s performance, whether both the variables are linked and measurable or not?”
The research objectives and the corresponding questions are presented as follows
· To review extensive literature for in-depth analysis of subject matter and developing preliminary framework to be proposed for analysis
· To identify the corporate governance in Pakistan and the ways of implementation
· To provide evidence of firms’ overall performance and to develop relationships among target variables
Research questions corresponding to each of the objectives are
o How the framework can be developed for analyzing relationship between corporate governance practices and performance?
o What are the corporate government practices and how they are enforced in Pakistan?
o What is the performance based indicators that can be of most relevance for the companies?
The fundamental focus of the research would be to examine relationship between corporate governance indicators on publicly listed KSE firms. As a result legal reforms and their enforcement quality can be analyzed in detail. It was identified that Pakistan belongs to those countries in which ownership dispersion is negligible and the ways to deal with agency problems is legal protection of the investors. Financial institutes are also legally protected to assure efficiency of systems. Hence the study regarding impact of corporate governance indicators on firm’s performance is worth to be conducted in this age, so that companies can relate the essential aspects for the growth and long-run survival.
There are huge volumes of empirical research in which the researchers have measured the influence of corporate governance on performance of the firms in international context however studies that are conducted in context of Pakistan are relatively low. The studies are conducted in both the developed and underdeveloped economies. Most of the researches acknowledge the evidence of good governing practices as an indicator of high productivity, economic value and low systematic failures.
According toButt and Hasan, (2009) ownership structure is one of the most important corporate governance component and discussion led to the topic in strategic management field. In international context, all the countries have different rules for governing an organization and this is dependent upon their political, social and economic needs. But it is essential to notice that the rules are actually designed to make sure that each organization gets same and levelled playing field and the governing authorities can protect the rights of stakeholders.
Yasser, Entebang and Mansor,(2011)conducted study to evaluate how the good governance contributes for the development of economies and provide them access to external capital. In order to study the corporate governance practices in Pakistan, analysis of Securities and Exchange Commission Pakistan (SECP) corporate governance code is considered as a dominant step for corporate governance reforms. These codes are aligned with international standards and the reforms related to board of directors are included so that accountability to the stakeholders can be assured. The research was based upon different perspectives of corporate governance and the judicious usage of financial resources of organizations was declared as overall firm’s corporate objective (Yasser,Entebang&Mansor,2011).
Limited researches have been undertaken in Pakistan to explore corporate governance practices however it was identified that ownership structures, financial market state, and dynamics of the market are the most relevant factors to be discussed. Butt and Hasan, (2009) argue that change in corporate structure might result in change of organizational culture. However in Pakistan, the governance revolves under regulatory institutions therefore cultural traits cannot occur significantly.
There are numerous studies conducted within international regimes for exploring this phenomenon and revealed systematic relationship between firm’s performance and board characteristics. Some of the scholars observed positive relationship amongst board size and firm’s performance whereas some identified negative relationships among variables. Thus the results seem to be country specific (Javed & Iqbal, 2007).
Among the major variables that need to be discussed under the framework of corporate governance is board of directors. Businesses are managed under supervision or guidance provided by board of directors. Board is responsible for appointing, compensating, monitoring and replacement of the executives. Leadership is one of the characteristics that might lead the company to dawn or doom. Since board of directors is directly responsible for preparation of strategic plans and operational plans therefore performance of the company is directly dependent upon this variable (Shah, & Hussain, 2012).
Another variable that seems to be prominent for performance of the firm is audit committee. Auditors are appointed by shareholders in order to determine measures to safeguard the interest of company’s assets. In addition to this, results are announced before publication so that the company can review the statistics and consider the recommendations. The auditors also review financial statements of firm and suggest several alternatives for assurance of adequate internal functions.
In order to acknowledge the mechanisms of corporate governance, there are several variables that can be considered as benchmarks and among them Board size is evident. According to the codes specified by SECP, the number of board of directors must not be too big because it directly affects the nature and quality of planning. The ideal size must be within the range of 5-6, depending upon the diversification or size of organization. The other variable that is relevant for the analysis is structure of the board.
Like size and nature of ownership, some of the researchers have identified positive deviation between independence of board and firm’s performance whereas the other researchers have identified negative relationship. The variable actually deals with executive and non-executive directors and their scope in planning and decision making. In Pakistan, codes of Governance reveal that the directors must not exceed more than 75% of the size. As a result, independent directors and minority shareholders are also given with the rights.
Regarding Audit committee, negative correlation was observed by Baek, Kang and Park, (2004) amongst management and independence of Audit committee. The researchers observed low debt financing ratios in case of independent committee.
In order to explore the details of topic, dependent and independent variables will be analyzed in detail and their interrelationship will be discussed in the study. On the basis of literature, the following variables are identified:
Return on Equity
Net Profit Margins
Size of the board: The size of the board is depicted in terms of total number of members within a board.
Board Composition: This variable accounts for the percentage of non-executive directors that are present within a board
CEO Status: This is the status of CEO, whether there is CEO Duality or Chairman and CEO are different.
Audit Committee: This variable indicates overall composition of audit committee.
Diagram of the proposed conceptual framework is as follows
Corporate Governance Firm Performance
This is an academic study oriented at inquiring the impact of corporate governance indicators on firm’s performance. For conducting the research, listed public limited companies on KSE are selected. The data that will be used in analysis will be secondary, obtained from audited statements of KSE within the timeframe of 2014 to 2015.
The top 30 firms of Karachi Stock Exchange are named as KSE-30. These companies are listed on the basis of turnover and the whole process of evaluation takes place after every 6 months.
The study aims to explore the impact of several independent variables on dependent variables and in this regard type of investigation is referred to as causal. The impact of corporate governance will be studied in relation to the two important financial ratios that reveal performance.
The study will be conducted in non-contrived environment and will not be conducted in field. Instead, secondary data obtained from the online sources of KSE will be used for analysis.
Since entire information is easily available and accessible on web based sources and individual needs to calculate the ratios and compare it with the independent variables, thus extent of researcher’s interference would be negligible. Researcher would not be able to manipulate the variables.
The unit of analysis would be KSE Listed Company. The sample of companies will be selected on the basis of re-composition. Data will be collected on the basis of re-composition that will be issued in December 2016.
As mentioned earlier, the data from the period of 2014 to 2015 will be selected for analysis and overall research study will be completed within the timeframe pre-specified by the academic authorities.
Data will be analyzed by using descriptive statistics for calculation of all variables discussed in the earlier sections. Mean, median, mode, standard deviation, Skewness, Kurtosis, Maximum and Minimum Range will be the descriptive statistics calculated for study. For developing the relationship among dependent and independent variables, Pearson correlation and regression will be used.
The research proposal identifies the need to undertake a research for inquiring impact of corporate governance on firms’ performance. The research is important to be undertaken because performance of organization reveals development or underdevelopment of economies. If the performance of organization would be up to the mark, then market of particular country is more likely to flourish.
The variables that are identified as result of analysis of literature are board size, nature of board, CEO status and nature of audit committee. These variables are independent variables because their impact over firm’s performance will be analyzed. On the other hand, return on equity and net profit margins are the indicators of firm’s performance. By applying relevant statistical models, the researcher will be able to derive relevant conclusions regarding positive or negative relationships existing within the variables in context of Pakistan.
Baek, J. S., Kang, J. K., & Park, K. S. (2004). Corporate governance and firm value: Evidence from the Korean financial crisis. Journal of Financial economics, 71(2), 265-313.
Butt, S. A., & Hasan, A. (2009).Impact of ownership structure and corporate governance on capital structure of Pakistani listed companies. International Journal of Business & Management, 4(2).
Javed, A. Y., & Iqbal, R. (2007). Relationship between corporate governance indicators and firm value: A case study of Karachi stock exchange.
Shah, S. Z. A., & Hussain, Z. (2012).Impact of ownership structure on firm performance evidence from non-financial listed companies at Karachi Stock Exchange. International Research Journal of Finance and Economics, 84.
Yasser, Q. R., Entebang, H. A., &Mansor, S. A. (2011). Corporate governance and firm performance in Pakistan: The case of Karachi Stock Exchange (KSE)-30. Journal of economics and international finance, 3(8), 482-491.