This research proposal aims to investigate the relationship between corporate governance practices and firm performance of Fortune 500 companies. The study will examine the impact of variables like board size, board independence, frequency of board meetings, presence of large shareholders, and CEO compensation on firm performance measures including return on assets, stock return, and Tobin's Q. Secondary data will be collected from 2004-2013 on a sample of 100 companies from the Fortune 500 list and multiple regression models will be used for analysis. The results could provide insights into governance practices that lead to better performance among major market players.

1. Research Proposal
Durayya Debaj Makhdoom
Does Corporate Governance beget
Firm’s Performance: An Empirical
Study of Fortune -500 Companies

2. • This study aims at investigating whether corporate governance has
an effect on Fortune 500 firms’ performance. The purpose of the
research is to investigate the relationship between corporate
governance practices and firms’ performance. There are eight
variables to conduct the study, out of which five variables namely
Board Size, Board Independence, Frequency of Board Meetings, Presence of
Large Shareholders and CEO Compensation relate to Corporate
Governance and three variables namely Return on Assets, Stock
Return and Tobin’s Q relate to Firm Performance. Secondary
resources will be used to collect the data. Multiple Regression
Models will be used to analyze the collected data. This proposal
gives a brief insight of our proposed study.
•
1. ABSTRACT

3. • In recent times, corporate governance has started to take centre
stage in private sector circles.
• The reason for this recent resurgence of corporate governance is the
global economic crisis; a crisis which has been largely attributable to
poor mortgage investment decisions amongst many financial
institutions led to the near collapse of the global banking industry.
(Erkens et al., 2012)
• Investigation has revealed that there seemed to be a failure of
corporate governance within such institutions as management in
such organizations made decisions considered as non-investor
friendly.
• Poor corporate governance decisions were responsible for the
collapse of Lehman Brothers; a financial disaster that almost
brought Wall Street and the City to its knees (Erkens et al., 2012).
2. INTRODUCTION

4. • The role of corporate governance in enhancing the risk
management strategies of many organizations cannot be
under-stressed.
• In examining the relationship between corporate
governance and increased organizational performance,
this research will focus on CG variables responsible for
financial performance of Fortune 500 companies.
Overall, this research will establish the relationship
between corporate governance and organizational
performance.
2. INTRODUCTION

5. • Corporate governance has been part of research in business
economics since Adam Smith’s (1776) seminal publication of
An Inquiry into the Nature and Causes of the Wealth of Nations
But..
• The 2008 financial crisis arose up new questions regarding the
role and vitality of corporate governance in all firms
especially the big market giants. (Erkens et al., 2012)
• There is a need to study the relationship between use of
stringent corporate governance and its impact on large firms’
performance.
3. STATEMENT OF
PROBLEM

6. Whether industry leaders of today face a tradeoff
between advanced firm performance and good
corporate governance, or the former variable is
ensured by the use of later?
• The role of good governance rules in assisting financial
results must be studied to envisage a comprehensive
regulatory programme that must benefit rights of both
the stakeholders and owners
3. STATEMENT OF
PROBLEM

7. The objectives therefore are:
o To investigate if firms continuously prevalent on
Fortune 500 list for last 10 years follow some specific
corporate governance mechanisms.
o To investigate the impact of variation in corporate
governance patterns on the firms’ performance on
year on year basis. (within the firm)
o To investigate the relationship between corporate
governance practices and firms’ performance of
Fortune 500 companies.
4. RESEARCH QUESTIONS

8. • Shareholders aspire to get the best value for their investments.
Any research that seeks to investigate the practices helpful for
enhanced performance or growth is a significant contribution
for shareholders.
• The study would quest for existence of a set of specific
corporate governance patterns common amongst the industry
outperformers. This may pave a new direction for developing
a well-encompassing framework to guide about what kind of
governance practices lead to better firm performance. Such
framework would be helpful for the companies who are
striving to be amongst the Fortune-500 market outperformers,
or who wish to benchmark the corporate governance practices
of Fortune -500 companies.
5. SIGNIFICANCE OF
STUDY

9. Researcher Year Relationships
Stenberg 1998 CG and Organizational
Internal Controls
Solomon 2004, 2010 CG & Shareholders
protection
Bhagat & Bolton 2008 CG & Firm Performance
Crane et. al 2008 CG & Corporate social
Responsibility
Erkens et al. 2012 CG & Financial Crisis of
2008
6. Preliminary Literature
Review

10. • There is very scarce literature available that deals with impact
of corporate governance on the firm performance with sample
of Fortune 500 companies. As such no study directly has
explored the corporate governance patterns of Fortune 500
companies and compared these with the firms’ performance.
The available research deals with same variables but have
been conducted within different geographical context, or
using different sample of firm sectors.
• This research is unique as it intends to investigate the impact
of corporate governance on firm’s performance in the global
market leaders, specifically targeting the population of all
Fortune-500 companies, irrespective of their geographical
location or operational sector. The results will be helpful in
understanding the effectiveness of good governance for
becoming a major market player.
7. RESEARCH GAP

11. 8.1. Hypotheses
H1: Board Size is inversely related to Firm Performance
H2: Board Independence is positively related to Firm
Performance.
H3: Frequency of Board Meetings has an inverse relation with
Firm Performance.
H4: Presence of Large Shareholders is inversely related to Firm
Performance.
H5: CEO Compensation is negatively related to Firm
Performance.
FRAMEWORK AND
HYPOTHESES

12. Figure: Conceptual Framework
Corporate Governance
•Board Size
•Board Independence
•Frequency of Board
Meetings
•Number of Large
Shareholders
•CEO Compensation
Firm
Performance
•ROA
•Stock Return
•Tobin’s Q
Firm Size
Leverage
(Control Variables)
8.2 Theoretical Framework

13. 9. RESEARCH
METHODOLOGY
• The proposed research is exploratory, correlational and
quantitative in nature.
• First we will look into the existence of some specific set
of corporate governance practices in Fortune 500
companies.
• Secondly we will determine the cause and effect
relationship between these corporate governance
practices and their impact on firms’ performance on
yearly basis.

14. • Fortune 500 companies have been taken as the
population of the study.
• We will collect the data of 10- year period i.e
from year 2004 to year 2013. Therefore, a sample
of 100 companies prevalent on Fortune 500 list
for last 10 years will be randomly selected. This
sampling is suggested to ensure complete range
of data across the study period.
9.1 Population and Sample
Description

15. • Data to make the analysis will be collected from
secondary sources like Fortune 500 magazine,
Reuters and firms’ official websites.
9.2 Data Collection Method and
Procedure

16. Following the research work of Erkens et al (2012) and Bhagat
S. & Bolton B. (2008), we will use following research variables.
Corporate Governance Variables:
1.Board Size:
Number of directors on the board.
2. Board Independence:
The number of unaffiliated independent directors divided by
the total number of board members.
3. Frequency of Board Meetings:
Number of annual general meetings held in a year.
4. Presence of Large Shareholders:
5. CEO Compensation
6. CEO Chair Duality (Dummy Variable)
Equals one when the CEO is not the chairman of the
board, and zero otherwise.
9.3 Data Coding and Analysis
Techniques - Variables:

17. Firm Performance Variables:
7. Return on Assets:
ROA is measured as operating income divided by end of
year average total assets. In general, following Bhagat &
Bolton (2008), we use operating income before depreciation
8. Stock Return:
Capital Gain in Stock Price + Dividend / Original Stock Price
9. Tobin’s Q:
(Market value of equity+ Book value of debt)/ Book value of
assets
9.3 Data Coding and Analysis
Techniques - Variables:

18. Control Variables:
In addition we control for firm size (assets), and leverage
(debt/total asset ratio) as suggested by Bhagat S. &
Bolton B. (2008). Firm size and growth control for
potential advantages of scale and scope, market power
and market opportunities. The leverage controls for
different risk characteristics of firm and industry.
9.3 Data Coding and Analysis
Techniques - Variables:

19. • The study uses more than one proxy for accounting and
market measure of firm performance.
9.3.2 Variables Measurement:
Return on Assets Operating Income/Avg. of Total Assets
Stock Return Capital Gain in Stock Price + Dividend
/ Original Stock Price
Tobin’s Q ( Market value of equity+ Book value of
debt)/ Book value of assets
Firm Size Natural log of total book value of assets
Leverage Total Debt/Total Assets

20. Multiple regression models are used to find out the
association between corporate governance and firms’
performance in the context of Fortune 500 companies.
Our base models take the following form:
Y it = ß0 + ßXit + µit
Where: Yit is the dependent variable.
ß0 is the intercept.
Xit is the independent variable.
µit are the error terms.
i is the number of firms and
t is the number of time periods.
9.3.2.1. Research Models

21. • YROA =β0-β1SIZE + β2INDP - β3FQY - β4LGSH -
β5CEOCOMP +β6 (dummy) CEODUAL+ µit
• YTQ = β0-β1SIZE + β2INDP - β3FQY - β4LGSH -
β5CEOCOMP +β6 (dummy) CEODUAL+ µit
• YSKRTN = β0-β1SIZE + β2INDP - β3FQY - β4LGSH -
β5CEOCOMP+β6 (dummy) CEODUAL+µit
9.3.2.1. Research Models

22. • We will apply Heteroscedasticity tests (Breusch-Pagan
test, F-test) to control for the endogeneity among the
variables.
9.3.2.2. Heteroscedasticity

23. Quantitative techniques will be employed. Descriptive
statistics, correlation matrix and multi-regression models
will be used for analysis of data.
9.3.2.3. Data Analysis
9.3.4. Instrumentation
As this research is based on secondary data collection,
there is no instrumentation involved. The data will be
collected and arranged using panel data approach.

24. • Better Governance reporting: A Practical Framework. Independent Audit Limited.
Available at www.independentaudit.com/goodreporting
• Bhagat S. & Bolton B. (2008). Corporate Governance and Firm Performance. Journal of
Corporate Finance. Vol (14). Pg. 257-273.
• Crane A., McWilliams A., Matten D., Moon J. & Siegel D. The Oxford Handbook of
Corporate Social Responsibility. Oxford University Press. (2008). USA.
• Erkens D.H., Hung M. and Matos P. (2012). Corporate governance in 2007 – 2008
financial crisis: Evidence from financial Institutions worldwide. Journal of Corporate
Governance. Vol 18 (2012). Pg 389-41
10. References

25. • Gompers A. P., Ishii L. J., & Matrick A. Corporate Governance and Equity Prices.
Quarterly Journal of Economics. (2003)
• La Porta R. Lopez-De-Silanes F. Shleifer A. & Vishney R. (2000). Investor
Protection and Corporate Governance. Journal of Financial Economics. Volume 3-27.
(2000).
• Solomon J. & Solomon S. (2004). Corporate Governance and Accountability. Wiley
Publishers.
• Solomon J. (2010). Corporate Governance and Accountability. Wiley Puvlishers. Ed.
III. USA.
• Sternberg E. (1998). Corporate Governance: Accountability in Market Place. Institute
of Economic Affairs 1998. UK.
References (Cont’d)