1. Board Structure and Firm
Performance of Hotel and Travel
Sector Companies in Sri Lanka
Sajith Jayawardhana
Department of Finance
Faculty of Commerce and Management Studies
University of Kelaniya
2. Background of the study
•This study investigates the effect of corporate governance practices to the
financial performance of Hotels and Travels sector companies in Sri Lanka.
What is Corporate Governance ?What is Corporate Governance ?
•Corporate Governance is the framework of rules and practices by which a
board of directors ensures accountability, fairness, and transparency in a
company's relationship with its all stakeholders.
Corporate Governance in Sri Lankan contestCorporate Governance in Sri Lankan contest
•A voluntary code on corporate governance was published jointly by the
Securities and Exchange Commission of Sri Lanka and the Institute of
Chartered Accountants of Sri Lanka in 2002.
3. Tourism sector overview - 2011Tourism sector overview - 2011
•There are 36 Hotels and Travels sector companies listed in Colombo stock
exchange in Sri Lanka which represent 13% out of 287 listed companies in
Colombo Stock Exchange.
•Sri Lanka’s tourist industry recorded an impressive performance in the year
2011 and is poised to continue its growth momentum in the coming years too.
Board StructureBoard Structure
•Components which affect to structure of the board are board size, percentage
of insider ownership, non-executive directors’ percentage and female director
percentage which were gathered from the companies’ audited annual reports.
Firm PerformanceFirm Performance
•As a financial performance indicator, the return on equity (ROE) is used in
this study.
4. Review of LiteratureReview of Literature
•Literature review focuses on the relationship between firm performance and
component of board structure such as board size, Non-executive directors in
the board, inside ownership, Female directors on the board.
1. Board size1. Board size
Inverse relation between board size and Firm performanceInverse relation between board size and Firm performance
- Dr. Roselina Shakir- Board size, board composition and property firm
performance 2006
- Lipton and Borsch 1992, Jensen 1993 - Limiting board size is believed to
improve firm performance
- Yermack (1996) documents an inverse relation between board size and
profitability
5. 2. Non-executive directors2. Non-executive directors
Inverse relation between Non-executive directors and Firm performanceInverse relation between Non-executive directors and Firm performance
- Klein (1998), Bhagat and Black (1997, 1998) and Hermalin and Weisbach (1991)
have found that a high proportion of independent directors does not predict better
future accounting performance.
- The proportion of non-executive directors in Sri Lankan firms has no significant
impact on the firm performance (Fernando, 2007).
- Fosberg (1989) finds no relation between the proportion of outsider directors and
return on equity.
Positive relation between Non-executive directors and Firm performancePositive relation between Non-executive directors and Firm performance
- Baysinger and Butler (1985) indicated that the proportion of independent non-
executive directors in 1970 was positively correlated with return on equity.
6. 3. Insider ownership3. Insider ownership
Inverse relation between insider ownership and Firm performanceInverse relation between insider ownership and Firm performance
- Demsetz and Lehn (1985) and Hubbard and Palia (1999) that
managerial ownership does not affect firm.
- Loderer and Martin (1997) points in the same direction that insider
ownership does not have a predictive effect on firm performance.
Positive relation between insider ownership and Firm performancePositive relation between insider ownership and Firm performance
- Kaserer & Moldenhauer (2008) find a positive relationship between insider
ownership and stock performance.
- D. Txomin Iturralde argued that if insider ownership is between 0 and 35%,
increases in ownership will result in higher firm performance.
7. 3. Female directors on the board3. Female directors on the board
Inverse relation between Female directors and Firm performanceInverse relation between Female directors and Firm performance
- Shrader, Blackburn, and Iles (1997) investigate the relationship between the
percentage of female board members and two accounting measures of
financial value (ROA and ROE) find a significant negative relationship
between those two.
Positive relation between Female directors and Firm performancePositive relation between Female directors and Firm performance
- Erhardt (2003) find that the percentage of female directors is
positively related to larger US firms’ two accounting measures; return on assets
and return on investments.
8. Research objectivesResearch objectives
• Identify the board structure of Hotels and Travels sector companies in Sri
Lanka.
• To determine the relationship between Board size and the Firm
performance measured by using Return on Equity.
• To determine the relationship between the Proportion of Non Executive
directors and the Firm performance measured by using Return on Equity.
• To determine the relationship between Insider ownership Percentage and
the Firm performance measured by using Return on Equity.
• To determine the relationship between the Proportion of female directors
and the Firm performance measured by using Return on Equity.
9. MethodologyMethodology
• Data CollectionData Collection
- Data were gathered from the companies’ audited annual reports.
- Firms with missing information and the firms which were not started
their commercial operation were excluded from the study and the final
sample was reduced to 33 listed companies out of 36 hotel and travel
sector companies.
• Dependent VariablesDependent Variables
Return On Equity (ROE)
To measure corporate performance return on equity (ROE) is used in this study
ROE = Net Income / Shareholder’s equityROE = Net Income / Shareholder’s equity
• Explanatory variablesExplanatory variables
Board Size (BS)
Non-Executive Director percentage (NED)
Insider ownership percentage (IO)
Female Director percentage (FD)
10. MethodologyMethodology
•The data were analyzed with SPSS and interpret findings using descriptive
statistics and Pearson correlation.
Descriptive statisticsDescriptive statistics
•Descriptive statistics measure the central tendency and dispersion.
•The descriptive statistics used in this study consist of mean which helps to
identify the Board Structure of Hospitality Companies in Sri Lanka.
Pearson correlationPearson correlation
•Pearson correlation coefficient is a measure of the correlation between two
variables. It is widely used in the sciences as a measure of the strength of
linear dependence between two variables which helps to determine the
relationship between corporate governance and financial performance of hotel
and travel sector companies in Sri Lanka.
11. Data analysis and findings
Descriptive statisticsDescriptive statistics
•Table 3 represents the data collected from annual reports of hotels and travel sector
companies.
•The first objective of the study is to identify the nature of the BOD within the Hotel
and Travel Sector organizations, in order to deliver this, descriptive statistics were
employed
Descriptive Statistics
Mean Std. Deviation N
ROE (%) 06.92 14.75 33
BS 8.67 2.203 33
NED (%) 73.82 27.78 33
IO (%) 06.56 14.26 33
FD (%) 07.61 10.20 33
12. Data analysis and findings
• Second objective of this study is to measure the association between the board characteristics
and financial performance, for this we measured correlation between the above said
variables.
• There is a significant correlation between Return on Equity and insider ownership.
13. ConclusionConclusion
• The results of this study proves that good corporate governance is an important factor in
determining firm performance.
• This study reported significant positive relationships between insider ownership percentage
and firm performance.
• And also this study proves that there is a inverse relationship between Board size and firm
performance as well as Non Executive directors and firm performance and there is a
positive association between The Proportion of female directors on the board and firm
performance.
• Descriptive statistics from the study showed that
- The BOD consists of around nine directors with a variation of around two within the
hotel sector organizations in Sri Lanka. This is fairly a large number for a board in
hotel sector organization, when compared to average of 7.56 per board for all the
listed companies in Sri Lanka.
- Female directors are about 7.6% out of the total board members.
- Non-executive director proportion in the board is 73.8% which is very high which is
given by the governance requirement.
- Insider Ownership is around 7% which is relatively small compared with findings from
other countries.