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Impact of corporate governance on firm performance published

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In the light of corporate financial scandals, there is an increasing attention on corporate governance issues. The investors look for emerging economies to diversify their investment portfolios to exhaust the possibilities of returns. This paper examines the impact of corporate governance variables on firms’ performance. This Research found that there is a direct positive relationship between profitability measured either by Earnings per share (EPS) or Return on assets (ROA) and corporate governance, also have a positive direct relationship between each of liquidity, dividend per share, and the size of the company with corporate governance, finally the study found a positive direct relationship between corporate governance and corporate performance. Various studies have been conducted in developing countries including Pakistan to investigate the relationship among corporate governance and firm performance. This study indicates that corporate governance can be measured through the following elements.
(1) board size (2) Female Member (3) CEO duality (4) Education of Directors (5) Board working experience(6) independent directors (7) board compensation (8) Board ownership (9) Audit committee (10) Board composition(11)Leadership Structure

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Impact of corporate governance on firm performance published

  1. 1. Impact of Corporate Governance on Firm Performance September 5 2016 A key objective of a corporate governance system should be the enhancement of shareholder wealth Abstract By: Muhammad Usman * Masters: Human Resource Management Department of Management and sciences COMSATS Institute of Information and Technology *Corresponding author: 0320-6640581 or Usman2skp@gmail.com International Journal of New Technology and Research (IJNTR) ISSN: 2454-4116, Volume-1, Issue-15, Oct 2016 © 2016. Muhammad Usman This is a research/review paper, distributed under the terms of the Creative Commons Attribution-Noncommercial 3.0 Unported License permitting all non-commercial use, distribution, and reproduction in any medium, provided the original work is properly cited
  2. 2. COMSATS Institute of Information and Technology | Corporate Governance 1 Impact of Corporate Governance On Firm Performance Mr. Shahzad Ghafoor PhD: International Business (Continue) Lecturer, Department of Management Sciences COMSATS University Lahore, Pakistan Co Authors: Saba Amanat Masters: Human Resource Management COMSATS Institute of Information and Technology Lahore Management and Sciences Asima Akram Masters: Accounting & Finance COMSATS Institute of Information and Technology Lahore Management and Sciences Under The Supervision of Respected Teacher: :
  3. 3. COMSATS Institute of Information and Technology | Corporate Governance 2 Abstract In the light of corporate financial scandals, there is an increasing attention on corporate governance issues. The investors look for emerging economies to diversify their investment portfolios to exhaust the possibilities of returns. This paper examines the impact of corporate governance variables on firms’ performance. This Research found that there is a direct positive relationship between profitability measured either by Earnings per share (EPS) or Return on assets (ROA) and corporate governance, also have a positive direct relationship between each of liquidity, dividend per share, and the size of the company with corporate governance, finally the study found a positive direct relationship between corporate governance and corporate performance. Various studies have been conducted in developing countries including Pakistan to investigate the relationship among corporate governance and firm performance. This study indicates that corporate governance can be measured through the following elements. (1) board size (2) Female Member (3) CEO duality (4) Education of Directors (5) Board working experience(6) independent directors (7) board compensation (8) Board ownership (9) Audit committee (10) Board composition(11)Leadership Structure. Key words: Corporate governance, firm performance, conceptual framework, financial performance, Independent directors, block holders, duality.
  4. 4. COMSATS Institute of Information and Technology | Corporate Governance 3 INTRODUCTION he corporate scandals of the early 2000s, including Enron, WorldCom, Tyco and others, led to a wave of regulation aimed at anticipation similar problems in the future. The culmination of every financial crisis academicians, regulators, governments tend to focus on the corporate governance more dynamically in order to enhance investors’ confidence that would attract investments. Corporate governance measures like board structure, compensation structure and ownership structure are determined by one another, and by variables such as risk, cash flows, firms’ size and principles etc. These variables also strongly affect a firm’s performance (Jensen and Mackling, 1976). Firm risk play an important role in the firm performance because firms that take more risk generally have higher returns. Due to their volatile nature, firm-specific risks hinder the firm’ s policy makers and planning department’ s ability to forecast and plan their cash flows and related activities, etc. These risks are generally related to the returns on the firm’s stocks (Bloom and Milkovich,-1998).But, firm-specific risks are also directly related to the performance of the firm (Nguyen, 2011).Corporate governance is an important research area, which deals with the many governance arrangements used to control the corporation within the objective of maximizing shareholders wealth. A literature review discloses this importance, and highlights problems with conflict of interest between shareholders and the management (Jensen and Mackling, 1976). Effectiveness of corporate governance essentially guarantees shareholders value and make sure the appropriate usage of firms' resources, allowing access to capital and improving investor confidence (Denis and McConnell, 2003). Corporate governance depends on internal organization and external market conditions; firm‘s responsiveness to external conditions is largely dependent on the way the firm is managed as well as the effectiveness of the firm‘s governance structure (Gregory and Simms, 1999). Several authors (e.g. Rwegasira, 2000; Nam et al., 2004) have debated that good corporate governance prevents the expropriation of company resources by managers, ensuring better decision making and efficient management. This results in better allocation of company resources and, ultimately, improved performance. In the light of corporate financial scandals, there is an ever increasing attention on corporate governance issues. Investor’s always aspect for emerging economies to diversify their investment portfolios to maximize Returns they are equally worried about governance factors to decrease risks in these economies. Corporate social responsibilities are one of the aspects of this governance framework which is voluntary and softer in nature. The compulsory governance issues are enforced by the lawsuit or compliance with the legal provisions. Softer social issues are T
  5. 5. COMSATS Institute of Information and Technology | Corporate Governance 4 required by stakeholders‟ pressure, boycotts, compliance with the self-regulatory codes of conduct. LITERATURE REVIEW Superior corporate governance leads to healthier operating performance (Drobetz, Schillhofer and Zimmermann, 2003) Firms with inferior governance ratings are observed to have produced higher returns because of more exposure to risk Pakistan is a country where the field of corporate governance is up till now at early stages and a lot of work is still needed to be done for the effective corporate governance and control. Securities and Exchange Commission of Pakistan is the regulatory authority that supervises the performance of corporate sector. Emphasis of the past researches in this field especially in Pakistan has been mostly upon the quantitative and conservative measures like Ownership concentration, board size, board composition, CEO/Chair duality, role of audit and other committees. However the objective of this study is to develop a conceptual model by including the factors of corporate governance which are related to instructions that govern the board of director, executives of the firms and other stakeholders. The implementation of these regulatory measures along with the conventional tools will strengthen the corporate governance system which will increase the firm performance. Corporate governance plays a major role in macroeconomic stability provide the suitable environment for economic growth as well as society welfare, therefore international institutions give major attention and concerns to this issue at the level of macro and micro parts, because of the importance of corporate governance at both the country and the corporate levels. Corporate Governance is “a set of relationships between a company’s management, its board, its shareholders, and other stakeholders. Corporate governance provides the structure through which the companies set their objectives, and the means of achieving those objectives and monitoring performance are determined. Good corporate governance should provide proper motivations for the board and management to follow objectives that are in the interests of the company and shareholders and should facilitate effective monitoring, in that way boosting firms to use resources more efficiently.” (OECD Principles of Corporate Governance 1999). Corporate governance deals with the behaviors in which suppliers of finance corporations reassures themselves of getting a return on their investment and is about promoting corporate fairness, clearness and accountability. And establishes how the several participants’ shareholders and other stakeholders, management, the board of directors interact in determining the direction and performance of corporations. Good governance holds management accountable to boards and boards accountable to the owners and other stakeholders. In the case of banks, significant stakeholders contain depositors and the banking supervisor such as the Central Banks. (2003). Internal corporate governance factors are interrelated to the effectiveness of the collaboration among a company’s management,
  6. 6. COMSATS Institute of Information and Technology | Corporate Governance 5 board, shareholders and stakeholders. Good corporate governance is not an end in itself, but instead facilitates a company’s capacity to define and achieve its purposes. The board must agree on the company’s values (what it stands for), and the strategy to achieve its purpose. It must account to shareholders and be responsible for relations with its other stakeholders, Denis, D. and J. McConnell (2002). Family and non-family companies’ performance also effect on CG the family companies controlled by the formation family have greater value, operated more efficiently and carry less debt than other companies. Miller and Breton-Miller (2006).That family Companies perform better than non-family companies when the family companies have the intention to keep the business for next generations. A study by Maury (2006) in 13 Western European countries found that active family control continued to outperform non-family control in terms of profitability in different legal regimes. In 2008, a survey conducted by Pakistan Institute of Corporate Governance (PICG) indicated that 80% of firms cannot reach the third generation of their founders in Pakistan. Family companies have several incentives to reduce agency costs (Fama& Jensen, 1983; Demsetz & Lehn, 1985; Anderson & Reeb, 2003) Research also claims that executives who are agents are motivated to act in the best interests of their principals (Donaldson & Davis, 1991) it is very difficult for family companies to avoid the misalignment between principal and agents. The agency cost in family companies can take place between minority owners and the major family owners. Board Size: The Different Researchers have different point of view about the size of board a too small or too large board size have negative impact on firm performance. Guest (2009)Board size was measured by the number of directors on the board and firm performance was measured by profitability, return on equity and Tobin’s The first school of thought claims that a smaller board size will contribute more to the success of a firm (Lipton and Lorsch, 1992; Jensen, 1993; Yermack, 1996). However, the second school of thought considers that a large board size will improve a firm’s performance (Pfeiffer, 1972; Klein, 1998; Coles and ctg, 2008). This research indicate that a large board will support and advise firm management more efficiently because of a complex of business environment and an organizational culture (Klein, 1998).Garg (2007) investigated the influence of board size and board on firm performance on a sample of Indian firms. Firm performance was measured by Tobin’s Q, return on assets and total However from the Asian countries perspective Watering’s and Swagerman ( 2011) conducted a study to trace out the impact of board size on firm value using a sample of 155 property firms and real estate investment trust listed in the exchanges of Singapore, Hong Kong and Malaysia. A positive relationship was observed between board size and firm value form the property firms. However the results forreal estate investment trust was insignificant.
  7. 7. COMSATS Institute of Information and Technology | Corporate Governance 6 assets turnover the research results recommend that there is an inverse relationship between board size and firm performance. CEO Duality: If the firm Chief executives are also the chairman of the board this represents the CEO chair duality. CEO duality will weaken the control mechanism and negatively influence the role of board members evaluating the activities of firm managers. The Research of Ujunwa (2012) Heenetigala & Armstrong (2007), Yasser et al. (2011) found that CEO chair duality have a negative impact upon the performance of the firm. According to Hewa-Wellalage and Locke 2011 study, in Sri Lanka, the Sri Lankan code of best practice on corporate governance give emphasis to the balance of power within a firm to minimize any one individual’s influence to the decision making process. Frequency Table CEO duality has a negative impact on firm performance. Frequency Percent Valid Percent Cumulative Percent Valid Strongly Agree 14 23.3 23.3 23.3 agree 25 41.7 41.7 65.0 Partially Agree 11 18.3 18.3 83.3 disagree 9 15.0 15.0 98.3 Strongly Disagree 1 1.7 1.7 100.0 Total 60 100.0 100.0 In Europe, 84 per cent of firms separate the roles of a chair of a board and a CEO of a firm (Hedrick and Struggles, 2009)
  8. 8. COMSATS Institute of Information and Technology | Corporate Governance 7 These rules provided recommendation that when there is a duality in a firm, a number of independent directors on a board should be a majority to provide balance and an effective and efficient operation of a board. Education Level of Board Members: A board is also called a control system in a business (Fama and Jensen, 1983) the basic role of a board is the internal corporate governance of a firm (Fama, 1980). so we have need of each board member to be fully equipped with management knowledge such as finance, accounting, marketing, information systems, legal issues and other interrelated areas to the decision making process. This requirement suggests that the quality of each board member will contribute significantly and positively to management decisions which is then translated into the firm’s performance (Nicholson and Kiel, 2004; Fairchild and Li, 2005; Adams and Ferreira, 2007).so if the firm’s directors have related professional education and have acquired professional training they can perform much better as compared to those members who does not have the related education and skills.
  9. 9. COMSATS Institute of Information and Technology | Corporate Governance 8 Board Working Experience: Competency of Directors is essential factors as they contribute positively to the working of the Companies (Johannisson andHuse,2000).Experience is expected to positively contribute to boost the performance of a firm. However, older-age board member seems to be more aggressive with decisions. These characteristics of board members may result in risky decision making, which may undermine a firm’s performance (Carlson and Karlsson, 1970)The board of director must establish the regulations regarding executives of the firm especially about the Firm CEO to ensure that executives are pursuing the goal of shareholders. Directors play a significant role in deciding the strategic direction and overall policy making of the firm so the corporate regulatory authority must establish some important regulation in order to confirm the better functioning of the governance mechanism. Table 1 Summary of Role of Board of Directors Theory Role of Board Implications for board Agency Managerial control Independent boards mechanism for shareholders to preserve ownership, control rights and monitor performance Stewardship Managerial empowerment The board controlled by management is empowered and manages. Resource Dependence Search for external resources Board with strong external links is a co-optation tool for firms to access external resources. Board members with a higher age average may face more limited pressures to a changing business environment and this may hinder the implementation of more strategic decisions [Note] Every firm must establish a defined rules and regulation regarding the retirement age of a board member so that older members could be replaced by energetic directors that can contribute better than their elder counterparts.
  10. 10. COMSATS Institute of Information and Technology | Corporate Governance 9 (Child, 1975).Moreover Berube (2005) notes that companies can no longer be deal with directors who simply put in a token of appearance. Companies search for qualified directors, with their expertise. A report from Christian & Timbers in New York also reflects the tough competition for qualified outside directors (Bates, 2003).A survey conducted in America by Ernst & Young reports that a lot of companies in Europe and America they are worried and complaining that they struggle to find qualified directors for their boards but it’s very difficult to get a board according to your requirements (The Economist, 2006). Hendry (2002). Board Compensation: shareholders should attach their financial benefits to compensation which is paid to a firm’s management. Once management behavior is not favorable, then compensation is a corporate governance mechanism to encourage management to run a firm in the interest of shareholders. Board Compensation solves agency issue between shareholders and management and contributes positively to a firm’s performance (Jensen and Murphy, 1990; Mehran, 1995). Board Ownership: Brickley et al. (1988) concluded that the board’s ownership is an encouragement for board members to do best efforts. This encouragement will help board members administrate management in a more efficient way. Consistent with this view, Jensen and Murphy (1990), Chung and Pruitt (1996) considered that, board’s ownership will improve firm’s performance. Mehran (1995) Presented empirical evidence that there is a positive correlation between board ownership and firm’s performance. Fama and Jensen (1983) argued that contribution of board’s ownership is measured as a “two-edged knife” in which there is an optimal level of board ownership which contributes positively to a firm’s performance. Independent Directors :Non-executive directors on the board of directors, performing on the part of external shareholders, are generally expected to monitor firm’ s strategy and decision-making in this regard. (Fama, 1980) and Mak and Kusnadi (2005) disclose that a higher fraction of independent directors on the board is linked to greater firm value.Yammeesri, J., &Herath, S. K. (2010) said at their research that it is still debatable whether non-executive directors will perform well in monitoring firm management and whether their performance could reflect an increase or decrease in corporate performance. Elloumi and Gueyié (2001) concluded that firms with high ratio of independent directors in a board face less financial pressure. In addition, when a business environment go downhill, firms with many independent directors have had lower probability of filing for bankruptcy (Daily et al., 2003)
  11. 11. COMSATS Institute of Information and Technology | Corporate Governance 10 Frequency Table Non-executive directors’ performance could reflect an increase in corporate performance. Frequency Percent Valid Percent Cumulative Percent Valid Strongly Agree 9 15.0 15.0 15.0 agree 32 53.3 53.3 68.3 Partially Agree 11 18.3 18.3 86.7 disagree 6 10.0 10.0 96.7 Strongly Disagree 2 3.3 3.3 100.0 Total 60 100.0 100.0 But another side also can be discuss in which the chief executive officer (CEO) may feel uncomfortable to discuss all the strategic matters with the non-executive directors, which will create a gap between the firm’s decisions and the participation of its independent board members. So, a negative relationship may be expected in this situation Block Holders: Small shareholders will bear serious consequences from block holders who may abuse the power how to run a business. Second, strict control from block holders to a firm’s management will hinder the firm’s performance due to restriction in work and decisions. If firm’s management will become inflexible with business environment. The
  12. 12. COMSATS Institute of Information and Technology | Corporate Governance 11 decision making process is no longer an initiative from the firm’s management and this results in lowered firm performance (Burkartet. Al., 1997; Myers, 2000). Denis and McConnell (2003) and Becker et al. (2011) considered that, centralizing managerial power in block holding individuals will generally positively affect the performance of the firm. Female Member: The female board members Shows a diversified characteristic of the board (Dutta và Bose, 2006).Female board members will convey better images in the perception of the community for a firm and this will contribute positively to firm’s performance. Frequency Table Female members have a positive impact on firm performance. Frequency Percent Valid Percent Cumulative Percent Valid Strongly Agree 20 33.3 33.3 33.3 agree 22 36.7 36.7 70.0 Partially Agree 10 16.7 16.7 86.7 disagree 5 8.3 8.3 95.0 Strongly Disagree 3 5.0 5.0 100.0 Total 60 100.0 100.0
  13. 13. COMSATS Institute of Information and Technology | Corporate Governance 12 Other board members will have improved understanding of the business environment when female board members are appointed. Audit Committee: Directors and audit committees that are independent from management can improve the firms' reporting system and the quality of reported earnings. Siagian and Tresnaningsih (2011). Generally, independent directors also serve as experienced professionals in other large organizations and therefore, care about their reputation (Nguyen and Nielsen, 2010).The committee should contains independent board of director along with other members. Islam, M. Z., Islam, M. N., Bhattacharjee, S., & Islam, A. Z. (2009).Independent audit committee is one of the important mechanisms. It is expected to satisfy the need of both internal and external users of financial statements, and previous studies have documented the importance of the independence of audit committee members for maintaining the integrity and quality of the corporate financial reporting process. Auditors play a important role in their clients’ disclosure practices and procedures.
  14. 14. COMSATS Institute of Information and Technology | Corporate Governance 13 Concerns regarding the quality of financial information and its association with the quality of the auditing process have grown with the time, given the rising incidence of fraud in big businesses, failures, and litigation (Chambers, 1999; Tie, 1999) Frequency Table The audit committee oversees management’s procedures for enforcing company’s code of conduct. Frequency Percent Valid Percent Cumulative Percent Valid Strongly Agree 7 11.7 11.7 11.7 agree 35 58.3 58.3 70.0 Partially Agree 15 25.0 25.0 95.0 disagree 3 5.0 5.0 100.0 Total 60 100.0 100.0
  15. 15. COMSATS Institute of Information and Technology | Corporate Governance 14 Thus, auditing may reduce misreporting and mispricing in financial reporting and control managerial discretion with respect to earnings management. There are some proxies for measuring audit quality, including the size of the auditing firm (DeAngelo, 1981), the auditor’s contract with its clients (Johnson, Khurana, & Reynolds, 2002), and the presence of an industry-specific auditor. However, there is sufficient evidence Received that the size of the auditing firm is a good representation for audit quality (see Francis, Maydew, & Sparks, 1999; Becker, DeFond, Jiambalvo, &Subramanyam, 1998; Chia, Lapsley, & Lee, 2007). Board Composition: Existence of outside board member has a positive relationship with firm performance. The board develops the mission, policies, and overall track for an organization. People with distinct values, opinions, and relationships to different people and communities comprise the board of directors and it follows that the individual characteristics of the people who serve on the board will influence the mission, policies, and overall direction of an organization. Therefore, having representatives of diverse populations on a board of directors will have a direct impact on the mission, policies, and overall direction of a nonprofit organization.
  16. 16. COMSATS Institute of Information and Technology | Corporate Governance 15 Some Alternation made By SECP in 2002 code and introduced 2012 code of corporate governance Table 2 2002 and 2012 Code Of CG Particulars Code 2002 Code 2012 Independent Director Encouraged a least of one independent director on the board of a listed company. One independent director is compulsory while preference is for 1/3rd of the total members of the board to be independent directors. Criteria for assessment of independence Very small criteria provided Criteria has been significantly expanded Executive Directors Number of Executive Directors not to be more than 75% of elected directors including CEO Maximum number of Executive Directors cannot be more than 1/3rd of nominated directors including CEO. Number of directorships A director can be on the board of no more than 10 listed companies at same time. A director can be on the board of 7 listed companies at one time. However, the limit does not include directorship in listed subsidiaries of a listed holding company Board evaluation Within two years of the execution of the Code 2012, the Board has to put in place a mechanism for undertaking annual evaluation of the performance of the Board. The Chairman of a listed company shall preferably be selected form among the The Chairman and CEO shall not be the same person, unless specifically provided
  17. 17. COMSATS Institute of Information and Technology | Corporate Governance 16 Office of Chairman and CEO nonexecutive directors of the listed company. in any other law. The Chairman shall be elected from the non-executive directors of the listed company. Training of the Board of Directors It is compulsory for directors of listed companies to attain certification. In the beginning, the PICG was to provide the training but later it was opened to other institutions, provided they met the criteria specified by the SECP. It will be mandatory for directors of listed companies to attain certification under any director training program (DTP) offered by any institution (local or foreign), which meets the criteria specified by the SECP. The criteria are available at the websites of the stock exchanges and the SECP. Appointment and removal and qualification criteria for Chief Financial Officer (CFO) and Company Secretary (CS) Appointment, remuneration and terms and conditions of employment of CFO and CS determined by CEO and approved by Board. The same mechanism followed for removal. The appointment, remuneration and terms and conditions of employment of the CFO, CS and the Head of Internal Audit (IA) of listed companies shall be determined by the Board. The removal will also be by the Board for CS and CFO. The Head of Internal Audit (IA) Qualification introduced for Head of IA. The removal of Head of IA is with the approval of the Board only upon recommendation of the Chairman of the Audit Committee. “Corporate governance principles and recommendations with 2010 amendments” Board Meetings: Boards meet officially at least four times per year, supplemented by additional monthly executive committee meetings attended by directors, the chairman, the CEO and senior managers (Ward, 1991).The board should decide the number of board meetings held in a year and the details of attendance of each individual director. They should also maintain minutes of meetings. Pakistani Code of Corporate Governance (2002)
  18. 18. COMSATS Institute of Information and Technology | Corporate Governance 17 proposes that the board should meet regularly, with due notice of issues to be discussed but should meet at least once in a quarter. Leadership Structure: The corporate governance perspective views the CEO duality to arise when the post of the CEO and Chairman are managed by one person. The agency theory claims that there must be a separation between ownership and control. The separate leadership structure can control agency problems, and enhance the firm’s value (Fama& Jensen, 1983).In contrast, duality leadership is common among family companies (Chen, Cheung, Stouraitis & Wong, 2005). The founder CEOs as more alarmed about the survival of their companies are willing to protect their inheritance for future generations. In the US, Moore (2002) finds that some companies have the CEO as the board chairman in order to focus the company’s’ leadership. In addition, by splitting the role of the chairman and CEO, it reduces the CEO’s freedom of action (Felton & Watson, 2002). Other researchers find that stewards who hold the positions of a board executive and a chairman concurrently have significantly higher corporate performance (Donaldson & Davis, 1991; Finkelstein & D’Aveni, 1994). The board‘s role is to display entrepreneurial leadership of the company within a frame work of prudent and effective controls which allows risk to be assessed and managed. The board should set the company‘s strategic aims, make sure that the necessary financial and human resources are in place for the company to meet its objectives and evaluation of management performance. The board should set the company‘s values and standards and ensure that its obligations to its shareholders and others are understood and met‖. (UK Combined Code, 2006, p. 3) and Directors ‘responsibilities have been classified into three groups: control, services and resource dependence. Because the managers ‘responsibility is to work in the best interest of shareholders, the control role demands the directors to be liable to hire and fire the managers and the CEO and to ensure that managers are working in the best interests of the shareholders (Monks and Minow, 1995).
  19. 19. COMSATS Institute of Information and Technology | Corporate Governance 18 Conceptual Frame work Figure 1 Conceptual Model The purpose of an effective governance system is securing the rights of the shareholders. So the shareholders must have right to call special meeting on the matters which they considers that its importance. Furthermore the firm must reply properly towards the rights of the society and must fulfill its social responsibility. A socially responsive firm will be able to develop its image in front stakeholders. The code of ethics must be clearly defined that m framework the rights and responsibilities of various stakeholders of the firm. The firm must have a policy to rotate the external auditor to make sure the true and fair view of financial information. On other hand the firm must disclose the compensation paid to the directors and executives of the firm.so performance of the firms is the independent variables which EffectiveCorporate Governance Female Member Independent Director Leadership Structure Board Compensation Education of Directors CEO duality Board working Experience Audit Committee Board ownership Board Composition Board size
  20. 20. COMSATS Institute of Information and Technology | Corporate Governance 19 depend on other factors which includes the board compensation, female board members, education and experience of Directors. Role of Effective Corporate Governance: Figure 2 Role of the corporate governance Role of corporate governance start from investment of the shareholders when shareholders invest their money they want to get the profit and to protect the shareholder corporate governance plays an important role to make the superior performance of firm so when the performance of firm is superior so we can say that it will earn highest profit and obviously he will pay higher profit to shareholders so it’s become the reason of satisfaction of shareholders and stakeholders so when all shareholder are satisfy so its encourage them to invest more money in the firm.
  21. 21. COMSATS Institute of Information and Technology | Corporate Governance 20 Descriptive Statistics Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 .414a .172 -.062 .61395 This table provides the R and R2 values. The R value represents the simple correlation and is 0.414 (the "R" Column), which indicates a high degree of correlation. The R2 value (the "R Square" column) indicates how much of the total variation in the dependent variable, can be explained by the independent variable. In this case, 17.2% can be explained. a. Predictors: (Constant), CEO duality has a negative impact on firm performance. Because its goes towards the favoritism and become the cause of fraudulent activities and Female members have a positive impact on firm performance. Because its create competiveness between the members of the board of directors. The role of internal auditors and audit committee is much important for good corporate governance and Independent director has a positive impact on audit committee because they create check and balance on them b. Dependent Variable: Good Corporate Governance increase firm performance. The above stated findings revealed that there is a significance relationship between Role of corporate governance and variables. The value of R is less than one and round to .414 which shows very strong positive relationship of our variable with the corporate governance and shows that our research The overall P value of the model is < 5% & 1% which shows that the overall model is significant (Smith, 1996; Huson, 1997; Nesbitt, 1994; Carleton et al., 1998; Strickland et al., 1996). P-value of board size and number of meetings < 5% show that both are significantly positively and negatively related to return on equity respectively (Alexander, Fennell, & Halpern, 1993; Goodstein, Gautam, & Boeker, 1994).
  22. 22. COMSATS Institute of Information and Technology | Corporate Governance 21 ANOVA Female member’s representation in board is pressing for more diversity and good governance Sum of Squares df Mean Square F Sig. Between Groups 20.259 4 5.065 5.686 .001 Within Groups 48.991 55 .891 Total 69.250 59 This is the table that shows the output of the ANOVA analysis and whether we have a statistically significant difference between our group means. We can see that the significance level is 0.001 (p = .001), which is below 0.05. This shows positive result of study. CEO duality has a negative impact on firm performance. * Good Corporate Governance increase firm performance Crosstab Good Corporate Governance increase firm performance Total Strongly Agree agr ee Partiall y Agree CEO duality has a negative impact on firm performance. Strongly Agree Count 8 6 0 14 Expected Count 7.2 6.1 .7 14.0 agree Count 14 11 0 25 Expected Count 12.9 10. 8 1.3 25.0 Partially Agree Count 5 4 2 11 Expected Count 5.7 4.8 .6 11.0 disagree Count 3 5 1 9 Expected Count 4.7 3.9 .5 9.0 Strongly Disagree Count 1 0 0 1 Expected Count .5 .4 .1 1.0 Total Count 31 26 3 60 Expected Count 31.0 26. 3.0 60.0
  23. 23. COMSATS Institute of Information and Technology | Corporate Governance 22 Chi-Square Tests Value df Asymp. Sig. (2- sided) Pearson Chi-Square 27.708a 16 .034 Likelihood Ratio 23.643 16 .098 Linear-by-Linear Association .066 1 .797 N of Valid Cases 60 a. 21 cells (84.0%) have expected count less than 5. The minimum expected count is .03. Chi square test is used to check the validity of relationship between dependent and independent variables. If the value of Pearson chi-square is less than 0.05 then the relationship between dependent and independent variables proves to be valid. Here in our research the value of chi-square is .034 which is less than 0.05 which shows that the Positive relationship. Research Focus and Methodology The research undertaken is interpretive in nature (Gephart, 2004), capitalizing on in-depth interviews with researchers of Corporate governance to explore their interpretations and perceptions of central role of Corporate Governance in Pakistan. Interpretive research is qualitative seeking to unearth collective frames of reference, or construed realities that guide the attribution of meaning and help account for how Corporate governance give benefits to its stake holders. A purposeful sample comprising 5 researchers’ corporate governance was used for this research. According to Patton (2002), qualitative inquiry usually focuses in-depth on relatively small samples, selected purposefully (whereas quantitative methods focus on larger samples selected randomly). “The logic and power of purposeful sampling lie in selecting information rich cases to study in depth; Information rich cases are those from which one can learn a lot about issues of central importance to the purpose of the inquiry” (Patton, 2002, p. 230). Under this logic, this study selectively included five researchers who have vast experience and knowledge about corporate governance. Sampling was intentional in the sense that only researchers of corporate governance who had accumulated relevant experience were
  24. 24. COMSATS Institute of Information and Technology | Corporate Governance 23 selected. As illustrated in Table, researchers were taken from different age groups (e.g., 25 to 65 years old). All researchers are expert in their own research area and have valuable information regarding corporate governance. Researchers Area of research Qualification Past Experience Work Status 1 Management sciences PHD HOD 2 Human Resource Management MBA in HR, MS in Project management Lecturer 3 Management and corporate governance Master in management science 4 years experienced at corporate sector Industrial Manager 4 Marketing Masters in Marketing lecturer 5 Management and corporate governance Master in management science 3 years experienced at corporate sector Industrial Manager An interview guide was prepared based on the literature review presented above. The interview guide addressed the factors and central role of corporate governance on the firm’s performance as reflected in Table II. The interview guide served the purpose of steering discussions around common themes (relating for example to opportunity identification, motivation, financing strategies, performance, role, legal environment,), while also leaving the interviewer to decide on the sequence and wording of questions in the course of the interview. All interviews were conducted in English and Urdu, lasted on average 10 min, and was tape recorded and transcribed. Table II Factors Dimension Description Role Of the Corporate Governance Central role central role of Corporate governance is the protection of shareholders and stake holders wealth Corporate Social Responsibilities Corporate governance also work for CSR which is most important for development of the country
  25. 25. COMSATS Institute of Information and Technology | Corporate Governance 24 Government role Current Governments Make it difficult to Operate Role of government is to provide code of corporate governance Independent Director Ratio of Directors One independent director is compulsory while preference is for 1/3rd of the total members of the board to be independent directors. Power of take Decisions It’s necessary that they Must have power of decisions for making fair and free working Director in others companies A director can be on the board of 7 listed companies at one time. However, the limit does not include directorship in listed subsidiaries of a listed holding company Contribution in the internal affairs Positive affect Positive affect in sense that they have a lot of experience in other companies so their decisions will be more accurate Negative affect Negative in sense that its Dangerous and can become the cause of leakage information and loosing competitive advantage Research Findings This research shows the role of the independent director he is no less than as stated in the preceding section, and to recommend otherwise would be inaccurate. What, however, is clear is that non-executive directors are not involved in and not expected to be involved in the day-to-day management of the company. Instead, they are expected to be observant guardians of the activities of the board as a whole these are some important points that’s discuss during the interviews by highly professionals. The main task of independent directors is to accept an oversight role and to ensure that the corporate assets are used only for the company. This task includes: a. become aware with the fundamentals of the business in which the company is involved and continue to be informed about the activities of the company, b. revising the accounts of the company, c. calling for further information where the accounts show less than the full picture, d. acting as a check on planned corporate strategy bearing in mind the economics of any potential transaction, e. regular appearance at board meetings to ensure ability to generally monitor of corporate affairs and policies
  26. 26. COMSATS Institute of Information and Technology | Corporate Governance 25 f. Contributing in the selection, assessment and remuneration of directors generally. g. Where an error or carelessness is discovered, whether on the part of the board or otherwise, the independent director cannot hide behind a coat of ignorance. Independent directors cannot close his eyes to what is happening in the company and assume that the executive directors are accomplishment their responsibilities to the company. h. The independent director's main role is not to protect the interest of the minority shareholders, but to act as a check and balance on the performances of the board and management of the company. His duty is to investigation and queries anything which has the appearance of being inappropriate in the company. Indirectly, of course, the role the independent director plays has the impression that it is promoting the best interests of minority shareholders; when in fact the reality is that it is encouraging the interest of all shareholders as a whole. Conclusion This paper shows the association between corporate governance and performance of the firms, converging on possible differences in results before and after 2012. A significant part of SECP and other exchange requirements tried to increase the role of independent board members. The impact of corporate governance on firm performance and firm risk has been broadly discussed. corporate governance, containing female board members, board’s working experience Education of the Directors, Board composition and board’s compensation etc. all have positive correlations with firm’s performance. Female board members show a diversification of board membership and this diversified nature will contribute positively to firm’s performance.  There should not be large number of members on the board because a larger board’s size will contribute negatively to firm’s performance.  Board should appoint female board members because these females will make a Vital contribution to firm’s performance. This study proves that female board members Shows a diversified characteristic of the board. Female board members will convey better images in the perception of the community for a firm and this will contribute positively to firm’s performance. Other board members will have improved understanding of the business environment when female board members are appointed.  This study also Shows that board’s compensation will positively Contribute to firm’s performance. Accordingly, it is necessary for listed firms to consider an appropriate and competitive compensation level of board’s members. Once management behavior is not favorable, then compensation is a corporate governance mechanism to encourage management to run a firm in the interest of shareholders. Board
  27. 27. COMSATS Institute of Information and Technology | Corporate Governance 26 Compensation solves agency issue between shareholders and management and contributes positively to a firm’s performance  The compensation will provide association between shareholders and firm’s Management and this association will enhance firm’s performance to maximize Shareholders value.  Education level of board members contributes positively because professional education will make them able to use their professional techniques and minimize the risk and protect the shareholder and timely decisions. we have need of each board member to be fully equipped with management knowledge such as finance, accounting, marketing, information systems, legal issues and other interrelated areas to the decision making process. This requirement suggests that the quality of each board member will contribute significantly and positively to management decisions which is then translated into the firm’s performance  Experience is expected to positively contribute to boost the performance of a firm. However, older-age board member seems to be more aggressive with decisions. These characteristics of board members may result in risky decision making, which may undermine a firm’s performance  It is concluded that the board’s ownership is an encouragement for board members to do best efforts. It’s confirmed that contribution of board’s ownership is measured as a “two-edged knife” in which there is an optimal level of board ownership which contributes positively to a firm’s performance.  It’s concluded that CEO duality will weaken the control mechanism and negatively influence the role of board members evaluating the activities of firm managers. And it is found that CEO chair duality have a negative impact upon the performance of the firm.  Board working experience also contribute a lot in the highest performance of the firms because the experience will make them able to make highly accurate decisions at critical situations. It’s also found that Role of corporate governance start from investment of the shareholders when shareholders invest their money they want to get the profit. And for protection the shareholder corporate governance plays an important role to make the superior performance of firm so when the performance of firm is superior then we can say that he
  28. 28. COMSATS Institute of Information and Technology | Corporate Governance 27 will be able to earn highest profit and obviously when he will pay higher profit to shareholders so it’s become the reason of satisfaction of shareholders and stakeholders when all shareholder are satisfy so its encourage them to invest more money in the firm. The above stated findings revealed that there is a significance relationship between Role of corporate governance and variables. The value of R is less than one and round to .414 which shows very strong positive relationship of our variable with the corporate governance and shows that our research The overall P value of the model is < 5% & 1% which shows that the overall model is significant (Smith, 1996; Huson, 1997; Nesbitt, 1994; Carleton et al., 1998; Strickland et al., 1996). P-value of board size and number of meetings < 5% show that both are significantly positively and negatively related to return on equity respectively (Alexander, Fennell, & Halpern, 1993; Goodstein, Gautam, & Boeker, 1994). IMPLICATIONS The study has some important implications for firms in order to improve their performance. Firms should aim at non-family directors on the board and should not permit banks to be their major shareholders since both negatively impact the firm’s risk-taking abilities and its performance. Firms should also motivate its directors to have more ownership in its stocks since that would encourage them to make decisions catering for their incentives also. FUTURE DIRECTIONS Future research should be directed at exploring more corporate governance variables for their relations with firm risk and firm performance using the dynamic panel approximation techniques. Also, an effort should be made to increase the sample size in this regard. Sector- wise analysis may also be done in order to explore the sector specific firm risk metrics. Researchers should try to implement modern econometric techniques in order to establish causality between the corporate governance variables. Future research should also try to include more firms into the analysis so that the issues like selective sampling bias could be catered for which at present is not possible because of the data unavailability. And explore the other factors which contribute to increase the performance of the firm and protection of stakeholders and shareholders.
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