CEO Duality and Firm Performance

1

FACULTY OF MANAGEMENT
Aberdeen Business School
Title: “CEO Duality and Firm Performance – An investigation in the
Oil and Gas Industry”
Name: Georgios Konstantinou
Matriculation Number: 1314473
Submission Date: 1st of October 2014
Supervisor: Mrs Lindsey Stewart
Aim: To investigate the relationship between certain Corporate
Governance variables (i.e. CEO/chairman duality) and firm
performance.
Objectives:
1. Is there a positive or negative association between dual leadership structure and
firm financial performance?
2. Does the total board size affect the overall financial performance?
3. Does the percentage of Non-Executive directors in the board affect the overall
financial performance?
Total word count (excluding acknowledgements, diagrams, references,
bibliography and appendices) 18416 words
This Dissertation is submitted in partial fulfilment of the requirements for
the MSc Degree in Oil and Gas Accounting.
Georgios Konstantinou (1314473)
October 1st
2014

2
ABERDEEN BUSINESS SCHOOL
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October 1st
2014

3
“CEO Duality and Firm Performance – An investigation in the
Oil and Gas Industry”
The Robert Gordon University, Aberdeen, UK
Aberdeen Business School,
MSc in Oil and Gas Accounting
1st
October 2014
Abstract

According to the best practices of the Combined code of UK Corporate
Governance, a chief executive should not go on to be the chairman of the
same company, unless the board consults major shareholders in advance
and set out its reasons to the investors. The foremost reasons that lead to
the adoption of this recommendation of Cadbury in the early report was to
avoid unfettered power, assist the monitoring role of the board, to reduce
conflicts of interest, to enhance accountability and thus to promote
investors confidence and improve overall performance. Nevertheless,
some corporations permit their chief executive to additionally hold the
post of the chairman while other companies choose to split the two roles.
This research study intents to investigate the relationship between dual
leadership structure (CEO being also the chairman) and financial
performance in a sample of thirty companies operating in the Oil and Gas
sector.
The intact formation of the aim primarily identified three main objectives.
The study implements a “post positivism” worldview, expending a
quantitative research method and approach. Data are analyzed using IBM
SPSS (Statistical Package for Social Sciences) and Microsoft Office Excel
spreadsheets. This consists on construction and implementation of simple
and multiple linear regression analysis models in evaluating the
relationships between the selected variables. Concerns of resource
requirements and ethics are also considered throughout the research
process.
The research, however, is restricted to thirty corporations (limited sample
size) and the investigator’s time constraints. Further limitations and
recommendations to overcome these limitations are mentioned and may
open a way towards new research study. Nonetheless, it should stipulate
a deep insight towards an extensive understanding of Corporate
Governance issues and practices that influence firm financial performance.
Keywords: CEO duality, Board Structure, Independent Non-Executive Directors,
Financial Performance, Oil and Gas.

4
October 1st
2014

Declaration

I declare that this research project is my own work. It is submitted in partial fulfillment of the
requirements for the MSc in Oil and Gas Accounting, Business School, Robert Gordon University.
Certainly, it has not been submitted before for any degree or examination in any other university. I
further declare that I have obtained the necessary authorisation and consent to carry out this research
by my supervisor Mrs. Lindsey Stewart.

5
Table
of
Contents

Abstract
..........................................................................................................................................
3

Declaration………………………………………………………………………………………………………..5

Acknowledgements
....................................................................................................................
8

CHAPTER
1
....................................................................................................................................
9

1.1
-‐
Introduction
..........................................................................................................................................
9

1.2
-‐
Aim
and
Objectives
..........................................................................................................................
10

CHAPTER
2
.................................................................................................................................
11

2.1
-‐
Theoretical
background
and
Literature
review
.................................................................
11

2.2
-‐
Defining
Corporate
Governance
................................................................................................
11

2.3
–
Significance
of
Corporate
Governance
...................................................................................
12

2.4
–
Theoretical
Perspective
of
Corporate
Governance
..........................................................
12

2.5
-‐
Roles
of
the
board,
chairman
and
CEO
...................................................................................
13

2.6
–
Division
of
Responsibilities
........................................................................................................
14

2.7
-‐
Agency
and
Stewardship
theory
a
controversial
discussion
........................................
15

2.8
-‐
Empirical
studies
investigating
Corporate
Governance
and
firm
performance
...
19

2.9
-‐
Empirical
studies
investigating
CEO
duality
and
firm
performance
.........................
21

2.10
-‐
Board
of
Director
Characteristics
and
Company
Performance
.................................
24

2.10.1
–
Board
Size
.............................................................................................................................
24

2.10.2
–
Empirical
studies
on
the
proportion
of
NEDs-‐performance
relationship
28

CHAPTER
3
-‐
Methodology
....................................................................................................
34

3.1
–
Introduction
......................................................................................................................................
34

3.2
–
Research
Process
and
the
concept
of
“Research
Onion”
................................................
34

6
3.3
–
Philosophical
Worldviews
/
Epistemologies
......................................................................
35

3.4
–
Research
Approach
and
Methodology
...................................................................................
37

3.5
-‐
Quantitative
versus
Qualitative
Approach
............................................................................
37

3.6
–
Type
of
Data
-‐
Secondary
Data
..................................................................................................
39

3.6.1
-‐
Merits
of
implementing
Secondary
data…………………………………………………39

3.6.2
-‐
Demerits
of
implementing
Secondary
data
..............................................................
.40

3.7
-‐
Sampling
considerations
..............................................................................................................
41

3.7.1
-‐
Sample
Selection
...................................................................................................................
41

3.7.2
-‐
Advantages
and
Disadvantages
......................................................................................
42

3.8
–
Data
Analysis
Methods
.................................................................................................................
43

3.9
–
Explanation
of
Variables
..............................................................................................................
43

3.10
–
Dependent
Variables
-‐
Firm
Accounting
and
Market
Performance
.......................
44

3.10.1
–
Dependent
Variable
-‐
Return
on
Assets
(ROA)
.....................................................
45

3.11
–
Hypothesis
.......................................................................................................................................
46

3.11.1
-‐
Factors
That
Affect
Power
..............................................................................................
47

3.11.2
-‐
Decision
Errors
...................................................................................................................
47

Chapter
4:
Data
Evaluation
and
Reporting
.....................................................................
49

4.1
-‐
Introduction
.......................................................................................................................................
49

4.2
–
Simple
Regression
for
CEO
duality
and
firm
Accounting
Performance
(ROA)
....
51

4.3
–
Simple
Regression
for
Total
Number
of
Board
Members
and
firm
Accounting

Performance
(ROA)
...................................................................................................................................
55

4.4
–
Simple
Regression
for
the
Proportion
of
NED’s
and
firm
Accounting
Performance

(ROA)
...............................................................................................................................................................
59

4.5
-‐
Multiple
Linear
Regression
in
SPSS
.........................................................................................
62

4.6
-‐
Ordinary
Least
Squares
(OLS)
Regression
............................................................................
62

4.7
-‐
Assumptions
.......................................................................................................................................
63

7
4.8
-‐
Hypothesis
..........................................................................................................................................
64

Regression
.....................................................................................................................................................
68

Chapter
5:

Results
and
Conclusion
...................................................................................
77

5.1
-‐
RESULTS
FOR
SIMPLE
LINEAR
REGRESSION
.....................................................................
78

5.1.1
-‐
Research
Question
1
–
Is
there
any
relationship
between
CEO-‐Chairman

duality
and
company
performance?
..................................................................................................
78

5.1.2
-‐
Research
Question
2
–
Board
Size
-‐
Is
there
any
relationship
between
board

size
and
company
performance?
.........................................................................................................
79

5.1.3
-‐
Research
Question
3
-‐
Is
there
any
relationship
between
the
proportion
of

independent
non-‐
Executive
directors
on
the
board
and
company
performance?
.......
79

5.2
–
Limitations
of
Research
................................................................................................................
80

5.3
-‐
Recommendations
...........................................................................................................................
81

References
..................................................................................................................................
82

Appendices:
...............................................................................................................................
91

Data
on
Excel
Spreadsheet:
2004-‐2013
...........................................................................
91

Appendix
1
..............................................................................................................................
101

Appendix
2
..............................................................................................................................
109

Appendix
3
..............................................................................................................................
117

Appendix
4
..............................................................................................................................
125

YearCode
=2004
.......................................................................................................................................
125

YearCode
=
2005
......................................................................................................................................
131

YearCode
=
2006
......................................................................................................................................
138

YearCode
=
2007
......................................................................................................................................
144

YearCode
=
2008
......................................................................................................................................
150

YearCode
=
2009
......................................................................................................................................
156

YearCode
=
2010
......................................................................................................................................
162

YearCode
=
2011
......................................................................................................................................
168

YearCode
=
2012
......................................................................................................................................
174

YearCode
=
2013
......................................................................................................................................
180

Appendix
5
..............................................................................................................................
186

8
Acknowledgements

I initiated the MSc Oil and Gas Accounting with specific expectations and goals in
mind and I never would have imagined that these would have been so greatly
surpassed. I feel that I have vastly matured both personally and professionally and
this is a journey I would recommend to all seeking a revolutionary change in their
lives. The completion of this gargantuan qualification would not have been possible
without the support and understanding of my dear fiancé, family, colleagues and
supervisor.
A special thank you and gratitude to:
• My fiancé, Aneliya, for her unwavering love, inspiration and
understanding when I was unable to be there for those special
moments. You are and always will be my unique pillar of strength.
• My parents, for their prayers, moral and financial support throughout
the completion of the program. I am immeasurably thankful and
grateful for every moment with you both.
• And last, but definitely not least, my supervisor, Mrs. Lindsey Stewart,
for being firm and honest with me but most significantly, your valuable
guidance and time.

9
CHAPTER
1

1.1
-‐
Introduction

It has been generally recognised that good governance assists the maximization of
shareholders wealth and enhances the confidence of investors. Therefore, the nature
of corporate governance structures of an entity has influence on the responsive
ability of a firm to external factors that affect its performance. The adoption of best
corporate governance provisions has been significant on the strategic agenda in
developed market economies for more than twenty years especially among large
companies (Kyereboah-Coleman 2005).
The separation of ownership and control that embodies the modern-day corporations
produces clashes of interest between the principals and agents. The board of
directors overseen by the chairman is charged with resolving such conflicts and
ensuring accountability to the shareholders. Alone, the owners cannot possibly
scrutinize the managers, thus boards of directors are elected to represent owners,
and as the representatives of shareholders, the board has the legal and moral
obligation as the agent to ensure that the firm is managed in the best interests of the
principals. Thus the board is a key element of the corporate structure and
consequently of best corporate governance provisions (Shuk Ying, 1998).
Even though the board has the responsibility for the company and apparently is the
ultimate source of power, in reality, multiple problems may arise. Management has
the expertise and the time to control and manage the company. Furthermore, boards
have limited time and information to exercise their responsibility. Thus some
companies permit their chief executive to hold also the post of chairman while other
firms choose to separate those two positions between two different directors. In
cases of CEO duality, the Chief Executive Officer, have both roles of the CEO and
chairman, whereas non-duality implies that different individuals serve as the CEO
and the chairperson (Ying Kwok 1998).
I consider that ‘’CEO duality and firm performance’’ topic is important due to the
reason that awareness in duality has occurred predominantly because it is assumed
to have significant implications for organisational performance and corporate
governance.

10
1.2
-‐
Aim
and
Objectives

The purpose of this research is to explore the relationship between CEO duality and
firm accounting performance on a random sample of 30 of the biggest in
capitalization Oil and Gas companies. The randomly chosen companies are:
ExxonMobil, Chevron Corporation, Total SA, Apache Corporation, Repsol YPF,
ConoccoPhilips, which have “dual” leadership structure; and on the other hand, BP
Plc, Royal Dutch Shell Plc, Gazprom, PetroChina, EnCanna Corporation, Occidental
Petroleum Corporation, Valero Energy, Chesapeake Energy Corporation, Petrobras,
Canadian Natural Resources, Afren Plc, OAO Lukoil, Eni, Statoil, Talisman Energy,
Petronas and Sinopec, which allow division of responsibilities in respect to leadership
structure.
The main aim of this research, therefore, is to address the following research
question:
Does CEO duality contributes to or constrains firm performance? This is
probably one of the most important, controversial and inconclusive issues in
corporate governance research and practice.
Additional objectives of the research are to check whether there is a negative or
positive association between the board composition, the proportion of independent
directors on the board and firm’s financial performance and to expand the current
research on Corporate Governance issues (CEO duality) in relation to firm financial
performance.
By duality we mean when one person has both the roles of chairman and the chief
executive officer. Financial performance will be measured using ROA (Return on
Assets), which is been calculated by using EBIT (earnings before interest and tax)
divided by the total assets of the entity.
To measure this relationship a model has been derived using various variables of
corporate governance from the annual reports which are publicly available to be
accessed by a range of analysts, investors and other involved stakeholders.
Table 1: Research Questions
Research Questions
RQ1
Is there a positive or negative association between dual leadership
structure and firm financial performance?

11

CHAPTER
2

2.1
-‐
Theoretical
background
and
Literature
review

2.2
-‐
Defining
Corporate
Governance

According to Roche (2005), Corporate Governance is not easy to be defined, as an
outcome of the ongoing expanding boundaries of the topic. Therefore the notion of
“corporate governance” has attracted several definitions, which vary according to the
context, cultural situations and differing perspectives of researches and
organisations, Amstrong and Sweeney (2002). For example, the Cadbury
Committee, (1992) originally defined corporate governance as “the system by which
entities are directed and controlled in the best interests of shareholders and other
stakeholders”. Similarly, Mayer (1997) explains, corporate governance is concerned
with ways of setting the relationships, concentrating the interests of principals and
agents in line and ensuring that firms are operated in the best interests of
shareholders and other stakeholders. In common, Tricker (2000), describes
corporate governance as an “umbrella term” that contains precise and detailed
issues from interfaces among high-ranking executives, stockholders, board of
directors, and other corporate stakeholders. Deakin and Hughes, (1997); argued that
the correlation between the internal governance mechanisms of organizations and
society’s formation of the capacity of corporate accountability are the major concerns
of Corporate Governance. In addition, Blair (1995), debates that Corporate
Governance is nothing more or less than “the entire set of legal, cultural, and
institutional arrangements that determine how publicly traded corporations act, who
controls them, how that control is exercised, and how the risks and returns from the
activities they undertake are allocated”. It has also been defined by Keasey et al
(1997) to contain ‘‘the structures, processes, cultures and systems that ensure the
successful operation of organizations.’’ Corporate Governance is also seen as the
RQ2 Does the total board size affect the overall financial performance?
RQ3
Does the percentage of Non-Executive directors in the board affect
the overall financial performance?

12
whole set of measures taken within the social entity that is an enterprise to favor the
economic agents to take part in the productive process, in order to generate some
organizational value, and to set up a fair distribution between the shareholders,
taking into consideration their investment (Maati, 1999). Furthermore, Andrian
Cadbury defines CG in accordance with the stakeholder theory:
“Corporate governance is concerned with setting the balance between economic and
social goals, and between individual and communal goals. The governance
framework is there to encourage efficient use of resources and equally to require
accountability for the stewardship of those resources. The aim is to align nearly as
possible the interest of individuals, corporations and society” (Cadbury 2000).

2.3
–
Significance
of
Corporate
Governance

According to Gregory and Simms (1999), Corporate Governance escalates a
company’s responsiveness towards the collective wellbeing of the society as a
whole, as well as promoting efficient utilization of resources within the entity and the
larger economy. They also added that Corporate Governance assist companies in
minimizing risk, especially financial, legal and reputational risks, by ensuring
appropriate systems of financial control, for monitoring risk and ensuring compliance
with the law are in place. Thus, benefits organisations to attract low cost investment
capital through improved investor and creditor confidence, both nationally and
internationally. Hence, they concluded that good Governance tries to establish clear
accountability at senior levels, provide accurate and timely reporting of
trustworthy/independent financial and operating data, consequently achieving firm-
wide efficiency and fair return for investors. Finally, according to Keong (2002) good
corporate governance can ensure adherence to and fulfillment of the strategic
objectives of the entity, thus aiding effective management and enhances corporate
performance, which would significantly add value to the company’s share price,
boosting the value of a shareholder’s holdings.

2.4
–
Theoretical
Perspective
of
Corporate
Governance

CG lacks any standard theoretical base or commonly accepted paradigm as yet

13
(Tricker, 2000; Parum, 2005; Carver, 2000; Larcker, Richardson and Tuna, 2007;
Harris and Raviv, 2008). As such, Corporate Governance research have been
experiencing the absence of consistency and soundness of any form, both
empirically and theoretically, suggesting that fragmentary, disjointed and
disorganized attempts have been made to comprehend and explain how the today’s
compound, contemporary organization is run. For this reason numerous theoretical
contexts deriving from a wide-ranging sciences including economics, management,
finance and sociology, have been historically used by investigators and academics in
explaining and analyzing Corporate Governance. Implementing several
terminologies, according to the instance, these theoretical contexts view and
examine CG from different viewpoint (Bhuiyan & Biswas ca.2009).
Hence, the theoretical perspectives that are relevant to this study are founded on the
governance structures and practices that affect firm’s financial performance.
2.5
-‐
Roles
of
the
board,
chairman
and
CEO

The primary role of the board is to determine strategic aims and this will include
setting the framework for the development of strategy and determining the mission
statement and values of the company; establish an effective internal control system
which is woven in the organization infrastructure. In addition the board will be the
public face of the company and its role is to manage the company relationships with
a broad range of stakeholders. Main issues under consideration in respect of board
membership are:
• Size of the board – the greater the numbers of executive and non-executive
directors in the board, the more opportunities are created for representation
of diversified opinions. However this can slow down the adequacy of
decision-making.
• Executives/NED’s mix – what proportion should be the executives, who are
taking decisions for the day to day operations and considered as employees
of the company and what proportion should be the Non Executive directors
whose main employment is not by the company and are considered to be
independent?
• Diversity – the issues here include male/female mix, representation from
ethnic minorities and representatives from professions other than business
(ACCA, 2012).

14
The chairperson is accountable for the functioning of the board of the directors; will
ensure that the board is run effectively and adequately perform its responsibilities
and takes account of the vital issues and the apprehensions of all board members.
He will certify the accurate and timely communication of information towards the
board, which will empower the board to take rigorous evaluations and monitor the
company effectively. In addition chairs the board meetings and sets the agenda,
ensuring effective communication with shareholders, he will take the lead in providing
an induction program for new directors and he will be the means for the development
of the board. Finally he will prepare a statement for the shareholders in annual
accounts and facilitate the effective contribution of NED’s (Capstone Publishing,
2003). Higgs, (2003), underlines that ‘the chairman is essential for generating the
proper conditions for individual director and overall board effectiveness.
The Chief Executive Officer will mainly run the organization’s business and develop
objectives and strategy based on the strategic aims set by the board. The chief
executive will be reliable for realizing the decisions of the board and its committees,
emerging the core policy statements and reviewing the business organisational
structure. He will have the full responsibility for performance of the company, decide
on investment and financing and report to the chairman and board of directors
(MacKenzie, 2006).
2.6
–
Division
of
Responsibilities

Most Corporate governance reports incorporate the prominence of having division of
responsibilities at the head of an organization; in being pro-active to prevent the
situation where one individual has unfettered power and control of the decision-
making process of an organization. Some of the reasons underlying the importance
of the separation of the roles are listed below:
i. According to the Association of Charted Certified Accountants, if the
chairman runs the board and communicates with shareholders; and
the chief executive runs the company day-to-day, then both roles are
very demanding for one individual to excel in performing them.

15
ii. There is a significant variance between the authority of the chairman
and the influential abilities and expertise of the CEO, which having the
roles taken by different individuals will purify. The chairperson
transmits the responsibility of the board whereas the CEO has the
authority that is deputised by the board. Dividing the posts highlights
that the chairperson is acting on behalf of the shareholders, whereas
the CEO has the authority given in his terms of appointment and only.
Having a single person controlling the whole organization, means that
unconstrained and autonomous power is condensed into one pair of
hands. The board most likely to be ineffective in scrutinising the
CEO’s actions, if it is led by him/her.
iii. The chairman must concentrate on representing the interests of the
shareholders, thus the separation of these two vital roles, avoids the
risk of conflicts of interest.
iv. The board cannot make the CEO truly accountable for management if
the CEO solely leads it.
v. The board would be more able to express its concerns effectively and
independently by providing a point of reporting for the NED’s.
vi. The chairman is responsible for obtaining the information that other
directors require to exercise proper oversight and monitor the
organisation effectively. If the CEO has both roles, then directors may
not be sure that the information they are getting is sufficient and
objective enough to promote their work. The chairman should ensure
that the board is receiving sufficient information in order to make
informed decisions, and should put pressure on the CEO if the
chairman believes that the chief executive is not providing adequate
information.
vii. By separating the roles of CEO/chairman the company will be in
compliance with best practices of corporate governance and therefore
reassures shareholders (ACCA, 2012).
2.7
-‐
Agency
and
Stewardship
theory
a
controversial
discussion

Agency Theory refers to the relationship that exists between two parties. One or
more persons, the principals, engage another person, the agent, to perform some

16
service on their behalf that involves delegating some decision-making authority to the
agent. The agent in turn owes the obligations of accountability and fiduciary duty
towards its principal. Accountability under this concept means that the agent must be
answerable under the contract to its principal and fiduciary duty is the legal and
moral obligation of the agent to act always in the best interests of the principal. In
Corporate Governance the principal is the shareholders and the agent the board of
the directors. Agency costs are costs incurred by the principal in order to monitor the
agent, and ensure that the principal’s interests are safeguarded. To clarify:
Agency cost is zero when the agent takes actions that are entirely consistent with the
principal’s interests/goals. When agent’s actions diverge from principals interests the
agency cost increases (Fama and Jensen, 1983b). By aligning the interests of the
agent with those of principals can reduce Agency Problem (Performance related
payment). Agency problems can sometimes lead to outrageous behavior. For
example, when Dennis Kozlowski, the CEO of Tyco, threw a $2 million 40th birthday
bash for his wife, he charged half of the cost to the company. This of course was an
extreme conflict of interest, as well as illegal. But more subtle and moderate agency
problems arise whenever managers think just a little less hard about spending
money when it is not their own. As in this case, conflict of interest is a situation where
a persons self interest is sufficient to influence its objectivity and independence
preventing him to adequate performing his responsibilities. In addition, the report on
Guinness case suggested that the Chief Executive, Ernest Saunders, paid himself a
£ 3 million reward without consulting the other directors.
Taking into consideration the initial energies have Berle and Means (1932), Principal-
Agent problems from the dispersed proprietorship in the contemporary corporation,
are initiated from the separation of ownership and control, where Corporate
Governance have entirely focused. According to Jensen and Meckling (1976), Fama
and Jensen (1983), even the most primary corporate governance issue, deals with
providing guidance how the principal (owner) will be able to prevent the agent (board
of the directors) from maximizing their own self-interest. Therefore, a scrutinizing
mechanism is devised to safeguard the shareholder interest because when the agent
enters in the process of maximizing his interest; this might conflict with the objectives
that are used to achieve better firm performance.
As such, there are two differing and conflicting opinions on board leadership
arrangements. Proponents of Agency Theory claim that different individuals should
keep the posts of CEO and chairman; otherwise, a sole individual holding both

17
positions will dominate the board. According Daily and Dalton (1993) and Jensen
(1993), an ineffective board and the existence of managerial opportunism occur from
a dominant CEO, which initially befall a dual leadership structure. Consequently,
CEO duality enriches CEO supremacy and diminishes board independence and in
turn less independent and unbiased directors will be engaged to the board. Agency
theory postulates, that where separation of ownership and control is seen, very often
the managerial actions diverge from promoting maximisation of shareholder wealth
(Berle and Means, 1932; Pratt and Zeckhauser, 1985).
Higgs (2003, p. 23) validates dividing these posts, in order to avoid concentration of
authority and power in one individual. The CEO is in charge for implementing the
entity’s policies and running the business, while the chairperson is in charge for
running the board and being accountable to the shareholders. The board have also a
“say” in the process of appointing, removing, evaluating the performance of, and
compensating the CEO, and therefore chairman should reasonably not be the same
person whose performance is being assessed; because realistically he/she cannot
objectively and fairly evaluate his/her own performance (Jensen, 1993, p. 36). CEOs
would therefore gain considerable power ‘‘to dominate the board and pursue their
own interests rather than the interests of their principals’’ (Weisbach, 1988, p. 435).
Hence, dual leadership structure is anticipated to distress firm performance.
Kakabadse, (2006); Coombes and Wong; and DGA, (2004), highlighted some
arguments for and against role separation. The arguments are listed in table 2:
Table 2: Adopted by Kakabadse, (2006); Coombes and Wong, (2004); DGA, (2004).

18
Alternatively, proponents of stewardship theory present a different model of
management, where agents are essentially reliable, truthful and are good guardians
of company resources (Donaldson, 1990; Donaldson and Davis, 1991, 1994). Thus
opponents of Agency theory consider managers to be self-actualizing human beings
rather than opportunistic egoists. In that they seek inherent fulfillment by performing
challenging work; in addition to financial incentives, are also motivated by such non-
financial motives as job satisfaction, advancement and recognition, respect for
authority, and work ethic. In addition to this stewardship theorists, argue that due to
unification and integration of the command chain, the leadership duality results in
faster and more robust decision-taking process (Syriopoulos, 2012). Brickley, (1997),
specifically, postulates that the CEO primary concern, is to safeguard the corporate
assets and diverge from an opportunistic manager. According to Davis et al. (1997),
Stewardship Theory is fundamentally based on social psychology, which focuses on
the behavior of agents. In this concept managers are more likely to serve
organizational rather than egoistic where their musts are based on growth,
accomplishment and self-actualization; they classify themselves attached on their
organization and persist highly committed to the organizational values. According to
Sallman’s (2004), view, “stewards” balance the conflicts between different
beneficiaries and other concentration groups. In addition he concluded, if
maximasation of shareholder is been achieved, then the stewards advantages are
maximased as well, due to organizational success will serve most requirements and
the stewards will have a clear mission. Furthermore, Donaldson and Davis, (1991),
suggest that firms which adopt duality are seen to have robust and effective decision-
taking process due to unambiguous leadership structure embodied in a unity of
command. Consequently these firms outperform these that have different individuals
for the posts of CEO and chairman. For this reason, “stewardship theory” is an
applicable argument put forward for firm financial and market performance that fulfills
the requirements of the interested parties, developing in dynamic performance
equilibrium for balanced governance.
In literature is enormous controversial in respect of separation or integration of the
positions of CEO and chairman, and comprises a frequently debated topic in
Corporate Governance.

19
Figure 1: The relationship between CEO duality and firm performance according to the two
theories. Adopted by Chen (2014).

The
table
below
shows
the
types
of
rationale
the
two
conflicting
groups
may

claim:

2.8
-‐
Empirical
studies
investigating
Corporate
Governance
and
firm

performance

According to Stanwick and Stanwick, (2010), if the degree of Corporate Governance

20
arrangements are unable to affect the financial performance of the companies, then
with no doubt, the importance of Corporate Governance will be diminished in the
eyes of executives and stockholders.
Due to the corporate collapses of the last decades, investors have become more
reluctant and conservative. By complying with best practices of Corporate
Governance, organisations could now attract and provide a certain level of
confidence to potential and current investors. Nevertheless, empirical studies have
specified mixed and controversial views in this regard.
For example, Khurram Khan et al. (2011) studied the influence of corporate
governance on firm’s financial performance of the Tobacco Industry of Pakistan for
four years. The findings revealed that there is a strong and positive impact of
corporate governance arrangements on firm’s financial performance.
Moreover, it was found by Brown and Caylor (2004) that firms with weaker corporate
governance performed more poorly in comparison with firms, that were fully
complied.
In addition, Muhammad Azam et al. (2011) conducted a similar research on a sample
of 14 firms operating in the Oil and Gas industry of Pakistan. The results indicated
that corporate governance has significant and positive impact on firm’s financial
performance and it is concluded that if a company improve it’s Corporate
Governance arrangements and structure, and then simultaneously can improve it’s
financial performance.
A further study carried out by Bauer et al. (2008), covering the relationship between
CG and share price performance, indicated that companies that comply with best
practices of Corporate Governance, outperform notably poorly governed companies
by greater than 15 percent per year. Conversely, Bhagat & Bolton (2008), found that
none of the Corporate Governance measures were correlated with future stock
market performance.
Finally, according to existing documented evidence, the relationship between
Corporate Governance arrangements and firm financial performance can either be
positive (Morck et al., 1989), negative (Lehman and Weigand, 2000), or none
(Burkart et al., 1997; Bolton and Von Thadden, 1998).

21
2.9
-‐
Empirical
studies
investigating
CEO
duality
and
firm
performance

This section contains of literature review and empirical studies, in respect of the
relation between Chief Executive Officer duality and company's performance. Once
analyzed in general, the results of the studies may be classified in three groups. CEO
duality has a positive effect on company performance; CEO duality has a negative
effect on company performance; there is no relation between CEO duality and
company performance. Next section briefly summarizes the studies in question.
Agreeing to Agency Theory, leadership duality is been considered inefficient and as
a result, the chief executive must evaluate hisher own work. As we have seen
repeatedly in the past, the CEO may use his power and position in appointing
directors which would not scrutinize his actions (Westphal and Zajac, 1995), or
choosing directors in such a manner to serve hisher own self-interest which may
lead to increase in agency problems and eventually decrease firm performance
(Rechner & Dalton, 1991). In relation to this, the board would be unable to effectively
challenge the CEO’s actions and thus duality suggests “the absence of separation of
decision management and decision control” (Fama & Jensen, 1983).
Advocates
Firstly, proponents of agency theory have concluded a negative effect on firm
performance, if the positions of CEO-chairman are combined (Rechner and Dalton,
1991; Pi and Timme, 1993; Dahya et al, 1996; Worrel et el, 1997; Faccio and Lasfer,
1999; Kiel and N icolson, 2003; Bozec, 2005; etc). Using different variables as firm
performance measures, such as ROA, ROE, and Tobin’s Q, the outcomes of these
studies specified a negative association between the CEO duality and firm
performance. The researchers above have suggested that duality may assist CEO to
implement his self-interest and therefore these decisions leading to poor
performance.
As indicated in the tables 3 and 4 the results in respect of duality and firm
performance are inconclusive.
Table 3: Adopted and modified by Owusu, (2012).

22
Furthermore, Chen et al (2005), by adopting Tobin’s Q, as a dependent variable,
concluded a negative relationship between profitability and dividend policies in
enterprises operating in Hong Kong. Although, by re conducting similar study 3 years
later, the results indicated, no significant relation between duality and profitability.
In addition, the results of Lam and Lee (2008), appears to be indecisive, since they
concluded a negative relation between dual leadership structure and accounting
performance in family organisations but positive in non-family enterprises.
Moreover, negative relationship between duality and accounting performance; have
been found also, by Ehikioya (2009) and Aygün and İç (2010).
Finally, Ramdani and Witteloostuijn (2010) looked at duality versus performance of
companies functioning in Malaysia, Indonesia, South Korea and Thailand. In their
findings, besides the negative relationship between the size of board of directors and
company accounting performance, a positive relation has been found between
duality and company accounting performance.

23
Detractors
Oppose to this, other researchers have conclude a positive association between
combining the two main posts and firm performance (Donaldson and Davis, 1991;
Brickley, 1997; Boyd, 1997; O’Sallivan and Wong, 1999; Coles, 2000; Dey, 2011;
Guillet, 2012; etc)
Likewise, Yu (2008), examined the effect of dual leadership structure on company
financial performance in companies operating in China. As a result of the study, no
relation has been found between the periods of 2000-2001. But a positive relation
has been found between duality and company performance in the period of 2002-
2003.

24
In addition, the effect of leadership structure of mutual fund companies have been
examined by Yıldız and Doğan (2012), and CEO duality has been found to have a
positive effect on their performance.
Similarly, the results of Gill and Mathur (2011a), who examined the effect of
Corporate Governance on company financial performance of the enterprises
operating in service sector in Canada for the period of 2008-2010, indicated a
positive relation between profitability and duality.
Furthermore, Peng et al. (2007) found that dual leadership structure has a positive
influence on company performance when accomplishing their study on the
relationship between duality and company financial performance in China.
Moreover, Baptista et al. (2011) have conducted similar analysis, using data of the
year 2008 in Brazil. The results indicated a positive relation between dual leadership
structure and ROE. Beside that, a positive relation has been found between
additional indicators of company performance such as ROA, ROCE, MTBV (Market
to Book Value), however this relation was not statistically significant.
Neutralists
Lastly (Daily and Dalton, 1993; Biliga, 1996; Vafeas and Theodorou, 1998; Dalton,
1998; Weir and Laing, 2000; Weir, 2002; Dulewicz and Herbert, 2004) have found a
substantial number of firms are changing from duality to non-duality although they
reported no significant relationship between duality and performance. Similar results
have been also concluded by Faleye (2007), in respect of company accounting
performance and structure of corporate leadership and Valenti et al. (2011), who
investigated the effect of Corporate Governance on firm accounting performance in
over 85 US companies.
Hypothesis Ho1: The separation of the roles of CEO and
the chairman should lead to higher firm performance.
2.10
-‐
Board
of
Director
Characteristics
and
Company
Performance

2.10.1
–
Board
Size

According to Klein, (1998), board size is frequently used as a sign of both scrutinizing
and counseling role. Historical results on the optimal board size seem to be
unconvincing. Outsized board has been condemned for rising costs and disputes

25
about insignificant issues throughout board meetings, however it is also claimed that
smaller board size might poorly monitor influential CEO’s.
Generally, there are two distinct schools of thoughts in respect of optimal board size.
The proponents of a smaller board size argue that the smaller board will contribute
more to the success of an organization, since the benefits of larger boards are offset
by the poorer communication, disability to react in different situations and decision
making speed of larger groups (Lipton and Lorsch, 1992; Jensen, 1993; Yermack,
1996). Specifically, Lipton and Lorch (1992) believed that the board size must not
exceed ten.
Conversely, opponents of the Agency Theory, counter argue that a larger board size
will significantly improve a firm’s financial performance (Pfeffer, 1972; Klein, 1998;
Coles and ctg, 2008), because of the complexity of business environment and
organizational culture (Klein, 1998). In addition, a larger board size will presumably
gather larger amounts information. Consequently, a larger board appears to be
essential for firm financial performance (Dalton and ctg, 1999). Hence, and as can be
seen from Tables 5 and 6, prior studies have found some mixed results on the
relationship between board size and firm performance (Yermack, 1996; Faccio and
Lasfer, 1999; Kiel and Nicolson, 2003; Guest, 2009; Adams and Mehran, 2012;
Wintoki et al, 2012).
Consistent with the view of Dalton (1999), Tanko & Kolawole (2008) established a
significant relation between the board’s size of companies operating in Nigeria and
their financial performances. This supports the view that bigger boards can improve
corporate and financial performance because have a greater range of expertise to
assist in better decision-making and in addition, larger boards are predictably more
challenging for a powerful Chief Executive Officer of a company to dominate (Tanko
& Kolawole, 2008).

26
Advocates
On the other hand, further studies carried by Yermack (1996) showed an inverse
correlation between the size of the board of directors and profitability (Bhuiyan &
Biswas ca.2009). In addition, Conyon and Peck (1998) documented that the effect of
board size on financial performance is largely significantly negative.
A further study carried out by Brown and Caylor (2004) revealed that organisations
with board sizes of between 7 and 14 have higher ROA and higher net profit margins
than do organisations with additional or least board members.
Moreover, Mashayekhi and Bazaz (2008) concluded that larger boards find it more
difficult to communicate and take decisions, while smaller boards might be less
overloaded with routine problems and may assist better at company financial
performance.
The latest US findings (Vefeas, 1999a; Cheng, 2008; Cheng et al, 2008), even non-
US studies (Eisenberg et al, 1998; Conyon & Peck, 1998; Dahya et al, 2002; Lasfer,
2004; Bozec, 2005; Mak and Kusnadi, 2005; Bennedsen et al, 2008; Guest, 2009;
O’Connell and Cramer, 2010; Guo and Kga, 2012; Ujunwa, 2012) have generally
concluded identical findings with those of Yermack (1996) that board size is
negatively related to firm financial performance.

27
Moreover, Conyon and Peck (1998a) concluded an adverse relationship between
board size and firm financial performance the UK, France, Netherlands, Denmark
and Italy.
Detractors
However, some other reports (Faccio and Lasfer, 1999; Kiel and Nicolson, 2003;
Coles et al, 2008; Adams and Mehran, 2012; 2003; El Mehdi, 2007; Kajola, 2008;
Jackling and Johl, 2009; Sanda et al, 2010) reported a positive relationship between
board size and firm performance.
With a model of 35 American banks, Adams and Mehran (2012) detected statistically
significant and positive relationship between board size and firm financial and market
performance as measured by Tobin’s Q.

28
Correspondingly, Jackling and Johl (2009) denoted that larger board size has a
positive effect on company performance amounted by Tobin’s Q, in India. These
reports are in line with the philosophy that larger boards bid greater exposure by
increased access to various resources and therefore positively impacts on financial
performance (Pearce and Zahra, 1992; Goodstein et al, 2006).
Neutralists
Finally, a 3rd
section of researchers have found no significant correlation between the
size of the board and firm financial performance (Dulewicz and Herbert, 2004;
Bennett and Robson, 2004; Wintoki et al, 2012).
As we have seen, the majority of the studies have provided theoretical support for
the agency theory proposition that smaller boards are more effective than larger
boards in affecting firm performance, it is therefore expected in this thesis for the
board size to have a positive impact on firm financial performance as measured by
Return on Assets (ROA).
Hypothesis Ho2: The smaller the board size should lead
to higher firm performance.
2.10.2
–
Empirical
studies
on
the
proportion
of
NEDs-‐performance

relationship

Generally the members of the board can be divided into two categories, being
executive or non-executive director, or differently NED. According to Adams et al.
(2009), a full time employee of a company is been considered to be executive
director, although non-primary employees are considered as NED’s or independent
NED’s.
Fama (1980); Lipton and Lorch (1992) and Jensen (1993), have suggested that the
selection of independent NED’s to sit on the board of the directors is an effective
Corporate Governance tool used to partially reduce the Agency problems between
the agent and principal in contemporary corporations. In respect of the agency theory
spirit, that boards are subject to dictation by executives who are (according to their
duties) not fully accountable to shareholders (Fama, 1980; Sonnenfeld; 2002), thus
the attendance of NED’s on the board with their new pair of eyes can bring to the
company external experience and knowledge and can provide a wider potential than
executive directors (Cadbury, 1992). Regarding this, the NED’s are generally
appointed in order to contribute to the development of strategy of the company,

29
review the performance of Senior Management, ensure that the company has a
sound system of internal controls and an adequate system of Risk Management and
finally to be closely involved on appointment, remuneration and appraisals of Senior
Management (ACCA, 2012). This is the fundamental of the foremost reasons which
most of the CG codes developed and recommended the inclusion of NED’s on the
board of directors. The most vital researches with a range of evidence concerning
the correlation between the proportion of NED’s on the board and firm financial
performance are shown in Tables 7, 8 and 9.
According to (Pearce & Zahra 1992; Daily & Dalton 1993; Agrawal & Knoeber 1996;
Klein, 1998; Vafeas & Theodorou 1998; Weir et al, 2002; Bozec 2005; El Mehdi,
2007; Coles et al, 2008; Kajola, 2008; Guest, 2009; Sanda et al, 2010, Adams &

30
Mehran, 2012; Wintoki et al, 2012), the results and conclusions in respect of
proportion of NED’s versus company performance seems to be diverse.
Firstly, Pearce and Zahra (1992), reported a statistically significant and positive
relationship between NED’s and Return on Assets (ROA), Return on Equity (ROE),
and Earnings per Share (EPS), as performance measurements. Likewise, using a
sample of 180 American companies, Daily and Dalton (1993), concluded identical
results.
A first school of studies (Faccio and Lasfer, 1999; Weir et al, 2002; El Mehdi, 2007;
Coles et al, 2008; Gupta and Fields, 2009; Cho and Kim, 2007, Jackling and Johl,

31
2009) have concluded a positive association between the proportion of NED’s and
firm profitability.
For example, Weir et al (2002) documented a positive correlation between the
proportion of NED’s and Tobin’s Q in his study conducted in UK. This was further
supported by a Korean study of Cho and Kim (2007) that adopted Return on Assets
(ROA), as dependent variable. These findings suggest that boards dominated by
outside directors offer higher performance.
Advocates

32
Alternatively, a second school of studies (Dulewicz and Herbert, 2004; Bozec, 2005
Guest, 2009, Mangena et al, 2012; Agrawal and Knoeber, 1996; Yermack, 1996; Kiel
and Nicolson, 2003) argued that the percentage of NED’s representation on the
board of the directors is negatively connected to firm performance.
To illustrate, Bozec (2005) reported that the association between the percentage of
NED’s and ROA, Asset Turnover and Asset Efficiency is negative. This was further
supported by Mangena et al (2012) who found a statistically significant and negative
correlation between the percentage of NED’s and Tobin’s Q, as a measurement
variable, in a Zimbabwean research study. Hence, the findings of the “second school
of studies”, suggest that the existence of independent Non-Executives in the boards
of directors may lead to extensive monitoring and scrutinizing which in turn may hold
back managerial initiative and consequently constraint performance.
Neutralists
Finally, a third school of researchers (Adams and Mehran; 2012;Daily and Dalton,
1992; Klein, 1998; Wintoki et al, 2012; Ghosh, 2006; Kajola, 2008; Sanda et al, 2010;
Vafeas and Theodorou, 1998; Laing and Weir, 1999; Weir and Laing; 2000; Haniffa
and Hudaib, 2006;) argued that the existence of NED’s on the board has absolutely
no influence on profitability.
To explain, Wintoki et al (2012) concluded no causal relation between board
independence and Return on Assets (ROA), as measurement variable. The same
measurement variable has been used also by Daily and Dalton at their study in 1992;
by using data of US listed companies concluded no relationship between board
independence and performance.
This was further supported by a range of UK studies (Laing and Weir, 1999; Vafeas
and Thoedorou, 1998; Weir and Laing, 2000), which also concluded no relationship
(statistically insignificant) between NED’s and firm performance. Moreover, Haniffa
and Hudaib (2006), conducted a similar study in Malaysia, also reported insignificant
correlation between NED’s and Return on Assets (ROA).
the third relevant hypothesis is operationalised in the following form:
Hypothesis Ho3: The higher the proportion of non-
executive directors, the lower the firm performance.

33
Numerous researchers both historically or recently have focused on efficient
corporate governance mechanisms and have attempted to assess the related
implications for corporate financial performance, targeting firms operating in
diversified business sectors, markets or countries. However, little or none emphasis
has been given to corporate governance in the oil and gas sector. The relevant
empirical research on this subject remains surprisingly thin. Following this earlier
discussion, it remains a useful, interesting and timely empirical exercise to
investigate the implications of CEO duality/separation for firm financial performance,
predominantly since past observed literature has not produced robust empirical
findings. In the next section we will review the worldviews and set the proposed
study’s methodology.

34

CHAPTER
3
-‐
Methodology

3.1
–
Introduction

This chapter discusses data collection techniques and considerations, as well as
philosophical worldviews characteristics, advantages and disadvantages, research
approach and finally analysis procedures used in an effort to achieve the current
thesis objectives. The purpose of this research is to investigate the relationship
between dual leadership structure (CEO being also the chairman), the size of the
board, and the proportion of independence on the board versus financial
performance of the 30 companies operating in the global Oil and Gas sector. The
problem associated with many previous studies focused on efficient corporate
governance mechanisms is that little or none emphasis has been given to corporate
governance in the oil and gas sector.
3.2
–
Research
Process
and
the
concept
of
“Research
Onion”

Research process refers to the various steps adopted by the researcher in analyzing
an issue with specific aim and objectives. With respect to the elements in the concept
of the “Research Onion”, (Saunders, Lewis and Thornhill, 2009), the researcher will
identify the procedures in conducting the proposed study. As indicated in Figure 2,
the primary elements of the research onion are research philosophy, research
approaches, techniques and methods of data collection.
Figure 2: “Research Onion” Adopted by Saunders, Lewis and Thornhill, 2009.

35

3.3
–
Philosophical
Worldviews
/
Epistemologies

In the external layer or the research onion, someone can find the research
philosophies. A research philosophy is a perception in respect to the collection,
interpretation and analysis of data collected. According to Creswell, (2009),
worldviews are a set of values that will guide the proposed research; hence the
researcher must identify the best suitable worldview in relation to the proposed aim
and objectives. The four most common philosophical worldviews is that of the
postpositivism/positivism, which adopts a quantitative research approach, that of the
interpretivism and participatory which adopt a qualitative research approach and
finally the pragmatist worldview which adopts mixed methods research. Table 10
indicates a characteristics break-down of the four Worldviews of Research:
Table 10: Adopted and modified by Creswell, (2009, p.6).

36
Table 6: Adopted by Creswell, (2009).
Merits and Demerits of Postpositivism Worldview

The post-positivism worldview focuses on a deterministic philosophy in which
causes, are probably the determinants of different endings. It is referred to the
“scientific method” of undertaking a research; differently is called “positivism
research” or “empirical science”. According to Creswell, (2009), post-positivism is the
thought produced from positivism which claims the true knowledge by challenging
the traditional notion of the absolute truth. Thus the proposed study reflects the need
to identify and access the causes that influence the outcome – firm financial
performance. From another point of view, can be seen as deductive approach, based
on the intention to moderate the overall ideas into research questions or hypotheses
in order to be accepted or rejected and determine the sole outcome (Creswell, 2009).

37
3.4
–
Research
Approach
and
Methodology

The next layer of the research onion (Saunders, Lewis and Thornhill, 2009), is the
research approach which can be either deductive or inductive. The study adopts
deductive research approach, where the hypotheses and theory are checked first
and only then the process move to more specific results; consequently the
conclusion will flows logically from the available facts. For instance, it shapes
theories of CEO duality, board size and independence relationship to firm financial
performance and draws hypothesis from them. The related hypotheses are then
tested using empirical social data to either confirm or reject the contentions. The
research will analyse panel data of a sample of the 30 largest in capitalization Oil and
Gas companies from 2004 to 2013. The choice of research approach is guided by
the nature of the research.
With respect to the 3rd
layer of the research onion, the research study undertakes
“experimental research strategy” which is mainly used for the research in physical
sciences. The purpose of an experiment is to study causal links; whether a change in
one independent variable produces a change in another dependent variable (Hakim
2000). Experimental strategy is adopted in studies where the researcher aims to
identify the cause-effect relationships and verifying inferences. The main qualities of
this technique are isolation of factors, replication of experiment and quantitative
measurement of results.
3.5
-‐
Quantitative
versus
Qualitative
Approach
(4th

layer)

According to Burns and Grove (2005), quantitative research is an official, robust,
methodical approach by which arithmetical data are collected and used to gain
information about certain issues. In addition, quantitative method is used in
describing different variables; assess relationships among them and to determine the
reason and the overall validity between them (Burns and Grove, 2005), while
qualitative research provides details of a specific case and how it relates to a wider
environment (Kent, 2006). This research adopts a quantitative approach (4th
layer of
the research onion), since it is more appropriate in discovering the correlation
between variables of Corporate Governance and firm financial performance.

38
Consequently, Quantitative research approach and design is more appropriate for
the requirements of this thesis because:
• According to (Kent, 2006) Quantitative Research is useful in making
predictions (experimental research). To illustrate, future research findings
based on quantitative studies will effectively assist in the prediction of the
potential correlation between CEO duality and firm financial performance in
later from now years.
• In addition, the conclusion is easy to be compared due to the reason that
Quantitative research is systematic in nature. For example, the controversial
and debatable conclusions of (Rechner and Dalton, 1991; Pi and Timme,
1993; Dahya et al, 1996; Worrel et el, 1997; Faccio and Lasfer, 1999; Kiel
and N icolson, 2003; Bozec, 2005) and (Donaldson and Davis, 1991;
Brickley, 1997; Boyd, 1997; O’Sallivan and Wong, 1999; Coles, 2000; Dey,
2011; Guillet, 2012) in respect of the correlation between certain Corporate
Governance variables and firm accounting and market performance can be
effortlessly be analogous within the perspectives of quantitative research.
• Moreover, according to Mc Givern (2006), when the size of the sample is
relatively large, quantitative research design is more applicable.
Alternatively, Qualitative research design implicates a more detailed examination of a
given condition or circumstance, simply by perceiving individual “cases”.
Furthermore, methods such as interviews and questionnaires may be adopted in
reaching a qualitative based conclusion. Some of the merits and demerits that will be
achieved by adopting a qualitative based approach are:
• More reliable and verifiable information sourced directly from respondents.
• More suitable for researching dispersed populations which may be heavily
biased if they are aggregated.
The demerits of a qualitative approach are that;
• It is not suitable for large sample sizes since it is cost and time consuming
• It is difficult to obtain access to certain key figures in a research such as Chief
Executives and Finance Directors

39
Even though qualitative research is more easy to be adapted as it can be tailored-
made according to each company’s distinctiveness and quantitative research
analyses every company equally regardless of their peculiar factors, neither
approach can be said to be superior to the other.
The type of this research study, together with the constraints of time and access to
key figures (Executives and NED’s of the chosen boards), wires the adoption of
quantitative methods design and approach.
The study points to analyze the relationship between independent variables of UK
and NYSE Corporate Governance provisions (dual leadership structure, percentage
of NED’s in the board) against the dependent variable, which is the financial
performance (as indicated at Figure 3). In the current study, the researcher has
chosen to represent financial performance by return on assets (ROA).
Figure 3: Conceptual Framework of the research study
3.6
–
Type
of
Data
-‐
Secondary
Data

According to Saunders et al. (2007) secondary data, are the data, which have
already been collected and stored for different reasons apart from the research
study. The current study implements multiple-source of secondary data gathered
from the financial reports of the chosen companies and stored on the OSIRIS
database (provided by the University), combined with director data amassed by the

40
Annual Reports for the period of 2004-2013. According to Mifflin (2008), the most
important criteria in choosing data, is their importance and relevance in serving the
current research study. The main advantages of using secondary data are that the
collection process requires substantially less time and cost, while the availability and
the quality of some data may be considered as a drawback in certain cases (Mifflin,
2008). The data on the board size, board composition, leadership structure and ROA
that are required for this study were collected from OSIRIS-database and the annual
reports which are publicly available for shareholders, various analysts and a range of
stakeholders. See below the detailed list for the merits and demerits of secondary
data:
3.6.1
-‐
Merits
of
implementing
secondary
data:

• Availability and Convenience
Commercial data of UK and US companies listed on the LSE and NYSE are
readily obtainable from databases such as OSIRIS, BLOOMBERG.com,
FT.com and digitallook.com which are freely available via the internet or by
student admission at The Robert Gordon University, UK.
• Genuineness and Validity
Secondary data from these professional databases are of high substance and
legitimacy and are often approved by the respondents before publication.
• Cost Saving
The cost, in money terms and efforts associated with the degree of difficulty
of accumulating the secondary data is substantially less if compared with
conducting a brand new survey.
• Time Consumption
It will be challenging to gather the amount of data required for this study in the
just 3 months, as allocated by Robert Gordon “thesis” regulations.
3.6.2
-‐
Demerits
of
implementing
Secondary
data:

• Approachability
All companies on the OSIRIS database with missing notes could not be
analysed. Data from other sources could not be used as substitutes so as to
avoid discrepancy, which may derive from computational differences of the

41
writers. This substantially decreased the size of the sample that was
observed.
• Layout and Register
Secondary data collected related with the boards of the directors, were not
available in electronic format and was manually inputted into a spreadsheet
which exposes the data to the risk of typographical errors.
• Deliberate Distortion
Secondary data in the form of published accounting figures are disposed to
manipulation from earnings management practices. This methodical
misrepresentation of actual results may affect the research conclusions.

3.7
-‐
Sampling
considerations

• Firstly, as a general rule, a larger sample size is being considered to be a
more accurate representation of the whole population;
• Moreover, the selected sample size is nothing else but a balance between
gaining a statistically valid illustration, and the time, energy, money,
equipment and access available;
• While the most statistically valid sampling strategy, is the one with no bias;
• Most methodologies simulate that the actual population is been characterized
by a normal distribution where most companies (in this case), grouped close
to the mean, with always, few extremes;
• A 95% probability or confidence level is usually assumed, to illustrate 95% of
companies will be within plus or minus two standard deviations from the
mean;
• This also means that up to 5% may lie outside of this - sampling, no matter
how good can only ever be claimed to be a very close estimate.

3.7.1
-‐
Sample
Selection

The 30 companies operating in the Global Oil and Gas sector, investigated in this
study were nominated based on stratified random sampling. According to Saunders
et al. (2007) Random Sampling permits a robust selection with having minimized the
possibility of bias, which further leads to an accurate representation of the actual
population. In addition, Saunders et al. (2007) notes, that Random Sampling is the
most effective from the sampling techniques, especially when data are readily

42
available and reliable to the researcher, for example, from the OSIRIS University
Database and Company’s Official Annual Reports. Important to note that the sample
was checked for missing entries on the OSIRIS database and several companies
with incomplete observations were excluded and replaced with randomly new
observations.
3.7.2
-‐
Advantages
and
Disadvantages

Stratified sampling generates a range of benefits:
Firstly, a stratified sample can be much more accurate than a simple random sample
of the same size. For that reason, a stratified sample often requires a smaller
sample, which minimizes the cost.
Moreover, a stratified sample can guard against an "unrepresentative" sample and in
addition, we can ensure that we obtain sufficient sample points to support a separate
analysis of any subgroup.
Finally, the main disadvantage of a stratified sample is that it may require more
administrative effort than a simple random sample.

Figure 4: “Population, Sample and individual cases (companies)”
Adopted by Saunders, Lewis and Thornhill, 2009

43
3.8
–
Data
Analysis
Methods

After collecting the required data from the financial statements included in the annual
reports of the various firms, the results of each of the variables is to incorporated in
IBM SPSS (Statistical Package for Social Sciences) and Microsoft Office Excel
spreadsheet and thereafter multiple regression analysis will be carried out.
Regression analysis models aim to describe and investigate the relationship between
a given variable Y (financial performance) and one or more variables X (dual
leadership structure, percentage of NED’s in the board). The goal is to develop a
statistical model that can be used to understand the relationships of Y and X or, and
predict the values of Y based on the values of X (Watsham and Paramore, 2009).
The proposed study will employ a modified version of the econometric model of Yan
Lam and Kam Lee (2008), which is given as follows:
Yj = βο + β1 BOARD+ β2 %NON-EXE+ β3 DUALITY+ ε
where Y is denoted as firm performance
j = ROA

βο
is denoted as Intercept and ε
is denoted as an error term
3.9
–
Explanation
of
Variables

Table 7: Adopted and modified by Latif, (2013).
Variable Definition
Independent variables
Board Size The total number of directors in the board of the
entity.
Board Composition Number of executives./ number of NED's,
According to the best provisions of Corporate
Governance must be 50% excluding the
chairman.

44
Duality Dual leadership structure or split roles, duality
will be a dichotomous variable - dummy
variable which will take the value of 1 if the
position is combined and 0 if two people
occupy the two positions.
Dependent variable
ROA Earnings before interest and tax divided by the
total assets of the entity.
3.10
–
Dependent
Variables
-‐
Firm
Accounting
and
Market
Performance

The pragmatic assessment leading to a robust analysis of the relationship between
Corporate Governance (IV”s) and firm performance requires the adoption of an
applicable performance measurement. However, according to (Cochran and Wood,
1984; Dalton et al, 1998; Ittner and Larcker, 2003), up to the moment, there has not
been any official consent as per which corporate performance measure is more
“correct”.
As we saw in the previous chapter, former researchers have implemented a range of
corporate performance measures in respect of analyzing the relationship
Governance versus Performance. The most common-used variables for performance
measurement are return on assets (ROA), return on equity (ROE) and Tobin’s Q. As
regards accounting performance measures (according to this research),
approximately 37% of the researches used return on assets (ROA) and 14% used
return on equity (ROE). However, almost 40% of the studies incorporated Tobin’s Q,
in order to take into consideration the market as well.
For example:
Return on Investment (ROI), has been used by (Rechner and Dalton, 1991; Boyd et
al, 1997),
Return on Investment (ROE), has been used by (Donaldson and Davis, 1991;
Baliga et al, 1996; Labelle, 2002; Cheung et al, 2007; Epps and Cereola; 2008),
Earnings per Share (EPS), has been adopted as a performance measurement by
(Pearce and Zahra, 1992),

45
In addition, Return on Assets (ROA), has been used by a range of researchers
(Daily and Dalton, 1993; Laing and Weir, 1999; Core et al, 2006; Larcker et al, 2007;
Kyereboah-Coleman and Amidu, 2008; Price et al, 2011),
Moreover, Tobin’s Q, has been used by the majority of studies (Yermack, 1996;
Weir et al, 2002; Gompers et al, 2003; Brown and Caylor, 2006; Bhagat and Bolton,
2009; Bozec et al, 2010), stock returns (Brickley et al, 1997; Bhagat and Bolton,
2008; Fodor and Diavatopoulos, 2010),
Finally, other researchers have used net profit margin (Bauer et al, 2010), sales
growth (Kouwenberg, 2006; Erthugul and Hedge, 2009), EVA (Saxena, 2009), and
P/E ratio (Faccio and Lasfer, 1999; Sanda et al, 2010).
From my perspective, all the firm performance measures used in the empirical
research can be divided into two categories; accounting-based performance
measures and market-based performance measures. According to Black et al.
(2006a), accounting based performance measures relates to the perspectives of the
senior management and generally the insiders of a company, however, market
based measures are more suitable to the investor’s perspectives. Specifically, Black
et al. (2006a) reports that firm performance is been assessed and valued inversely
by the two parties.
Nevertheless, the current research study, which can be characterized as single-
sided, adopts the accounting-based measure of Return on Assets as an only pointer
in apprehending the value-effects of Corporate Governance mechanisms from the
point of view of Senior Management or insiders.
3.10.1
–
Dependent
Variable
-‐
Return
on
Assets
(ROA)

Return on Assets (ROA), as mentioned in this study is the earnings before interest
and tax (EBIT) at the end of each fiscal year distributed to “book value” of total
assets for the matching year (Pi and Timme, 1993; Haniffa and Hudaib, 2006). As
discussed in the previous section, this financial ratio has been adopted by a range of
empirical studies and gives an idea as to how efficient management is at using its
assets to generate earnings for the shareholders.
In line with the Agency Problem, it is possible the shareholders to be deceived by the
senior management (agents) therefore, Return on Assets is an indication of financial

46
performance straightforwardly interconnected to the value that the board have
produced by utilizing the firm’s resources. In comparison always, with previous years,
main competitors or the industry, which the company is operating, the greater the
ROA suggests greater levels of efficiency, in respect of the management of assets in
maximizing shareholders wealth, given CG mechanisms in place. Otherwise, poorer
ROA implies lower level of management efficiency and CG mechanisms in place.
However, Pi and Timme, (1993), concluded that the use of ROA as financial
performance measure can be misleading since can be subject of manipulation and
creating accounting. Hence, accounting earnings are likely to don’t reflect “economic
earnings” and the book value of assets as reported in a company’s balance sheet
and in addition to this, the market values of those assets are indifferent.
Despite the related limitations, Return on Assets is selected in this research study
because, according to Lev and Sunder (1979), allows an effective comparison across
companies of different magnitude and dimensions by excluding size mismatches. In
addition, it captures the fundamentals of business performance in a holistic way,
looking at both income statement performance and the assets required to run a
business.
Henceforth, it is suitable to use ROA in this research study. The data on the earnings
before interest and tax and the book value of total assets are collected from OSIRIS
university database, for the period of 2004-2013

3.11
–
Hypothesis

According to Watsham and Parramore (2009) a statistical hypothesis is an
assumption about the value of a population parameter of the probability distribution
under consideration. Hence, when testing a hypothesis, two hypotheses are
established, the null hypothesis and the alternative hypothesis. The null hypothesis,
is usually designated (Ho), is the assumption, which will be accepted depending on
the evidence against it from a statistical test procedure. On the other hand the
alternative hypothesis, usually designated (H1), is that hypothesis which will be
accepted if the statistical evidence is enough to lead to a rejection of the Null
hypothesis. Important to note, is that the exact formulation of the hypothesis depends
on the research questions and what the researcher is trying to prove. In this research

47
study, hypotheses are concerned with the nature and strength of the relationships
between CEO duality, board size and proportion of independence in the board of the
directors versus firm performance. The 3 related hypotheses formed according to the
literature are listed below:
1. Hypothesis Ho1: The separation of the roles of CEO and the
chairman should lead to higher firm performance.
2. Hypothesis Ho2: The smaller the board size should lead to higher
firm performance.
3. Hypothesis Ho3: The higher the proportion of non-executive
directors, the lower the firm performance.

3.11.1
-‐
Factors
That
Affect
Power

The power of a hypothesis test is affected by three factors.
1. Sample size (n): Other things being equal, the larger the sample size, the
larger the robustness of the test.
2. Significance level (α): The higher the significance level, the higher the
power of the test. If an increased significance level is been achieved, at the
same time a reduction to the region of acceptance is been achieved as well.
Consequently, it is more likely for the null hypothesis to be rejected. In
addition it is much less possible for the researcher to accept the null, where
he/she shouldnt (type II error).
3. The "true" value of the parameter being tested. The greater the difference
between the "true" value of a parameter and the value specified in the null
hypothesis, the greater the power of the test. That is, the greater the effect
size, the greater the power of the test.
3.11.2
-‐
Decision
Errors

Two types of errors can result from a hypothesis test.
Type I error. A Type I error is the most serious of the two errors and occurs when
the researcher rejects a null hypothesis when it is true. The probability of committing
a Type I error is called the significance level. This probability is also called alpha, and
is often denoted by α.

48
Type II error. A Type II error occurs when the researcher fails to reject a null
hypothesis that is false. The probability of committing a Type II error is called Beta,
and is often denoted by β. The probability of not committing a Type II error is called
the Power of the test.

49
Chapter
4:
Data
Evaluation
and
Reporting

4.1
-‐
Introduction

This is the chapter where the statistical measures used in this research are
discussed. In addition, it provides some assumptions and information on the
statistical means utilized in this investigation. The purpose of this research is to
discover if any of the independent variables – proportion of NED’s on the board,
Total Number of Board Members, and duality (Setting a dummy variable “duality”
which is equal to 1 if its duality and 0 otherwise) has significant effect on the
dependent variable – Return on Assets (ROA).
This research aims to identify if the proportion of NED’s, Total No of Board Members,
and duality have any effect on ROA across the years 2004 - 2013. ROA is used as
the dependent variable. The independent variables employed here are the % of
NED’s, Total No of Board Members, and duality (Setting a dummy variable “duality”
which is equal to 1 if its duality and 0 otherwise). Thus, this research work was
motivated by the search for the kind of functional relationship that exists between
ROA and duality, the total number of the members on the board and the proportion of
independent NED’s.
In addition, is a causal or explanatory analysis since it seeks answers to questions
related to the causes and determinants of ROA.
The research adopts a deductive approach. It outlines ROA relationship to the
proportion of NED’s, Total No of Board Members, and dual leadership structure and
draws hypothesis from them. These hypotheses are then tested using empirical data
to either confirm or reject the contentions.
Moreover the study will analyze longitudinal data of a sample of 30 companies
operating in the global Oil and Gas sector from 2004 to 2013. Longitudinal research
design is used to analyze changes and it helps to establish not just causal
relationships of variables but causal direction as well (McGivern, 2006). The
selection of research approach is driven by the nature of the study.
It is possible to include categorical independent variable in a regression analysis, but
it requires some extra effort in performing the analysis and extra work in properly
interpreting the results. The independent variables listed above are combination of
categorical and interval predictors. Interval variables and Independent categorical
variable duality with two categories or levels can be used in the regression model.
Independent variables with three or more categories will be Dummy coded so that all

50
the information concerning the three levels is accounted for. The independent
categorical variable Duality is dichotomous variable and thus does not need further
dummy coding. The simplest case of dummy coding is when the categorical variable
has three levels and is converted to two dichotomous variables.
Let y1 = ß01 + ß1 (the % of NED’s)
Let y2 = ß02+ ß2 (Total No of Board Members)
Let y3 = ß03+ ß3 (duality (Setting a dummy variable “duality” which is equal to 1 if its
duality and 0 otherwise)).
Hypothesis
Hypotheses are concerned with the nature and strength of the relationships between
the dependent variable – ROA and independent variables - the proportion of NED’s,
Total No of Board Members, and duality (Setting a dummy variable “duality” which is
equal to 1 if its duality and 0 otherwise).
This research study seeks to test the following hypotheses at 95% confidence:
1. For duality and ROA
Ho: The separation of the roles of CEO and the chairman should not lead to higher
firm performance.
H1: The separation of the roles of CEO and the chairman should lead to higher firm
performance.
2. For Total No of Board Members and ROA
Ho2: The smaller the board size should not lead to higher firm performance.
H12: The smaller the board size should lead to higher firm performance.
3. For the Proportion of NED’s and ROA
Ho3: The higher the proportion of non-executive directors does not lead to the lower
the firm performance.
H13: The higher the proportion of non-executive directors does lead to lower firm
performance.

51
4.2
–
Simple
Regression
for
CEO
duality
and
firm
Accounting
Performance

(ROA)

Descriptive Statistics
Mean Std. Deviation N
ROA 11.46962 10.290668 290
1 for duality & 0 for not
(DUMMY)
.34 .474 290
Correlations
ROA 1 for duality
& 0 for not
(DUMMY)
Pearson Correlation
ROA 1.000 .158
(DUMMY)
.158 1.000
Sig. (1-tailed)
ROA . .004
(DUMMY)
.004 .
N
ROA 290 290
(DUMMY)
290 290
The Correlations table above indicates a statistically significant and positive
correlation between ROA and Dual leadership structure (r= 0.158, p=0.004)
Variables Entered/Removed
a
Model Variables
Entered
Variables
Removed
Method
1
1 for duality
& 0 for not
(DUMMY)
b
. Enter
a. Dependent Variable: ROA
b. All requested variables entered.

52
Model Summary
b
Model R R Square Adjusted R
Square
Std. Error of the
Estimate
Change Statistics
R Square
Change
F Change
1 .158
a
.025 .021 10.179535 .025 7.345
Model Summary
b
Model Change Statistics
df1 df2 Sig. F Change
1 1
a
288 .007
a. Predictors: (Constant), 1 for duality & 0 for not (DUMMY)
b. Dependent Variable: ROA
The ANOVA table below tests the overall significance of the model (the regression
equation). The regression was a poor overall fit, describing only 2.5% of the variance
in ROA by the independent variable Duality (Setting a dummy variable “duality” which
is equal to 1 if its duality and 0 otherwise), but the overall relationship was statistically
significant (F1, 288= 7.345, p<0.05). The ANOVA summary table indicates that our
model's R² is significantly different from zero, F (1, 288) = 7.345, p < .05. Therefore,
the stepwise REGRESSION model is significant. Thus it can be presumed that there
is a linear relationship between the Return on Assets (ROA) and CEO Duality.
ANOVA
a
Model Sum of Squares df Mean Square F Sig.
1
Regression 761.072 1 761.072 7.345 .007
b
Residual 29843.405 288 103.623
Total 30604.477 289
b. Predictors: (Constant), 1 for duality & 0 for not (DUMMY)
The b coefficients (regression equation) and the constant are used to create the
prediction. For this model, predicted ROA = 10.312+3.425*Duality. However, as
noted above in the summary table, the standard error of estimate is 10.179535. This
means that the fluctuations around the regression line seems to be enormous and
that at the 0.05 significance level, the estimate will be in the range plus or minus
1.96*10.179535 (critical region).

53
Coefficients
a
Model Unstandardized Coefficients Standardized
Coefficients
t
B Std. Error Beta
1
(Constant) 10.312 .735 14.037
(DUMMY)
3.425 1.264 .158 2.710
Coefficients
a
Model Sig. 95.0% Confidence Interval for B Correlations
Lower Bound Upper Bound Zero-order
1
(Constant) .000 8.866 11.758
(DUMMY)
.007 .938 5.912 .158
It’s shown that duality (Setting a dummy variable “duality” which is equal to 1 if its
duality and 0 otherwise)) is significant predictor.
Coefficients
a
Model Correlations
Partial Part
1
(Constant)
1 for duality & 0 for not (DUMMY) .158 .158
Coefficient Correlations
a
Model 1 for duality
& 0 for not
(DUMMY)
1
Correlations
(DUMMY)
1.000
Covariances
(DUMMY)
1.597

54
From the regression model and scatter
Taking into consideration the figure above and Appendix 1, the increase in ROA
does depend on increase in Duality, thus this is the reason for the upward slope.
At a zero level of duality – and by that we mean when separation of the positions of
CEO and chairman, the ROA is low at the point of interception βo = 10.312. As we
proceed from left to right of the diagram, Y estimated line; the point’s shows an
upward trend from the left bottom to the right top.
According to the model, the financial performance as indicated by ROA tends to be
lower when the positions of CEO-Chairman are split and higher when the two
positions are combined (duality). Thus, we accept the H0 that the separation of the
roles of CEO and the chairman should not lead to higher accounting performance.
Residuals Statistics
a
Minimum Maximum Mean Std. Deviation N
Predicted Value 10.31224 13.73714 11.46962 1.622796 290
Residual -46.692238 54.927761 .000000 10.161908 290
Std. Predicted Value -.713 1.397 .000 1.000 290
Std. Residual -4.587 5.396 .000 .998 290

55
4.3
–
Simple
Regression
for
Total
Number
of
Board
Members
and
firm

Accounting
Performance
(ROA)

Descriptive Statistics
Mean Std. Deviation N
ROA 11.46962 10.290668 290
Total No of Board Members 11.59 1.924 290
Correlations
ROA Total No of
Board Members
Pearson Correlation
ROA 1.000 .139
Total No of Board Members .139 1.000
Sig. (1-tailed)
ROA . .009
Total No of Board Members .009 .
N
ROA 290 290
Total No of Board Members 290 290
The table above specifies a statistically significant and positive correlation between
ROA and Total No of Board Members (r= 0.139, p=0.009).
Variables Entered/Removed
a
Model Variables
Entered
Variables
Removed
Method
1
Total No of
Board
Members
b
. Enter
b. All requested variables entered.
Model Summary
b
Model R R Square Adjusted R
Square
Std. Error of the
Estimate
Change Statistics
R Square
Change
F Change
1 .139
a
.019 .016 10.208469 .019 5.673

56
Model Summary
b
Model Change Statistics
df1 df2 Sig. F Change
1 1
a
288 .018
a. Predictors: (Constant), Total No of Board Members
b. Dependent Variable: ROA
The ANOVA table below tests the overall significance of the model (the regression
equation). The regression once again was a poor fit, describing only 1.9% of the
variance in ROA by the independent variable Total No of Board Members, but the
overall relationship was statistically significant (F1, 288= 5.673, p<0.05). The ANOVA
summary table indicates that our model's R² is significantly different from zero, F (1,
288) = 5.673, p < .05. So the stepwise REGRESSION model is significant. Thus it
can be presumed that there is a linear relationship between Total Numbers of Board
Members and firm accounting performance, which is denoted with Return on Assets
(ROA).
ANOVA
a
Model Sum of Squares df Mean Square F Sig.
1
Regression 591.177 1 591.177 5.673 .018
b
Residual 30013.300 288 104.213
Total 30604.477 289
b. Predictors: (Constant), Total No of Board Members
The b coefficients and the constant are used to create the prediction (regression)
equation. For this model, predicted ROA = 2.859+0.743*(Total No of Board
Members). However, as noted above in the summary table, the standard error of
estimate is 10.208469. This means that at the 0.05 significance level, the estimate is
the one from this range plus or minus 1.96*10.208469.

57
Coefficients
a
Model Unstandardized Coefficients Standardized
Coefficients
t
B Std. Error Beta
1
(Constant) 2.859 3.665 .780
Total No of Board Members .743 .312 .139 2.382
It is shown that Total No of Board Members is significant predictor.
Coefficients
a
Model Sig. 95.0% Confidence Interval for B Correlations
Lower Bound Upper Bound Zero-order
1
(Constant) .436 -4.354 10.072
Total No of Board Members .018 .129 1.357 .139
Coefficients
a
Model Correlations
Partial Part
1
(Constant)
Total No of Board Members .139 .139
Coefficient Correlations
a
Model Total No of
Board Members
1
Correlations Total No of Board Members 1.000
Covariances Total No of Board Members .097

58
From the figure above and Appendix 2 can be concluded that the increase in ROA
does depend on increase in Total No of Board Members, thus and the reason for the
upward slope. To illustrate, at lower levels of Total No of Board Members, the ROA is
low at the point of interception βo = 2.859.
As we proceed from left to right of the diagram, Y estimated line; the point’s shows
an upward trend from the left bottom to the right top.
Hence, there is not enough statistical evidence in rejecting the Null, we accept H0
that the smaller the board size should not lead to higher firm performance.

Residuals Statistics
a
Minimum Maximum Mean Std. Deviation N
Predicted Value 7.31803 15.49307 11.46962 1.430244 290
Residual -46.670776 53.462852 .000000 10.190792 290
Std. Predicted Value -2.903 2.813 .000 1.000 290
Std. Residual -4.572 5.237 .000 .998 290

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