Corporate Governance and Firm Performance: Evidence from Ghana
Written By: Caesar K. Simpson Swiss Management Center University
Publisher: Galore Knowledge Publication Pvt. Ltd. www.gkpublication.in
Corporate Governance and Firm Performance
Corporate Governance and Firm Performance: Evidence from Ghana
Caesar K. Simpson
Swiss Management Center University
Submitted as partial fulfillment of the requirements for the degree of Doctorate of Finance
To: Professor John Marangos
February 2016
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Corporate Governance and Firm Performance
ABSTRACT
The study investigated whether there exists a relationship between corporate governance and firm performance of listed firms on Ghana Stock Exchange. The study constructed a corporate governance index (0~100) using all the six OECD principles of corporate governance as independent sub-variables for 30 of the 36 listed companies, relying primarily on survey responses and secondary data. Using regression and correlation analyses, the study reported evidence that corporate governance is an important factor in explaining the performance of listed companies on Ghana Stock Exchange. The study revealed a strong positive correlation between the overall corporate governance index and firm performance measured in terms of ROA, ROE and Tobin’s Q which were robust with the results of the regression analyses. All the six OECD principles of corporate governance that constituted the index, individually showed strong positive correlation with the three performance variables. The study further investigated whether there exists a relationship between the corporate governance framework of Ghana and the OECD principles of corporate governance. The results indicated a very robust relationship between the two frameworks. The study made use of control variables that were not previously used in other studies on Ghana. The combined control variables also correlated positively with the performance variables and were statistically significant.
Key words: Corporate governance, firm performance, Ghana Stock Exchange, OECD principles of corporate governance, corporate governance index, corporate governance framework of Ghana.
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Declaration - Signature
“I declare in lieu of an oath that I have written this doctoral thesis by myself, and that I did not use other sources or resources than stated for its preparation. I declare that I have clearly indicated all direct and indirect quotations, and that this thesis has not been submitted elsewhere for examination purposes or publication.”
______(Date / Name)
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Dissertation Committee – Signature
I certify that I have read this dissertation and that, in my opinion, it is fully adequate in scope and quality as a doctoral thesis.
______(Date / Name)
I certify that I have read this dissertation and that, in my opinion, it is fully adequate in scope and quality as a doctoral thesis.
______(Date / Name)
I certify that I have read this dissertation and that, in my opinion, it is fully adequate in scope and quality as a doctoral thesis.
______(Date / Name)
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ACKNOWLEDGEMENTS
First and foremost, I wish to register my profound gratitude to the Almighty God for making this long awaited dream come through. I am very grateful to my mentor, Professor John Marangos, for the immense interest he has shown in the study and for his meticulous guidance and incredible support. My acknowledgement also goes to Marilyn Baker, SMC University Research Director, SMC University Dissertation Committee, and all my course professors for their individual key roles played during the course of this course. Furthermore, I extend my acknowledgement to my former employer Gold Coast Securities Limited, Mr Harrison Afeku of Gold Coast Fund Management Limited, Ghana Stock Exchange and Mrs Eileen Owusu of Ghana Stock Exchange for their respective assistance in collection of both primary and secondary data. Lastly, but not the least, I am very grateful to my dear and loving wife Rev. Mrs Eunice Simpson and our children Jayden Simpson and Jessica Simpson for their utmost support and encouragement.
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Table of Contents
Abstract………………………………………………………………………………………..2 List of Figures ………………………………………………………………………………....7 List of Tables…………………………………………………………………………………..8 List of Abbreviations…………………………………………………………………………..9 List of Appendices……………………………………………………………………………10 Dedication……………………………………………………………………………………11 Chapter 1: Overview…………………………………………………………………………12 Problem Statement…………………………………………………………………...12 Purpose of Research………………………………………………………………….13 Significance of the Study…………………………………………………………….13 Research Design……………………………………………………………………...15 Research Questions and Hypotheses…………………………………………………18 Assumptions and Limitations………………………………………………………...19 Operational Definitions………………………………………………………………20 Summary……………………………………………………………………………..21 Chapter 2: Literature Review………………………………………………………………...22 Theoretical Orientation for the Dissertation………………………………………….22 Critique of Previous Research………………………………………………………..32 Synthesis of Research………………………………………………………………...50 Summary……………………………………………………………………………..53 Chapter 3: Methodology……………………………………………………………………...54 Research Design……………………………………………………………………...54 Research Questions and Hypotheses…………………………………………………63 Population and Sampling Strategy…………………………………………………...64 Research Instrument………………………………………………………………....65 Data Collection Procedures…………………………………………………....…….68 Data Analyses………………………………………………………………………...69 Summary……………………………………………………………………………..69 Chapter 4: Analysis and Presentation of Results…………………………………………….70 Demographic Statistics……………………………………………………………....70 Details of Analysis and Results………………………………………………………71 Summary of Results……………………………………………………………….....83 Chapter 5: Conclusions and Recommendations……………………………………………..85 Summary of the Results……………………………………………………………...85 Discussion of the Results………………………………………………………….....88 Conclusions and Practical Recommendations……………………………………....101 Recommendations for Further Research……………………………………………102 References…………………………………………………………………………………..102 Appendices………………………………………………………………………………….112
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List of Figures
Figure 1. Ghana Country Assessment vs. Africa Regional Average...... 46 Figure 2. Individual Effect Sizes...... 52 Figure 3. Research 'onion'...... 54 Figure 4. Distribution of firms...... 70
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List of Tables
Table 1 Synthesis of sampled of literature reviewed...... 51 Table 2 Major differences between deductive and inductive approaches……...... 55 Table 3 Reliability statistics test for the data instrument of the study ……………………....67 Table 4 Sample Demographics: Gender …………………………………………………....70 Table 5 Sample Demographics: Position in the Firm ……………………………………....70 Table 6 Sample Demographics: Respondents’ Educational Level……………………….....70 Table 7 Sample Demographics: Industry...... 70 Table 8 Sample Demographics: Market Capitalization (US$ Million - 2013) ...... 71 Table 9 Sample Demographics: Revenue (Sales) (US$ Million - 2013) ………………...... 71 Table 10 Sample Demographics: Number of Employees (2013) ……………………………71 Table 11 Sample Demographics: Listing Age …………………………………………...…..71 Table 12 Descriptive Statistics …………………………………………..…………………..71 Table 13 Regression Coefficients – ROA as performance measure………………...... ……..72 Table 14 Regression Statistics – Model Summary (ROA as a measure of performance)…....73 Table 15 Regression Coefficients – ROE as performance measure ………………...... 74 Table 16 Regression Statistics – Model Summary (ROA as a measure of performance)...... 75 Table 17 Regression Coefficients – Tobin’s Q as performance measure ………………...... 75 Table 18 Regression Statistics–Model Summary -Tobin’s Q as a measure of performance...76 Table 19 Correlations Analysis - Corporate governance and firm performance …………...77 Table 20 Correlation Analysis - Ensuring a basis for an effective corporate governance framework (VAR 1) and firm performance ……………………………...... 77 Table 21 Correlation Analysis - the rights of shareholders (VAR 2) and firm performance...78 Table 22 Correlation Analysis - fair and equal treatment of shareholders (VAR 3) and firm Performance ………………………………...... 79 Table 23 Correlation Analysis - stakeholders in corporate governance (VAR 4) and firm Performance ……………………………………...... ………...80 Table 24 Correlation Analysis - disclosure in firm’s financial statement (VAR 5) and firm Performance …………………………………………………...... ………………...81 Table 25 Correlation Analysis - effective fulfilment of responsibilities of Board of Directors (VAR 6) and firm performance …………………………………………...………..81 Table 26 Descriptive Statistics - Corporate governance framework of Ghana and OECD principles of corporate governance …………………….…………………………………...82 Table 27 Descriptive Statistics - Corporate governance framework of Ghana and OECD principles of corporate governance …………………………………………………………82
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Corporate Governance and Firm Performance
List of Abbreviations
APA American Psychological Association CEO Chief Executive Officer CGG Corporate Governance Guidelines CGI Corporate Governance Index CV Control Variables DFID Department for International Development EPS Earnings per share EVA Economic Value Added GNAS Ghana National Accounting Standards GSE Ghana Stock Exchange ICAG Institute of Chartered Accountants, Ghana IFRS International Financial Reporting Standards ISA International Standards of Audit JSE Johannesburg Stock Exchange NED Non-executive directors OECD Organisation for Economic Co-operation and Development ROA Return on Assets ROE Return on Equity SEC Securities and Exchange Commission SMEs Small to Medium-sized Enterprises SMC Swiss Management Centre SPSS Statistical Package for the Social Sciences
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List of Appendices
Appendix A Informed Consent …………………………………………………………….112 Appendix B Survey Instrument……...... 113 Appendix C Participants Characteristics...... 117 Appendix D Distribution of firms ……………………………………………………….....118
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Dedication
This work is dedicated to the Almighty God. To God be the glory for this great thing He Has done. He has made all things beautiful in His own time. This is His doing and it is marvelous in my eyes.
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CHAPTER 1: OVERVIEW
Low level of development of how these companies are being governed developing nations like Ghana has been (Tornyeva & Wereko, 2012). ascribed to low level of productivity (Bloom Corporate governance has become a et. al., 2010). Firms in developing countries, contemporary issue because of its enormous for example Ghana, are often poorly contribution to the economic growth and managed, which significantly reduces their development of nations (Tornyeva & productivity. As a result, such countries Wereko, 2012). Effective governance is have been identified by the World Bank and critical to all economic relations especially other writers as having insufficient capacity in emerging and transition economies to efficiently manage their resources (Dharwardkar et al., 2000). Previous studies (Tornyeva & Wereko, 2012). Companies have established positive relationship have a major role in building and between good corporate governance empowering the domestic economy, as an practices and firm performance( Kelly& economy’s progress is enhanced by the Switzer, 2006; Cornett et al., 2009; Akpakli, performance of its companies (Minow & 2010; Ahmad 2010; Drobetz, Schillhofer & Monks, 2008). Zimmermann, 2011; Meeamol et al., 2011; Ghana is located on the West coast Kowalewski, 2012;Duke II, Kankpang & of African continent. The country, like Okonkwo, 2012).However, other studies many other African countries, has suffered have established negative relationship from a long history of economic and social (Bathala & Rao, 1995; Chaghadari, 2011). upheavals that considerably impaired its Nevertheless, different research could not developmental progress. The private sector prove any relationship (Demsetz & in Ghana is seen as the engine of economic Villalonga, 2001; Dulewicz & Herbert, growth and development but the sector has 2004; Abdullah & Page, 2009). not been able to bring about this desired Despite these inconsistent results, growth and development. Amjad, Shah & abundant extant literature largely attested to Shah, (2013) asserted that financial the importance of good corporate performance of companies affect share governance in enhancing firm performance. prices. The performance of the companies This is evident by the increasing attention listed on Ghana Stock Exchange (GSE) as being given to matters of corporate reflected by their share prices in the past ten governance by governments, regulatory years indicates that whilst few have bodies, regional bodies, and private appreciated, others have depreciated and institutions (Tornyeva & Wereko, 2012). some have neither declined nor appreciated This quantitative research study in value (Akpakli, 2010). For example, the investigated the relationship and impact of share price of Mettalloplastica Ghana corporate governance on firm performance Limited had extremely depreciated on the of 36 listed companies on GSE between GSE to the extent that the company had to 2004 and 2013.The study provided be de-listed and consequently liquidated empirical evidence on corporate governance (Akpakli, 2010). and firm performance from the Ghanaian Nevertheless, few companies such as perspective. The study’s goal is to better Standard Chartered Bank Ghana Limited understand corporate governance and and Enterprise Insurance Company corporate performance in Ghana. Limited’s share prices keep on rising every Problem Statement year. The problem of these variations in the Ghana’s economy remains performance of the listed companies on underdeveloped notwithstanding decades of GSE may be credited to their financial conceptualizing, formulating and performance which may be connected to implementing various types of economic
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Corporate Governance and Firm Performance policies and programmes (Nkurayija, 2011). relationship between corporate governance The private sector in every economy serves practices and firm performance of listed as the engine of growth (DFID, 2011). companies on GSE. This quantitative study However, the private sector in Ghana is investigated whether the corporate saddled with poor performance and is not governance practices of listed companies on able to bring about the required economic GSE have any effect on their performances growth and development (DFID, 2011).The as both recent and past empirical studies private sector for example, has low have established in both developed and productivity, poor management of developing countries (Kyereboah-Coleman, resources, weak management practices, and 2007; Black et al., 2009; Tornyeva & inability to attract sufficient funds for Wereko, 2012; Htay, 2012; Kowalewski, investment (Bloom et. al., 2010). Prior 2012; Afolabi, 2013). The study purposed to works, such as Tybout (2000) and World reveal any positive linkage between Bank (2004), have underlined a set of issues corporate governance and firm performance. including weak regulatory framework as the The study aimed at exploiting any positive main cause of low productivity of firms in linkage revealed to promote firm Ghana. performance of the listed companies on Good corporate governance has been GSE to bring about the need economic emphasised to be important to corporate growth and development in Ghana. organisations especially in transition and The study also compared and developing economies like Ghana (Akpakli, contrasted corporate governance framework 2010). The effectiveness of a company’s of Ghana with the OECD principles of corporate governance structure has a corporate governance. The study evaluated comprehensive consequence on how well it the corporate governance framework of performs (Fooladi et al., 2014). Aboagye, Ghana, and made necessary Agyemang and Ahali (2013) asserted that recommendations that would make it robust corporate governance encourages effective like internationally accepted frameworks, and efficient allocation of resources, assists for example OECD principles of corporate corporate organisations in attracting capital governance. The recommendations were at low cost and assists corporate made to regulatory bodies namely Ghana organisations in maximising their Securities and Exchange Commission (SEC) performance as well as their ability in and GSE. This is to promote good corporate meeting community needs. governance practices among listed firms in Research maintained that good Ghana to enhance the country’s economic corporate governance practices improve growth and development. This quantitative, firm performance through judicious correlational research study utilised a five- allocation of firm’s resources, competent point Likert type scaled survey with management, high productivity, increase descriptive statistics to identify and define profitability and among others (Black et al., the specific independent variables of 2009; Akpakli, 2010; Deku II, Kankpang & corporate governance that significantly Okonkwo, 2012; Tornyeva & Wereko, relate to the dependent variables of firm 2012; Afolabi, 2013). performance. The study sought to find out how Significance of the Study good corporate governance practices among Matters regarding governance have listed companies in Ghana could address the received increased attention in recent times poor performance of the 36 listed companies on the continent, more so, as it is to accelerate Ghana’s economic growth and emphasised by the New Partnership for development. Africa’s Development Agenda (Kyereboah- Purpose of Research Coleman, 2007). An understanding of the The study sought to understand the pattern of corporate governance in the
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Corporate Governance and Firm Performance corporate sector of Ghana will provide an research result adapt serve developmental, important awareness to top policy makers training, and evaluation needs of board of and help in the on-going restructuring of the directors of the 36 listed companies on GSE country. For example, the study has in Ghana.For example, the result showed established very strong relationship between that there exists strong positive correlation disclosure and firm performance. To between the roles and responsibilities of the enhance disclosure and thereby increase board and firm performance. Boards aim at performance of the listed firms, the study maximising shareholders value through would encourage law enactment arm of good performance. To achieve this, the government and regulators to enact laws study would encourage boards to be that would boot disclosure, for example, appraising their roles and responsibilities Freedom of Information Act. This Act vis-à-vis those cited in OECD (2004) such would give right to organisations as well as as: individuals to seek information from the Board members should act on a fully listed companies as well as government informed basis, in good faith, with due agencies thereby deepening disclosure. This diligence and care, and in the best act would help in exposing bribery and interest of the company and the corruption which Afolabi (2013) had shareholders. identified as one of the factors constraining Where board decisions may affect good corporate governance in Africa. different shareholder groups Furthermore, the level of financial reporting differently, the board should treat all is one of the essential elements for effective shareholders fairly. corporate governance system (Afolabi, The board should apply high ethical 2013). The study would encourage the standards. It should take into account regulatory authorities like GSE and SEC to the interests of stakeholders. ensure that accounting professional adhere Reviewing and guiding corporate to internationally accepted standards, for strategy, major plans of action, risk example, International Financial Reporting policy, annual budgets and business Standards (IFRS). The study also showed plans; setting performance objectives; strong positive correlation between the monitoring implementation and corporate governance framework of Ghana corporate performance; and overseeing and the OECD principles of corporate major capital expenditures, acquisitions governance. The study would help the and divestitures. regulatory authority of Ghana to critically Monitoring the effectiveness of the contrast the two frameworks and see the company’s governance practices and possible areas of the Ghanaian framework making changes as needed. that could be improved upon. Monitoring and managing potential The study uncovered critical conflicts of interest of management, components of the OECD principles of board members and shareholders, corporate governance elements that affect including misuse of corporate assets firm performance in present volatile and and abuse in related party transaction unpredictable business environment in Ensuring the integrity of the Ghana, where monetary prime rate was corporation’s accounting and financial 12.5% in 2011, but increased to 16% in reporting systems, including the 2014; inflation rate which was 8.4 % in independent audit, and that appropriate 2011 increased to 16.9% in 2014; and the systems of control are in place, in exchange rate of Ghana Cedi to US dollar particular, systems for risk was GHS1.43 to $1.00 in 2011 but management, financial and operational increased to GHS3.19 to $1.00 in 2014 control, and compliance with the law (Ghana Statistical Service, 2014). The and relevant standards. Boards should
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Corporate Governance and Firm Performance
consider assigning a sufficient number compared to firms still using the Ghanaian of non-executive board members framework. The used of the OECD capable of exercising independent principles would boost confidence of judgement to tasks where there is a international investors and attract more potential for conflict of interest. foreign investment into the firms. Examples of such key responsibilities A detailed country assessment of the are ensuring the integrity of financial corporate governance framework of Ghana and non-financial reporting, the review vis-a-vis the OECD principles of corporate of related party transactions, governance by the World Bank (2010) nomination of board members and key revealed that Ghana’s scores were: executives, and board remuneration. shareholder rights was 75%; equitable According to Carter and Lorsch treatment of shareholders 61%; disclosure (2004) corporate boards many a times 62%; responsibility of the board 43%; operate in a multifaceted environment and regulatory framework 61%; and equitable face a number of dilemmas. As the heads of treatment of stakeholders 68%. The boards the company when they fail to perform their can therefore improve their corporate duties efficiently as a result of poor skill, it governance practices in all these six areas would adversely affect performance. identified and benefit from good firm Several corporate failures have been performance. These could be achieved accredited to the inability of boards to through regular evaluation, monitory, recognize the problems early enough supervision and enforcement of these best because they lack the necessary skills. In practices across the organisation.Even addressing this challenge, several though there are no major corporate failures institutions have designed precise courses in Ghana, and it has happened in other parts for the training of directors, principally in of the world, prevention is better than cure the area of risk management (Tornyeva & (CIMA, 2008). Prevention must come Wereko, 20120). before failure (Barzel, Habib & Johnsen, The research results would serve as a 2004); this was the impulse of this study. mechanism for board of directors to The study would be significant to improve upon their performance to prevent regulatory authorities in Ghana in pursuance corporate failure in Ghana.Companies are of their responsibilities of ensuring run on going concern concept principle, the compliance with good corporate governance assumption that the entity will remain in practices among 36 listed firms on GSE. business for the foreseeable future. In view The result of the study would also add to the of this, it is incumbent on boards to always bodies of knowledge on corporate look for ways of improving their governance and firm performance and fill performances to ensure continued existence literature and knowledge gap on the subject of the business. The present study has in Ghana. The research is therefore essential demonstrated that the way to achieved good to organisational leadership, investors, GSE, performance is good corporate governance regulatory bodies such as Securities and practices. The result showed that the Exchange Commission of Ghana, Bank of corporate governance framework of Ghana Ghana, to mention few. is highly positively correlated with OECD Research Design principles of corporate governance. The research design for this study Notwithstanding, the OECD is more robust was quantitative research methodology. The than the Ghanaian framework. The adoption researcher in pursuance of this study of the OECD principle of corporate adopted the deductive approach. The governance by the boards would translate rationale in adopting this approach included into higher corporate governance practices among others: with resultant improved firm performance because the researcher sought to
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Corporate Governance and Firm Performance
explain relationship between variables, sharing a specific experience (Leedy & because the researcher intended to Ormrod, 2005; Sun, 2011). collect quantitative data, Given the nature of the research because the researcher intended to problem, the population size was too small control and allow the testing of to enable random sampling. The research hypothesis, therefore utilised purposeful sampling because the researcher was because the study aimed at examining the independent of what was being companies that were listed on GSE from the observed, year 2004 to 2013.The sample size because concepts were operationalized consisted of30 companies which were listed in a way that enabled facts to be within this timeframe. This was because the measured quantitatively, and study took retrospect of firm performance because findings would be generalized over ten years’ period 2004-2013. to some extent (Saunders, Lewis, & The first step of the implementation Thornhill, research study is creating the data collection 2003;Creswell, 2006;Saunders, Lewis, tools to be used to collect important study & Thornhill, 2007 Bajpai& Singh, data, for example in this study a 2008; Sun, questionnaire (Kremlin, 2008). Aquestionnaire was used as the primary 2009; Staff, 2012). Based on the literature review on research tool. The study made use of both corporate governance and firm performance, primary and secondary data. The primary the study sought to understand the data was collected through a survey. The relationship between these variables in format of the survey was a self-administered Ghana. The population of interest was listed questionnaire. There were five participants companies on Ghana Stock Exchange which from each selected firm namely: the Board had 36 listed companies as at the time of Chairman, two other Non-Executive this study. The population comprised of Directors, the Chief Executive Officer both local and international companies from (CEO) and one other Executive Director. different sectors of the economy such as This was to serve as a form of triangulation Banking; Insurance, Manufacturing; to minimise interpretation bias. There were Agriculture; Mining; Oil; among others. therefore 150 survey participants (five Assessing the companies within participants from each selected listed Organisation for Economic Co-operation company multiplied by 30 selected listed and Development (OECD) Principles of companies). Corporate Governance and past financial The invitation to participate in the survey was sent out through e-mail and statements of the listed companies provided meaningful data concerning corporate further distributed letters. This was to make governance and firm performance of those sure that the participants receive the companies which is consistent with Blacket invitations as there was possibility that some al. (2009), Black, Jang and Kim (2003), and of those emails could go into junk e-mail Garay and Gonzalez (2008).As a non- boxes and be deleted. This was to enhance experimental approach, the study surveyed a the response rate. The responses to the sample with a population of 36 listed survey were requested within 30 days of companies on GSE. Survey research is receiving the e-mails. The questionnaires common in quantitative studies as it seeks to were collected personally to maximize the gather information regarding the opinions, response rate. Participation in this study was characteristics, experiences and attitudes of voluntary as per APA (2002). Participants had the right not to participate at all or to people (Leedy & Ormrod, 2005; Sun, 2011). This process permits researchers to capture leave the study at any time which is a snapshot in time of a cluster of people consistent with APA (2002). Deciding not
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Corporate Governance and Firm Performance to participate or choosing to leave the study scale. Strongly Disagree (1) Disagree (2) Do did not result in any penalty or loss of Not Know (3), Agree (4) and Strongly benefits to which the participants are Agree (5). This instrument contained 21 entitled, and it did not harm their item assessment. relationship with GSE, Securities and Third, the instrument for corporate Exchange Commission or any individual. If governance regulatory framework of Ghana, any participant decided to leave the study, developed and validated by Ghana company the procedure was just to either telephone or law, Companies Code, 1963 Act 179. The email the researcher. aim of this instrument was to assist in The secondary data consisted of the comparing the OECD principles of balance sheets and income statements of corporate governance with the corporate listed companies, maintained by the Ghana governance regulatory framework of Ghana Company House and GSE; informed for robustness. The corporate governance consent was be required on GSE for regulatory framework of Ghana has been collection of this data. divided into six major sections, namely: a) This study made use of three the mission, responsibilities and validated instruments. First, the instrument accountability of the board; b) committees for corporate governance was the instrument of the board; c) relationship to shareholders developed and validated by OECD (2004), and stakeholders, and the rights of titled Principles of Corporate Governance. shareholders; d) financial affairs and The study investigated the relationship auditing; e) disclosures in annual reports between corporate governance and firm (transparency); and f) code of ethics performance. The study took diligent steps (Aboagye, Agyemang., & Ahali, 2013). The to ensure validity with comparison with instrument therefore contained six scales multiple pre-existing measures in the and each scale had seven questions with a validation study (Black, Jang, & Kim, 2003; five-point Likert scale with the following Tornyeva & Wereko, 2012). The test-retest labels: Strongly Disagree (1) Disagree (2) reliability was performed to further establish Do Not Know (3), Agree (4) and Strongly the reliability of the instrument. There are Agree (5). This instrument on the whole, six points contained in the Principles of contained 42 item assessments. In order to Corporate Governance (OECD, 2004). The solidify the validity and reliability of the instrument therefore contained six scales combined instruments, the study further namely: governance framework; rights of tested the instrument including construct shareholders; fair and equal treatment of validity and reliability (Creswell, 2009). shareholders; role of stakeholders; The data analysis seeks to address disclosure; and responsibilities of the board. the research questions. The study contained Each scale had seven questions with a five- four statistical analysis namely, descriptive point Likert scale with the following labels: statistics, correlational analysis, regression Strongly Disagree (1) Disagree (2) Do Not analysis and test of hypothesis. All Know (3), Agree (4) and Strongly Agree statistical analysis was parametric methods (5). This instrument on the whole, contained assuming the dataset to be normally 42 item assessments. distributed (Triola, 2009). Both Excel and Second, the dependent variable (firm SPSS stored, organised and executed the performance) made use of audited financial statistical analysis. All data types were statements of the sampled companies. The discrete data organized in rows for each second instrument was built based on the participant's responses. A data integrity audited financial statements of the sampled check was performed to ensure that all data firms. The instrument contained ROA, were within expected range of one to five. ROE, and Tobin’s Q. The instrument had During the processing and analysis of the eight questions with a five point Likert data, AVG 2014 software protected the data
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Corporate Governance and Firm Performance from probable hackers from accessing the shareholders in a firm in Ghana does data. The data was presented in figures, not affect performance. tables, charts and graphs. Upon completion H1cA: Fair and equal treatment of of the analysis, the database file was safely shareholders in a firm in Ghana does storage and backed up on external hard affect performance. drive. Research Questions and Hypotheses RQ1d: Do stakeholders in corporate The research questions and hypotheses to governance in a firm in Ghana affect address the research problem were as performance? follow: H1dO: The stakeholders in corporate RQ1: Is there any relationship between governance in a firm in Ghana does not corporate governance and firm’s affect performance. performance in Ghana? H1dA: The stakeholders in corporate H1O: There is no relationship between governance in a firm in Ghana does corporate governance and firm’s affect performance. performance in Ghana. H1A: There is a relationship between RQ1e: Does disclosure in firm’s corporate governance and firm’s financial statement in Ghana affect performance in Ghana. performance? Sub-questions: The six OECD principles of H1eO: Disclosure in firm’s financial corporate governance was tested against statement in Ghana does not affect firm performance measures such as Return performance. on Equity, Return on Assets, and Tobin’s Q H1eA: Disclosure in firm’s financial so as to identify any relationship between statement in Ghana does affect the variables. performance. RQ1a: Does ensuring a basis for an effective corporate governance RQ1f: Do effective fulfilment of framework in a firm in Ghana affect responsibilities of Board of Directors in performance? a firm in Ghana affect performance? H1aO: Ensuring a basis for an effective H1fO: Effective fulfilment of corporate governance framework in a responsibilities of Board of Directors in firm in Ghana does not affect a firm in Ghana does not affect performance. performance. H1aA: Ensuring a basis for an effective H1fA: Effective fulfilment of corporate governance framework in a responsibilities of Board of Directors in firm in Ghana does affect performance. a firm in Ghana does affect performance. RQ1b: Do the rights of shareholders in a firm in Ghana affect performance? RQ2: Is there any relationship between H1bO: The rights of shareholders in a corporate governance framework of firm in Ghana do not affect Ghana and OECD principles of performance. corporate governance? H1bA: The rights of shareholders in a H2O: There is no relationship between firm in Ghana do affect performance. corporate governance framework of Ghana and OECD principles of RQ1c: Does fair and equal treatment of corporate governance shareholders in a firm in Ghana affect H2A: There is a relationship between performance? corporate governance framework of H1cO: Fair and equal treatment of Ghana and OECD principles of
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Corporate Governance and Firm Performance
corporate governance. letter requested a flexible time span of at Assumptions and Limitations most 30 days for participation. The study The methodological assumption was also assumed that the individuals were the quantitative survey process to the under normal conditions and not bothered assessment of link between corporate for time or within their environment. governance and firm performance. As a The limitations of the study rest in sensitive topic, the study assumed that the generalize-ability of the research. Since participants did not amplify their self- the study was focused on ten years perceptions and answered candidly to the timeframe, not all listed companies were best of their knowledge (Vigil, 2005; Sun, covered in this study. Another limitation for 2011). The method of self-administration of the study was the small population and surveys assumes the honesty in responses sample size. The data collected was self- (Bernard, 2000). Listed companies were reported data. Whereas it offers efficiency used in this study because of assume data in data collection, limitations also exist dependability as these companies are using this technique of data collection (Sun, mandated by law to publish annual reports 2011). Although there was no control over and accounts (Kyereboah-Coleman, 2007). the interpretations of the questions in the The principal theoretical assumption instrument, self-administered questionnaires rests within the literature concerning may have challenges like response rates and corporate governance and firm performance honesty in responses (Bernard, 2000). The (Aguilera & Desender, 2012; OECD, 2004; study centered on firms quoted on GSE, the Austin & Gittell, 2002). Corporate researcher was mindful of the fact that the governance indices may not sufficiently fundamental behaviour of this stock market capture the quality of governance (Aguilera (bullish or bearish) could have effect on & Desender, 2012). Distinguishing effective especially the performance variables which from ineffective governance presents an could either positively or negatively skew enormous challenge, especially given the the regression results. Nevertheless, it was great diversity of corporate governance hoped that most of these effects would have mechanisms employed by firms (Aguilera & been accommodated for by the use of Desender, 2012). The study assumed that control variables in the analysis. the corporate governance index that was One of the key challenges in molded from the survey responses amply quantifying and substantiating corporate captured the quality of governance being governance indices is in what level these practiced by the sampled listed firms. indices are capturing firm-level governance Generally accepted models of performance quality (Aguilera & Desender, 2012). This measurement, for example, return on equity, study did not investigate inter-firm level return on assets, and Tobin’s Q - as used in governance quality among the sampled this study, follow three basic principles: firms and therefore considered this as a performance should be clearly defined; limitation. Additional limitation was the use performance should be accurately measured; of correlational research, which is only a and rewards should be contingent upon descriptive approach (Sun, 2011). Whereas measured performance (Austin & Gittell, relationships between variables may be 2002). The study therefore assumed that the proven, it is still imprecise if certain performances of the sampled listed antecedent and intervening variables may companies as obtained from their financial further muddle the relationship between statements were accurately measured. independent and dependent variables The study assumed that the (Bernard, 2000).Notwithstanding the strong participants answered all parts of the relationship established between corporate questionnaire with complete honesty and governance and performance (ROA, ROE with minimal interruptions. The invitation and Tobin’s Q), it is imperative to put a
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Corporate Governance and Firm Performance caveat regarding uncertainties of causality. Donaldson and Davis (1991). The The study had not been able to prove that theory is grounded on the assumption the independent variables are exogenous. that the interest of shareholders and the Owing to the complexity of the corporate interest of management are connected governance variables it was cumbersome to therefore management is inspired to control for possible endogeneity in the make decisions that would maximize model, hence the researcher could not make performance and the total worth of the an assessment of the causality relationship company. between the variables. 2. The resource dependency theory was Operational Definitions developed by Pfeffer (1973) and Pfeffer Two major constructs form the basis and Salancik (1978) with the purpose for this study: corporate governance and of accentuating the important role firm performance. played by board of directors in Corporate governance. Cadbury providing access to resources that Committee (1992, defines corporate would increase the company’s governance as "the system by which performance and safeguard it against companies are directed and controlled" p.14. externalities. More precisely it is the framework by which 3. Stakeholder theory was developed by the several stakeholder interests are Freeman (1984) with importance on the balanced (Cadbury Committee, 1992). The need for managers to have corporate OECD Principles of Corporate Governance accountability to stakeholders instead (2004) states that “corporate governance of shareholders. Stakeholder theory involves a set of relationships between a considers agency theory perspective to company’s management, its board, its be too narrow since manager’s actions shareholders and other stakeholders” p.11. have consequence on other interested Corporate governance also offers the parties than just shareholders. platform through which the objectives of the Firm performance. Firm company are set, and the means of performance on the other hand, is a accomplishing those objectives and fundamental constituent of how businesses monitoring performance are determined do things and act in a manner that helps (OECD, 2004). Fuenzalida et al. (2013) them subsist and succeed (Kellen, 2003). In averred that good corporate governance order to subsist and thrive, firms need to set practices improve firm performance through strategic directions, set objectives, judicious allocation of firm’s resources, implement decisions and monitor their state competent management, high output, and behaviour as they move towards their increase profitability and among others. aim (Kellen, 2003). Euske and Lebas (2002) Poorly governed firms are thus, probable to provide a good definition of performance as be less profitable, have greater insolvency “doing today what will lead to measured risk, lower valuations and pay out less value outcomes tomorrow” p.26. Firm dividend to their shareholders (Kyereboah- performance measurement systems are used Coleman, 2007). to measure performance and comprise of The study used four theoretical multiple measures (Kellen, 2003). The study principles of corporate governance: One of used three measures: the theoretical philosophies underlining the Return on equity (ROE). ROE issue of corporate governance is the agency measures the rate of return of ownership theory developed by Jensen and Meckling interest (shareholders' equity) of common (1976) of the separation of ownership and stock owners (Damodaran, 2007). It control. measures the effectiveness of a firm in 1. The stewardship theory developed as a making profits from each unit of result of the seminar work by shareholder equity, also known as net assets
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Corporate Governance and Firm Performance or assets minus liabilities. ROE (Meeamol, 2011). In this present study, demonstrations how healthy a company uses Tobin’s Q wasdefined as: investments to produce earnings growth
(Damodaran, 2007). ROE is defined as:
Market value of assets as is defined
as book value of debt plus book value of Average Stockholders’ Equity is preferred stocks plus market value of defined as sum of shareholders' equity at the common stocks. This consistent with beginning and at the end of the year divided Tornyeva and Wereko (2012), Akpakli by two. This is consistent with Tornyeva & (2010), Black et al. (2009), Kyereboah- Wereko (2012), Akpakli (2010), Black et al. Coleman (2007), among others. (2009), Kyereboah-Coleman (2007) among The Ghana Stock Exchange others. (GSE). GSE is the stock exchange of Return on assets (ROA). ROA Ghana. The exchange was incorporated in displays the percentage of how profitable a July 1989 with trading commencing in company's assets are in generating income 1990. GSE currently lists 38 equities (from (Kupiec & Lee, 2012). This number shows 36 companies) and 2 corporate bonds. All what the company has attained by use of its types of securities can be listed. The assets. It is a useful number for matching benchmarks for listing include profitability, rival companies in the same industry. capital adequacy, spread of shares, years of Return on assets gives a sign of the capital existence and management efficiency. The strength of the company, which will depend GSE is located in Accra. on the industry. Companies that need large Summary initial investments will normally have lower In Chapter I, the problem statement return on assets (Kupiec & Lee, 2012). identified the need to examine the ROAs over 5% are normally considered relationship between corporate governance good (Kupiec & Lee, 2012). ROA is defined and firm performance. Next provided the as: purpose of the study, which was to
investigate whether the corporate governance practices of listed companies on
GSE have any effect on their performances This consistent with Tornyeva and as both recent and past empirical studies Wereko (2012), Akpakli (2010), Black, have established in both developed and Kim, Jang, and Park (2009), Kyereboah- developing countries. The purpose of the Coleman (2007) among others. study was followed by the significance of Tobin's Q. Tobin’s Q is the ratio the study, which were uncovering critical between a physical asset's market value and components of the OECD principles of its replacement value. It was introduced in corporate governance elements that affect 1969 by James Tobin. If Tobin's Q is greater firm performance in present volatile and than 1.0, then the market value is greater unpredictable business environment in than the value of the company's recorded Ghana. The significance of the study was assets (Meeamol, 2011). This proposes that followed by research design, research the market value mirrors some unmeasured questions and hypotheses, assumptions and or unrecorded assets of the company. High limitations, operational definitions, and Tobin's Q values inspire companies to invest finally summary. The review of literature extra in capital because they are "worth" used for the current study was presented in more than the price they paid for them the following Chapter 2.
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Corporate Governance and Firm Performance
CHAPTER 2: LITERATURE REVIEW
Ghana’s economy is still Stakeholder theory considers underdeveloped after 58 years of Agency theory’s contractual view of the independence notwithstanding formulation relationship between managers and and implementation of various types of shareholders where the managers have the economic policies and programs (Nkurayija singular objective of maximizing the wealth 2011). The private sector in every economy of shareholders to be too slim since serves as the engine of growth (DFID, manager’s activities have consequence on 2011). However, the private sector in Ghana other interested parties than just is saddle with poor performance and is not shareholders. The theory was developed by able to bring about the required economic Freeman (1984) with stress on the need for growth and development (DFID, 2011). managers to have corporate accountability Tybout (2000) and World Bank (2004) have to stakeholders instead of shareholders. underlined a set of issues including weak Stewardship theory arose as a result regulatory structure as the key cause of low of the seminar work by Donaldson and productivity of firms in Ghana. Good Davis (1991). The theory is based on the governance would lead to economic assumption that the interest of shareholders revolution through which economic growth and the interest of management are should be achieved (Nkurayija 2011). The connected therefore management is inspired usefulness of a company’s corporate to make decisions that would maximize governance framework has a sweeping performance and the total worth of the effect on how well it performs (Fooladi et company. The theory postulates that there is al., 2014). Aboagye, Agyemang, and Ahali higher satisfaction in cooperative than (2013) asserted that good corporate individualistic behaviour and hence whilst governance stimulates effective and the actions of management would be efficient distribution of resources and aids maximizing shareholder fortune, it would at corporate organisations in maximising their the same time be meeting their personal performance. needs. The study sought to find out how The resource dependency theory was good corporate governance practices among developed by Pfeffer (1973), and, Pfeffer listed companies in Ghana could address the and Salancik (1978) with the aim of poor performance of the 36 listed companies accentuating the important role played by to accelerate Ghana’s economic growth and board of directors in providing access to development. Four theories formed the resources that would increase the theoretical framework for the study. One of company’s performance and safeguard it the theoretical philosophies underlining the against externalities. Companies need issue of corporate governance is the agency resources in areas of finance, human, theory developed by Jensen and Meckling technical, information, communication and (1976). The agency theory advocates technology to function properly and to separation of ownership from control. accomplish their aims and objectives. Investors have surplus resources to invest This chapter reviews the literature but due to technical limitations such as on corporate governance and firm insufficient capital and managerial know- performance. how to manage the funds, employ the Theoretical Orientation services of managers to invest their funds in Corporate governance. Good profitable undertakings to generate good corporate governance has been emphasized returns and the managers are remunerated to be essential to corporate organisations for their service. particularly in transition and emerging economies. The efficiency of a company’s
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Corporate Governance and Firm Performance corporate governance structure has a the use of a set of influential micro-policy sweeping effect on how well the company instruments in an organisation to guarantee functions (Aboagye, Agyemang, & Ahali, an efficient and effective use of resources in 2013). A company that embarks on good attaining the central objectives of its capital corporate governance practice offers vital providers as well as maximizing positive information to its equity holders and other impact on other stakeholders (Agyemang & stakeholders to minimize information Castellini, 2012). Using the agency theory asymmetry (Duke & Kankpang, 2011). approach, Shleifer and Vishny (1997) Financial scandals that are currently defined corporate governance as a happening across the world and the recent procedure in which a provider of finance to failure of major corporate organisations firms assure themselves of getting a return including Enron, WorldCom, Tyco, on their investment. Adelphia, Arthur Anderson, Lehman The existence of different and Brothers, Freddy Mac, Fanny Mae, sometimes contradictory objectives among WorldCom, Goldman Sachs, Marconi, corporate managers and shareholders has Northern Rock, Parmalat and Yukos have given rise to the design of several models made corporate governance to take on the and devices to ensure that the cost related centre stage for academic and professional with such different interests is marginal discourse (Aboagye, Agyemang, & Ahali, (Kyereboah-Coleman, 2007). One of the 2013). The piquancy of the search for a measures suggested to deal with this is general understanding of the indicators, corporate governance (Jensen & Meckling, drivers and alleviating instruments of 1976). It has been maintained that the corporate governance has been intensified in agency theory has been the most central recent times by these remarkable corporate issue in corporate governance (Tornyeva & failures (Duke & Kankpang, 2011). Wereko, 2012). However, some other There is no commonly held or sole theories have developed, all in an effort to definition of corporate governance and highlight the objective of a firm and how the certainly no definition that all countries firm should be accountable in meeting its agree upon (Mayes et al., 2001, OECD, responsibilities. Four of these relevant 2004). As a result, corporate governance can theories that formed the basis of this present be defined and practiced in different ways study were discussed below: internationally depending upon the relative Agency theory. The separation of power of owners, managers and providers of ownership of an organisation from its capital (Craig, 2005). Cadbury Committee management has created a lot of dialogue on (1992) defines corporate governance as "the how to effectively bring into line the interest system by which companies is directed and of the managers and the owners (Ansari & controlled" p.14. More precisely it is the Pande, 2014). Adam Smith raised this query framework by which the several stakeholder as early as 1776 when he submitted that the interests are balanced (Cadbury Committee, separation of ownership and control resulted 1992). The OECD Principles of corporate in poor inducements for managers to governance (2004) states that “corporate proficiently manage the affairs of the firm governance involves a set of relationships (Ansari & Pande, 2014). The theoretical between a company’s management, its foundations for most of the modern board, its shareholders and other framework of corporate governance has stakeholders” p.11. Corporate governance come from the classic work of Berle and also offers the structure through which the Means (1932) which describes the agency goals of the company are set and the means problem in modern firms as one emanating of achieving those goals and monitoring from the separation of ownership and performance are determined (OECD, 2004). control. In this typical work, there is a Corporate governance could be defined as thoughtful explanation of a central agency
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Corporate Governance and Firm Performance problem in modern firms owing principally calculation that simply describes what to the separation between financing sources managers and shareholders maximise value, and management (Ansari & Pande, 2014). without adjudicating the moral truth of these The key theoretical principle behind actions. With a concentration on value agency theory is that the firm is made up of maximisation comes an alignment to agency a link of agreements. As significance, theory’s first layer which is, in line with the agency theory is appropriate to all above discussion, often depicted as contractual relationships in the firm exclusively driven by profit and self-interest (Gomez-Mejia & Grabke-Rundell, 2002). (Jensen, 2002). However, it centres strongly on top Specifically, in the first layer managers because they are at the strategic managers are depicted as agents of firms peak of the firm as they are accountable for who involve in managerialism, a form of resource distribution decisions, new market opportunism linked to the principal–agent entries, acquisitions and divestitures among problem, where firm wealth is sacrificed for others (Carpenter& Sanders, 1998). Based improved salaries, reputations, bonuses, and on economics, agency theory’s focal other desired results (Fama & Jensen, 1983). behavioural assumptions include the With conflicts arising between managers proclamation that: (a) agents and principals following personal wealth and shareholders are rational; (b) agents and principals are following maximised firm value, agency self-interested; (c) agents are more risk- theory attempts to limit managerialism and averse than principals (Gomez-Mejia& reinstate goal congruent to the manager– Grabke-Rundell, 2002; Deutsch, 2005). shareholder relationship (Bondy & Raelin, Shareholders (principals) delegate 2013; Cyert, Kang, & Kumar, 2002). To do decision making to management (agents). this, the first layer of agency theory was Certainly, this leads to opportunity costs, established, which portrays shareholders also called ‘agency costs’ which relate the and managers as adversaries. With cost to the principals to monitor the shareholders showed as oriented to value behaviour of an agent (CEO) to reduce maximization and managers portrayed as agent opportunism (Bainbridge, 2005). oriented to personal value, a competition Agency theory suggests that the contract arises around the sharing of limited between principal and agent is the foremost resources. The adversarial relationship mechanism for lessening agency costs. This arises as both parties direct limited contract may comprise the development of a resources in possibly oppositional monitoring scheme to safeguard those directions, with managers oriented to behaviours and outcomes do not depart from bonuses and shareholders oriented to stock the owners’ interests. It also includes the performance (Jensen & Meckling, 1976). instituting of an incentive scheme rewarding Concentrating on defining what the agent for results that are important to the good governance looks like has helped principal, for example, profitability and opaque agency theory’s second layer: share price (Baeten, Balkin, & Berghe, shareholders as agents of society. The 2011; Tosi et al., 2000). public in an independent society is defined Given the ascendancy of agency as persons who, “receive rights and theory within corporate governance, good undertake responsibilities and restrictions in corporate governance is often interpreted by return for the ability to have a direct and the modern political-economic environment indirect say in the form and content of their as exclusively oriented to value representation” (Devinney, 2011, p335). It maximisation, often used synonymously is debated that they are eligible to with profit maximisation (Daily et al., representation and consideration in 2003). Agency theorists therefore lessen decisions affecting them (Boatright, 1994; corporate governance to a cost–benefit Donalson, 2007). Though seldom directly
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Corporate Governance and Firm Performance addressed in agency theory and regularly shareholders and managers involve in relegated to areas such as corporate social mutual acts of managerialism, damaging responsibility the second layer admits that society and reducing long-term firm firms enter agreements with society to create sustainability (Bondy & Raelin, 2013). The positive, jointly beneficial dealings that, if application of agency theory without a violated, can lead to damaging social principal focus on society stimulates actions against the firm (Donaldson, 2007; exploitation rather than promoting both firm Heath, 2009). Although the second layer and societal interests. Whereas the above focuses on guarding society against negative discussion raises the likelihood that the very externalities, it is significant to recognise theory used to encourage good governance that society can benefit from positive really damages society, agency theory’s externalities of firm activity. For example if descriptive nature is frequently presented to unexpected consumer buying leads to a firm rationalise its usage (Hunt III & Jones, paying competitive wages that go beyond a 1991). living wage, employees can enhance their Contemporary firms practise standard of living by buying a home (Bondy separation of ownership and control and are & Raelin, 2013). Positive societal therefore run by professional managers externalities are presumed to create benefits (agents) who are not answerable to remote that accrue back to business, leading to shareholders (Kyereboah-Coleman, 2007). long-term firm value maximisation (Jensen, This interpretation fits into the principal- 2012). When taking a long-term view, it can agent paradigm. In this regard, the central thus be debated that firms are not question is how to ensure that managers necessarily hurt by positive societal follow the interests of shareholders in order externalities. In contrast, it has been to reduce cost associated with principal- reasoned that society can be adversely agent contract. The principals are affected by adverse firm externalities challenged with two main problems. Apart (Mahoney, McGahan, & Pitelis, 2009). from facing an adverse selection problem in Consequently, the second layer of agency that they are confronted with selecting the theory essentially emphases on alleviating most proficient managers, they are also the harmful impacts on society of adverse confronted with a moral hazard problem firm externalities. Notwithstanding the because they must give the agents possibility of adverse firm externalities (managers) the right inducements to put flowing to society, the simple economic forth the suitable effort and make decisions description of agency theory positions to the allied with shareholder interests. In a further argument that societal benefits assist the definition of agency relationship and cost, firm and vice versa causing the positive Jensen and Meckling (1976) describe connection between social good and value agency relationship as an agreement under maximisation to become taken for granted which one or more persons (principal) (Jensen, 2012; Pedersen& Thomsen, 2000). engage another person (agent) to Consequently, the nuances of the second accomplish some service on their behalf, layer remain almost overlooked. Value which involves entrusting some decision- maximisation thus becomes taken-for- making authority to the agent. There exists a granted as an end in itself rather than a conflict of interests between managers or procedure leading to societal benefits. While controlling shareholders and bondholders overlooking the second layer raises the and outside or minority shareholders leading likelihood that firms can profit from this, to the propensity that the former may extract long-term damage can transpire as second incentives (or perks) out of a firm’s layer abuses, thus if shareholders can resources and be less interested to pursue personally profit without assisting society, new profitable undertakings (Kyereboah- can flow to the first layer where Coleman, 2007).
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Corporate Governance and Firm Performance
The principle of separation of only the residual cash flow of the firm ownership from management however, (Brickley, Smith, & Zimmerman, 2001). creates a serious problem of trust between Since Agency costs function to decrease the stockholders (the principal) and managers firm’s stock value, they must therefore be (the agent). The agency theory controlled. A number of methods have been fundamentally describes the association suggested for this including: separation of between these two sets of organisational office of board chair from that of the CEO stakeholders. It puts the matter of trust in in order to remove concentration of power viewpoint by proposing that conflict of and lessen the influence of the CEO; interest frequently the contractual constituting the board mostly of relationship between stockholders and independent and non-executive directors in managers, and the challenge is how to order that they can efficiently monitor, and manage this conflict. Handling the agency reprimand managers as the need arises; problem is intricate in the sense that securing the financial compensation of organisational owners surrender control of managers to the long term performance of the firm to the board and managers under an the firm as a way of compelling managers to agency agreement. The organisational focus on maximising stock value; and, owners however subsequently become regulating managers through board action, hostages to their agents, whom the theory including sacking those whose activities do assumes will continuously place their own not meet the expectations of the board individual goals ahead of the organisation’s (Duke II, Kankpang & Okonkwo, 2012; and its owners (Duke II, Kankpang, & Mintz, 2004). Okonkwo, 2012; Mintz, 2004). The agency theory’s concept of Shareholders would usually anticipate that separate leadership structure, thus CEO and the agents will perform in the principal’s Board Chairperson should not be the same, best interest, however that does not happen is used in Ghana, United Kingdom and all the times (Padilla, 2000). The agency Malaysia to mention few. This is consistent theory suggests that it is only when the with OECD principles of corporate interests of the managers are channelled into governance. a single long-term objective with those of Stakeholder theory. Stakeholder stockholders and the firm that managers theory was developed by Freeman (1984) could be presumed to be acting in an with prominence on the necessity for accountable way (Duke II, Kankpang, & managers to have corporate responsibility to Okonkwo, 2012). This reduces the stakeholders instead of shareholders. stockholders’ fundamental problem to that Stakeholder theory is a management theory of choosing the right quality of persons to and later has been advanced by Freeman act as their agent (at the board, and therefore (1984) spreading the accountability of top management) and raising a suitable corporate players from the shareholder incentive schemes that should warrant focus to other stakeholders. Stakeholders are symmetry between the agent’s interests and “any group or individual that can affect or is theirs. Where the stockholders are not affected by the achievement of a satisfactorily able to manage this corporation’s purpose” (Freeman 1984, relationship, and there are disagreements p.229). Donaldson and Preston (1995) between managers’ information and defined stakeholders as recognisable groups stockholders’ knowledge about the firm, the or people who have genuine interest in an resulting conflict of interest starts to raise organisation and these interests have the agency (monitoring) cost of the firm inherent value. Generally, majority of (Jensen & Meckling, 1976). This agency stakeholders are employees, creditors, cost is an opportunity cost incurred solely suppliers, customers and the local by the stockholder, who is the recipient of community (Ayuso et al., 2007).
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Corporate Governance and Firm Performance
The stakeholder theory is a blend of performance. Going one step further, a few philosophical ideas from economic, however, stakeholder theory even views ethics, law and organisational features. One incentive alignment to be an example of of the principal underlying assumptions of ineffective contracting because of a stakeholder theory is that the firm has fundamental absence of credibility towards associations with multiple component executive managers (Jones, 1995). groups and that these groups’ interests have The Stakeholder theory advocates inherent value (Gay, 2002). Stakeholder that performance and success are contingent theory lessens the classical economic on how well an organisation manages its assumption that the only stakeholder that is dealings with these stakeholders (Freeman of paramount importance is the shareholder, & Phillips, 2002). Certainly to succeed, the which is a conjecture used in agency theory. manager needs to synchronise contradictory Stakeholder theory could in fact be interests of these stakeholders in a balancing presumed to be a theory dealing with act which calls for significant diplomacy. manifold principals and manifold agents Where these interests are appropriately (Gomez-Mejia et al., 2005). This theory accommodated, the support of the spreads the accountability of the directors stakeholders is preserved, while the firm is towards the corporate social responsibility seen as a worthy platform upon which the (Amaeshi, 2010). Stakeholder theory views stakeholders’ interests can be maximised. agency theory’s contractual view of the The focal argument of the Stakeholder relationship between managers and theory is that people, who without shareholders where the managers have the restrictions come to associate themselves single objective of maximising the value of with the firm, are the ones who create shareholders to be too narrow, since economic value to the firm. The interest of manager’s activities have consequence on these people must therefore be paramount. other interested parties than just Accordingly, managers need to nurture shareholders. Stakeholder theory gives quality dealings with these stakeholders that focus on business ethics as well as the will inspire them to endeavour to contribute maximisation of the profit (Htay et al., in a supportive way towards attainment of 2012). The theory is concerned in how the organisational goals. Profits will then be managerial organisation decision making the guaranteed result of this relationship, affect all the stakeholders and no one's once value is created (Freeman, Parmar, & interest should be able to supersede Wicks, 2004). However, Ort and Strudler (Donaldson & Preston, 1995). Executive (2002) maintained that the description of a compensation can be viewed as a tool to firm’s stakeholders in this context should be streamline the interests of executives and limited to only those parties whose assets in stakeholders. As significance, stakeholder the firm are at some risk, and their wealth theory recommends judging managers not are directly and/or considerably affected by only on the value created for shareholders, the firm’s accomplishment of its objectives. for example, share price and dividends, but In this respect, stockholders and employees also on stakeholder value that was produced are the primary stakeholders. Even creditors (Charreaux & Desbrières, 2001). More are considered outsiders in this narrow concretely, the performance measures that stakeholder definition because they are are used in bonus schemes should, for usually protected by debt contracts with the example, also be connected to employee firm and, in furtherance; they enjoy satisfaction, customer satisfaction, safety principal and interest payment on their and environmental measures (Baeten, transactions with the firm. The interests of Balkin, & Berghe, 2011). These wider government, communities or suppliers are performance metrics indeed may have a even more isolated in this consideration as resilient correspondence to long-term non-accomplishment of organisational
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Corporate Governance and Firm Performance objectives endangers their interests neither theory has currently been adopted by some directly nor considerably. of the corporate governance guidelines, such The principle of the stakeholder as Corporate Governance Framework of theory has been well covered in two key Ghana, Combined Code from U.K. and questions formulated by Freeman (1994). Malaysian Code on Corporate Governance, The first question was what is the purpose by extending the responsibility of directors of the firm? (Ansari & Pande, 2014). This to other stakeholders (Htay, Meera, & question inspires managers of a firm to Salma, 2013). communicate the shared sense of the value Stewardship theory. The that they create and which brings the main stewardship theory developed as a product stakeholders together and pushes the firm of the seminar work by Donaldson and forward, allowing it to produce superior Davis (1991). In contrast with agency performance in terms of its business theory, stewardship theory submits that objectives and marketplace financial metrics agents’ (executives) interests are allied with (Ansari & Pande, 2014). Secondly, the those of the firm’s principals (owners). stakeholder theory asked the question; what Interests are focussed towards is the responsibility of the management of organisational objectives rather than the firm to its stakeholders? (Ansari & personal objectives (Davis et al., 1997).The Pande, 2014). This question beseeches stewardship theory takes a contrasting and managers to define how they want to do somewhat conciliatory view from the business, precisely, what kinds of agency theory as it submits that relationships they want and need to create organisational managers are basically with their stakeholders to deliver on their concerned with the maximisation of the business objectives (Ansari & Pande, 2014). performance of the firm, and their reasons Even though, in the legal structure and activities will therefore be symmetrical under which a company operates, the with those of the firm’s other stakeholders directors of a company are accountable and (Duke II, Kankpang, & Okonkwo, 2012). It responsible only to the shareholders of the discredits the agency opinion that managers company, such legal culpability exists only will act in the interest of other stakeholders in a stringent and narrow sense. Today, with only when there are forced with governance intensifying public pressure arising from instruments. Organisational managers corporate governance failures and should therefore be seen as stewards, rather environmental concerns, the concept of the than undertakers of shareholders assets. responsibility of companies is shifting and The theory is based on hypothesis broader corporate governance guidelines are that the interest of shareholders and the progressively developing. Consequently, the interest of management are aligned; earlier view based on a narrow legal therefore management is inspired to make interpretation, which held that the directors decisions that would maximise performance in an organisation are exclusively and the total value of the company. accountable to their shareholders, is now Stewardship theory is not in support of speedily giving way to a broader control mechanisms because these might understanding of their role and challenge the pro-organisational behaviour responsibilities to all stakeholders as well. of the agent (Baeten, Balkin, & Berghe, Stakeholder theory takes on a normative 2011). This conjecture aligns stewardship position and goes on to advocate that the theory with psychological contract theory. firm should be managed in way that results However, stewardship theory principally in a benefit to all stakeholders, emphases on underlying conventions about notwithstanding of the influence on the executives’ behaviour, rather than on financial performance of the firm (Freeman, their psychological contract and their roles. Wicks & Parmar, 2004). The concept of this These assumptions about executives’
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Corporate Governance and Firm Performance behaviour have an influence on the design comprising trust, in the running of an of executive compensation. First of all, enterprise and is grounded on the principle stewardship theorists view executive of collectivism that principally stands for compensation as a comparatively minor part caring for other peoples’ money and of executive motivation (Baeten, Balkin, & resources, entrusted to the care of corporate Berghe, 2011). The emphasis is more on the directors and executive management (Ansari acknowledgement executives receive from & Pande, 2014). being the firm’s stewards. Secondly, Stewardship theory, in disagreeing stewardship theory does not assume a with the agency theory, postulates that specific relationship between executive managerial opportunism is not relevant compensation and shareholder wealth or (Davis& Donaldson, 1991; Davis, operational dimensions of the firm’s Donaldson, & Schoorman, 1997; Donaldson financial performance (Baeten, Balkin, & & Muth, 1998). According to the Berghe, 2011). The motive is that stewardship theory, a manager’s objective is executives perform as stewards of the firm principally to maximise the firm’s and pursue organisational objectives. As a performance because a manager’s need for result, it is not necessary to develop extra accomplishment and success is fulfilled instruments to realise interest alignment when the initial condition of better firm (Otten, 2007). This means that this theory performance is achieved. One important also offers a possible explanation for the distinctive feature of the theory of weak association between executive pay and stewardship is that it substitutes the lack of firm performance (Baeten, Balkin, & trust to which agency theory refers with Berghe, 2011). respect for authority and a predisposition to The theory postulates that there is ethical behaviour. In summary, the superior utility in cooperative than stewardship theory views the following as individualistic attitude and hence whereas critical for guaranteeing effective corporate the actions of management would be governance in any entity: maximising shareholder wealth, it would at Board of directors: The contribution of the same time be meeting their personal non-executive directors is vital to needs. The managers safeguard and boost the effectiveness of the board’s maximise shareholders wealth through firm activities because executive directors performance, because by so doing, their have full knowledge of the firm’s utility functions are make best use of operations. This is believed to enrich (Daviset al., 1997). Analogous to the agency decision-making and to warrant the theory, stewardship theory exhibits the link sustainability of the business. between principals and agents. However, Leadership: Divergent to the agency the stewardship theory views the link from theory, the stewardship theory requires opposite angle (Htay, Meera, & Salma, that the positions of CEO and board 2013). Stewardship theory considers the chair should be concentrated in the board of directors as a group of top same individual, the reason being that corporate players will maximise the firm’s it affords the CEO the chance to carry performance, rather than their individual through a decision quickly and without interest, to improve the wealth of the interference of unwarranted shareholders (Davis& Donaldson, 1991). bureaucracy. Since the objective of stewards is to Board size: Lastly, stewardship theory maximise the shareholders’ wealth through maintains that small board sizes firm performance, it promotes goal should be encouraged to stimulate congruence between shareholders and top effective communication and decision management (Htay, Meera, & Salma, 2013). making. What constitutes small, Stewardship relies on higher values, however, is not defined by the theory.
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Corporate Governance and Firm Performance
As a foundation for a corporate the Chairman) combined rather than governance framework, the stewardship separated (Davis Donaldson, 1991). This theory proposes that management and board supports the fundamental proposition of the members in an organisation are inspired by stewardship theory which suggests that some superior force than the desire for individual directors in an organisation look personal wealth. Drawing upon after the interests of someone or something organisational psychology implies that self- larger than their personal self-interest. The esteem and fulfilment as had been suggested corporate governance guidelines developed in Maslow’s hierarchy of needs, broadly in USA, Germany and Japan use this influence the board member’s decision theoretical concept of stewardship theory. making (Ansari & Pande, 2014).In this For example, in the case of board leadership framework, stewards are company structure, USA, Germany and Japan prefer executives and managers who labour for the the combined board leadership structure shareholders and safeguard and make profits (CEO is also the chairman of the board) to for them. Unlike the agency theory, the safeguard that the firms are functioning in stewardship theory does not focus on the one direction and to get more commitment perspective of individualism but rather on from the top leaders (Fauziah & Idris, the role of topmost management as stewards 2012). in an organisation (Davis & Donaldson, Resource dependency theory. The 1991). Stewardship theory incorporates the resource dependency theory was developed goals of top management with that of the by Pfeffer (1973), and, Pfeffer and Salancik organisation and views top management as (1978) with the purpose of highlighting the being satisfied and inspired only when essential role played by board of directors in organisational success is achieved (Ansari providing access to resources that would & Pande, 2014). Agyris (1973) debated that improve the company’s performance and a substantial shortcoming of the agency safeguard against negative externalities. theory is that it looks upon an employee or Arikan and Barney (2001) defines resources person as an economic being, which as the ‘‘tangible and intangible assets firms overwhelms an individual’s own ambitions. use to conceive of and implement their Stewardship theory, on the other hand, aims strategies’’ p.138. Resource dependency at endowing the employees and gives them theory is concerned with the link between independence built on trust and encourages an organisation and a set of actors in the board members to act more independently environment (Hessel & Terjesen, 2010). so that the shareholders’ returns are Resource dependency theory centres on a maximised (Ansari & Pande, 2014). firm’s need to access resources from other Going against the framework of stakeholders and describes how resource having separate people to fill in the posts of inadequacies force organisations to pursue the Chairman and the CEO in an new innovations that use other resources organisation, as a check and balance (Hessel & Terjesen, 2010). Accordingly, the mechanism that is likely to lead to better theory describes how organisations face governance under the agency theory competitive pressures and may be assumptions, stewardship theory contingent on, or be impacted by, other recommends the amalgamation of these two actors in the objectives (Hessel & Terjesen, roles in one person. The stewardship theory 2010). Consistent with the resource-based presumes the post holder, as the steward of view of firms as bundles of unique resources the organisation, would performance in the that lead to competitive advantage, the organization’s best interest. It has been resource dependency theory emphases onthe empirically demonstrated that the firm’s ability to foster relations to access performance for an organisation, enhanced resources (Boone & Van Witteloostuijn, by having both the positions (the CEO and 2006).
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The fundamental assumption of resources provides them with the power resource dependency theory is that they need to operate properly in their organisations are dependent on actors exchange with the various stakeholders. outside the organisation because these Three key ideas emanate from this theory, actors provides critical resources that lessen which aid in explaining managerial uncertainty in achieving strategic behaviour. They are: (a) the social setting performance goals (Baeten, Balkin, & under which the firm functions matters, and Berghe, 2011). The theory is based on the it considerably influences managers’ assumption that organisational choice is behaviour; (b) firms have fundamental inhibited by multiple external pressures and strategies and mechanisms to use in that organisations are concerned with improving their independence and pursuing building legitimacy and acceptance vis-à-vis their interests in their environments; and (c) external stakeholders (Hessel & Terjesen, power is more serious to managers than 2010). Resource dependency theory reasonableness of decisions and efficiency presumes that the organisation makes (Davis & Cobb, 2009). dynamic choices to attain objectives. While stakeholder theory takes a Resource dependency theory assumes that wider approach and centres on all corporations rely on one another to access stakeholders, resource dependency theory valuable resources and therefore try to pays explicit attention to the stakeholders establish links among themselves (Bordean, who provide vital resources to the firm. Crisan, & Pop, 2012). Having to depend on these stakeholders A key ideology of resource indicates uncertainty in the functioning dependency theory is resource scarcity, environment (Berman et al., 2005). As a ensuing in multiple organisations rivalry for result, organisations endeavour to lessen this the same or similar bundle of scarce uncertainty by establishing coalitions with resources. As resource dependency theory is powerful stakeholders. For instance, the grounded on the argument that organisations board is considered to be a body that could are reliant on resources in the external safeguard the firm from environmental environment for their existence, the question uncertainties in its capability as a boundary of how to define the interior and exterior of spanner (Donaldson & Muth, 1998; the organisation becomes a point of interest Erakovic & Goel, 2008). In this respect, the (Henningsson, Hrastinski, & Rukanova, engagement of external directors and 2010). interconnecting directorships are Resource dependency theory debates instruments that can be used to lessen these that the uncertainties that are often brought environmental uncertainties as directors can about by outside influences on managers’ be a source of timely and essential behaviours become lessen when the information for executives (Donaldson & organisation provides sufficient resources Muth, 1998). Translating this into executive for its own development (Duke II, compensation, the extent to which the CEO Kankpang, & Okonkwo, 2012). In order that and the other executives succeed in managers’ performance in the best interest diminishing environmental uncertainties of all stakeholders, it is imperative that they will have an influence on their are safeguarded from outside influences and compensation. For example, organisations pressures. As established by Pfeffer (2003), might offer higher compensation to a CEO managers are interested in the existence and who is more capable to reduce equilibrium of the firm. Nevertheless, their environmental uncertainty. own independence ranks as a far more An essential feature of resource essential objective to them than even the dependency theory is that it centres on the profits of the firm (Duke II, Kankpang & value of executives’ extra-organisational Okonkwo, 2012). Availability of ample networks. These networks aid to decrease
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Corporate Governance and Firm Performance the uncertainty that surrounds dependency This theory, by introducing a serious on external resources. They also provide dimension to the debate on corporate better access to strategic information. As governance, availability to resources, and significance, these forms of social capital the separation of ownership and control, should also be cherished in the process of indicates that a board of directors largely determining executive remuneration. This is works as a link. Again, the theory points out the added insight provided by resource that, in real practical terms, organisations dependency theory. usually tend to lessen the uncertainty of Companies need resources in areas external influences to ensure that resources of finance, human, technical, information, are available for their existence and communication and technology to function development. By implication, this theory appropriately and to realise their objectives. appears to propose that the issue of the Daily et al. (2003) suggested that the separation between executive and non- accessibility to resources boosts executive directors is actually irrelevant organisational functioning, performance and (Kyereboah-Coleman, 2007). The theory existence. Hillman et al. (2000) maintained indicates that what is pertinent is the firm’s that resource dependency theory centres on presence (directors) on the boards of other the important role that the directors play in organisations to establish connections in providing or securing essential resources to order to have access to resources in the form the company through their relations to the of information which could then be utilised external environment. They assert that to the firm’s benefit. directors bring resources to the company in To conclude, the ultimate corporate the form of information, skills, access to key governance started from agency theory and constituents such as suppliers, buyers, due to the needs of emerging issues, other public policy makers, social groups as well theories such as stakeholder theory, as legitimacy to enhancement the company's stewardship theory and resource performance. According to resource dependency theory was developed. dependency theory, firms are reliant on Corporate governance was designed by the other actors in the close environment to culture, politics, the regulation and all the obtain resources. To subsist, firms need to parties involved and thus there is a necessity acquire resources from actors in the external to consider all the issues in developing the environment (Arikan & Barney, 2001). theory (Htay et al., 2013). Consequently, According to this theory, two companies until now there is no corporate governance can benefit from the interweaving theory that is applicable and valid in all the directorship if they are able to develop times (Htay et al., 2013). The current social relationships between them within corporate governance theories are not able which one person is a member of the boards to describe the best corporate governance of both companies (Hung, 1998). practices and hence, Alhaji, Fauziah, and From a resource-based view, it can Idris (2012) suggested to use the be argued that the exclusive combination of combination of a few theories to provide the the expertise and wider experience of the guidelines for good corporate governance board (stock of knowledge, habits, system. It is in this vein that this present creativity, social and personality attributes study used the combinations of these coupled with being gifted with the capacity theories afore-mentioned. to reason sensibly or logically) and the Critique of Previous Research: Corporate excellence of top management will Governance and Firm Performance in favourably contribute to the strategic Developed Economies decision-making and eventually to There are various researches that prosperous performance of the firm highlight the significance of corporate (Bordean, Crisan, & Pop, 2012). governance in both developed and emerging
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Corporate Governance and Firm Performance economies (Kelly & Switzer, 2006; value. The study studied a sample of 969 Abdullah & Page, 2009; firms acquired from Standard and Poor’s Cornett et al., 2009; Ahmad 2010; 1996 ExecuComp database. The findings Drobetz, Schillhofer, & Zimmermann, indicated a resilient evidence of a non-linear 2011; Meeamol et al., 2011; Kowalewski, relationship between insiders on the board 2012; Duke II, Kankpang, & Okonkwo, and the market to book ratio (Q). The value 2012). These studies provided evidence that of the firm first increases then decreases as there is empirical relationship between the percentage of insiders on the board corporate governance and firm performance. increases. The maximum Q-value is reached Conyon and Peck (1998) examined the when 50% of the board is comprised of relationship between board size and firm insiders. The increase and then decrease in performance (measured as return on equity firm value as board configuration rises is and market to book ratio, Tobin’s Q) for consistent with enhancements in governance United Kingdom, France, Netherlands, as monitoring of management increases, but Denmark and Italy from 1992 to 1995 and that boards become unmanageable as the established robust positive relationship number of outsiders upsurge (Griffith, between corporate governance and firm 1999). MacAvoy and Millstein (1999) used performance. Morck et al. (1988) a different measure of board independence investigated the relationship between insider in the form of minimum percentage ownership and firm performance for 371 requirement of outside directors for well- Fortune 500 firms for the year 1980. They functioning board, in associating corporate found a positive relationship between governance to firm performance. They Tobin’s Q and managerial ownership for the conjectured that companies with 0-5% board ownership range, a negative professional boards show improved relationship in the 5-25% board ownership economic performance, on average, than range as boards stay together for longer other companies. Using Economic Value years, and a positive relationship again for Added (EVA) as the measure of corporate board ownership exceeding 25%. The two performance, they established a positive studies above used Tobin’s Q to measure relationship between an active and firm performance which is one of the three independent board and EVA, where the performance measurement variables for the added returns to investors linked with the present study. However, they used different presence of professional boards are positive corporate governance variables that are not and significant. Notwithstanding the fact the the same as the present study. three studies above all investigated the Laing and Weir (1999) investigated relationship between corporate governance the extent of Cadbury compliance and its and firm performance, they used varied effect on performance of UK quoted corporate governance variables distinct from companies. They unscientifically selected that of the present study (OECD principles). 115 companies which appeared in the Times Similarly, the performance measurements 1,000 for the years 1992 and 1995. The used (EVA and Tobin’s Q) are not exactly governance mechanisms in this study were the same as the present study (ROE, ROA non-executive director representation, and Tobin’s Q). Differences in both leadership structure and board committees dependent and independent sub-variables (presence of both remuneration and audit could yield conflicting result of the committees). Their findings indicated strong relationship between the two variable. evidence of compliance amongst UK quoted Studies conducted by McKinsey and companies and evidence of strong positive Company (2000) in cooperation with the influence on performance. Griffith (1999) World Bank, found a relationship between examined the impact of board composition the extent to which a company practices (ratio of inside to outside directors) on firm good corporate governance and its
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Corporate Governance and Firm Performance performance outcomes. The results of the over 200 institutional investors across Asia, study indicated that a strong correlation US, and Latin America found out over 80 exists between corporate governance and percent of investors agreed that they would performance of large companies and that the pay a premium for the shares of a better average return of large capitalised firms governed company than for those of a with the best governance practices was more poorly governed company with comparable than five times higher than the performance financial performance. The study of firms in the bottom corporate governance demonstrated that the value of good quartile. Their studies showed that good corporate governance, that is, the premium corporate governance in the United States of that investors are willing to pay, varied America and the United Kingdom brought across regions. the lowest premium at 18 percent. However, Gompers, Ishi, & Metrick (2003) for investments in Asian and Latin also constructed a US governance index to American countries, the premium increased proxy for the level of shareholder rights for to between 20 and 28 percent. The variance about 1,500 large firms during the 1990s. in the premium revealed the lack of good They divided the firms into a ‘Dictatorship governance standards in Asia and Latin Portfolio’ (firms with weak shareholder America compared to the standards in the rights) and a ‘Democracy Portfolio’ (firms United States of America and the United with strong shareholder rights). They found Kingdom. The study provided good a strong correlation between corporate understanding for the present study as the governance and stock returns during the present study compared the governance 1990s and that the ‘Democracy portfolio’ standard of Ghana to that of OECD outperformed the ‘Dictatorship Portfolio’. standards in answering research question An investment strategy that purchased the two. ‘democracy portfolio’ and sold the Black (2001) reported a strong ‘dictatorship portfolio’ would have earned correlation between the market value and an abnormal return of 8.5% per annum. In corporate governance of Russian firms. addition they found that firms with stronger Weir and Laing (2001) examined the shareholder rights have higher firm value magnitude of Cadbury compliance in 320 (measured by Tobin’s Q), higher profits, non-financial UK-based listed companies higher sales growth, lower capital for the years 1995 and 1996. They obtained expenditures, and made fewer corporate the governance data from the 1995 annual acquisitions. The authors suggested two reports and the performance measures were explanations for their results; poor taken from the 1996 annual report. They governance causes agency costs, and/or the reported extensive compliance (separating governance index is associated with risk or the role of Chair and CEO, sufficient other factors that affected the stock returns number of non-executive directors on the during the 1990s. This study used only one board and acceptance of a remuneration of the OECD principles as corporate committee) with the Cadbury Code. In governance variable (shareholders right). addition, they assessed the linkage between The present study on the other hand used all governance structure and corporate the six principles in an attempt to ensure performance as measured by return on holistic approach to the study. assets. They established strong relationship In a related study, Brown and Caylor between good corporate governance and (2004) analysed US firms with 51 factors, 8 firm performance. However, Black (2001) sub-categories for 2,327 firms based on employed different corporate governance dataset of Institutional Shareholder Service variables which are not the same as the (ISS). Their findings indicated that better present study. governed firms were relatively more Similarly, Low (2002) in a study of profitable, more valuable and pay more cash
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Corporate Governance and Firm Performance to their shareholder. Coles et al. (2004) regression and correlation in establishing debated that certain classes of firms benefit the relationship which is consistent with the from larger boards. Their findings indicated present study. However, the sub-variables of a positive association between firm both dependent and independent variables performance (measured by Q) and board differ from those of the present study. size for diversified firms, larger firms, and Cornett et al. (2009) showed that high leverage firms. The two studies above during the recent financial crisis, firms that differ from the present study in terms of had better internal corporate governance corporate governance variables used but tend to have higher rates of return. their performance measurement variable Consequently, the existing results showed (Tobin’s Q) is among the performance that corporate governance determine firm variables for the present study. performance and value, in developed as well Davies et al. (2005) suggested a as developing countries, and even during complex relationship between managerial financial crises. Recent study by Drobetz, ownership and performance (measured as Schillhofer, and Zimmermann (2011) Q). Their analysis on 802 UK industrial investigated whether differences in the companies provided evidence that corporate quality of firm-level corporate governance value, firm level of investment and also help to explain firm performance in a managerial ownership are all cross-section of 91 companies in Germany. interdependent. Likewise, Kelly, & Switzer The valuation measures were Tobin’s Q and (2006) deployed governance mechanisms the market-to-book ratio. The corresponding for Canadian small-cap firms by estimating regression results showed adjusted R- a simultaneous equation system that linked squares were 0.032 and 0.037 for the four control mechanisms to firm Tobin’s Q and the market-to-book value performance, using a unique database for regression, respectively. Supporting their the companies in the S&P/TSX Small Cap hypothesis, there is a significant relationship Index over the years 1997 to 2004. With a between corporate governance and firm sample of 94 companies comprising 470 performance in both cases. The effect is not observations, their results confirmed only statistically significant, but its simultaneity between several governance magnitude is also substantial from an mechanisms and Canadian small-cap firm economic point of view. For example, for performance. MacNeil and Li (2006) the median firm, the point estimate in the examined FTSE 100 serial non-compliers regression for Tobin’s Q implies that a one over a period of 2000 to 2004. Their standard deviation change in the governance findings suggested that there is a link rating would results in about a 24% increase between share price performance and in the value of Tobin’s Q. The effect is even investors’ tolerance of non-compliance with more pronounced for the market-to-book the Combined Code; companies are likely to ratio, the corresponding coefficient would increase their compliance with governance be 0.203. In establishing the positive recommendations after a period of poor relationship between corporate governance performance. Governance Metrics and performance, the study used regression International (GMI, 2006), in a study based and Tobin’s Q which are consistent with the on their proprietary international database, present study. However, the corporate found a correlation between their rating and governance sub-variables differ which make accounting measures of performance. In a the need for this study intriguing. study of the same database Ashbaugh- Flodberg and Nadjari (2013) Skaife and Lafond (2006) found that highly- investigated the link between corporate rated companies have lower costs of capital governance and firm performance in the and concluded this is because of lower Nordic countries. The Nordic countries are a ‘agency risk’. The above studies used geographical and cultural region in Northern
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Corporate Governance and Firm Performance
Europe and the North Atlantic. It consists of companies in the lowest corporate five countries: Denmark, Finland, Iceland, governance quartile had a lower return on Norway, and Sweden (Flodberg & Nadjari, capital than the market average. 2013). They constructed a model for 190 Wiwattanakantang (2001) investigated the Nordic firms with Tobin’s Q as the effects of controlling shareholders on dependent variable, Corporate Governance corporate governance in Thailand. Her Index as the independent variable while results indicated that the presence of controlling for Total Assets, Financial Risk, controlling shareholders is associated with Systematic Risk, Unsystematic Risk and better corporate performance when this Growth to evaluate the impact upon firm presence is assessed by accounting performance from 2004-2011. The study measures such as return on assets and the showed a positive relationship between ratio of sales to assets. The above studies Corporate Governance and Firm used only ROA as a measure of firm Performance as well as statistically performance. It is important to note, significant control variables. The findings however, that many factors can influence suggest that corporate governance, even ROA, including a firm's degree of though implemented differently, seems to capitalization. ROA favours highly have the same effect on performance in the capitalized institutions (Davidson, 1997). Nordic countries as it does in the other Davidson (1997) noted that ROA measure developed economies. The study used treats equity capital as 'free funds'-there is regression and correlation as methods of no 'cost' associated with them. The author establishing the relationship which is the asserts that financial theory as well as same as adopted in this present study. common sense tells us that this is certainly Notwithstanding, the sub-variables of both not the case. As a result of this and other dependent and independent variables vary. limitations, it is advisable to combine ROA These make the focus of this study with other measures of profitability and unprecedented. performance (Davidson, 1997). It is in line Critique of Previous Research: Corporate with these limitations of ROA that the Governance and Firm Performance in present study combined ROA with other Emerging Economies measures of performance (ROE and Tobin’s Johnson et al. (2000) found that Q) in carrying out this present study. weak legal institutions and frameworks for Mitton (2002) using firm level data corporate governance were fundamental on 398 listed companies from Indonesia, factors in intensifying the stock market Korea, Malaysia, Philippines and Thailand declines during the 1997 East Asian documented that the firm-level differences financial crisis. They reported that in in variables are related to corporate countries with weaker investor protection, governance and have strong impact on firm net capital inflows were more sensitive to performance during East Asian Crisis in negative events that adversely affect 1997 and 1998. Moreover, the study investors’ confidence. However, in times of suggested that better price performance is economic shock the quality of corporate associated with firms that have indicators of governance can also affect firms’ higher disclosure quality, higher outside performance and valuation. In a similar ownership concentration and they were study, Credit Lyonnais Securities Asia focused rather than diversified. Similarly, (2001) found out that across emerging Lemmon and Lins (2002) found that, during markets, companies in the top corporate the Asian financial crisis, firms showed low governance quartile for their respective performance when their controlling regions had a significantly higher return on managers had more control rights than capital employed than their market sample. ownership rights. This provided firm-level In twelve of the emerging markets analysed, evidence consistent with the view that
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Corporate Governance and Firm Performance corporate governance helps explain firm variables as this present study. performance during a financial crisis. On the issue of board structure there Durnev and Kim (2002) found that higher is empirical evidence that there is link scores on both governance index and the between board structure and corporate disclosure and transparency index predict performance. Klapper and Love (2004) higher firm value for a sample of 859 large included various board structures and firms in 27 emerging countries. Klapper and operation dummies in their study which Love (2002) found similar results for a found a positive relationship between good sample of 495 large firms in 25 countries. governance practices and corporate value. These studies employed regression and They used data on more than 400 companies correlation in establishing the linkage in 25 emerging economies to show that between corporate governance and firm good corporate governance practices are performance which correspond to the highly correlated with corporate methods for the present study. However, the performance. Their study also indicated the focus of the present study is Ghana as a case importance of legal framework which turns study of an emerging economy. out that corporate governance practices tend Black, Jang and Kim (2003) reported to be worse in countries with poor legal evidence that corporate governance is an framework. These results were confirmed important factor in explaining the market by Black et al. (2006) using a corporate value of Korean public companies. They governance index found evidence that constructed a corporate governance index corporate governance is an important factor (0~100) for 526 companies based primarily in explaining the market value of Korean on responses to a Spring 2001 survey of all public companies. Overall, most studies listed companies by the Korea Stock supported the importance of firm level Exchange. The index was based on six sub- corporate governance using a corporate indices for shareholder rights, board of governance index, especially in countries directors in general, outside directors, audit with weak legal protections for investors. committee and internal auditor, disclosure to Kyereboah-Coleman (2007) investors, and ownership parity. A moderate investigated relationship between corporate 10 point increase in the corporate governance and firm performance from governance index predicts a 5% increase in African perspective. This study considered Tobin’s Q and a 14% increase in 103 listed companies drawn from Ghana, market/book ratio in ordinary least squares Nigeria, Kenya and South Africa and 52 (OLS) regressions. A worst-to best change Microfinance Institutions from Ghana. in the index predicts a 38% increase in Using annual ROA as a measure of Tobin's Q and a 105% increase in performance and Panel Data Framework, market/book ratio. This effect is statistically the results indicated that large and strong and robust to choice of performance independent boards enhance firm value and variable (Tobin's Q, market/book, and that when a CEO serves as board chair, it market/sales) and to specification of the has negative effect on performance which is corporate governance index. Each sub-index consistent with agency theory perspective of was an individually significant or corporate governance. The findings again, marginally significant predictor of higher suggested that board diversity through the Tobin's Q and other performance variables. inclusion of women is important for The present study emulated Black, Jang and enhanced performance of microfinance Kim (2003) in terms of methodology, institutions and the independence of performance variables and some corporate corporate boards in particular is important governance variables. The little difference for firm performance. Abdo and Fisher was that the authors did not use all the (2007) performed a similar study using OECD principles as corporate governance seven distinct corporate governance
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Corporate Governance and Firm Performance categories, for a sample of 97 firms in nine dividend pay-outs, 9.9 per cent in price-to- sectors on the Johannesburg Stock book, and 2.7 per cent in Tobin’s Q. Their Exchange (JSE). Their research entailed the findings are consistent with the theoretical construction of a Score, as a proxy for the models that relate good corporate level of corporate governance disclosure governance practices to higher investor among companies. These companies were confidence, and with the agency model of assessed using the G-Score during the dividend pay-out. Similarly, Ahmad (2010) period 30 June 2003 and 30 June 2006. The explored the factors that influence the relationship between governance disclosure relation between corporate governance and and corporate performance in South Africa performance of 18 banks operating in revealed a striking relationship. Corporate Palestine relying on financial ratios, namely governance was positively correlated with ROA and ROE. Using Generalized Least share price returns during the period under Squares (GLS) regression, the findings review. An investment strategy that indicated that the board size, CEO duality purchased shares in the highest G-Score and internal ownership have positive companies (High portfolio) for each JSE statistically significance impact on firm sector outperformed the index for the sector. performance. Consistent with the earlier Similarly an investment strategy that studies, Meeamol et al. (2011) also analysed purchased shares in the lowest G-Score the relationship of a firm performance with companies (Low portfolio) underperformed the structure of board members of firms that the index in terms of annual average return are listed in Thailand SET 100. The over the three year period. The analysis independent variables are board size, suggests that investors place a premium on percentage of independent director, South African companies with good percentage of financial or accounting governance. These findings have significant expertise in audit committee, independent implications for companies neglecting chairman, CEO duality, and percentage of corporate governance disclosure. The two female directors. The dependent variable studies above focused on African countries was firm performance which was calculated as the present study. They are similar in by using Tobin’s Q score. The data used for terms of methodology, dependent and the study was from financial statements independent variables. However, Kyereboa- between the years 2007 to 2009. Using a Coleman (2007) comprised four African sample of 87 companies, the empirical countries with relatively larger sample size. result suggested that the structure of board Similarly, Abdo & Fisher (2007) focused on members of a firm has strong relationship South Africa which is relatively more with firm performance. The present study developed and with large sample size of mirrored the three studies above in terms 97firms. methodology and performance measurement Garay and González (2008) using variables. However, only few of the Ordinary Least Squares (OLS) regression, corporate governance variables of the examined the relationship between present study were covered in those studies. corporate governance and firm value, and Recent studies have continued to evaluated the relatively understudied confirm the positive relationship between governance practices in Venezuela. They good corporate governance practices and constructed a corporate governance index firm performance. For example, (CGI) for 46 publicly-listed firms and Kowalewski (2012) investigated the showed strong positive relationship between relationship between corporate governance, good corporate governance and firm measured by Corporate Governance Index performance. They showed that an increase (CGI), and firm’s performance and dividend of one per cent in the CGI results in an pay-outs during the financial crisis in average increase of 11.3 per cent in Poland. The empirical approach in the study
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Corporate Governance and Firm Performance lies in constructing comprehensive measures reliable manner. Correspondingly, Duke II, of the corporate governance for 298 non- Kankpang and Okonkwo (2012) examined financial companies listed on Warsaw Stock the relationship between corporate Exchange in the years 2006-2010. The governance and organisational efficiency in results showed a positive association courier service firms in Nigeria. Data for the between corporate governance and study were obtained from 149 courier performance measured by Tobin’s Q. This service companies, randomly selected from study also provided evidence that higher the 237 firms. Ordinary Least Square (OLS) corporate governance leads to an increase in regression result showed that corporate cash dividends. The results indicated that governance variables, board size, internal during the 2008 financial crisis in Poland, audit, separation of board chair from CEO corporate governance was strongly and and the number of non-executive directors positively associated with return on assets. were positively associated with Likewise, Amba (2012) examined the organisational performance. These results impact of corporate governance on financial confirmed a number of findings from earlier performance of 39 firms listed in Bahrain studies and also showed that corporate bourse in the Kingdom of Bahrain. CEO governance is as critical to firm duality, Chairman of Audit Committee, performance. Proportion of Non-executive Directors, Furthermore, recent study by Vo and Concentrated Ownership structure and Phan (2013) also confirmed strong positive Institutional Investors were used as relationship between good corporate corporate governance (independent) governance and firm performance. Their variables and ROA and ROE were used as study used flexible generalised least squares performance (dependent) variables. Using (FGLS) technique on 77 listed firms on multiple regression analysis on a data set Vietnam Stock Exchange trading over the from 2010–2012, the study showed that the period from 2006 to 2011. The findings of effect of corporate governance variables on this study indicate that elements of firm financial performance is statistically corporate governance such as the presence significant. In a related study, Alhaji of female board members, the duality of the &Yusoff (2012) examined the relationship CEO, the working experience of board between corporate governance and firm members, and the compensation of board performance for a sample of 813 listed members have positive effects on the companies representing nine sectors of the performance of firms, as measured by ROA. main board of Bursa Malaysia from 2009 to Similarly, the present study matches the 2011. Three corporate governance variables study above in the area of methodology used in this study are proportion of non- (regression and correlation) and executive directors (NED), board leadership performance variables. However, they structure, and board size. Firm performance contrast in terms of corporate governance was measured in terms of firm earnings per variables. share (EPS) and return on equity (ROE). Finally, Lodhand Rashid (2014) also The study discovered the influence of the examined corporate governance three corporate governance measurements mechanisms and firm performance of 87 on both dimensions of firm performance medium and small sized enterprises (SMEs) from years 2009 to 2011. The influence of listed on Dhaka Stock Exchange in corporate governance on the financial Bangladesh for the period 2000-2008. From performance of Malaysian listed companies an observation of 769 firms, they found that was very significant. The result depicts that there is a significant positive relationship many corporate failures were due to the between good corporate governance boards’ incapability to address the overall practices and firm performance measured by company performance in an effective and ROA and Tobin’s Q. The findings support
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Corporate Governance and Firm Performance the principal-agency relationship view of accountability; board meetings; reward separation of CEO from board chairman systems; control and risk management; and roles. It is therefore apparent that there is board training and awareness as volume of literature confirming strong independent variables. Using regression and positive relationship between good correlation, the study revealed that with the corporate governance and firm performance exception of the strategic planning role, the in emerging economies. other main behavioural issues of board Critique of Previous Research: Corporate structure; ethics, transparency and Governance and Firm Performance in accountability; board meetings; reward Ghana systems; control and risk management; and In the context of Ghana, few studies board training and awareness correlate namely, Abor and Biekpe (2007); Akpakli insignificantly with corporate financial (2010); and, Tornyeva and Wereko (2012) performance. It was concluded that have also confirmed positive relationship companies that adhere to generally accepted between good corporate governance and corporate governance behaviours enhanced firm performance. However, their studies in value. The present study investigated the were limited to Small and Medium issue in a broader perspective compare to Enterprises (SMEs), very small sample size Akpakli (2010). For example, the study used of listed firms on GSE and the insurance a sample size of six firms, the present study sector respectively. used a sample size of thirty; the study used Abor and Biekpe (2007) assessed only ROE as performance measure, the how the adoption of corporate governance present study used ROE, ROA and Tobin’s structures affects the performance of SMEs Q; and the study used data for just a single (small to medium-sized enterprises) in year (2007) but the present study used a data Ghana. Regression analysis was used to set for ten years (2004-2013). The findings estimate the relationship between corporate in the present study would be generalized to governance and performance of 22 SMEs. some extent hence investigating the issues The results showed that board size, board in a broader perspective would enable composition, management skill level, CEO meaningful generalisation to be made duality, inside ownership, family business, (Creswell, 2006; Saunders et al., 2007; and foreign ownership have significantly Bajpai & Singh, 2008; Sun, 2009; Staff, positive impacts on firm performance. It is 2012). clear from this study that corporate Tornyeva and Wereko (2012) governance structures influence investigated the relationship between performance of SMEs in Ghana, however, corporate governance and the financial the scope of the study was limited to SMEs performance of insurance companies in in Ghana which were not listed firms. The Ghana. Using a Panel Data Methodology present study focused on only listed firms with a sample of 19 firms, their study hence the difference between the two showed that large board size, board skill, studies and the need to carry out the study. management skill, longer serving CEOs, Akpakli (2010) investigated size of audit committee, audit committee corporate governance and organisational independence, foreign ownership, performance to assess the effectiveness of institutional ownership, dividend policy and listed companies on GSE. This study used a annual general meeting are positively data set for 2007 financial year of a sample associated with the financial performance of of six firms. Return on equity (ROE) was insurance companies in Ghana. They made used a measure of firm performance use of ROE and ROA as the measure of (dependent variable) and corporate performance of the sampled firms. governance variables such as board Comparing this study to the present study, it structure; ethics, transparency and is limited in scope as it covered only
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Corporate Governance and Firm Performance insurance companies and with a small corporate governance and corporate sample of 19 as compared to 30 for the performance in Ghana. present study. Critique of Previous Research: Corporate Two other related studies by Governance and Firm Performance- Tsamenyi et al. (2007) and Bokpin and Divergent Findings Isshaq (2009) did not concentrate on firm In spite of the generally accepted performance but only corporate governance notion that effective corporate governance variables with concentration on disclosure enhances firm performance, other studies as dependent on the rest of the corporate have reported no relationship between governance variables. Tsamenyi et al. corporate governance and firm performance (2007) examined the corporate governance in both developed and emerging economies. disclosures of 22 listed companies in Ghana. Baysinger and Butler (1985) found no The paper examined the extent to which significant same-year correlation between factors such as ownership structure, board composition and various measures of dispersion of shareholding, firm size, and corporate performance. A few studies leverage influence disclosure practices. provided evidence that firms with a high Consistent with findings reported in studies percentage of independent directors may from other developing countries the study perform worse (Baysinger & Butler, 1985; found that the level of disclosure in Ghana Amber, 2012; Dulewicz and Herbert, 2004). was low. Furthermore, ownership structure, Klein (1998), in a study of US firms’ dispersion of shareholding, and firm size performance and board committee structure, (measured as total assets and market found no significant relationship between capitalization) all have significant effect on firm performance and the percentage of disclosure. This study used other corporate insiders (executive directors). However, her governance variables such as ownership findings indicated a positive linkage structure and dispersion of shareholding as between the percentages of inside directors independent variables and made disclosure on finance and investment board which is also corporate governance variable committees with accounting and stock as independent variable. Tsamenyi et al. performance measures. Her interpretation (2007) did not investigate the impact of was that insiders are better informed and corporate governance on firm performance; knowledgeable about the firm’s operations. this is what made it different from the Vafeas and Teodorou (1998) investigated present study. the link between corporate board Bokpin and Isshaq (2009) examined characteristics (board composition, the interaction between foreign share managerial ownership, board committee and ownership on the organization Ghana Stock leadership structure) and corporate Exchange and corporate disclosure. It performance (measured as market to book informed about the importance of corporate ratio) in 250 UK public limited companies governance in improving investor goodwill (PLCs). They found no clear link between and confidence while buying shares. It board structure and firm performance. included information on the results of the Demsetz and Villalonga (2001) found no study which depict that free cash flow and statistical significant relation between financial leverage have statistically ownership structure and firm performance. significant relationships with foreign share Using 1997 survey data, Dulewicz and ownership. This study too did not cover firm Herbert (2004) evaluated the link between a performance. The present study provided set of independent governance variables empirical evidence on corporate governance (board size, number and proportion of and firm performance from the Ghanaian independent directors, board tenure, pay, perspective. It represented yet another leadership structure, board committee) and platform to a better understanding of firm performance (cash flow return on total
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Corporate Governance and Firm Performance sales, and sales turnover). Generally they and debt leverage of the firm. The results found no significant relationship between revealed that board composition is the governance variables except for the systematically related to a number of agency proportion of inside directors. Abdullah and cost and financial variables. These results Page (2009) using UK FTSE 350 non- suggest that firms optimally choose the financial companies over the period 1999- board composition depending on the extent 2004 found no consistent relationship to which alternative agency conflict between governance structure (board and minimizing devices are utilized. Yermack ownership structure) and companies’ market (1996) used 452 large U.S. companies and book value, accounting performance, stock found that there exists an inverse association return or risk. Chaghadari (2011) found that between board size and the firm value there is no significant relationship between measured by Tobin’s Q. Yermack (1996) board independency, board size and reported a significant negative correlation ownership structure as independent between the proportion of independent variables and firm performance as directors and Q but no significant dependent variable. The conflicting results correlation for several other performance could be largely due to presence of variables such as sales/assets, operating moderator variables, sampling error, income/assets, and operating income/sales. research methodology, and heterogeneity of The result showed the major part of loss in sample among other. DeCoster (2004) firm value happens when the board size asserted that it is becoming common grows from relatively small to relatively practice to follow up a set of moderator medium. Yermack (1996) also found that analyses with a multiple regression model the companies with smaller boards tend to containing all of the significant predictors. have greater operating profitability and The multiple regression model provides a higher likelihood of CEO dismissal after control for the total number of tests, poor firm performance. Consistent with reducing the likelihood of a Type I error Yermack’s findings, Eisenberg, Sundgren which is the incorrect rejection of a true null and Wells (1998) found a negative relation hypothesis (DeCoster, 2004). Moderator between board size and firm’s profitability analysis also helps to detect whether measured by industry-adjusted return on collinearity might provide an alternative asset using a sample of nearly 900 small- explanation for some of the significant sized Finnish firms. The consistent results results (DeCoster, 2004). of these two studies, which were conducted Similarly, other studies have on different categories of companies in reported a negative relationship between different countries, enhance the explanatory corporate governance and firm performance power of board size in firm performance. in both developed and emerging economies. Kyereboah-Coleman (2007) from African Bathala and Rao (1995) examined the perspective found that when a CEO serves interrelationship between board composition as board chair, it has negative effect on and variables that capture various agency performance and such firms employ less and financial dimensions of the firm in US. debt. Chaghadari (2011) explored whether The final sample of firm for which complete there is any relationship between corporate the data were from different sources governance and firm performance of consisting of 261 firms. Using a companies listed in Bursa Malaysia. Four multivariate framework, the study corporate governance variables used in this documented an inverse relationship between study were board independency, CEO the proportion of outside board members duality, ownership structure, and board size. and various other agency conflict Based on a randomly selected sample of 30 controlling mechanisms including inside companies listed on Bursa Malaysia and ownership of equity, dividend pay- out ratio, applying linear multiple regression as the
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Corporate Governance and Firm Performance underlying statistical tests, the study found Meeting at Ministerial level on 27-28 April that CEO duality has a negative relationship 1998, to develop, in conjunction with with firm performance (Return on Equity national governments, other relevant and Return on Asset). This is consistent international organisations and the private with Kyereboah-Coleman (2007). Amber sector, a set of corporate governance (2012) also found out that CEO duality, standards and guidelines (OECD, 2004). proportion of non-executive directors and Since the Principles were agreed in 1999, leverage have negative influence on firm they have formed the basis for corporate performance using firms traded in Bahrain governance initiatives in both OECD and bourse. This is consistent with Kyereboah- non-OECD countries alike (OECD, 2004). Coleman (2007) and Chaghadari (2011). Moreover, they have been adopted as one of Reasons for such inconsistencies are the Twelve Key Standards for Sound several and varying. Some have argued that Financial Systems by the Financial Stability the restrictive use of either publicly Forum. Consequently, they form the basis of available data or survey data could be part the corporate governance component of the of the problem (Gani & Jermias, 2006; World Bank/IMF Reports on the Abdullah & Page, 2009; Amba, 2012; Observance of Standards and Codes Alhaji & Yusoff, 2012). It has also been (OECD, 2004). The 1999 Principles were pointed out that the nature of performance revised to take into account new measures, for example, restrictive use of developments and concerns in 2004. The accounting based measures such ROA, revision was pursued with a view to ROE, and return on capital employed maintaining a non-binding principles-based (ROCE) or restrictive use of market-based approach, which recognises the need to measures such as market value of equities adapt implementation to varying legal could also contribute to this inconsistency economic and cultural circumstances. The (Gani & Jermias, 2006; Abdullah & Page, revised Principles were built upon a broad 2009; Amba, 2012; Alhaji& Yusoff, 2012). range of experience not only in the OECD Thus, to address some of these problems, it area but also in non-OECD countries is recommended that a look at corporate (OECD, 2004). governance and its correlation with firm The Principles are envisioned to performance should take these issues into assist OECD and non-OECD governments account (Abdullah & Page, 2009; Alhaji & in their determinations to assess and Yusoff, 2012). The present study added to improve the legal, institutional and the literature by employing both market- regulatory framework for corporate based and accounting-based performance governance in their countries (OECD, measures namely ROE, ROA, and Tobin’s 2004).The Principles offer guidance and Q, and relating these to six OECD principles suggestions for stock exchanges, investors, of corporate governance variables: corporations, and other parties that have a regulatory (legal) framework; rights of part in the process of developing good shareholders; equal treatment of corporate governance. The Principles shareholders; role of stakeholders; concentrate on publicly traded companies, disclosure; and responsibilities of the board. both financial and non-financial (OECD, The rationale for this broad set of variables 2004). Nevertheless, to the extent they are was to reduce, to some extent, the degree of deemed applicable, they might also be a bias. useful tool to improve corporate governance Critique of Previous Research: OECD in non-traded companies, for example, Principles of Corporate Governance privately held and state-owned enterprises. The OECD Principles of Corporate The Principles represent a common basis Governance were originally developed in that OECD member countries consider response to a call by the OECD Council essential for the development of good
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Corporate Governance and Firm Performance governance practices. They are envisioned of firms, and are essential to their long-term to be concise, understandable and accessible success. The Principles therefore centre on to the international community (OECD, governance problems that result from the 2004). They are not intended to substitute separation of ownership and control. for government, semi-government or private There is no single model of good sector initiatives to develop more detailed corporate governance (OECD, 2004). “best practice” in corporate governance However, work carried out in both OECD (OECD, 2004). Progressively, the OECD and non-OECD countries have identified and its member governments have realised some common fundamentals that inspire the synergy between macroeconomic and good corporate governance. The Principles structural policies in achieving fundamental build on these common rudiments and are policy goals (OECD, 2004). Corporate formulated to harmonise the different governance is one key component in models that exist (OECD, 2004). For improving economic efficiency and growth instance, they do not support any particular as well as improving investor confidence. board structure and the term “board” is Corporate governance involves a set of meant to embrace the different national relationships between a company’s models of board structures found in OECD management, its board, its shareholders and and non-OECD countries. In the typical two other stakeholders (OECD, 2004). tier system, found in some countries, Corporate governance also provides the “board” as used in the Principles refers to structure through which the objectives of the the “supervisory board” while “key company are set, and the means of attaining executives” refers to the “management those objectives and monitoring board” (OECD, 2004, p. 13). The Principles performance are determined (OECD, 2004). are non-binding and do not aim at detailed Good corporate governance should offer prescriptions for national legislation; rather, suitable incentives for the board and they seek to identify goals and suggest management to pursue objectives that are in several means for attaining them. Their the interests of the company and its purpose is to serve as a reference point shareholders and should facilitate effective (OECD, 2004). They can be used by policy monitoring. The existence of an effective makers as they examine and develop the corporate governance system, within an legal and regulatory frameworks for individual company and across an economy corporate governance that reflect their own as a whole, assists to provide a degree of economic, social, legal and cultural confidence that is necessary for the proper circumstances, and by market participants as functioning of a market economy. As a they develop their own practices (OECD, result, the cost of capital is lower and firms 2004). The Principles are evolutionary in are encouraged to use resources more nature and should be reviewed in light of efficiently, thereby underpinning growth significant changes in circumstances (OECD, 2004). (OECD, 2004). It is up to governments and The corporate governance market participants to decide how to apply framework also depends on the legal, these Principles in developing their own regulatory, and institutional environment. In frameworks for corporate governance, addition, factors such as business ethics and taking into account the costs and benefits of corporate awareness of the environmental regulation. The Principles are made up of and societal interests of the communities in six broad areas as follows: which a company operates can also have an 1. Ensuring the basis for an effective impact on its reputation and its long-term corporate governance framework; success (Burton et al., 2009). It is worth 2. The rights of shareholders and key noting that multiplicity of factors affect the ownership functions; governance and decision- making processes
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Corporate Governance and Firm Performance
3. The equitable treatment of the effectiveness of the board as a shareholders; mechanism for corporate control. These 4. The role of stakeholders; elements are the composition of the board, 5. Disclosure and transparency; and independence of the board, the leadership 6. The responsibilities of the board. structure (CEO- Chairperson Separation), These six principles therefore board committees such as the audit formed the corporate governance variables committee and remuneration committee, (independent variables) for this present and access to timely and regular information study by directors. Critique of Previous Research: Legal and In Ghana, corporate governance is Regulatory Framework of Corporate practised within the framework of the Governance in Ghana Companies Code of 1963 Act 179 for all The regulatory framework for an types of companies. Notwithstanding, some effective corporate governance practice in companies report in their annual reports Ghana is contained in the Companies code some corporate governance practices that 1963 (Act 179), Securities Industry Law conform to some of the conventions and 1993 (PNDCL 333) as revised by the codes of other jurisdictions. Their Securities Industry (Amendment) Act, 2000 compliance to these corporate governance (Act 590) and the listing regulations, 1990 behaviour and processes may to some extent (L.I. 1509) of the Ghana Stock Exchange. have a positive effect on their performances The regulatory framework of Ghana for (Akpakli, 2010). effective corporate governance has been In 2010, the World Bank carried out divided into six major sections, namely: an assessment on Ghana’s legal and 1. The mission, responsibilities and regulatory framework regarding observance accountability of the board; of standards and codes. The goal of the 2. Committees of the board; initiative was to identify weaknesses that 3. Relationship to shareholders and may contribute to the country’s economic stakeholders, and the rights of and financial vulnerability. The assessment shareholders; benchmarks the country’s legal and 4. Financial affairs and auditing; regulatory framework, practices and 5. Disclosures in annual reports; and compliance of listed firms, and enforcement 6. Code of ethics. capacity vis-à-vis the OECD Principles. A The principles of corporate comparative analysis was also made with governance of Ghana reflect shareholder the Sub-Sahara average. The World Bank perspective of the Anglo-American model (2010) report revealed that Ghana lags in of corporate governance. This is because the some key areas compared to other countries principles reflect the sovereign rights of in the sub-region. For example, when shareholders, since the board of directors compared to other countries in Sub-Saharan who are considered to be the principal Africa with listed companies, Ghana does mechanism to ensuring effective corporate well in terms of: enforcement and governance has to account to shareholders institutional framework; shareholder rights (Aboagye, Agyemang & Ahali, 2013). and ownership; equitable treatment of Furthermore, the principles highlight the stakeholders; and transparency and traditional view where the board is disclosure, but lags in equitable treatment of considered as representatives of shareholders and, especially, responsibilities shareholders. Finally, the framework clearly of the board (World Bank, 2010). This is states the elements or factors that determine shown in Figure 1.
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Corporate Governance and Firm Performance
Figure 1. Ghana Country Assessment vs. Africa Regional Average. Source: The World Bank (2010). Source: The World Bank (2010).
Critique of Previous Research: External doing business and this has benefit for factors affecting Corporate Governance adopting good corporate governance of firms practices (Burton et al., 2009; Afolabi, This section of the study provides 2013). detail of prior literature which suggest that The OECD principles of corporate external factors mentioned below can affect governance (2004), explained that the corporate governance practices in firms. economic situation in a country may have a These prior studies explained the way these role to play in effective governance. As a factors can influence corporate governance. result the organisation believes that The factors include the following: corporate governance is only part of the Economic factors. Burton et al. greater economic framework in which firms (2009) explained that macro-economic operate such as macroeconomic policies and policies affect the ways in which degree of competition in product and factor organisations are managed. Economic markets. Doidge et.al (2007) asserted that factors such as the level of poverty, economic and financial developments have inflation, unfavorable foreign exchange rate more impact on a country’s corporate and increasing cost of doing business (high governance practices than firm interest rate) are challenges to good characteristics. The authors revealed that corporate governance structure (Burton et corporate governance is positively al., 2009). Also, the attraction of local and significant with growth opportunities and foreign investors will depend on the type of availability of external finance. In a related business environment and corporate study, Burton et al. (2009) explained that in governance practice in the region and this a country with poor financial and economic can affect the growth and development of development there is less access to external the firms (Afolabi, 2013). The authors funding, therefore it is possible for large further explained that economic and shareholders to extract private benefit more financial developments have more influence readily due to less monitoring by outsiders. on a nation’s corporate governance than In Ghana, the economic factors such firm characteristics. The economy of a as poverty, high inflation, unfavorable country affects the costs that firm incur in foreign exchange rate and high interest rate
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Corporate Governance and Firm Performance as cited by Burton et.al (2009) are very moral value held by employee may also prevalent. For example, monetary prime rate affect good corporate governance practices was 12.5% in 2011 but increased to 16% in in firms (Afolabi, 2013). Besides this, 2014; inflation rate which was 8.4 % in Cooke and Haniffa (2002) argued that the 2011 increased to 16.9% in 2014; the proportion of family members in the board exchange rate of Ghana cedi to US dollar composition of a firm may influence was GHS1.43 to $1.00 in 2011 but disclosure practices, the authors believe that increased to GHS3.19 to $1.00 in 2014 in a firm where families have substantial (Ghana Statistical Service, 2014). This equity holding there is no separation economic factor therefore poses serious between those who own and those who challenges to efficient and effective manage capital. corporate governance practices in Ghana. In the context of Ghana, there are lot Societal and cultural factors. of firms owned by families and clans and Burton et al. (2009) argued that the the heads of these families and clans make individual nature of each developing decisions for family/clan-owned businesses country can affect corporate governance without following the corporate governance practices, such that a situation where the guidelines (Afolabi, 2013). Such decisions head of a family makes decisions for a include issues of employment, board family-owned business without following members, attitude towards women and the corporate governance guideline. Such disclosure. Families and clans are decisions include issues of employment, accordingly very important factors in board members, attitude towards women Ghanaian culture which may influence good and tribalism. In some cases position corporate governance practices of firms in influences decision at management level in Ghana (Afolabi, 2013). a firm, hence extended family and clan Bribery and corruption factors. members in managerial level are likely to Burton et al. (2009) argued that the influence decision on issues related to individual nature of each developing employment. This may result in recruiting country can affect corporate governance unqualified family or clan members to hold practices, such that a situation where there is positions in a firm with high likelihood of pressure from individual families and clan compromising good corporate governance for financial support may promote bribery practices (Afolabi, 2013). Burton et al. and corruption. Socio-political corruption (2009) argued that cultural and social can effect corporate governance practice framework is essential in the context of among parties or stakeholders of corporate ethical environment in which the modern governance. This parties include the firms operate. They revealed that culture regulatory bodies, the Chief Executives and social factors considerably impacted on Officers, (CEO) the board of directors, corporate governance of developing management, shareholders, auditors and countries. Cooke and Haniffa (2002) other stakeholders (Burton et al.,2009). The claimed that cultural factors are imperative level of corruption is cut across the because the traditions of a nation are responsibility, duties or task being given to inculcated in its people and this might help each of them in their capacity (Afolabi, to explain why things are as they are. The 2013). Burton et al. (2009) asserted that the authors found that family members sitting enhancement of corporate governance can on the board of firms may influence on lessen the level of corruption and this may disclosure practices, therefore this can affect affect confidence of domestic and foreign the corporate governance of firms. The investors. Afolabi, (2013) also maintained ethical framework within which firms that bribery and corruption can influence the operate such as values held by culture, enforcement of corporate governance society, internal corporate practices and through regulatory officers and the
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Corporate Governance and Firm Performance judiciary. An issue of business ethic practices in Ghana. comprises the process of privatization of Political factors. Burton et al. state-owned enterprises with the goal to (2009) asserted that a nation’s political enhance managerial incentive and advance environment influences the practice of corporate efficiency. The process for this corporate governance in terms of fiscal and privatization will affect the valuation of monetary policies, security and stability and state assets, the stock market, the way and type of political leadership (democratic or manner those in authority carry out the autocratic) in power. This will influence exercise will affect the corporate government interferences with work of governance in term of ownership and regulatory and supervisory bodies, control (Afolabi, 2013). Furthermore, appointment of chairman of corporation and Rossouw (2005) showed that ethical incentive for company executives (Afolabi, concepts concern transparency, 2013). Government ministries are liable for accountability, responsibility, the function monitoring and enforcement of corporate of board and their composition, reporting, governance principles and this can be disclosure and respect for the rights of all influenced by politicians or the type of stakeholders of firms. The author further leadership in that country (Afolabi, 2013). expounded that business ethics consider an In addition, ECA (2002) elucidated that integral and vital part of sound corporate good economic governance exist in governance based on the analysis of various economies that institutions of government national codes of corporate governance. are able to manage resources efficiently, Furthermore, Burton et al. (2009) showed formulate, implement and enforce sound that corruption remains endemic in policies and regulation. Governments can be developing African nations and in some monitored and held accountable if there is cases, this becomes institutionalized as a respect for rules and norms of economic result of collective behaviour. Similarly, interaction. Furthermore, Burton et al. Okike (2004) avowed that absence of (2009) and Chryssides and Kaler (1996) adequate internal control system in a firm debated that the business sector operate in may led to corruption among employee in accordance with policies, laws, rules and organisations and that when there is regulations that are in place as a result of economic hardship people easily sell their political decision by the government in conscience. power. As a result the authors’ believed that In Ghana, Mensah et.al (2003) effective development of fiscal and documented that the Ghana Centre for monetary policies, the laws governing Democracy and Development and the commercial interaction, and sound World Bank found that corruption is enforcement will provide a stable prevalent in both the private and public framework for business activities. sector in Ghana. This position was Moreover, La Portal et al. (1998) confirmed by Transparency International by established that a well organised legislative ranking Ghana in 2012, 2013 and 2014 as branch, passing and monitoring appropriate 64th out 176, 63rd out of 177 and 61st out of laws, with sound regulatory and supervisory 175 less corrupt countries respectively in the agencies in place, promotes corporate Corruption Perception Index (Transparency governance. All these will definitely help in International, 2014). building good and efficient corporate The perceived high level of corruption in governance framework. Ahunwan (2002) Ghana coupled with the current economic clarified that several years of military rule hardship; which could cause people to easily and high level of corruption have negatively sell their consciences as hypothesised by influence the management of public and Okike (2004), have high potential of private corporations in some developing influencing good corporate governance countries. The author professed that
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Corporate Governance and Firm Performance appointment to the board, senior governance principles (Afolabi, 2013). In management position and even lower officer view of this, OECD principles (2004) are all based on political connection, instead explained the prominence of accounting of using efficiency and professional framework in encouraging disclosure and qualification for the appointment. All these transparency by maintaining that will surely have adverse effects on corporate information should be prepared and governance practice. disclosed in accordance with high quality The political situation in Ghana is standards of accounting, financial and exactly as have been described by Burton et nonfinancial disclosure. Consequently, al. (2009) and Ahunwan (2002) above. Adams and Gray (1996) asserted that Ghana since independence in 1957 has accounting information may play a key part witnessed five intermittent military rules. in promoting a sound corporate governance These military rulers were dictators and of a firm; this will enable relevant most of the time interfered with work of stakeholders to monitor the performance of regulatory and supervisory bodies to managers and use the information to hold achieve their parochial interests (Afolabi, the managers accountable. Furthermore, 2013). The high level of political instability Cadbury report (1992) enlightened the coupled with ensuing corruption has had importance of financial reporting system by serious repercussion on the efficient and stating that a rudimentary weakness in the effective corporate governance practices in current system of financial reporting is the Ghana. possibility of different accounting treatment Accounting system. The level of being applied to basically the same facts, financial reporting is one of the essential with the effect that different results or elements for effective corporate governance financial positions could be reported each system (Afolabi, 2013). The accountants ostensibly complying with the principal and auditors are primary providers of prerequisite to show a true and fair view. information to shareholders and potential The report further emphasised that investors. As a result, the board of directors regardless financial reporting of how far the should expect that management prepares the market can comprehend the implication of financial information in compliance with alternative accounting treatments or see statutory and ethical obligation and based on through presentation design to show a auditors’ competence (SEC, 2010; Afolabi, company’s figure is most flattering light. In 2013). There may be conflict of interest addition, the report also showed that there which places the financial reporting in are merits to investors, analysts, others misgiving to client pressure to satisfy the accounting users and eventually to the management. Such misleading financing company itself in financial reporting rules reporting accounts for the collapse of Enron which limit the scope for uncertainty and (Afolabi, 2013). Moreover, the accounting manipulation. Minow and Monks (2004) professional in each of the countries can averred that annual audits carry out by play a substantial role in effectiveness and independent, competent and qualified enforcement of corporate governance auditors as it being recommended by the practices by making use of International OECD principles, that it should deliver an Financial Reporting Standards (IFRS) (SEC, external and objective assurance to the 2010; Afolabi, 2013). The appointment of management board and shareholders about independent auditor should follow the financial situation and performance of the normal process so that there will be no firm. Whittington (1993) and Okike (2007) interference from the management (SEC, postulated that financial reporting is one of 2011). All these issues mentioned above can the essential elements in corporate affect transparency, disclosure, and risk governance; as a result some of the management which is part of corporate corporate failure is probable due to
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Corporate Governance and Firm Performance insufficient financial reporting. The authors assessed and generalisations cannot be argued that lack of auditors’ independence made, thus the progress of the scientific and corrupt environment on auditors in field as well as any potential practical discharging their responsibilities will surely applications are prevented (Roberts et al., have negative impact on the financial 2006). Research synthesis can be executed reporting of firms. Accordingly, Bushman either qualitatively, in the form of a and Smith, (2001) stressed that the body that narrative review, or quantitatively, by is accountable for setting up the nation’s employing various statistical methods for accounting standard should make sure they the integration of results from individual embolden the reporting of a true and fair studies (Colautti et al. 2006). One of the view of the transactions. In addition, the common methods is meta-analysis. body should make sure that these standards Meta-analysis. The term “meta- are applied uniformly across the firms in analysis” was devised by Glass (1976) in same way the standards have been set by the orientation to the statistical analysis of a body. large collection of analysis of results from To address this misleading financing individual studies for the purpose of reporting issue in Ghana, the external incorporating the findings. The above auditor is to make sure that the audit of the definition is wide and includes all the company is conducted in accordance with techniques used in quantitative research the one required by the Institute of synthesis including vote counting and Chartered Accountants, Ghana (ICAG) combining probabilities, as described (Aboagye, Agyemang & Ahali, 2013). The earlier. Meta-analysis more narrowly, is as a external auditor is required to indicate in his set of statistical methods for combining the or her report if financial statements audited extents of the outcomes (effect sizes) across have been prepared in accordance with the different data sets addressing the same Ghana National Accounting Standards research question (Gurevitch, Koricheva & (GNAS) (Aboagye, Agyemang & Ahali, Mengersen, 2013).The methods of meta- 2013). Furthermore, the external auditor is analysis were originally developed in required to specify any departures from medicine and various social sciences (Glass accounting standards and should contain the et al., 1981; Hedges & Olkin, 1985). They auditors’ opinion as to whether or not the were introduced in ecology and departure is not intentional and also give evolutionary biology in the early 1990s reasons for such departure (Aboagye, (Järvinen, 1991; Gurevitch et al., 1992; Agyemang & Ahali, 2013). Meanwhile, in Arnqvist & Wooster, 1995a). Meta-analysis order to ensure a continued effectiveness of offers a potent, informative, and unbiased audit personnel including the audit partner set of tools for summarising the results of should be frequently rotated or changed in studies on the same topic. Meta-analysis is order to offer fresh procedures in regards to based on expressing the outcome of each audit work (Aboagye, Agyemang & Ahali, study on a common scale. This measure of 2013). outcome is called an “effect size.” Cohen Synthesis of Research (1988) defined an effect size as “the degree Research synthesis may be defined to which the phenomenon is present in the as a review of primary research on a given population, or the degree to which the null topic with the purpose of integrating the hypothesis is false” (p.9-10). It includes findings (e.g., for creating generalizations or information on the sign and magnitude of an resolving conflicts) (Gurevitch, Koricheva effect of interest from each study. In many & Mengersen, 2013). Research synthesis is cases the variance of this effect size can also principal to the scientific enterprise. be calculated (Gurevitch, Koricheva & Without it, the evidence for various Mengersen, 2013). These effect size alternative hypotheses cannot be properly measures can then be combined across
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Corporate Governance and Firm Performance studies to estimate the grand mean effect among studies (Gurevitch, Koricheva& size and its confidence interval, and to test Mengersen, 2013). whether this overall effect varies Considering the several advantage significantly from zero (Gurevitch, the meta-analysis has over the other Koricheva & Mengersen, 2013). Hence, research synthesis methods, for example, unlike other methods of research synthesis assesses statistical significance of the mean described above, meta-analysis allows the (overall) effect; assesses the magnitude of researcher to estimate the magnitude and the mean effect; and allows analysis of sign of the grand mean effect across studies, sources of variation among studies assesses whether the confidence interval (Gurevitch, Koricheva & Mengersen, 2013), around the effect includes zero, and this present study adopted the meta-analysis examines sources of variation in that effect method in synthesising a sample of 20 related literature reviewed in Table 1.
Table 1: Synthesis of sampled of literature reviewed Code Author/Year Purpose Country Population Sample Research Correlation Effect Size Size Method Coefficient Size (N) (n) (r) (d) R1 Black, Jang, & Kim To Investigate Korea 535 Correlation 0.7400 2.2005 (2003) relationship between corporate governance and firm performance. R2 Switzer & Kelley Same as above Canada 94 Regression 0.4502 1.0084 (2006) R3 Abor & Fisher (2007) Same as above South Africa. 97 Correlation 0.4000 0.8729 R4 Abor & Biekpe (2007) Same as above Ghana 22 Regression 0.6980 1.9495 R5 Kyreboah-Coleman Same as above Ghana, 155 Regression 0.7550 2.3029 (2007) Nigeria, Correlation South Africa & Kenya R6 Abdullah & Page Same as above UK 444 365 Regression 0.7900 2.5771 (2009) Correlation R7 Black et al., (2009) Same as above Korea 750 Regression 0.7800 2.4928 R8 Ahmad (2010) Same as above Palestine 22 18 Regression 0.6518 1.7189 R9 Akpakli (2010) Same as above Ghana 22 6 Regression 0.8690 3.5126 R10 Chaghadari (2011) Same as above Malaysia 30 Correlation 0.0410 0.0821 R11 Drobetz, Schillhofer & Same as above Germany 253 91 Regression 0.5657 1.3721 Zimmermann (2011) R12 Meeamol et al., (2011) Same as above Thailand 100 87 Correlation 0.6372 1.6538 Regression R13 Amba (2012) Same as above Bahrain 49 39 Regression 0.8750 3.6157 R14 Duke II, Kankpang & Same as above Nigeria 237 149 Regression 0.8204 2.8696 Okonkwo (2012) R15 Kowalewski (2012) Same as above Poland 361 298 Regression 0.0400 0.0801 R16 Tornyeva & Wereko Same as above Ghana 19 Correlation 0.6380 1.6572 (2012). R17 Yusoff & Alhaji (2012) Same as above Malaysia 813 Correlation 0.1010 0.2031 R18 Flodberg & Nadjari Same as above Nordic 190 Regression 0.4940 1.1365 (2013) Countries R19 Vo & Phan (2013) Same as above Vietnam 122 77 Regression 0.5198 1.2169 R20 Rashid & Lodh (2014) Same as above Bangladesh 87 Regression 0.7609 2.3456 Correlation Overall Effect Size 1.7435 (Average)
The individual effect sizes in the Kowalewski (2012), Chaghadari (2011) and table above are represented in a histogram Yusoff and Alhaji (2012), R15, R10 and in figure 1. The findings of Amba (2012) R17 respectively in the Figure 2, formed the and Akpakli (2010), R13 and R9 in the lower outliers of the distribution. This could Figure 1, formed the main upper outliers of be attributable to reporting bias, sampling the distribution. The finding of Akpakli error, missing data among others (2010) could be attributable to small size of (Gurevitch, Koricheva & Mengersen, 2013). the sample (six out of 22 firms).
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Figure 2. Individual Effect Sizes.
To calculate average (mean) effect performance. The authors have not all used size (d) from correlation coefficient (r), the the same dependent and independent formula: was used as discussed variables but varied variables. Notwithstanding the prominence of by Cohen (1965, 1988), Friedman (1968), the effect size, several critics have pointed Glass, McGraw, and Smith (1981), out that measures of association are affected Rosenthal (1984), Wolf (1986) and by the dependability of the measures, the DeCoster (2004). Effect size can be thought heterogeneity of the populations being of as the average percentile standing of the compared, the specific levels of the average treatment (or experimental) variables studied, the strength of the participant relative to the average untreated treatments, and the range of treatments (or control) participant. From Table 1, the make such comparisons precarious effect size is 1.7435. An effect size of 1.7 (Maxwell et al., 1981; O’Grady, 1982; indicates that the mean of the treatment Sechrest & Yeaton, 1982). Fern and Monroe group is at the 95.5 percentile of the (1996) asserted that differences in the untreated group (Ward, 2002). This means following factors can lead to misleading that the finding of the twenty studies comparisons of measures of effect: synthesised above, show that there exist 1. Low dependability increases the error strong positive relationship between variance and puts a limit on the corporate governance and firm performance amount of variance that can be and is confirmed by 95.5% of the other explained by an explanatory variable. reviewed research in the study but not Two measures of effect from two synthesised above. studies of the same explanatory Effect size can also be interpreted in variable can be significantly different terms of the percentage of non-overlap of if the outcome measures used have the treatment group's scores with those of considerably different dependability. the untreated group. An effect size of 1.7 2. Population heterogeneity can decrease indicates a non-overlap of 75.4% in the two the extent of the effect size measure. distributions (Coe, 2002). Similarly, this The effect sizes computed in two means that 75.4% of the twenty researches studies that differ with respect to the synthesised and those not synthesised do not variability of the outcome measure overlap. This is an indication that all the may not be comparable. For example, literature reviewed has broadly covered all if one investigation studies high school aspects of corporate governance and firm freshmen, while a second study
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involves high school students from all economies and in the context of Ghana. grade levels, the measures of effect Majority of the literature confirmed positive size may not be comparable. relationship between these two variables, 3. In fixed effects models the extent to whilst few reported negative relationship the measures of effect size depends on and no relationship. The chapter further the specific levels of the variables discussed OECD principles of corporate studied. If different levels of the governance, the corporate governance explanatory variable are examined, the framework of Ghana and external factors measure of effect will not be that affect corporate governance practices of comparable. firms: Economics factors; Societal and 4. The range of treatments included in a cultural factors; Corruption and bribery study can increase or reduce the factors; Political factors; and Accounting proportion of variation explained. For system. Finally, this chapter synthesized 20 example, if the levels of the treatment studies of the literature reviewed. Using variable were narrowly defined (e.g., meta-analysis method of synthesizing 10, 20, 30, 40…), the variation would research, produced an effect size of 1.7. An be lower than in a study with a greater effect size of 1.7 indicates that the mean of spread (e.g., 30, 60, 90, 120…). The the treatment group is at the 95.5 percentile increased variability of the latter of the untreated group (Ward, 2002). This design is likely to lead to a greater means that the finding of the twenty studies measure of effect. synthesised, show that there exist strong To conclude this chapter, it is worth positive relationship between corporate to note that the literature review found many governance and firm performance and is similarities amongst various empirical confirmed by 95.5% of the other reviewed studies and theories. The result of the studies but not synthesised. The studies synthesis of research is an indication that were consistent in their quantitative overall, there was a general consensus that methodology and use of well-established there exist positive relationship between instruments. The literature review found corporate governance and firm performance. many similarities amongst various empirical Summary studies and theories. The result of the This chapter provided significant synthesis of research is an indication that review of literature concerning corporate overall, there was a general consensus that governance and its four foundation theories: there exist positive relationship between agency theory; stakeholder theory; corporate governance and firm performance. stewardship theory; and resource Chapter three detailed the methodology dependency theory. A sizeable volume adopted by this research to support or reject reviews of research studies was carried out the research hypotheses and to determine on relationship between good corporate the impact of specific variables of corporate governance practices and firm performance governance practices on firm performance. in developed economies, emerging
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CHAPTER 3: METHODOLOGY
This chapter discuss the The study also compared and methodological approach to identifying contrasted corporate governance framework relationship between corporate governance of Ghana with the OECD principles of and firm performance. The chapter corporate governance. The study evaluated describes the research methodology selected the corporate governance framework of and how it provided support or rejection for Ghana, and made necessary the research hypotheses. It also includes the recommendations that would make it robust purpose of the study, a description of the like internationally accepted frameworks, research design, research questions and for example OECD principles of corporate hypothesis, population and sampling governance. The recommendations are strategy, the research instrument, instrument made to regulatory bodies namely Ghana validity, data collection procedures and data Securities and Exchange Commission (SEC) analyses. and GSE. This is to promote good corporate The study sought to understand the governance practices among listed firms in relationship between corporate governance Ghana to enhance the country’s economic practices and firm performance of listed growth and development. This quantitative, companies on GSE. This quantitative study correlational research study utilised a five- investigated whether the corporate point Likert type scaled survey with governance practices of listed companies on descriptive statistics to identify and define GSE have any effect on their performances the specific independent variables of as both recent and past empirical studies corporate governance that significantly have established in both developed and relate to the dependent variables of firm developing countries (Kyereboah-Coleman, performance. 2007; Black et al., 2009; Tornyeva & Research Design Wereko, 2012; Htay, 2012; Kowalewski, This study investigated the 2012; Afolabi, 2013). The study purposed to relationship between OECD principles of reveal any positive linkage between corporate governance and firm performance corporate governance and firm performance. of listed companies on GSE. The research The study aimed at exploiting any positive design for this present study was consistent linkage revealed to promote firm with the research ‘onion’ designed by performance of the listed companies on Saunders et al (2006) as shown in Figure 3. GSE to bring about the needed economic growth and development in Ghana.
Figure 3. Research 'onion'. Source: Saunders, M., Lewis, P. & Thornhill, A. (2006, p.124)
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Saunders et al. (2006) averred that relationship between two or more dependent research worldview consist of the primary and independent variables (Saunders et al., research philosophies such as positivism, 2009; Sun, 2009). Furthermore, Saunders et realism, interpretivism, subjectivism, and al. (2009) asserted that deductive research is pragmatism among others. Research a development of theory that is subjected to philosophy according to Saunders et al. rigorous test. Deductive research is an effort (2006) influences the whole research to clarify the underlying relationship process from approach, strategy, choice of between phenomenal. method, time frame, data collection and data The inductive approach according to analysis technique as shown in Figure 3. Lancaster (2005) incorporates the The present study adopted a positivism origination of principle from data analysis in philosophy because the study was based on order to comprehend the nature of a contrasts that are scientifically verifiable, problem, and then explain the ways humans which are capable of logical or interpret the real world. Deductive approach mathematical proof, and therefore rejecting is frequently critiqued for been too metaphysics and theism (Saunders et al., inflexible and does not permit flexibility in 2006). terms of different interpretations of the The research approach according to nature of the problems (Lancaster, 2005). Saunders et al. (2006) could either be a Research tends to posit that one approach is deductive or inductive approach as shown in better than the other, according to Saunders the second layer of the research ‘onion’ in et al. (2009). However, this notion may be Figure 3. The two research approaches misleading, hence, the knowledge of the comprise explicit characteristics that characteristics and limitations of the distinguish each one from the other given different approaches will enable the the researcher an option to select any of the researcher to adopt the most appropriate two options. Deductive approach tends approach in designing a research study towards systematic investigation of (Saunders et al., 2009). Table 2 shows the phenomenal in order to conduct a rigorous key differences between deductive and testing of hypothesis to examine the inductive research approaches.
Table 2: Major differences between deductive and inductive approaches Deductive Approach Inductive Approach • Scientific principle • Gaining an understanding of the meanings human attach to events • The need to explain causal relationships between variables • A close understanding of the research context • The collection of quantitative data • A more flexible structure to permit changes of research emphasis as • Application of controls for validity the research progresses • The operationalisation of concepts to ensure clarity of • A realisation that the researcher is part ofthe research process definition • Less concern with the need to generalise subjectivity • A highly structured approach • Objectivity of the researcher • The necessity to select samples of sufficient size in order to generalise conclusion Source: Saunders, M., Lewis, P. & Thornhill, A. (2009, p.127)
The researcher in pursuance of this because the researcher was study adopted the deductive approach. The independent of what was being rationale in adopting this approach included observed, among others: because concepts were operationalized because the researcher sought to in a way that enabled facts to be explain relationship between variables, measured quantitatively, and because the researcher intended to because findings would be generalized collect quantitative data, to some extent (Saunders et al., 2003; because the researcher intended to Creswell, 2006; Saunders et al., 2007; control and allow the testing of Bajpai & Singh, 2008; Sun, 2009; hypothesis, Staff, 2012).
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The deductive approach chosen for The present study adopted survey as this study is similar to other studies in a research strategy because the study strived corporate governance and firm performance to quantify specific variables of interest such as Black et al., (2009), Nuryanah and (corporate governance and firm Islam, (2011), Deku II, Kankpang and performance) in numerical terms. Statistical Okonkwo, (2012), Afolabi, (2013), methods such as multiple regression and Fuenzalida et al., (2013), Supriti and correlation were used to deduce the validity Pitabas, (2014), and Fooladi et al., (2014). of the relationship between corporate According to Saunders et al. (2006) governance and firm performance. A research strategy could either be any or a descriptive correlational survey was adopted combination of multiple design strategies, as the primary strategy for the study because namely: experimentation, survey, case the study attempted to look at two or more study, action research, grounded theory, variables to determine if there is a ethnography, and archival research. relationship between them (Sun, 2009). According to Saunders et al (2009) and Correlational research is a statistical Zikmund et al (2010) no one research investigation concerning the relationships of strategy or even mixture of strategies can be variables, in this case, a statistical claimed as the best strategy, as any strategy investigation concerning the relationship will yield a worthwhile result. Surveys can between the specific OECD principles of be an effective and reliable method of corporate governance and firm performance collecting data about the attitudes and (Sun, 2009; Leedy & Ormrod, 2001). behaviour of a group of people (Saunders et The research method adopted for al., 2009). Traditional approaches of surveys this study was a quantitative research are postal questionnaires and structured method. A quantitative research method was interviews with the benefits of low cost per appropriate for this study to determine the respondents. However, low response rate relationship between corporate governance and data precision can be a problem with and firm performance (Creswell, 2006; postal survey, whereas, structured interview Saunders et al., 2007; Sun, 2009). The surveys are much more expensive and time quantitative method was chosen for a overwhelming (Crawford et al., 2001; number of reasons. First, the objective Dillman, 2000; Easterby-Smith et al., 2008). nature of a quantitative survey and its Web based questionnaires is alternative analysis minimized the potential for bias in dependable form of gathering participants the study (Sun, 2009; Creswell, 1994). opinion for survey research strategy. Secondly, the relatively short duration of the According to Zikmund et al. (2010) surveys study and a low tolerance for ambiguity can provide trustworthy responses to called for quantitative methods (Sun, 2009; research questions of what, where, how Creswell, 1994). Three previous related much, how many and how, especially in studies in Ghana by Abor and Biekpe descriptive and correlational studies such as (2007), Akpakli (2010), and Tornyeva and this present study. Saunders et al. (2009) Wereko (2012) guided the selection of this affirmed that outcomes of well conducted research method. They have confirmed surveys are viewed by the public as positive relationship between good dependable, convincing and easier to corporate governance and firm performance. explain and understand. Surveys are However, their studies were limited to principal instruments in the field of Small and Medium Enterprises (SMEs), psychology (Creswell, 2001; Sun, 2009). very small sample size of listed firms on Surveys attempt to quantify specific GSE and the insurance sector respectively. variables of interest in numerical terms so All the three studies focused on the that statistical methods can infer the legality relationship between corporate governance of a given theory (Sun, 2009). and firm performance in Ghana.
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Sun (2009) asserted that Toney, 1995; Triola, 2001). Data analysis developmental designs take two primary used Pearson correlation and multiple shapes. One is a cross-sectional study that regression which are common statistical looks at people of a specific cross section of methods used in quantitative studies (Triola, the population such as an age group. A 2001). The methodology focused on either specific behavior is the focus to determine if rejecting or accepting the null hypothesis. there is a difference between the age groups. The study used common statistical methods The second is a longitudinal study that looks such as multiple regression and Person at a set of variables over time. Various correlation in analysing the data. Several fields of psychology use these designs to tests of hypotheses were also carried out to determine the relationships between accept or reject null hypotheses of variables (Sun, 2009). In this study, the relationship between dependent and longitudinal approach was adopted because independent variables. Each completed the study covered a set of variables survey was initially stored as a Microsoft (corporate governance and firm Excel document. The data was then performance) over time (2004-2013). processed by use of Statistical Package for According to Saunders et al (2006), the Social Sciences (SPSS) software. the last inner layer of the research ‘onion’ is The study made use of three techniques and procedures as shown in categories of variables namely: dependent Figure 3. The research techniques and variable; independent variable; and control procedures include data collection and data variable. The present study used firm analysis. A questionnaire was used as the performance as dependent variable. Firm survey instrument to obtain data because the performance is an integral component of study attempted to quantify specific how businesses do things and act in a variables of interest in numerical terms so manner that helps them survive and thrive that statistical methods can deduce the (Kellen, 2003). Lebas and Euske (2002) validity of a given theory, in this case defined performance as “doing today what corporate governance and firm performance will lead to measured value outcomes (Sun, 2009). The design incorporated tomorrow”p.26. In other to ensure validity detailed plans on what, where, and how the of the result, the study triangulated the data was collected (Leedy & Ormrod, 2001; method for measuring performance by using Sun, 2009). The primary data required for three different measures. this research was the corporate governance Return on equity (ROE) measures practices of listed firms on GSE. To collect the rate of return of ownership interest this data, a survey was designed to solicit (shareholders' equity) of common stock response from participants, who were owners (Damodaran, 2007). It measures the directors of the firms, by means of efficiency of a firm in generating profits questionnaire. The questionnaire provides from each unit of shareholder equity, also the numerical data to understand known as net assets or assets minus behavioural and other characteristics of liabilities. ROE shows how well a company corporate governance and firm performance. uses investments to generate earnings The secondary data needed for the study growth (Damodaran, 2007). ROE is defined was the past financial performances of the as: firms which were extracted from the financial statements of the firms.The methods used for data analysis were designed using scientific standards found in Average Stockholders’ Equity is other dissertations and statistics textbooks defined as sum of shareholders' equity at the (Sun, 209; Chadwick, 1998; Leedy & beginning and at the end of the year divided Ormrod, 2001; Paige, 1999; Stephens, 2000; by two. This is consistent with Tornyeva &
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Wereko (2012), Akpakli (2010), Black et al. Cadbury Committee (1992) defines (2009), Kyereboah-Coleman (2007) among corporate governance as "the system by others. which companies is directed and controlled" Return on assets (ROA) shows the p.14. More specifically it is the framework percentage of how profitable a company's by which the various stakeholder interests assets are in generating revenue (Kupiec & are balanced (Cadbury Committee, 1992). Lee, 2012). This number tells what the The OECD Principles of corporate company has achieved by use of its assets. It governance (2004) states that “corporate is a useful number for comparing competing governance involves a set of relationships companies in the same industry. Return on between a company’s management, its assets gives an indication of the capital board, its shareholders and other intensity of the company, which will depend stakeholders”p.11. Corporate governance on the industry. Companies that require also provides the structure through which large initial investments will generally have the objectives of the company are set and lower return on assets (Kupiec & Lee, the means of attaining those objectives and 2012). ROAs over 5% are generally monitoring performance are determined considered good (Kupiec & Lee, 2012). (OECD, 2004). Corporate governance could ROA is defined as: be defined as the application of a set of
powerful micro-policy instruments in an
organisation to ensure an efficient and effective use of resources in achieving the This consistent with Tornyeva & main objectives of its capital providers as Wereko (2012), Akpakli (2010), Black et al. well as maximizing positive influence on (2009), Kyereboah-Coleman (2007) among other stakeholders (Agyemang & Castellini, others. 2012). The independent variable (corporate Tobin’s Q is the ratio between a governance) was further divided into six physical asset's market value and its sub-variables as follows: replacement value. It was introduced in 1. Ensuring the basis for an effective 1969 by James Tobin. If Tobin's Q is greater corporate governance framework. This is than 1.0, then the market value is greater the first principle of the OECD principles of than the value of the company's recorded corporate governance. OECD (2004) asserts assets (Meeamol, 2011). This suggests that that the corporate governance framework the market value reflects some unmeasured should be developed with a view to its or unrecorded assets of the company. High impact on overall economic performance. Tobin's Q values encourage companies to This principle is established on the basis invest more in capital because they are that the legal and regulatory requirements "worth" more than the price they paid for that affect corporate governance practices in them (Meeamol, 2011). In this present a jurisdiction should be consistent with the study, Tobin’s Q is defined as: rule of law, transparent and enforceable
(OECD, 2004). In furtherance, OECD
(2004) asserted that the division of Market value of assets as is defined responsibilities among different authorities as book value of debt plus book value of in a jurisdiction should be clearly articulated preferred stocks plus market value of and ensure that the public interest is served. common stocks. This consistent with Also, the supervisory, regulatory and Tornyeva & Wereko (2012), Akpakli enforcement authorities should have the (2010), Black et al. (2009), Kyereboah- authority, integrity and resources to fulfil Coleman (2007) among others. their duties in a professional and objective This study used corporate manner (OECD, 2004). Moreover, their governance as independent variable. rulings should be timely, transparent and
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Corporate Governance and Firm Performance fully explained (OECD, 2004). Aboagye, adequate and timely information Agyemang, & Ahali, (2013) asserted that concerning the date, location and effective corporate governance framework agenda of general meetings, as well as provides a structure for evaluating corporate full and timely information regarding organisations. Effective corporate the issues to be decided at the meeting. governance framework makes possible 2. Shareholders should have the comparative analysis among all sectors of opportunity to ask questions to the an economy and forms the cornerstone for board, including questions relating to corporate governance guidelines for the annual external audit, to place items corporate organisations (Aboagye, on the agenda of general meetings, and Agyemang & Ahali, 2013). Aboagye, to propose resolutions, subject to Agyemang, and Ahali, (2013) concluded reasonable limitations. that effective corporate governance 3. Effective shareholder participation in framework promotes effective and efficient key corporate governance decisions, allocation of resources, assists organisations such as the nomination and election of in attracting capital at low cost and helps board members, should be facilitated. corporate organisations in maximising their Shareholders should be able to make performance as well as their capability in their views known on the remuneration fulfilling stakeholder wishes. policy for board members and key 2. The rights of shareholders. This is executives. The equity component of the second principle of the OECD principles compensation schemes for board of corporate governance. OECD (2004) members and employees should be asserted that basic shareholder rights should subject to shareholder approval. include the right to: a) secure methods of 4. Shareholders should be able to vote in ownership registration; b) convey or transfer person or in absentia, and equal effect shares; c) obtain relevant and material should be given to votes whether cast in information on the corporation on a timely person or in absentia. and regular basis; d) participate and vote in Afolabi, (2013) asserted that the general shareholder meetings; e) elect and level of legal right and protection of remove members of the board; and f) share shareholders in any country is an essential in the profits of the corporation. Also, the factor in determining the development of the OECD (2004) states that shareholders financial market of company in that country. should have the right to participate in, and Okpara (2010) asserted that issue of rights to be adequately informed on, decisions of shareholders is vital for the protection of concerning ultimate corporate changes such shareholders against poor running of firm. as: a) amendments to the statutes, or articles In developing countries like Ghana, the of incorporation or similar governing protection of the rights of shareholders has documents of the company; b) the become a serious challenge for authorisation of additional shares; and c) implementing effective corporate extraordinary transactions, including the governance system (Afolabi, 2013). La transfer of all or substantially all assets, that portal, et al. (1998) scrutinised the legal in effect result in the sale of the company. In rules covering security of corporate furtherance, OECD (2004) accentuated that shareholders and creditors in 49 countries. shareholders should have the opportunity to Using empirical analysis the study showed participate effectively and vote in general that the concentration of ownership of shareholder meetings and should be shares in largest public companies was informed of the rules, including voting negatively related to shareholder protection procedures, that govern general shareholder and the same with the hypothesis that small meetings: and diversified shareholders are not likely to 1. Shareholders should be furnished with be recognised in countries that cannot
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Corporate Governance and Firm Performance protect right of shareholders. maintained that this condition is one of the 3. The equitable (fair and equal) central agency problems in countries with treatment of shareholders. This is the third weak shareholder protection. Furthermore, principle of the OECD principles of Morck et al. (2000) established that corporate governance. OECD (2004) controlling shareholders may pursue an maintained that all shareholders of the same objective that will not favour minority series of a class should be treated equally as shareholders. follow: 4. The role of stakeholders. This is 1. All shares should carry the same rights the fourth principle of the OECD principles within any series of a class. All of corporate governance. OECD (2004) investors should be able to obtain asserted that the competitiveness and information about the rights attached to ultimate success of an organisation is the all series and classes of shares before result of teamwork that embodies they purchase. Any changes in voting contributions from a range of different rights should be subject to approval by stakeholders including investors, those classes of shares which are employees, creditors, and suppliers. Also, negatively affected. the OECD (2004) averred that corporations 2. Minority shareholders should be should recognise that the contributions of protected from abusive actions by, or in stakeholders constitute a valuable resource the interest of, controlling shareholders for building competitive and profitable acting either directly or indirectly, and companies. It is, therefore, in the long-term should have effective means of redress. interest of corporations to foster wealth- 3. Votes should be cast by custodians or creating co-operation among stakeholders nominees in a manner agreed upon with (OECD, 2004). The OECD (2004) further the beneficial owner of the shares. posited that governance framework should 4. Impediments to cross border voting recognise that the interests of the should be eliminated. corporation are served by recognising the 5. Processes and procedures for general interests of stakeholders and their shareholder meetings should allow for contribution to the long-term success of the equitable treatment of all shareholders. corporation. Stakeholder as defined by Company procedures should not make Ramachandran (2008) is “any group or it unduly difficult or expensive to cast individual who can affect or is affected by votes. the achievement of the firm’s objectives” OECD (2004) in furtherance, p.1. Ramachandran (2008) asserted that role maintained that insider trading and abusive of stakeholders can affect a corporation’s self-dealing should be prohibited and financial success. Ramachandran (2008) members of the board and key executives avowed that stakeholders contribute to the should be required to disclose to the board wealth-creating capacity of a corporation whether they, directly, indirectly or on and are, therefore, corporation’s potential behalf of third parties, have a material beneficiaries and/or risk bearers. interest in any transaction or matter directly Stakeholders perform as gatekeepers to affecting the corporation. Afolabi (2013) resources that firms need. For example, found that equitable treatment of customers decide to buy or not the products shareholders has strong positive relationship or services of the organization; employees with firm performance. Johnson et al. decide to share or not their innovative ideas (2000) avowed that large shareholder or with their employer or defect to a shareholders can agree with managers to competitor; and communities decide to let benefit at the expense of minority an organisation operate from a location in shareholders, popularly known as their area or not (Ramachandran, 2008). tunnelling. La Portal et al. (1999; 2000)
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5. Disclosure. This is the fifth Other authors such as Akpakli (2010), principle of the OECD principles of Ahmad (2010), Afolabi (2012), and corporate governance. OECD (2004) stated Kowalewsk (2012) affirmed positive that disclosure should include, but not be relationship between disclosure and firm limited to, material information on: performance. 1. The financial and operating results of 6. The responsibilities of the board. the company. This is the sixth (the last) principle of the 2. Company objectives. OECD principles of corporate governance. 3. Major share ownership and voting OECD (2004) asserted that board members rights. should act on a fully informed basis, in good 4. Remuneration policy for members of faith, with due diligence and care, and in the the board and key executives, and best interest of the company and the information about board members, shareholders. Where board decisions may including their qualifications, the affect different shareholder groups selection process, other company differently, the board should treat all directorships and whether they are shareholders fairly. OEDC (2004) also regarded as independent by the board. upheld that the board should apply high 5. Related party transactions. ethical standards. It should take into account 6. Foreseeable risk factors. the interests of stakeholders. The board 7. Issues regarding employees and other should fulfil certain key functions, stakeholders. including: 8. Governance structures and policies, in 1. Reviewing and guiding corporate particular, the content of any corporate strategy, major plans of action, risk governance code or policy and the policy, annual budgets and business process by which it is implemented. plans; setting performance objectives; OECD (2004) also maintained that monitoring implementation and information should be prepared and corporate performance; and overseeing disclosed in accordance with high quality major capital expenditures, standards of accounting and financial and acquisitions and divestitures. non-financial disclosure. Additionally, 2. Monitoring the effectiveness of the OECD (2004) asserted that an annual audit company’s governance practices and should be conducted by an independent, making changes as needed. competent and qualified, auditor in order to 3. Selecting, compensating, monitoring provide an external and objective assurance and, when necessary, replacing key to the board and shareholders that the executives and overseeing succession financial statements fairly represent the planning. financial position and performance of the 4. Aligning key executive and board company in all material respects. remuneration with the longer term Furthermore, OECD (2004) upheld that interests of the company and its external auditors should be accountable to shareholders. the shareholders and owe a duty to the 5. Ensuring a formal and transparent company to exercise due professional care board nomination and election in the conduct of the audit, and that process. channels for circulating information should 6. Monitoring and managing potential provide for equal, timely and cost-efficient conflicts of interest of management, access to relevant information by users. board members and shareholders, Abdo and Fisher (2007) asserted that there including misuse of corporate assets is sufficient evidence to conclude that there and abuse in related party transactions. is a positive relationship between the level 7. Ensuring the integrity of the of disclosure and corporate performance. corporation’s accounting and financial
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reporting systems, including the (Chen, 2012). Jensen (1986) and Kim and independent audit, and that appropriate Sorensen (1986) asserted that there exists a systems of control are in place, in positive relationship between leverage and particular, systems for risk firm performance because the high financial management, financial and operational leverage spurs the debt holders to monitor control, and compliance with the law the agent and reduce the agency costs. and relevant standards. Conversely, Myers (1977) developed the 8. Overseeing the process of disclosure pecking order theory and posits that the and communications. good firms tend to avoid high leverage and Furthermore, OECD (2004) averred use internal funds. The study assumed that the board should be able to exercise positive effects of financial leverage on firm objective independent judgement on performance. The use of financial leverage corporate affairs and in order to fulfil their as a control variable is consistent with responsibilities, board members should have Black, Jang and Kim (2003), Chen (2012), access to accurate, relevant and timely Tornyeva and Wereko (2012) and information. Studies such as Akpakli Kowalewski (2012). (2010), Afolabi (2012), Vo and Phan (2013) Liquidity: The variable liquidity is supported positive relationship between defined as the net cash from operating responsibilities of the board and firm activities divided by current liabilities and performance. the higher liquidity, the lower the risk of The study acknowledges possibility bankruptcy (Chen, 2012). Agrawal and of inability to adequately outline the Mandelker (1990) argued that liquidity is determinants of firm performance; hence to negatively related to firm performance reduce measurement bias in other to ensure because the high financial liquidity is a sign robustness of the result, the following of inefficient use of cash and may lead to a control variables were employed. takeover. The study assumed positive Firm Size: The variable firm size is effects of liquidity on firm performance. defined as the logarithm of total assets The use of liquidity as a control variable is (Akinyomi & Olagunju, 2013). Pedersen consistent with Black, Jang and Kim (2003), and Thomsen (1999) averred that there Chen (2012), Tornyeva and Wereko (2012) exists a positive direct effect of firm size on and Kowalewski (2012). firm performance because the larger firm Firm Age: The variable firm age is size brings economies of scale and defined as the logarithm of the number of synergies, additionally, the costs of years between the observation year and firm production, distribution, among others are incorporation year (Chen, 2012). This reduced by vertical integration and variable demonstrates the life cycle effects increased market power. Nevertheless, the (Chen, 2012). While some studies like larger size may also decrease firm’s growth, Anderson and Reeb (2003) and Han and because of the decreasing marginal benefit Suk (1998) showed negative relationship of the scale (Chen, 2012). The study between firm age and performance, others assumed positive effects of size on firm like Black, Jang and Kim (2003), Chen performance. The use of firm size as a (2012), Tornyeva and Wereko (2012) and control variable is consistent with Black, Kowalewski (2012) showed positive Jang and Kim (2003), Chen (2012), relationship. These conflicting results could Tornyeva and Wereko (2012) and not be explained by the life cycle theory Kowalewski (2012). because the old firms do not necessary Financial Leverage: Leverage is position in the mature or even saturated defined as the long-term debt divided by stage. On the contrary, old firms are able to total assets and it measures the effect of diversify their business units and have good financial leverage on firm performance performances (Chen, 2012). Positive effect
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Corporate Governance and Firm Performance of age on performance measures was and a time series dimension, indicated by assumed. The use of firm age as a control subscript (Tornyeva & Wereko, 2012; Hsiao variable is consistent with Black, Jang and & Yanan, 2006). The study attached double Kim (2003), Chen (2012) Tornyeva and subscripts to the variables in the regression Wereko (2012) and Kowalewski (2012). model in order to differentiate them from Industry: The industry that a firm regular time-series or cross section operates in, to some extent, has an influence regression. To establish the relationship on the performance or profitability of the between corporate governance and firm firm according to studies like Pedersen and performance in order to answer the research Thomsen (1997), Thomsen and Pedersen question one, the study used a regression (1998) and Chen (2012). This is because model: there exists differences in product life cycle Pit = β0i+ β1CGIit + β2Cit + µit (2). in different industries and inter-industry Where: accounting differences (Chen, 2012). The Pit = performance of firm i in time t; use of industry as a control variable is CGIit = a vector of corporate governance consistent with Black, Jang and Kim (2003), index of firm i in time t; Chen (2012), Tornyeva and Wereko (2012) Cit = a set of control variables of firm i in and Kowalewski (2012). time t; The study constructed a Corporate µit = the error term Governance Index (CGI) ranging from 0 to The model is consistent with Black, 100 for the 30 listed firms, with better Jang and Kim (2003), Black et al (2009), governed firms having higher scores. The Ahmad (2010), Tornyeva and Wereko CGI was classified into six sub-indices: (a) (2012) and Kowalewski (2012). effective corporate governance framework Research Questions and Hypotheses (sub-index A); (b) rights of shareholders The research questions and hypotheses to (sub-index B); (c) fair and equal treatment address the research problem are as follow: of shareholders (sub-index C); (d) RQ1: Is there any relationship between stakeholders (sub-index D); (e) disclosure corporate governance and firm’s (sub-index E) ; and (f) responsibilities of performance in Ghana? board of directors (sub-index F). Each of the H1O: There is no relationship between sub-indices were standardised to have a corporate governance and firm’s value between 0 and 16.67. The overall performance in Ghana. corporate governance index (CGI) was H1A: There is a relationship between constructed as follows: corporate governance and firm’s CGI = A + B + C + D + E + F (1). performance in Ghana. The construction of the CGI is Sub-questions: The six OECD principles of consistent with Black, Jang and Kim (2003), corporate governance will be tested against Black et al (2009) and Kowalewski (2012). firm performance measures such as Return The study used panel data framework which on Equity, Return on Assets, and Tobin’s q follows the one used by Tornyeva and so as to identify any relationship between Wereko (2012), Abor and Biekpe, (2007), the variables. and Kyereboah-Coleman (2007). This RQ1a: Does ensuring a basis for an involves the pooling of observations on effective corporate governance cross-section of units over several time framework in a firm in Ghana affect periods and provides results that are simply performance? not detectable in pure cross-sections or pure H1aO: Ensuring a basis for an effective time-series studies (Tornyeva & Wereko, corporate governance framework in a 2012). An observation in panel data firm in Ghana does not affect comprises at least two dimensions: a cross- performance. sectional dimension, indicated by subscript i H1aA: Ensuring a basis for an effective
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corporate governance framework in a RQ2: Is there any relationship between firm in Ghana does affect performance. corporate governance framework of
RQ1b: Does the rights of shareholders Ghana and OECD principles of in a firm in Ghana affect performance? corporate governance? H1bO: The rights of shareholders in a H2O: There is no relationship between firm in Ghana do not affect corporate governance framework of performance. Ghana and OECD principles of corporate governance H1bA: The rights of shareholders in a firm in Ghana do affect performance. H2A: There is a relationship between corporate governance framework of RQ1c: Does fair and equal treatment of Ghana and OECD principles of shareholders in a firm in Ghana affect corporate governance. performance? Population and Sampling Strategy H1cO: Fair and equal treatment of The population of interest was listed shareholders in a firm in Ghana does companies on Ghana Stock Exchange. It not affect performance. currently has 36 listed companies. The H1cA: Fair and equal treatment of population comprised of local and shareholders in a firm in Ghana does international companies from different affect performance. sectors of the economy such as Banking, Insurance, Manufacturing, Agriculture, RQ1d: Do stakeholders in corporate Mining, Oil, among others. Assessing the governance in a firm in Ghana affect companies within OECD Principles of performance? Corporate Governance and past financial H1dO: The stakeholders in corporate statements of the listed companies provided governance in a firm in Ghana do not meaningful data concerning corporate affect performance. governance and firm performance of those H1dA: The stakeholders in corporate companies which is consistent with Black governance in a firm in Ghana do affect (2001), Black, Jang and Kim (2003), and performance. Garay and Gonzalez (2008). RQ1e: Does disclosure in firm’s The sample was in the listing age financial statement in Ghana affect range of companies that have had performance? continuous listing on GSE from the year H1eO: Disclosure in firm’s financial 2000 to 2013. The sampling approach is statement in Ghana does not affect similar to that of Black, Jang and Kim performance. (2003) and Black (2001). In addition to the H1eA: Disclosure in firm’s financial purpose of the study and population size, statement in Ghana does affect three criteria usually will need to be performance. specified to determine the appropriate sample size: the level of precision; the level RQ1f: Do effective fulfilment of of confidence or risk; and the degree of responsibilities of Board of Directors in variability in the attributes being measured a firm in Ghana affect performance? (Miaoulis & Michener, 1976). H1fO: Effective fulfilment of Level of precision: The level of responsibilities of Board of Directors in precision, sometimes called sampling error, a firm in Ghana does not affect is the range in which the true value of the performance. population is estimated to be (Miaoulis & H1fA: Effective fulfilment of Michener, 1976). This range is often responsibilities of Board of Directors in expressed in percentage points (for example, a firm in Ghana does affect ±5 percent). Thus, if the present study finds performance. that 60% of firms in the sample have
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Corporate Governance and Firm Performance adopted a recommended good corporate drawn from a sample of 30 out of 36 listed governance practice with a precision rate of companies on Ghana Stock Exchange, ±5%, then the study can conclude that representing 83.3% of the population.This is between 55% and 65% of firms in the because the study would take retrospect of population have adopted the practice. firm performance over ten years’ period Confidence Level: The confidence (2005 - 2014), the unselected firms were not or risk level is based on ideas encompassed listed throughout that period. The sample under the Central Limit Theorem (Miaoulis size is therefore large enough according to & Michener, 1976). The key idea Yamane (1967) at 90% confidence level encompassed in the Central Limit Theorem (10% level of precision). However, had the is that when a population is repeatedly confidence level been increased to 95% (5% sampled, the average value of the attribute level of precision) the sample size that obtained by those samples is equal to the would have been required for this present true population value. Furthermore, the study would have been 33 firms, which is values obtained by these samples are relatively higher than the 30 firms for the distributed normally about the true value, present study. Notwithstanding, as a with some samples having a higher value quantitative study, a minimum of 30 in the and some obtaining a lower score than the sample size ensures a normal distribution true population value (Miaoulis & for parametric analysis such as correlation Michener, 1976). In a normal distribution, (Triola, 2009). In this perspective, the approximately 95% of the sample values are sample size for present study could again within two standard deviations of the true been seen as large enough and statistically population mean (Miaoulis & Michener, significant for the study. The selected 1976).In other words, this means that if a sample size provides convenient access to 95% confidence level is selected, 95 out of 150 respondents (board of directors) with 100 samples will have the true population interest in developing and ensuring good value within the range of precision corporate governance practices. specified. Research Instrument Degree of Variability: The third Aquestionnaire was used as the criterion, the degree of variability in the primary research instrument. The instrument attributes being measured, refers to the made use of a five-point likert scale (1 = distribution of attributes in the population strongly disagree to 5 = strongly agree). The (Miaoulis & Michener, 1976). The more rational for using this scale was to enable heterogeneous a population, the larger the the respondents to express their level of sample size required to obtain a given level agreement to facilitate the researcher to of precision. The less variable (more measure the intensity of response. The homogeneous) a population, the smaller the justification of the choice of the five-point sample size (Miaoulis & Michener, 1976). likert scales was grounded on Bryman Yamane (1967) provided a simplified (2008), who maintained that five-point likert formula to calculate sample sizes as follows: scales is imperative because it permits the
respondents to express their level of
agreement with the statement in the question
Where, n is the sample size, N is the effectively. Ide Vacus (2002) also asserted population size, and e is the level of that the five-point likert scale format offers precision. five response choices which give more Using the above formula, at 90% flexibility and also provides a measure of confidence level (10% level of precision) intensity, extremity and direction. with the population size of 36, the ideal This study made use of three sample size (n) of the present study was 26 validated instruments. First, the instrument firms. The data for the present study was for corporate governance is the instrument
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Corporate Governance and Firm Performance developed and validated by OECD (2004), Disagree (1) Disagree (2) Do Not Know (3), titled Principles of Corporate Governance. Agree (4) and Strongly Agree (5). This There are six points contained in the instrument on the whole, contained 42 item Principles of Corporate Governance assessment. (OECD, 2004). The instrument therefore The combination of the three contained six scales namely: governance instruments forms a 92-item assessment for framework; rights of shareholders; fair and this study. equal treatment of shareholders; role of A cover letter (see Appendix A) stakeholders; disclosure; and responsibilities invited the participants to take part in this of the board. Each scale had seven study. Since the participants are busy questionswith a five -point Likert scale with directors, the cover letter was crafted to the following labels: Strongly Disagree (1) stimulate their support for study. Disagree (2) Do Not Know (3), Agree (4) Notwithstanding the merits of using and Strongly Agree (5). This instrument on questionnaire as the research instrument, it the whole, contained 42 item assessment. has embedded limitations (Saunders et al., Second, the dependent variable (firm 2009; Sun, 2009; Afolabi, 2013). For performance) made use of audited financial example, the finding from the respondents statements of the sampled companies. The was an opinion about what was happening second instrument was built based on the on the issues of corporate governance of audited financial statements of the sampled firms in Ghana (Afolabi, 2013). Also the firms. The instrument contained ROA, respondents were not questioned or probed ROE, and Tobin’s Q. The instrument has (Afolabi, 2013). The result could therefore eight questions with a five point Likert have been skewed to a particular direction. scale. Strongly Disagree (1) Disagree (2) Do Furthermore, there was a level of researcher Not Know (3), Agree (4) and Strongly imposition, thus when developing the Agree (5). This instrument contained 21 questionnaire the researcher made implied item assessment. assumptions as to what was important and Third, the instrument for corporate not important (Afolabi, 2013). The governance regulatory framework of Ghana, researcher might have missed some developed and validated by Ghana company important aspects of corporate governance law, Companies Code, 1963 Act 179. The and firm performance, which is considered aim of this instrument was to assist in as one of the limitations of this study. comparing the OECD principles of Validity as defined by Gregory corporate governance with the corporate (1992) is “the extent to which [a test] governance regulatory framework of Ghana measures what it claims to measure”p.117. for robustness. Validity is the degree to which an The corporate governance regulatory assessment measures what it is supposed to framework of Ghana has been divided into measure (Kazi & Khalid, 2012). Essentially six major sections, namely: a) the mission, there are three types of validity a) content responsibilities and accountability of the validity, b) criterion- related validity, and c) board; b) committees of the board; c) construct validity (Kazi & Khalid, 2012). relationship to shareholders and Kazi and Khalid (2012) asserted that stakeholders, and the rights of shareholders; questionnaire undergoes a validation d) financial affairs and auditing; e) procedure to make sure that it accurately disclosures in annual reports (transparency); measures what it aims to do, regardless of and f) code of ethics (Aboagye, Agyemang, the responder. The authors affirmed further & Ahali, 2013). The instrument therefore that valid questionnaire helps to collect contained six scales and each scale had better quality data with high comparability seven questions with a five -point Likert which reduces the effort and increase the scale with the following labels: Strongly credibility of data.
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In order to solidify the validity and used to determine the internal consistency reliability of the combined instrument, the reliability of each subscale study tested the instrument including (The Leadership Circle, 2011). According construct validity and reliability, which is to The Leadership Circle (2011), reliability consistent with (Creswell, 2009). To ensure coefficients range from 0.0, indicates no construct validity in the combined consistency among the items, to 1.0, instrument, a correlational coefficient meaning the measures are completely between two similar groups has to average consistent. Sun (2011) asserted that an ideal above 0.80 (Sun, 2011). Since all the average for Cronbach alpha is above 0.8. instruments have well above this critical Similarly, Vogt (2006) affirmed that an value as shown in Table 3, construct validity alpha of 0.70 or higher is naturally should not be an issue (Sun, 2011). In considered suitable because the squared addition, doctoral-level authorities auxiliary correlation (r2) of a reliability coefficient scrutinized the survey instrument less than 0.70 would account for less than construction and validity of the wording of 50% of variance explained: 0.70 × 0.70 = the questions. The following experts were 0.49. As a test for the inter-item correlation, actively involved in the survey instrument the higher correlations provides evidence of development and validation process: internal consistency (Sun, 2011). Professor J. Marangos of SMC University, Overall, the reliabilities, as measured Switzerland; and two other former lecturers using coefficient alpha, for the corporate at South Wales University, UK and governance and firm performance variables University of Ghana. were strong and ranged from 0.82 to 0.93, Internal consistency reliability is the with a mean Cronbach’s alpha of 0.86 as degree to which different parts of a test or shown in Table 3. They were all above the items in a scale are correlated with each typical alpha criterion of 0.80. Specific other; highly correlated items are therefore alphas for each corporate governance and interpreted as measuring the same construct firm performance variables can be found in (The Leadership Circle, 2011). Split-half the third column in Table 3. Results of the reliability is a type of internal consistency reliability analyses revealed that alphas for reliability calculated by splitting the data corporate governance and firm performance and computing the correlation between were high, in general, with a mean scores on one half of the data to the other coefficient alpha of 0.86, indicating strong (The Leadership Circle, 2011). Cronbach’s internal consistency. Consequently, the alpha (also known as alpha or coefficient result from Table 3 indicates that the five alpha) is the average of the coefficients Liker-scale used for this study was reliable found by calculating the split-half reliability with the sample and the internal consistency of all possible halves of the data, and was was accurate for the study.
Table 3: Reliability statistics test for the data instrument of the study Section Main Variables Cronbach's Alpha Coefficient No. of Items 1 Regulatory framework 0.87 7 Right of shareholders 0.86 7 Equal treatment of shareholders 0.84 7 Role of shareholders 0.83 7 Disclosure 0.86 7 Responsibilities of the board 0.9 7 2 ROA 0.8 5 ROE 0.82 5 Tobin's Q 0.84 5 3 Mission of the Board 0.85 7 Committees of the Board 0.87 7 Relationship to stakeholders 0.89 7 Financial affairs and auditing 0.93 7 Transparency 0.86 7 Code of ethics 0.89 7 Overall 0.86 Sources: Afolabi (2012, p.109) and Tornyeva & Wereko (2012, p.111).
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Prior studies provided evidence for entitled, and it will not harm their test-retest reliability of these instruments relationship with Ghana Stock Exchange, with coefficients of 0.925 (Black, Jang & Securities and Exchange Commission or Kim, 2003), 0.876 (Black et al., 2009), 0. any individual. The participants were also 891 (Ahmad, 2010), 0.901 (Tornyeva & informed that if any participant decided to Wereko, 2012), and 0.883 (Kowalewski, leave the study, the procedure was to either 2012). This is consistent with Sun (2011). telephone or email the researcher. Data Collection Procedures The secondary data comprised of the The first step of the implementation balance sheets and income statements of research study is creating the data collection listed companies, maintained by the Ghana tools to be used to collect essential study Company House and Ghana Stock data via a questionnaire (Kremlin, 2008). Exchange; informed consent was served on The study made use of both primary and GSE for collection of this data. secondary data. The primary data was The names of the participants will collected through a survey. The format of not be used when data from this study are the survey was a self-administered published. Every effort will be made to keep questionnaire. The participants in this their corporate governance, financial survey included: the Board Chairman, two performance, research records, and other other Non-Executive Directors, the Chief personal information confidential as per Executive Officer (CEO) and one other APA, (2002). The researcher took the Executive Director from the 30 selected following steps to keep information company. The total number of survey confidential and to protect the information participants was 150 (five participants from from unauthorized disclosure, tampering, or each selected listed company multiplied by damage: The research supervisor and the 30 selected listed companies). researcher were the only people that had The invitation to participate in the access to participants’ information. The data survey was sent out through e-mail and was described anonymously as data drawn further distributed letters. This was to make from a listed company on the Ghana Stock sure that the participants receive the Exchange. The data was not be shared with invitations as there was possibility that some any other individual or organization. Data of those emails could have gone into junk e- files were kept in a locked cabinet and the mail boxes and be deleted. This was to data kept on a computer which has a enhance the response rate. Responses to the password required for getting onto the survey were requested within 30 days of system. The researcher is the only person receiving the e-mails. The questionnaires who has access to the password for the were collected by post through self- computer. addressed envelopes provided and also The study followed the three basic personally by the researcher to maximize principles of respect for persons, the response rate. A total of 136 beneficence, and justice as defined by the questionnaires were received, representing Belmont report (Office of Human Subjects 90.67% response rate. Participation in this Research, 1979) and APA’s (2002) ethical study was voluntary as per APA (2002). principles of psychologists and code of Participants had the right not to participate conduct. Specifically, the study contained a at all or to leave the study at any time which clear and concise informed consent that was consistent with APA (2002). The informs the participants of the possible participants were informed that deciding not consequences of their participation. Clear to participate or choosing to leave the study and understandable language clearly will not result in any penalty or loss of communicated the risks and benefits of benefits to which the participants are participation along with complete assurance
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Corporate Governance and Firm Performance of participants’ confidentiality. The within expected range of one to two. During information gathered from the participants the processing and analysis of the data, was only used within the study in a secured AVG 2014 software was used to protect the database. The ethical considerations in the data from potential hackers from accessing data collection procedure for this study was the data. Upon completion of analyses, the cognisant of respect for persons, database file was securely storage and beneficence and justice, which was backed up on external hard drive. The data consistent with Office of Human Subjects was presented in the form of tables and Research, (1979). The informed consent charts for fast and easy understanding. form sent to the participants was the first Summary step in the agreement for participation, The present chapter discussed the incorporating APA’s ethical principles of research methodology adopted for this study psychologists and code of conduct (APA, to investigate the relationship between 2002). corporate governance and firm performance. Data Analyses The chapter re-stated the purpose of the Data analyses aim at addressing study which was to understand the research questions (Sun, 2011). Data relationship between corporate governance analysis according to Saunders et al (2009) practices and firm performance of listed is a procedure of examining, cleaning, companies on GSE. The chapter discussed converting, and demonstrating data with the the research design for the study which is objective of ascertaining useful information, consistent with the research ‘onion’ deriving inferences, and supporting designed by Saunders et al (2006). The decision-making. Data analysis has Saunders et al (2006) research ‘onion’ is manifold aspects and tactics, covering made up of six layers namely: philosophy, varied methods (analyses) (Saunders et al., approach, strategy, choice, time horizon, 2009). and techniques and procedures. The study The study employed four statistical adopted the positivism philosophy, analyses: descriptive statistics, correlational deductive approach, survey strategy, choice analysis, regression analysis and test of of quantitative method, longitudinal time hypothesis. The regression was to help horizon, and questionnaire as technique and establish the relationship between corporate procedure for collection of data for the governance and firm performance. In order study. The chapter further described: three to test the hypotheses, the regression variables for the dependent variable (firm statistics and Pearson’s correlation performance); six variables for the coefficients were employed. The study independent variable (corporate employed two-tail significant tests because governance); and five control variables. the hypotheses predicted non-directional of Furthermore, the chapter discussed the correlation. All the statistical analyses were model used in establishing the relationship parametric methods assuming the dataset to between the dependent and independent be normally distributed (Triola, 2009). Both variable and consequently stating the Excel and Statistical Package for the Social research questions and the relative Sciences (SPSS) were used to store, hypotheses tested. Population and Sampling organise and perform the statistical Strategy, research instrument which was a analyses. SPSS is a statistic software that questionnaire and validation of the contains analysis functions such as questionnaire to make sure that it accurately regression and correlational analysis (Sun, measures what it aimed to do, regardless of 2011). All data types were discrete data the responder, were discussed in this organised in rows for each participant's chapter. Finally, the procedures adopted in responses. A data integrity check was collection of the data and analyses were conducted to ensure that all data were discussed. The study employed four
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Corporate Governance and Firm Performance statistical analyses: descriptive statistics, to help establish the relationship between correlational analysis, regression analysis corporate governance and firm performance. and test of hypothesis. The regression was
CHAPTER 4: ANALYSIS AND PRESENTATION OF RESULTS
This chapter presented the analysis Majority of the respondents (96) and presentation of results of the survey. It were masters’ degree holders, representing comprised the description of the sample 71% of the total respondents. Doctorate demographics along with summary of degree holders were 40, representing 29%. results organised by research questions. The It is worth noting that all the respondents are comprehensive presentation of data highly educated, at least to tertiary level. delivered the evidence for accepting or Table 7: Sample Demographics: Industry rejecting each hypothesis. Industry No. of Firms % Demographic Statistics Manufacturing 13 43.33% Banking 8 26.67% The demographic categories of the Oil & Gas 3 10.00% respondents were based on gender, position Mining 2 6.67% Technology 1 3.33% in the firm, respondents’ educational level, Retail 1 3.33% type of industry, market capitalization, Publishing 1 3.33% revenue (sales) size of the firm, number of Insurance 1 3.33% Total 30 100.00% employees, and listing age of the firms. Each of these demographic categories was The sample was made up of 13 summarized in tabular format. In general, manufacturing firms, representing 43.33%. the gender demographic showed that a large Manufacturing firms thus formed the percentage of the participants were male, highest proportion of the sample by representing 71%. This is shown in Table 4. coincidence as guided by the selection Table 4: Sample Demographics: Gender criteria. This is also an indication that the Gender No. of Respondents % population (36 firms) was positively skewed Male 96 71% Female 40 29% towards the manufacturing sector. The next Total 136 100% significant industry in the sample that needs
Table 5: Sample Demographics: Position in the Firm mentioning was the banking industry. It Position No. of Respondents % accounted for 8 firms, representing 26.67%. Non-Executive Director 53 39% The above distribution of the firms is Chairman 29 21% CEO 28 21% depicted in Figure 4. Executive Director 26 19% Total 136 100%
Non-Executive Director position constituted the highest proportion of the participants, representing about 39%. This was followed closely by Chairman, CEO and Executive Director Positions, representing 21%, 21% and 19% respectively.
Table 6: Sample Demographics: Respondents’ Educational Level Educational Level No. of Respondents % First Degree 0 0% Masters’ Degree 96 71% Doctorate Degree 40 29% Total 136 100% Figure 4. Distribution of firms
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Table 8: Sample Demographics: Market Capitalization (US$ Table 10: Sample Demographics: Number of Employees (2013) Million - 2013) Number of Employees No. of Firms % Capitalisation (US$ Million - 2013) No. of Firms % < 1,000 10 33.33% < 212 8 26.67% 1,000 – 2,000 14 46.67% 212 - 425 13 43.33% > 2,000 6 20.00% > 425 9 30.00% Total 30 100.00% Total 30 100.00% Source: GSE 2013 Market Information Source: GSE 2013 Market Information. In the year 2013, 14 firms out of the In the year 2013, (the end point of sample of 30 firms, representing 46.67% the survey timeframe) 13 firms out of the employed 1,000 - 2,000 employees. Only 6 sample of 30 had market capitalization size firms (20%) employed more than 2,000 between US$212 - 425 (million), employees whilst 10 firms (33.33%) representing 43.33%. Only nine firms (30%) employed less than 1,000 employees. had market capitalization size greater than US$425 million. On the other side of the Table 11: Sample Demographics: Listing Age Listing Age No. of Firms % spectrum, eight firms had market 1 - 10 12 40.00% capitalization size less US$212 million, 11 - 15 5 16.67% 16 - 20 6 20.00% representing 26.67%. It is worth mentioning 21 - 25 7 23.33% that the market capitalisation of the firms Total 30 100.00% Source: GSE 2013 Market Information. was relatively small. It is apparent from Table 8 that the market capitalisation of 21 The sample consisted of 12 and 5 firms, representing 70% in the year 2013 did firms with listing ages ranging between 1-10 not exceed US$425 million. and 11-15 years respectively. These represented 40% and 16.67% of the sample Table 9: Sample Demographics: Revenue (Sales) (US$ Million - 2013) respectively. A total of six and seven firms Revenue (US$ Million - 2013) No. of Firms % also had listing ages ranging between 16-20 < 212 15 50% 212 - 425 9 30% and 21-25 years respectively. These > 425 6 20% accounted for 20% and 23.33% of the Total 30 100.% sample respectively. It is worth to know that Source: GSE 2013 Market Information. the seven firms with listing age 21-25 years In the year 2013, 15 firms out of the were among the maiden firms listed on GSE sample of 30 had revenue size less US$212 in 1990 when the exchange officially million, representing 50%. A sample of 9 commenced trading. firms (30%) had revenue size between Details of Analysis and Results US$212 - 425 million. Only 6 firms (20%) The Descriptive Statistics which had revenue size greater than US$425 described the main features of the data million. From Table 9, it is indicative that collected was shown in table 12. The main the revenue of 24 firms, representing 80% in features included: the number of the year 2013 did not exceed US$425 observations (N); minimum number of million. observations; maximum number of observations; mean of the distribution and the standard deviation of the distribution.
Table 12: Descriptive Statistics N Minimum Maximum Mean Std. Deviation ROA 10 0.02 0.06 0.044 0.0001 ROE 10 0.12 2.97 0.499 0.018 Tobin's Q 10 1.39 2.53 1.726 0.034 CGI 10 90.89 95.67 93.276 1.606 Control Variables 10 102.25 707.43 318.257 97.634 Valid N (listwise) 10
Table 12 showed that performance respectively. Their corresponding standard variables ROA, ROE and Tobin’s Q had deviations, which measure dispersion mean of 0.044, 0.499 and 1.726 (spread) of a given distribution around the
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mean were 0.001, 0.018 and 0.043 CVit = a set of control variables of firm i in respectively. These standard deviations time t; were relatively low, thus 2.27%, 3.61% and µit = the error term 1.97% of the means respectively. The lower Like any other theory, the linear the standard deviation the better the regression analysis is also based on certain measurement or performance, vice versa assumptions. Four assumptions were made (Bland & Altman, 1996). about this model as follows: The independent variables CGI and Assumption 1: The random error term µit control variables also had means of 93.276 had a mean equal to zero for each CGIit. and 318.257 respectively. Their This assumption simply states that the sum corresponding standard deviations were of the positive errors is equal to the sum of 1.606 and 97.634 respectively. The standard the negative errors, so the mean of all the deviation for CGI was relatively low, thus errors is zero. Thus, the mean value of µit is 1.72% of the mean. This means that the zero, the mean value of Pit for a given CGIit spread of the observations around the mean is equal toβ0i+ β1CGIit + β2CVit and it is was very close which is very good. The written Pit = β0i+ β1CGIit + β2CVit + µit standard deviation for the control variables (Mann, 2004). on the other hand, was relatively high, thus Assumption 2: The errors associated with 30.68% of the mean. This is symptomatic different observations were independent. that most of the observations of the control According to this assumption, the errors for variables were scattered far away from the any given two years’ CGI are independent mean. Thus there were many outliers in the (Mann, 2004). distribution for the control variables. The Assumption 3: For any given CGIit, the observations were therefore poorly distribution of the errors was normal. The distributed. corollary of this assumption is that the RQ1: Is there any relationship corporate governance index for the sampled between corporate governance and firm’s firm for the ten years under observation are performance in Ghana? Research question normally distributed (Mann, 2004). one investigated whether there is any Assumption 4: The distribution of relationship between corporate governance population errors for CGIit, had the same and firm’s performance in Ghana. To (constant) standard deviation. This answer this question, the researcher used assumption indicates that the spread of regression analysis where performance (P) points around the regression line is similar represented the dependent variable and for all the annual corporate governance Corporate Governance Index (CGI) and indices (Mann, 2004). Control Variables (CV) represented the The application of regression independent variables. Mathematically the analysis in answering this research question regression equation was given by: Pit = β0i+ was therefore based on the afore-mentioned β1CGIit + β2CVit + µit assumptions. Where: Using ROA as a performance Pit = performance of firm i in time t; measure. The results showed that the CGIit = a vector of corporate governance unstandardized regression coefficients B0, index of firm i in time t; B1 and B2 were 0.0218, 0.0397 and 0.0088 respectively (see Table 13).
Table 13: Regression Coefficients – ROA as performance measure Model Unstandardized Standardized t sig. Coefficients Coefficients B Std. Error Beta 1 (Constant) 0.0218 0.0051 4.2745 0.0523 CGI (ROA) 0.0397 0.0127 0.0206 3.126 0.0482 Control Variables 0.0088 0.0013 0.5407 6.7692 0.0541 a. Dependent Variable: ROA
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The regression equation therefore generally considered good. The regression became: Pit = 0.0218+ 0.0397CGIit + result therefore established a positive 0.0088CVit + µit. relationship between corporate governance This means that in absence of and firm performance of the listed corporate governance and the set of control companies on GSE. From Table 13, the variables, the firm would make a ROA of level of significance for the regression 0.0218 (2.18%) which is smaller than the coefficients B0, B1 and B2 were 0.0523, mean of 0.004 (4.4%) in Table 12. But in 0.0482 and 0.0541 respectively. These presence of corporate governance, the firm levels of significances mean that the would increase its ROA by 0.0397 (3.97%) probabilities that the coefficients B0, B1 of the corporate governance index (CGI) and B2 occurred by chance were 0.0523, and also in the presence of the set of control 0.0482 and 0.0541 respectively. This means variables, the firm stands to increase its 5.23%, 4.82% and 5.41% of the regression ROA by 0.0088 (0.88%) of the value of the coefficients B0, B1 and B2 respectively control variables. occurred by chance and there were 94.77%, Given the mean values of CGI and 95.18% and 94.59% precision of the control variables as 93.276 and 318.257 as occurrences respectively. A very low in Table 12, and using the regression significance value, usually 0.05 (5%) means equation , the firm would achieve ROA (Pit ) that the coefficient is unlikely to have = 2.18% + 3.97% (93.276) + 0.88% occurred by chance a lone (Saunders et al., (318.257) = 8.68%. The result implies that if 2003). The impact of the relationship as a firm has corporate governance principles established in the regression equation was in place, coupled with the set of the control measured by the regression coefficient R- variables, it would achieve a ROA above the Square. From the regression analysis R- average of 4.40% in Table 12. Crosson et Square was 0.767 (see Table 14). al., (2008) averred that ROAs over 5% are
Table 14: Regression Statistics – Model Summary (ROA as a measure of performance) Model R R-Square Adjusted R-Square Std. Error of the Estimate 1 1 0.876a 0.767 0.747 0.01049 a. Predictors: (Constant), Control Variables, CGI
The R-Square showed how much of Square indicated. The Adjusted R-Square the change in the target variable figure (74.7%) despites lower than that of (performance) was explained by the the R-Square (76.7%) still showed predictor variables (CGI and control statistically significant how much impact variables). The result indicated that corporate governance and the set of control corporate governance and the set of control variables had on firm performance of the variables accounts for 76.7% of any change listed firms on GSE. firm performance. The result from Table 14 Hypothesis Testing - H1O: There is indicates that Adjusted R-Square was 0.747 no relationship between corporate (74.7%). This means that if the most governance and firm’s performance in extreme observations that still lie within the Ghana (using ROA as a measure of lower and upper limits of the data set (the performance).The researcher tested survey data for this study) were attuned or hypothesis to agree or disagree with positive brought closer to the line of best fit (the relationship established by the regression regression line) to minimize their influence analysis: on the result, corporate governance and the H1O: There is no relationship set of control variables would have between corporate governance and accounted for 74.7% of any change in firm firm’s performance in Ghana. performance and not 76.7 % as the R- H1A: There is a relationship
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between corporate governance and (3.126 > 2.365), the null hypothesis that firm’s performance in Ghana. there is no relationship between corporate The test statistic (ts) was the governance and firm’s performance in coefficient of CGI (B1) divided by its Ghana was rejected and the alternative standard error (SEB1) (see Table 13) hypothesis accepted at 95% level of ie ts = B1/SEB1 significance that there is a relationship ts = 0.0397 / 0.0127 between corporate governance and firm’s ts = 3.126 (See Table 13) performance in Ghana. The result of the test The critical value (tc) = 2.365 for t- of hypothesis supported that of the distribution of seven degrees of freedom regression analysis that there is a strong (number of observations (10) minus three positive relationship between corporate variables) at 0.05 (5%) significance level, governance and firm performance of listed two tailed test. The researcher used firms on GSE. students’-distribution because the number of Using ROE as a performance observed variables (ten years corporate measure. The result showed that the governance indices) is less than 30. unstandardized regression coefficients B0, Decision Rule. Accept Ho if ts is B1 and B2 were 0.1076, 0.1548 and 0.0957 less than tc, reject Ho otherwise. respectively (see Table 15). Result. Since the test statistic (ts) was greater than the critical value (tc)
Table 15: Regression Coefficients – ROE as performance measure Model Unstandardized Standardized t sig. Coefficients Coefficients B Std. Error Beta (Constant) 0.1076 0.0293 3.6724 0.0571 1 CGI (ROE) 0.1548 0.0241 0.0612 6.4232 0.0373 Control Variables 0.0957 0.0133 0.5194 7.1955 0.0484 a. Dependent Variable: ROE
The regression equation therefore implies that if a firm has corporate became: Pit = 0.1076+ 0.1548CGIit + governance principles in place, coupled with 0.0957CVit + µit. the set of the control variables, it would This means that in absence of achieve a ROE above the average 49.87% in corporate governance and the set of control Table 12. The regression result therefore variables, the firm would make a ROE of established a positive relationship between 0.1076 (10.76%) which is smaller than the corporate governance and firm performance mean of 0.4987 (49.87%) in Table 12. But of the listed companies on GSE. From Table in presence of corporate governance, the 15, the level of significance for the firm would increase its ROE by 0.1548 regression coefficients B0, B1 and B2 were (15.48%) of the corporate governance index 0.0571, 0.0373 and 0.0484 respectively. (CGI) and also in the presence of the set of These imply that the probabilities that the control variables, the firm stands to increase coefficients B0, B1 and B2 occurred by its ROE by 0.0957 (9.57%) of the value of chance were 0.0571, 0.0373 and 0.0484 the control variables. Given the mean values respectively. These results mean 5.71%, of CGI and control variables as 93.276 and 3.73% and 4.84% of the regression 318.257 as in Table 12, and using the coefficients B0, B1 and B2 respectively regression equation , the firm would achieve occurred by chance and there were 94.29%, ROE (Pit ) = 10.76%+ 15.48% (93.276) + 96.27% and 95.16% precision of the 9.57% (318.257) = 55.66%. Randall and occurrences respectively. From the Gary (2006) asserted that ROEs of 15-20% regression analysis R-Square was 0.731 (see are generally considered good. The result Table 16).
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Table 16: Regression Statistics – Model Summary (ROA as a measure of performance) Model R R-Square Adjusted R-Square Std. Error of the Estimate 1 1 0.855a 0.731 0.709 0.95746 a. Predictors: (Constant), Control Variables, CGI
The result indicated that corporate The test statistic (ts) was the governance and the set of control variables coefficient of CGI (B1) divided by its accounts for 73.1% of any change firm standard error (SEB1) (see Table 15) performance. The result from the Table 16 ie ts = B1/SEB1 indicates that Adjusted R-Square was 0.709 ts = 0.1548 / 0.0241 (70.9%). This means that if the most ts = 6.4232 (See Table 15) extreme observations that still lie within the The critical value (tc) = 2.365 for t- lower and upper limits of the data set (the distribution of seven degrees of freedom survey data for this study) were attuned or (number of observations (10) minus three brought closer to the line of best fit (the variables) at 0.05 (5%) significance level, regression line) to minimize their influence two tailed test. The researcher used Students on the result, corporate governance and the t- distribution because the number of set of control variables would have observed variables (ten years corporate accounted for 70.9% of any change in firm governance indices) is less than 30. performance and not 73.1 % as the R- Decision Rule. Accept Ho if ts is Square indicated. The Adjusted R-Square less than tc, reject Ho otherwise. figure (70.9%) despites lower than that of Result. Since the test statistic (ts) the R-Square (73.1%) still shows was greater than the critical value (tc) statistically significant how much impact (6.4232 > 2.365), the null hypothesis that corporate governance and the set of control there is no relationship between corporate variables had on firm performance of the governance and firm’s performance in listed firms on GSE. Ghana was rejected and the alternative Hypothesis Testing - H1O: There is hypothesis accepted at 95% level of no relationship between corporate significance that there is a relationship governance and firm’s performance in between corporate governance and firm’s Ghana (using ROE as a measure of performance in Ghana. The result of the test performance). The researcher tested of hypothesis sustained that of the hypothesis to agree or disagree with positive regression analysis that there is a strong relationship established by the regression positive relationship between corporate analysis: governance and firm performance of listed H1O: There is no relationship firms on GSE. between corporate governance and Using Tobin’s Q as a performance firm’s performance in Ghana. measure. The result showed that the H1A: There is a relationship unstandardized regression coefficients B0, between corporate governance and B1 and B2 were 0.9465, 0.0068 and 0.0031 firm’s performance in Ghana. respectively (see Table 17).
Table 17: Regression Coefficients - Tobin’s Q as performance measure Model Unstandardized Standardized t sig. Coefficients Coefficients B Std. Error Beta (Constant) 0.9465 0.2320 4.0797 0.0432 1 CGI (Tobin’s Q) 0.0068 0.0018 0.0853 3.7778 0.0337 Control Variables 0.0031 0.0012 0.4963 2.5833 0.0456 a. Dependent Variable: Tobin’s Q
The regression equation therefore 0.0031CVit + µit. This means that in absence became: Pit = 0.9465+ 0.0068CGIit + of corporate governance and the set of
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Corporate Governance and Firm Performance control variables, the firm’s Tobin’s Q corporate governance principles in place, would be 0.9465, which is smaller than the coupled with the set of the control variables, mean of 1.7257 in Table 12. But in presence it would achieve a Tobin’s Q above the of corporate governance, the firm would average of 1.7257 in Table 12. The increase its Tobin’s Q by 0.0068 (0.68%) of regression result therefore established a the corporate governance index (CGI) and positive relationship between corporate also in the presence of the set of control governance and firm performance of the variables, the firm stands to increase its listed companies on GSE. From Table 17, Tobin’s Q by 0.0031 (0.31%) of the value of the level of significance for the regression the control variables. Given the mean values coefficients B0, B1 and B2 were 0.0432, of CGI and control variables as 93.276 and 0.0337 and 0.0456 respectively. These 318.257 as in Table 12, and using the imply that the probabilities that the regression equation, the firm would achieve coefficients B0, B1 and B2 occurred by Tobin’s Q (Pit ) = 0.9465+ 0.0068(93.276) + chance were 0.0432, 0.0337 and 0.0456 0.0031(318.257) = 2.5674. Firms with high respectively. These results mean 4.32%, Tobin’s Qs (greater than 1.00) have been 3.37% and 4.56% of the regression found to have better investment coefficients B0, B1 and B2 respectively opportunities, have higher growth potential, occurred by chance and there were 95.68%, and indicate management has performed 96.63% and 95.44% precision of the well with the assets under its command occurrences respectively. From the (Wolfe & Sauaia, 2003; Tobin & Brainard, regression analysis R-Square was 0.753 (see 1968; Tobin, 1969; Lang, Stulz & Walkling, Table 18). 1989). The result implies that if a firm has
Table 18: Regression Statistics – Model Summary (Tobin’s Q as a measure of performance) Model R R-Square Adjusted R-Square Std. Error of the Estimate 1 1 0.868a 0.753 0.725 0.19190 a. Predictors: (Constant), Control Variables, CGI
The result indicated that corporate Hypothesis Testing - H1O: There is governance and the set of control variables no relationship between corporate accounts for 75.3% of any change firm governance and firm’s performance in performance. The result from the Table 18 Ghana (using Tobin’s Q as a measure of indicates that Adjusted R-Square was 0.725 performance). The researcher tested (72.5%). This means that if the most hypothesis to agree or disagree with positive extreme observations that still lie within the relationship established by the regression lower and upper limits of the data set (the analysis: survey data for this study) were attuned or H1O: There is no relationship brought closer to the line of best fit (the between corporate governance and regression line) to minimize their influence firm’s performance in Ghana. on the result, corporate governance and the H1A: There is a relationship set of control variables would have between corporate governance and accounted for 72.5% of any change in firm firm’s performance in Ghana. performance and not 75.3 % as the R- The test statistic (ts) was the Square indicated. The Adjusted R-Square coefficient of CGI (B1) divided byits figure (72.5%) even though lower than that standard error (SEB1) (see Table 17) of the R-Square (75.3%) still shows ie ts = B1/SEB1 statistically significant how much impact ts = 0.0068 / 0.0018 corporate governance and the set of control ts = 3.7778 (See Table 17) variables had on firm performance of the The critical value (tc) = 2.365 for t- listed firms on GSE. distribution of seven degrees of freedom
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(number of observations (10) minus three and firm performance of listed firms on variables) at 0.05 (5%) significance level, GSE. two tailed test. The researcher used Students Correlation Analysis. The result of t-distribution because the number of Pearson Correlation analysis supported the observed variables (ten years corporate results of the regression analysis with strong governance indices) is less than 30. positive correlation coefficients. The result Decision Rule. Accept Ho if ts is showed that the three performance less than tc, reject Ho otherwise. measures: ROA; ROE; and Tobin’s Q were Result. Since the test statistic (ts) all strongly and positively correlated with was greater than the critical value (tc) CGI with correlation coefficients of 0.876, (3.7778> 2.365), the null hypothesis that 0.855 and 0.868 respectively. Similarly, there is no relationship between corporate these performance measures were also governance and firm’s performance in positively correlated with the set of control Ghana was rejected and the alternative variables with correlation coefficients of hypothesis accepted at 95% level of 0.560, 0.512 and 0.569 respectively. These significance that there is a relationship are shown in Table 19.A correlation between corporate governance and firm’s coefficient greater than 0.5 signifies strong performance in Ghana. The result of the test association (Saunders et al., 2003). It is of hypothesis affirmed that of the regression therefore apparent that there exists a very analysis that there is a strong positive strong positive relationship between relationship between corporate governance corporate governance and firm performance of listed firms in Ghana.
Table 19: Correlations Analysis - Corporate governance and firm performance ROA ROE Tobin's Q CGI Control Variables Pearson Correlation 1 0.476 0.325 0.876 0.560 ROA Sig. (2-tailed) 0.834 0.359 0.044 0.092 N 10 10 10 10 10 Pearson Correlation 0.476 1 0.237 0.855 0.512 ROE Sig. (2-tailed) 0.834 0.509 0.046 0.057 N 10 10 10 10 10 Pearson Correlation 0.325 0.237 1 0.868 0.569 Tobin's Q Sig. (2-tailed) 0.359 0.509 0.037 0.640 N 10 10 10 10 10 Pearson Correlation 0.876 0.855 0.868 1 0.961** CGI Sig. (2-tailed) 0.044 0.046 0.037 0.020 N 10 10 10 10 10 Pearson Correlation 0.560 0.512 0.569 0.961** 1 Control Variables Sig. (2-tailed) 0.092 0.057 0.640 0.020 N 10 10 10 10 10 **. Correlation is significant at the 0.01 level (2-tailed).
Table 20: Correlation Analysis - Ensuring a basis for an effective corporate governance framework (VAR 1) and firm performance. ROA ROE Tobin's Q VAR 1 Pearson Correlation 1 0.499 0.525 0.856 ROA Sig. (2-tailed) 0.092 0.059 0.045 N 10 10 10 10 Pearson Correlation 0.499 1 0.501 0.845 ROE Sig. (2-tailed) 0.092 0.078 0.034 N 10 10 10 10 Pearson Correlation 0.525 0.501 1 0.875 Tobin's Q Sig. (2-tailed) 0.059 0.078 0.025 N 10 10 10 10 Pearson Correlation 0.856 0.845 0.875 1 VAR 1 Sig. (2-tailed) 0.045 0.034 0.025 N 10 10 10 10
RQ1a: Does ensuring a basis for investigated whether ensuring a basis for an an effective corporate governance effective corporate governance framework framework in a firm in Ghana affect in a firm in Ghana affect performance. The performance? Research question RQ1a, result of correlation analysis in Table 20
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Corporate Governance and Firm Performance showed strong positive correlation Decision Rule. Accept Ho if ts is coefficient between ensuring a basis for an less than tc, reject Ho otherwise. effective corporate governance framework Result. The test statistic (ts) for in a firm in Ghana and firm performance. VAR 1 and ROA, VAR 1 and ROE and The correlation coefficient between the VAR 1 and Tobin’s Q were 4.683, 4.469 corporate governance variable and and 5.112 respectively. They were all performance measurement variables ROA, greater than the critical value (tc) 0.632, and ROE, and Tobin’s Q were 0.856, 0.845 and are statistically significant. The null 0.875 respectively. hypothesis that ensuring a basis for an Hypothesis Testing - H1aO: effective corporate governance framework Ensuring a basis for an effective corporate in a firm in Ghana does not affect governance framework in a firm in Ghana performance was rejected and the does not affect performance. alternative hypothesis accepted at 95% level H1aO: Ensuring a basis for an of significance that ensuring a basis for an effective corporate governance effective corporate governance framework framework in a firm in Ghana does in a firm in Ghana does affect performance. not affect performance. The result of the test of hypothesis H1aA: Ensuring a basis for an collaborated that of the correlation analysis effective corporate governance that ensuring a basis for an effective framework in a firm in Ghana does corporate governance framework in a firm affect performance. in Ghana does affect performance. The test statistic (ts) for correlation RQ1b: Does the rights of coefficient was defined as: shareholders in a firm in Ghana affect ts = t = r (n-2/1-r2)0.5, n = number of performance? Research question RQ1b, observations (10), r = correlation coefficient sought to find out whether the rights of VAR1 and ROA: ts = 0.856 (10-2/1- shareholders in a firm in Ghana affect 0.8562)0.5 = 4.683 performance. The result of correlation VAR 1 and ROE: ts = 0.845 (10-2/1- analysis in Table 21 showed strong positive 0.8452)0.5 = 4.469 correlation coefficient between the rights of VAR 1 and Tobin’s Q: ts = 0.875 (10-2/1- shareholders in a firm in Ghana and firm 0.8752)0.5 = 5.112 performance. The correlation coefficient The critical value (tc) = 0.632fromr- between the rights of shareholders and table of eight degrees of freedom (number performance measurement variables ROA, of observations (10) minus two variables) at ROE, and Tobin’s Q were 0.736, 0.768 and 0.05 (5%) significance level, two tailed test. 0.797 respectively.
Table 21: Correlation Analysis - the rights of shareholders (VAR 2) and firm performance. ROA ROE Tobin's Q VAR 2 Pearson Correlation 1 0.509 0.625 0.736 ROA Sig. (2-tailed) 0.092 0.059 0.031 N 10 10 10 10 Pearson Correlation 0.590 1 0.501 0.768 ROE Sig. (2-tailed) 0.092 0.078 0.034 N 10 10 10 10 Pearson Correlation 0.625 0.501 1 0.797 Tobin's Q Sig. (2-tailed) 0.059 0.078 0.056 N 10 10 10 10 Pearson Correlation 0.736 0.768 0.797 1 VAR 2 Sig. (2-tailed) 0.031 0.034 0.056 N 10 10 10 10
Hypothesis Testing - H1bO: The a firm in Ghana do not affect rights of shareholders in a firm in Ghana performance. do not affect performance. H1bA: The rights of shareholders in H1bO: The rights of shareholders in a firm in Ghana do affect
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Corporate Governance and Firm Performance
performance. a firm in Ghana do not affect performance The test statistic (ts) for the correlation was rejected and the alternative hypothesis coefficient was defined as: accepted at 95% level of significance that ts = t = r (n-2/1-r2)0.5, n = number of the rights of shareholders in a firm in Ghana observations (10), r = correlation coefficient do affect performance. The result of the test VAR 2 and ROA: t = 0.736 (10-2/1- of hypothesis upheld that of the correlation 0.7362)0.5 = 3.075 analysis. VAR 2 and ROE: t = 0.768 (10-2/1- RQ1c: Does fair and equal 0.7682)0.5 = 3.392 treatment of shareholders in a firm in VAR 2 and Tobin’s Q: t = 0.797 (10-2/1- Ghana affect performance? Research 0.7972)0.5 = 3.732 question RQ1c investigated whether fair and The critical value (tc) = 0.632fromr- equal treatment of shareholders in a firm in table of eight degrees of freedom (number Ghana affect performance. The result of of observations (10) minus two variables) at correlation analysis in Table 22 showed 0.05 (5%) significance level, two tailed test. strong positive correlation coefficient Decision Rule. Accept Ho if ts is between fair and equal treatment of less than tc, reject Ho otherwise. shareholders in a firm in Ghana and firm Result. The test statistic (ts) for performance. The correlation coefficient VAR 2 and ROA, VAR 2 and ROE and between fair and equal treatment of VAR 2 and Tobin’s Q were 3.075, 3.392 shareholders and performance measurement and 3.732 respectively. They were all variables ROA, ROE, and Tobin’s Q were greater than the critical value (tc) 0.632, and 0.841, 0.812 and 0.853 respectively as were statistically significant. The null shown in Table 22. hypothesis that the rights of shareholders in
Table 22: Correlation Analysis - fair and equal treatment of shareholders (VAR 3) and firm performance. ROA ROE Tobin's Q VAR 3 Pearson Correlation 1 0.649 0.525 0.841 ROA Sig. (2-tailed) 0.092 0.059 0.036 N 10 10 10 10 Pearson Correlation 0.649 1 0.561 0.812 ROE Sig. (2-tailed) 0.092 0.057 0.041 N 10 10 10 10 Pearson Correlation 0.525 0.561 1 0.853 Tobin's Q Sig. (2-tailed) 0.059 0.057 0.024
N 10 10 10 10
Pearson Correlation 0.841 0.812 0.853 1 VAR 3 Sig. (2-tailed) 0.036 0.041 0.024 N 10 10 10 10
Hypothesis Testing - H1cO: Fair VAR 3 and ROA: t = 0.841 (10-2/1- and equal treatment of shareholders in a 0.8412)0.5 = 4.397 firm in Ghana does not affect VAR 3 and ROE: t = 0.812 (10-2/1- performance. 0.8122)0.5 = 3.935 H1cO: Fair and equal treatment of VAR 3 and Tobin’s Q: t = 0.853 (10-2/1- shareholders in a firm in Ghana does 0.8532)0.5 = 4.623 not affect performance. The critical value (tc) = 0.632fromr- H1cA: Fair and equal treatment of table of eight degrees of freedom (number shareholders in a firm in Ghana does of observations (10) minus two variables) at affect performance. 0.05 (5%) significance level, two tailed test. The test statistic (ts) for the correlation Decision Rule. Accept Ho if ts is coefficient was defined as: less than tc, reject Ho otherwise ts = t = r (n-2/1-r2)0.5, n = number of Result. The test statistic (ts) for observations (10), r = correlation coefficient VAR 3 and ROA, VAR 3 and ROE and VAR 3 and Tobin’s Q were 4.397, 3.935
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Corporate Governance and Firm Performance and 4.623 respectively. They were all affect performance? Research question greater than the critical value (tc) 0.632, and RQ1d explored whether stakeholders in were statistically significant. The null corporate governance in a firm in Ghana hypothesis that fair and equal treatment of affect performance. The result of correlation shareholders in a firm in Ghana does not analysis in Table 23 demonstrated strong affect performance was rejected and the positive correlation coefficient between alternative hypothesis accepted at 95% level stakeholders in corporate governance in a of significance that fair and equal treatment firm in Ghana and firm performance. The of shareholders in a firm in Ghana does correlation coefficient between stakeholders affect performance. The result of the test of and performance measurement variables hypothesis agreed with that of the ROA, ROE, and Tobin’s Q were 0.742, correlation analysis. 0.739 and 0.789 respectively as shown in RQ1d: Do stakeholders in Table 23. corporate governance in a firm in Ghana
Table 23: Correlation Analysis - stakeholders in corporate governance (VAR 4) and firm performance. ROA ROE Tobin's Q VAR 4 Pearson Correlation 1 0.509 0.525 0.742 ROA Sig. (2-tailed) 0.052 0.035 0.025 N 10 10 10 10 Pearson Correlation 0.509 1 0.517 0.739 ROE Sig. (2-tailed) 0.052 0.378 0.292 N 10 10 10 10 Pearson Correlation 0.525 0.517 1 0.789 Tobin's Q Sig. (2-tailed) 0.035 0.378 0.052 N 10 10 10 10 Pearson Correlation 0.742 0.739 0.789 1 VAR 4 Sig. (2-tailed) 0.025 0.292 0.052 N 10 10 10 10
Hypothesis Testing - H1dO: The Result. The test statistic (ts) for stakeholders in corporate governance in a VAR 4 and ROA, VAR 4 and ROE and firm in Ghana does not affect VAR 4 and Tobin’s Q were 3.131, 3.103 performance. and 3.632 respectively. They were all H1dO: The stakeholders in corporate greater than the critical value (tc) 0.632,and governance in a firm in Ghana does not were statistically significant. The null affect performance. hypothesis that stakeholders in corporate H1dA: The stakeholders in corporate governance in a firm in Ghana does not governance in a firm in Ghana does affect performance was rejected and the affect performance. alternative hypothesis accepted at 95% level The test statistic (ts) for the correlation of significance that stakeholders in coefficient was defined as: corporate governance in a firm in Ghana ts = t = r (n-2/1-r2)0.5, n = number of does affect performance. The result of the observations (10), r = correlation coefficient test of hypothesis collaborated that of the VAR 4 and ROA: t = 0.742(10-2/1- correlation analysis. 0.7422)0.5 = 3.131 RQ1e: Does disclosure in firm’s VAR 4 and ROE: t = 0.739 (10-2/1- financial statement in Ghana affect 0.7392)0.5 = 3.103 performance? Research question RQ1e VAR 4 and Tobin’s Q: t = 0.789 (10-2/1- sought whether disclosure in firm’s 0.7892)0.5 = 3. 632 financial statement in Ghana affect The critical value (tc) = 0.632 from performance. Correlation analysis result in r-table of eight degrees of freedom (number Table 24 demonstrates strong positive of observations (10) minus two variables). correlation coefficient between disclosure in Decision Rule. Accept Ho if ts is firm’s financial statement in Ghana and firm less than tc, reject Ho otherwise. performance. The correlation coefficient
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Corporate Governance and Firm Performance between disclosure and performance Tobin’s Q were 0.842, 0.837 and 0.875 measurement variables ROA, ROE, and respectively as shown in Table 24.
Table 24: Correlation Analysis - disclosure in firm’s financial statement (VAR 5) and firm performance. ROA ROE Tobin's Q VAR 5 Pearson Correlation 1 0.549 0.556 0.842 ROA Sig. (2-tailed) 0.038 0.059 0.046 N 10 10 10 10 Pearson Correlation 0.549 1 0.501 0.837 ROE Sig. (2-tailed) 0.042 0.078 0.057 N 10 10 10 10 Pearson Correlation 0.556 0.501 1 0.875 Tobin's Q Sig. (2-tailed) 0.059 0.078 0.025 N 10 10 10 10 Pearson Correlation 0.842 0.837 0.875 1 VAR 5 Sig. (2-tailed) 0.046 0.057 0.025 N 10 10 10 10
Hypothesis Testing - H1eO: The critical value (tc) = 0.632 from Disclosure in firm’s financial statement in r-table of eight degrees of freedom (number Ghana does not affect performance. of observations (10) minus two variables) at H1eO: Disclosure in firm’s financial 0.05 (5%) significance level, two tailed test. statement in Ghana does not affect Decision Rule. Accept Ho if ts less performance. than tc, reject Ho otherwise. H1eA: Disclosure in firm’s financial Result. The test statistic (ts) for statement in Ghana does affect VAR 5 and ROA, V|AR 5 and ROE and performance. VAR 5 and Tobin’s Q were 4.415, 4.326 The test statistic (ts) for the correlation and 5.112 respectively. They were all coefficient was defined as: greater than the critical value (tc) 0.632, and ts = t = r (n-2/1-r2)0.5, n = number of were statistically significant. The null observations (10), r = correlation coefficient hypothesis that disclosure in firm’s financial VAR 5 and ROA: t = 0.842(10-2/1- statement in Ghana does not affect 0.8422)0.5 = 4.415. performance was rejected and the VAR 5 and ROE: t = 0.837 (10-2/1- alternative hypothesis accepted at 95% level 0.8372)0.5 = 4.326 of significance that disclosure in firm’s VAR 5 and Tobin’s Q: t = 0.875 (10-2/1- financial statement in Ghana does affect 0.8752)0.5 = 5.112 performance. The result of the test of hypothesis supported that of the correlation analysis.
Table 25: Correlation Analysis - effective fulfilment of responsibilities of Board of Directors (VAR 6) and firm performance. ROA ROE Tobin's Q VAR 6 Pearson Correlation 1 0.665 0.532 0.798 ROA Sig. (2-tailed) 0.034 0.059 0.011 N 10 10 10 10 Pearson Correlation 0.665 1 0.567 0.806 ROE Sig. (2-tailed) 0.034 0.054 0.047 N 10 10 10 10 Pearson Correlation 0.525 0.567 1 0.854 Tobin's Q Sig. (2-tailed) 0.059 0.054 0.035 N 10 10 10 10 Pearson Correlation 0.798 0.806 0.854 1 VAR 6 Sig. (2-tailed) 0.011 0.047 0.035 N 10 10 10 10
RQ1f: Do effective fulfilment of responsibilities of Board of Directors in a responsibilities of Board of Directors in a firm in Ghana affect performance. firm in Ghana affect performance? Correlation analysis result in Table 25 Research question RQ1f investigated demonstrates strong positive correlation whether effective fulfilment of coefficient between effective fulfilment of
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Corporate Governance and Firm Performance responsibilities of Board of Directors in a The critical value (tc) = 0.632 from firm in Ghana and firm performance. The r-table of eight degrees of freedom (number correlation coefficient between effective of observations minus two variables) at 0.05 fulfilment of responsibilities of Board of (5%) significance level, two tailed test. Directors and performance measurement Decision Rule. Accept Ho if ts is variables ROA, ROE, and Tobin’s Q were less than tc, reject Ho otherwise. 0.798, 0.806 and 0.854 respectively as Result. The test statistic (ts) for shown in Table 25. VAR 6 and ROA, V|AR 6 and ROE and Hypothesis Testing - H1fO: VAR 6 and Tobin’s Q were 3.745, 3.851 Effective fulfilment of responsibilities of and 4.643 respectively. They were all Board of Directors in a firm in Ghana does greater than the critical value (tc) 0.632, and not affect performance. were statistically significant. The null H1fO: Effective fulfilment of hypothesis that effective fulfilment of responsibilities of Board of Directors responsibilities of Board of Directors in a in a firm in Ghana does not affect firm in Ghana does not affect performance performance. was rejected and the alternative hypothesis H1fA: Effective fulfilment of accepted at 95% level of significance that responsibilities of Board of Directors effective fulfilment of responsibilities of in a firm in Ghana does affect Board of Directors in a firm in Ghana does performance. affect performance. The result of the test of The test statistic (ts) for the correlation hypothesis affirmed that of the correlation coefficient was defined as: analysis. ts = t = r (n-2/1-r2)0.5, n = number of RQ2: Is there any relationship observations (10), r = correlation coefficient between corporate governance VAR 6 and ROA: t = 0.798(10-2/1- framework of Ghana and OECD 0.7982)0.5 = 3.745 principles of corporate governance? The VAR 6 and ROE: t = 0.806(10-2/1- research question RQ2 aimed at establishing 0.8062)0.5 = 3.851 whether there is any relationship between VAR 6 and Tobin’s Q: t = 0.854(10-2/1- corporate governance framework of Ghana 0.8542)0.5 = 4.643 and OECD principles of corporate governance. Table 26 shows the descriptive statistics of the two variables.
Table 26: Descriptive Statistics - Corporate governance framework of Ghana and OECD principles of corporate governance N Minimum Maximum Mean Std. Deviation CGI of Ghana 10 90.89 95.67 93.276 1.606 CGI of OECD 10 95.00 100.00 97.48 1.674 Valid N (list wise) 10
From Table 26, corporate corresponding standard deviations were governance framework of Ghana and OECD 1.606 and 1.674 respectively. These were principles of corporate governance had relatively very small, implying that the corporate governance index (CGI) means of distributions were very close around the 93.276 and 97.480 respectively. Their mean.
Table 27: Correlation Analysis - Corporate governance framework of Ghana and OECD principles of corporate governance CGI of Ghana CGI of OECD Pearson Correlation 1 0.926** CGI of Ghana Sig. (2-tailed) 0.013 N 10 10 Pearson Correlation 0.926** 1 CGI of OECD Sig. (2-tailed) 0.013 N 10 10 **. Correlation is significant at the 0.01 level (2-tailed).
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Correlation analysis result in Table Tobin’s Q established strong positive 27 established strong positive correlation relationship between corporate governance coefficient between corporate governance and firm performance of the listed framework of Ghana and OECD principles companies on GSE. The impact of the of corporate governance. The correlation relationship as established in the regression coefficient between the two variables was equations, measured by the regression 0.926. coefficient R-Square were 0.767, 0.731 and Hypothesis Testing - H2O: There is 0.753 respectively. The result of the Pearson no relationship between corporate Correlation analysis supported the result of governance framework of Ghana and the regression analysis with strong positive OECD principles of corporate governance. correlation coefficients. The result showed H2O: There is no relationship between that the three performance measures: ROA; corporate governance framework of ROE; and Tobin’s Q were all strongly and Ghana and OECD principles of positively correlated with CGI with corporate governance. correlation coefficients of 0.876, 0.855 and H2A: There is a relationship between 0.868 respectively. Similarly, these corporate governance framework of performance measures were also positively Ghana and OECD principles of correlated with the set of control variables corporate governance. with correlation coefficients of 0.560, 0.512 The test statistic (ts) for the correlation and 0.569 respectively. The test of coefficient was defined as: hypothesises carried out using ROA, ROE ts = t = r (n-2/1-r2)0.5, n = number of and Tobin’s Q as performance measures had observations (10), r = correlation coefficient test statistics 3.126, 6.4232, and 3.7778 ts = t = 0.926(10-2/1-0.9262)0.5 = 6.938 respectively. These were greater than the The critical value (tc) = 0.632fromr- critical value 2.365 and statistically table of eight degrees of freedom (number significant, hence the null hypothesises that of observations (10) minus two variables) at there is no relationship between corporate 0.05 (5%) significance level, two tailed test. governance and firm’s performance in Decision Rule. Accept Ho if ts is Ghana were rejected and the alternative less than tc, reject Ho otherwise. hypothesises accepted at 95% level of Result. The test statistic (ts) 6.938 significance that there is a relationship was greater than the critical value (tc) 0.632, between corporate governance and firm’s and is statistically significant. The null performance in Ghana. hypothesis that there is no relationship Research question 1a (RQ1a) sought between corporate governance framework to find out whether ensuring a basis for an of Ghana and OECD principles of corporate effective corporate governance framework governance was rejected and the alternative in a firm in Ghana affect performance. The hypothesis accepted at 95% level of result of correlation analysis showed strong significance that there is a relationship positive correlation coefficient between between corporate governance framework ensuring a basis for an effective corporate of Ghana and OECD principles of corporate governance framework in a firm in Ghana governance.The result of the test of and firm performance. The correlation hypothesis confirmed that of the correlation coefficient between the corporate analysis. governance variable and performance Summary of Results measurement variables ROA, ROE, and Research question 1 (RQ1) Tobin’s Q were 0.856, 0.845 and 0.875 investigated whether there is any respectively. The test of hypothesises relationship between corporate governance carried out using ROA, ROE and Tobin’s Q and firm’s performance in Ghana. The as performance measures had test regression results of ROA, ROE and statistics4.683, 4.469 and 5.112
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Corporate Governance and Firm Performance respectively. They were all greater than the 4.623 respectively. They were all greater critical value (tc) 0.632, and were than the critical value (tc) 0.632, and were statistically significant. The null hypothesis statistically significant. The null hypothesis that ensuring a basis for an effective that fair and equal treatment of shareholders corporate governance framework in a firm in a firm in Ghana does not affect in Ghana does not affect performance was performance was rejected and the rejected and the alternative hypothesis alternative hypothesis accepted at 95% level accepted at 95% level of significance that of significance that fair and equal treatment ensuring a basis for an effective corporate of shareholders in a firm in Ghana does governance framework in a firm in Ghana affect performance. The results of the test of does affect performance. hypothesises collaborated that of the Research question 1b (RQ1b) correlation analysis. investigated whether the rights of Research question 1d (RQ1d) shareholders in a firm in Ghana affect firm explored whether stakeholders in corporate performance. The result of correlation governance in a firm in Ghana affect analysis showed strong positive correlation performance. The result of correlation coefficient between the rights of analysis demonstrated strong positive shareholders in a firm in Ghana and firm correlation coefficient between stakeholders performance. The correlation coefficient in corporate governance in a firm in Ghana between the rights of shareholders and and firm performance. The correlation performance measurement variables ROA, coefficient between stakeholders and ROE, and Tobin’s Q were 0.736, 0.768 and performance measurement variables ROA, 0.797 respectively. The test of hypothesises ROE, and Tobin’s Q were 0.742, 0.739 and carried out using ROA, ROE and Tobin’s Q 0.789 respectively. The test of hypothesises as performance measures had test carried out using ROA, ROE and Tobin’s Q statistics3.075, 3.392 and 3.732 as performance measures had test respectively. They were all greater than the statistics3.131, 3.103 and 3.632 critical value (tc) 0.632, and were respectively. They were all greater than the statistically significant. The null hypothesis critical value (tc) 0.632, and were that the rights of shareholders in a firm in statistically significant. The null hypothesis Ghana do not affect performance was that stakeholders in corporate governance in rejected and the alternative hypothesis a firm in Ghana do not affect performance accepted at 95% level of significance that was rejected and the alternative hypothesis the rights of shareholders in a firm in Ghana accepted at 95% level of significance that do affect performance. stakeholders in corporate governance in a Research question 1c (RQ1c) firm in Ghana do affect performance. The examined whether fair and equal treatment result of the test of hypothesises supported of shareholders in a firm in Ghana affect that of the correlation analysis. firm performance. The result of correlation Research question 1e (RQ1e) analysis showed strong positive correlation searched whether disclosure in firm’s coefficient between fair and equal treatment financial statement in Ghana affect of shareholders in a firm in Ghana and firm performance. Correlation analysis result performance. The correlation coefficient demonstrated strong positive correlation between fair and equal treatment of coefficient between disclosure in firm’s shareholders and performance measurement financial statement in Ghana and firm variables ROA, ROE, and Tobin’s Q were performance. The correlation coefficient 0.841, 0.812 and 0.853 respectively. The between disclosure and performance test of hypothesises carried out using ROA, measurement variables ROA, ROE, and ROE and Tobin’s Q as performance Tobin’s Q were 0.842, 0.837 and 0.875 measures had test statistics 4.397, 3.935 and respectively. Test of hypothesises carried
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Corporate Governance and Firm Performance out using ROA, ROE and Tobin’s Q as of Board of Directors in a firm in Ghana performance measures had test does not affect performance was rejected statistics4.415, 4.326 and 5.112 and the alternative hypothesis accepted at respectively. They were all greater than the 95% level of significance that effective critical value (tc) 0.632, and were fulfilment of responsibilities of Board of statistically significant. The null hypothesis Directors in a firm in Ghana does affect that disclosure in firm’s financial statement performance. The results of the test of in Ghana does not affect performance was hypothesises upheld that of the correlation rejected and the alternative hypothesis analysis. accepted at 95% level of significance that The research question 2 (RQ2) disclosure in firm’s financial statement in explored whether there is any relationship Ghana does affect performance. The results between corporate governance framework of the test of hypothesises affirmed that of of Ghana and OECD principles of corporate the correlation analysis. governance. Correlation analysis result Research question 1f (RQ1f) revealed strong positive correlation investigated whether effective fulfilment of coefficient between corporate governance responsibilities of Board of Directors in a framework of Ghana and OECD principles firm in Ghana affect performance. of corporate governance. The correlation Correlation analysis result established coefficient between the two variables was strong positive correlation coefficient 0.926. Test of hypothesis carried out had between effective fulfilment of test statistic (ts) 6.938 which was greater responsibilities of Board of Directors in a than the critical value (tc) 0.632, and was firm in Ghana and firm performance. The statistically significant. The null hypothesis correlation coefficient between effective that there is no relationship between fulfilment of responsibilities of Board of corporate governance framework of Ghana Directors and performance measurement and OECD principles of corporate variables ROA, ROE, and Tobin’s Q were governance was rejected and the alternative 0.798, 0.806 and 0.854 respectively. Test of hypothesis accepted at 95% level of hypothesises carried out using ROA, ROE significance that there is a relationship and Tobin’s Q as performance measures had between corporate governance framework test statistics 3.745, 3.851 and 4.643 of Ghana and OECD principles of corporate respectively. They were all greater than the governance.The result of the test of critical value (tc) 0.632, and were hypothesis collaborated that of the statistically significant. The null hypothesis correlation analysis. that effective fulfilment of responsibilities
CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS
The results of the data analysis Summary of the Results presented in Chapter 4 provided significant Research question 1 (RQ1) evidence to support the hypothesis that investigated whether there is any corporate governance has a statistically relationship between corporate governance positive impact on performance of listed and firm’s performance in Ghana. The firms on GSE. This chapter provides an in- regression results of ROA, ROE and depth discussion of the results including Tobin’s Q established strong positive comparative analysis with relevant relationship between corporate governance empirical studies. This last chapter, draw the and firm performance of the listed conclusion of the study and finally made companies on GSE. The impact of the practical recommendations and suggestions relationship as established in the regression for further research. equations, measured by the regression
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Corporate Governance and Firm Performance coefficient R-Square were 0.767, 0.731 and rejected and the alternative hypothesis 0.753 respectively. The result of the Pearson accepted at 95% level of significance that Correlation analysis supported the result of ensuring a basis for an effective corporate the regression analysis with strong positive governance framework in a firm in Ghana correlation coefficients. The result showed does affect performance. that the three performance measures: ROA; Research question 1b (RQ1b) ROE; and Tobin’s Q were all strongly and investigated whether the rights of positively correlated with CGI with shareholders in a firm in Ghana affect firm correlation coefficients of 0.876, 0.855 and performance. The result of correlation 0.868 respectively. Similarly, these analysis showed strong positive correlation performance measures were also positively coefficient between the rights of correlated with the set of control variables shareholders in a firm in Ghana and firm with correlation coefficients of 0.560, 0.512 performance. The correlation coefficient and 0.569 respectively. The test of between the rights of shareholders and hypothesises carried out using ROA, ROE performance measurement variables ROA, and Tobin’s Q as performance measures had ROE, and Tobin’s Q were 0.736, 0.768 and test statistics 3.126, 6.4232, and 3.7778 0.797 respectively. respectively. These were greater than the The test of hypothesises carried out critical value 2.365 and statistically using ROA, ROE and Tobin’s Q as significant, hence the null hypothesises that performance measures had test there is no relationship between corporate statistics3.075, 3.392 and 3.732 governance and firm’s performance in respectively. They were all greater than the Ghana were rejected and the alternative critical value (tc) 0.632, and were hypothesises accepted at 95% level of statistically significant. The null hypothesis significance that there is a relationship that the rights of shareholders in a firm in between corporate governance and firm’s Ghana do not affect performance was performance in Ghana. rejected and the alternative hypothesis Research question 1a (RQ1a) sought accepted at 95% level of significance that to find out whether ensuring a basis for an the rights of shareholders in a firm in Ghana effective corporate governance framework do affect performance. in a firm in Ghana affect performance. The Research question 1c (RQ1c) examined result of correlation analysis showed strong whether fair and equal treatment of positive correlation coefficient between shareholders in a firm in Ghana affect firm ensuring a basis for an effective corporate performance. The result of correlation governance framework in a firm in Ghana analysis showed strong positive correlation and firm performance. The correlation coefficient between fair and equal treatment coefficient between the corporate of shareholders in a firm in Ghana and firm governance variable and performance performance. The correlation coefficient measurement variables ROA, ROE, and between fair and equal treatment of Tobin’s Q were 0.856, 0.845 and 0.875 shareholders and performance measurement respectively. The test of hypothesises variables ROA, ROE, and Tobin’s Q were carried out using ROA, ROE and Tobin’s Q 0.841, 0.812 and 0.853 respectively. The as performance measures had test test of hypothesises carried out using ROA, statistics4.683, 4.469 and 5.112 ROE and Tobin’s Q as performance respectively. They were all greater than the measures had test statistics4.397, 3.935 and critical value (tc) 0.632, and were 4.623 respectively. They were all greater statistically significant. The null hypothesis than the critical value (tc) 0.632, and were that ensuring a basis for an effective statistically significant. The null hypothesis corporate governance framework in a firm that fair and equal treatment of shareholders in Ghana does not affect performance was in a firm in Ghana does not affect
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Corporate Governance and Firm Performance performance was rejected and the statistically significant. The null hypothesis alternative hypothesis accepted at 95% level that disclosure in firm’s financial statement of significance that fair and equal treatment in Ghana does not affect performance was of shareholders in a firm in Ghana does rejected and the alternative hypothesis affect performance. The result of the test of accepted at 95% level of significance that hypothesis collaborated that of the disclosure in firm’s financial statement in correlation analysis. Ghana does affect performance. The result Research question 1d (RQ1d) explored of the test of hypothesis affirmed that of the whether stakeholders in corporate correlation analysis. governance in a firm in Ghana affect Research question 1f (RQ1f) performance. The result of correlation investigated whether effective fulfilment of analysis demonstrated strong positive responsibilities of Board of Directors in a correlation coefficient between stakeholders firm in Ghana affect performance. in corporate governance in a firm in Ghana Correlation analysis result established and firm performance. The correlation strong positive correlation coefficient coefficient between stakeholders and between effective fulfilment of performance measurement variables ROA, responsibilities of Board of Directors in a ROE, and Tobin’s Q were 0.742, 0.739 and firm in Ghana and firm performance. The 0.789 respectively. The test of hypothesises correlation coefficient between effective carried out using ROA, ROE and Tobin’s Q fulfilment of responsibilities of Board of as performance measures had test Directors and performance measurement statistics3.131, 3.103 and 3.632 variables ROA, ROE, and Tobin’s Q were respectively. They were all greater than the 0.798, 0.806 and 0.854 respectively. Test of critical value (tc) 0.632, and were hypothesises carried out using ROA, ROE statistically significant. The null hypothesis and Tobin’s Q as performance measures had that stakeholders in corporate governance in test statistics 3.745, 3.851 and 4.643 a firm in Ghana do not affect performance respectively. They were all greater than the was rejected and the alternative hypothesis critical value (tc) 0.632, and were accepted at 95% level of significance that statistically significant. The null hypothesis stakeholders in corporate governance in a that effective fulfilment of responsibilities firm in Ghana do affect performance. The of Board of Directors in a firm in Ghana result of the test of hypothesis supported does not affect performance was rejected that of the correlation analysis. and the alternative hypothesis accepted at Research question 1e (RQ1e) 95% level of significance that effective searched whether disclosure in firm’s fulfilment of responsibilities of Board of financial statement in Ghana affect Directors in a firm in Ghana does affect performance. Correlation analysis result performance. The result of the test of demonstrated strong positive correlation hypothesis upheld that of the correlation coefficient between disclosure in firm’s analysis. financial statement in Ghana and firm The research question 2 (RQ2) performance. The correlation coefficient explored whether there is any relationship between disclosure and performance between corporate governance framework measurement variables ROA, ROE, and of Ghana and OECD principles of corporate Tobin’s Q were 0.842, 0.837 and 0.875 governance. Correlation analysis result respectively. Test of hypothesises carried revealed strong positive correlation out using ROA, ROE and Tobin’s Q as coefficient between corporate governance performance measures had test framework of Ghana and OECD principles statistics4.415, 4.326 and 5.112 of corporate governance. The correlation respectively. They were all greater than the coefficient between the two variables was critical value (tc) 0.632, and were 0.926. Test of hypothesis carried out had
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Corporate Governance and Firm Performance test statistic (ts) 6.938 which was greater correlation coefficients of 0.876, 0.855 and than the critical value (tc) 0.632, and was 0.868 respectively. Similarly, these statistically significant. The null hypothesis performance measures were also positively that there is no relationship between correlated with the set of control variables corporate governance framework of Ghana with correlation coefficients of 0.560, 0.512 and OECD principles of corporate and 0.569 respectively. The test of governance was rejected and the alternative hypothesises carried out using ROA, ROE hypothesis accepted at 95% level of and Tobin’s Q as performance measures had significance that there is a relationship test statistics 3.126, 6.4232, and 3.7778 between corporate governance framework respectively. These were greater than the of Ghana and OECD principles of corporate critical value 2.365 and statistically governance.The result of the test of significant, hence the null hypothesises that hypothesis collaborated that of the there is no relationship between corporate correlation analysis. governance and firm’s performance in Discussion of the Results Ghana were rejected and the alternative Research question 1 (RQ1). It hypothesises accepted at 95% level of investigated whether there is any significance that there is a relationship relationship between corporate governance between corporate governance and firm’s and firm’s performance in Ghana. Using the performance in Ghana. model, Pit = β0i+ β1CGIit + β2CVit + µit, the All the three dependant variables regression results of ROA, ROE and above (ROA, ROE, and Tobin’s Q) showed Tobin’s Q established strong positive statistically significant positive relationship relationship between corporate governance with corporate governance using regression and firm performance of the listed and correlation analyses. These suggest that companies on GSE. The analysis of the a firm can increase value by improving its results of the model showed that in governance. The findings also supported the existence of corporate governance, a firm theory that corporate governance has would increase its ROA by 0.0397 (3.97%) positive effect on performance. Thus a firm of its corporate governance index (CGI) and with relatively low corporate governance 0.0088 (0.88%) of the value of its control can increase its value by changing variables, all things being equal. Similarly, governance structure. Therefore a firm with in presence of corporate governance, the low corporate governance has the firm would increase its ROE by 0.1548 opportunity to increase its value (Flodberg (15.48%) of its CGI and 0.0957 (9.57%) of & Nadjari, 2013). This is consistent with the value of its control variables. Also in disequilibrium phenomenon theory by presence of corporate governance, the firm Demsetz (1993) that contended that a firm would increase its’ Tobin’s Q by 0.0068 would change its value by changing the (0.68%) of its CGI and 0.0031 (0.31%) of level of its corporate governance. The the value of its control variables. results also concurred with the agency The impact of the relationship as theory such that decreasing agency cost; a established in the regression equations, manager will for example have less measured by the regression coefficient R- opportunity to take on bad investments and Square were 0.767, 0.731 and 0.753 therefore increase firm performance respectively. The result of the Pearson (Flodberg & Nadjari, 2013). In line with the Correlation analysis supported the result of agency theory, the firms would need to put the regression analysis with strong positive in a number of control mechanisms as part correlation coefficients. The result showed of checks and balances to reduce the that the three performance measures: ROA; principal-agent conflict to optimise the ROE; and Tobin’s Q were all strongly and firm’s performance (Lodh &Rashid, 2014). positively correlated with CGI with This would align the interest of the
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Corporate Governance and Firm Performance managers and shareholders and thereby across a wide range of developed enhance corporate performance (Jensen and economies. For instance Black (2001) Meckling, 1976; Jensen, 1993). The reported a strong correlation between the stakeholder theory advocates that market value and corporate governance of performance and success are contingent on Russian firms. The result showed that the how well an organisation manages its three performance measures: ROA; ROE; dealings with its stakeholders (Freeman & and Tobin’s Q were all strongly and Phillips, 2002). Certainly to succeed, the positively correlated with corporate firms need to synchronise contradictory governance with correlation coefficients of interests of these stakeholders in a balancing 0.876, 0.855 and 0.868 respectively. act which calls for significant diplomacy. However, Black (2001) employed different Where these interests are appropriately corporate governance variables which were accommodated, the support of the not the same as the ones used in the present stakeholders is preserved, while the firm is study. The result was also consistent with seen as a worthy platform upon which the Gompers et al. (2003) which constructed a stakeholders’ value can be maximised US governance index to proxy for the level (Freeman & Phillips, 2002). Corporate of shareholder rights for about 1,500 large governance encompasses the relationship firms during the 1990s. They found a strong and patterns of behaviour among different correlation between corporate governance interested parties in a corporation, such as and stock returns during the 1990s and that management, board of directors and the ‘Democracy portfolio’ outperformed the shareholders (Lodh & Rashid, 2014). This ‘Dictatorship Portfolio’. However, their symbiotic relationship would need to be study used only one of the OECD principles nurtured and maintained among the as corporate governance variable interested parties to guarantee a continuous (shareholders right). The present study on good corporate performance. the other hand used all the six principles in Notwithstanding the strong an attempt to ensure holistic approach to the relationship established between corporate study. The result also supported Coles et al. governance and performance (ROA, ROE (2004) which found a positive association and Tobin’s Q), it is imperative to put a between firm performance (measured by Q) caveat regarding uncertainties of causality. and corporate governance variables such as The study has not been able to prove that board size for diversified firms, larger firms, the independent variables were exogenous. and high leverage firms. Their study Owing to the complexity of the corporate conversely differed from the present study governance variables it was cumbersome to in terms of corporate governance variables control for possible endogeneity in the used but their performance measurement model, hence the researcher could not make variable (Tobin’s Q) was among the an assessment of the causality relationship performance variables used for the present between the variables. study. Developed economies. It is worthy Furthermore, the result was to establish that the results were consistent unswerving with Drobetz, Schillhofer and with several earlier findings such as Black Zimmermann (2011) which investigated (2001), Laing and Weir (2001), Low (2002), whether differences in the quality of firm- Gompers et al. (2003), Brown and Caylor level corporate governance also help to (2004), Coles et al. (2004), Davies et al. explain firm performance in a cross-section (2005), Kelly and Switzer (2006), Li and of 91 companies in Germany. The valuation MacNeil (2006), Ashbaugh-Skaife and measures were Tobin’s Q and the market-to- Lafond (2006), Cornett et al. (2009), book ratio. The corresponding regression Schillhofer and Zimmermann (2011), and results showed adjusted R-squares were Flodberg and Nadjari (2013)conducted 0.032 and 0.037 for the Tobin’s Q and the
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Corporate Governance and Firm Performance market-to-book value respectively. The However, the sub-variables of both regression results for the present study dependent and independent variables vary. showed that the adjusted R-squares for This made the focus of this study ROA, ROE and Tobin’s Q were 0.747, unprecedented. 0.709 and 0.725 respectively (see Tables 14, Notwithstanding the consistency of 16 and 18). Comparatively, the regression the results with earlier studies from results of the present study were relatively developed economies aforementioned, the statistically significant than those of corporate governance framework, Drobetz, Schillhofer and Zimmermann monitoring, supervision and compliance (2011). In establishing the positive existing in Ghana cannot be compared with relationship between corporate governance those existing in these developed and firm performance, their study used economies. For instance, Laing and Weir regression and Tobin’s Q which are (1999) which investigated the extent of consistent with the present study. However, Cadbury compliance and its effect on the corporate governance sub-variables performance of UK quoted companies, differed which made the need for this study found strong evidence of compliance intriguing. amongst UK quoted companies and Furthermore, the result agreed with evidence of strong positive influence on Flodberg and Nadjari (2013) which performance. Existence of strong corporate investigated the link between corporate governance instructions, monitoring and governance and firm performance in the supervision to ensure compliance is a major Nordic countries. They constructed a model problem in Ghana. This may be partly for 190 Nordic firms with Tobin’s Q as the attributed to bribery and corruption which dependent variable, Corporate Governance according to Burton et al. (2009) can Index as the independent variable while influence the enforcement of corporate controlling for Total Assets, Financial governance through regulatory officers and Leverage, Systematic Risk, Unsystematic the judiciary. Furthermore, Burton et al. Risk and Growth to evaluate the impact (2009) showed that corruption remains upon firm performance from 2004-2011. endemic in developing African nations and Their study showed a positive relationship in some cases, this becomes institutionalized between corporate governance and firm as a result of collective behaviour. For performance as well as statistically instance, in Ghana, Mensah et.al (2003) significant control variables. The present documented that the Ghana Centre for study also used Tobin’s Q as one the Democracy and Development and the dependent variables and had Total Assets World Bank found that corruption is and Financial Leverage as some of the prevalent in both the private and public control variables.The result showed that the sector in Ghana. This position was three performance measures: ROA; ROE; confirmed by Transparency International by and Tobin’s Q were all strongly and ranking Ghana in 2012, 2013 and 2014 as positively correlated with CGI with 64th out 176, 63rd out of 177 and 61st out of correlation coefficients of 0.876, 0.855 and 175 less corrupt countries respectively in the 0.868 respectively. Similarly, these Corruption Perception Index (Transparency performance measures were also positively International, 2014). Firms in Ghana would correlated with the set of control variables therefore be able to take opportunity to with correlation coefficients of 0.560, 0.512 increase their value through corporate and 0.569 respectively (see Table 19). It is governance if these weaknesses are worthy to know that their study used comprehensively addressed. regression and correlation as methods of Emerging economies. Similarly, the establishing the relationship which was the results of the study also strongly correspond same as adopted in this present study. to several earlier studies conducted in
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Corporate Governance and Firm Performance emerging economies, for example,Black, shareholders; role of stakeholders; Jang and Kim (2003), Klapper and Love disclosure; and responsibilities of the board. (2004), Black et al. (2006), Kyereboah- Equally, each sub-index is individually Coleman (2007), Abdo and Fisher (2007), significant predictor of higher Tobin's Q and Garay and González (2008), Ahmad (2010), other performance variables. For instance, Meeamol et al. (2011), Kowalewski (2012), shareholder rights and disclosure which are Amba (2012), Alhaji and Yusoff (2012), common sub-indices for both studies, in the Duke II, Kankpang & Okonkwo (2012), current study show strong correlation with Phan and Vo (2013), and Lodh and Rashid Tobin’s Q and other performance variables (2014). ROA and ROE. The correlation coefficient For example, Black, Jang and Kim between the rights of shareholders and (2003) reported evidence that corporate performance measurement variables Tobin’s governance is an important factor in Q, ROA and ROE, were 0.797, 0.736, and explaining the market value of Korean 0.768 respectively (see Table 21). Likewise, public companies. They constructed a the correlation coefficient between corporate governance index (0~100) for 526 disclosure and performance measurement companies based primarily on responses to a variables Tobin’s Q, ROA, and ROE, were Spring 2001 survey of all listed companies 0.875, 0.842, and 0.837 respectively (see by the Korea Stock Exchange. They found Table 24). Notwithstanding the large extent that a moderate 10 point increase in the to which the current study collaborated corporate governance index predicts a 5% Black, Jang and Kim (2003), it is increase in Tobin’s Q. The current study worthwhile to mention that there is a little produced a model Pit = 0.9465+ 0.0068CGIit difference between the two studies. Black, + 0.0031CVit + µit for Tobin’s Q as a Jang and Kim (2003) included only two measure of performance. From the above OECD principles of corporate governance model, it implies that a moderate 10 point among their six variables whilst the present increase in the corporate governance index study used all the six OECD principles of predicts a 6.8% increase in Tobin’s Q. This corporate governance. is comparatively consistent with the result The results also confirmed of Black, Jang and Kim (2003). The high Kyereboah-Coleman (2007) which Tobin's Q value would inspire firms to established a positive relationship between invest more in capital because they are corporate governance and firm performance "worth" more than the price they paid for from African perspective. This study them (Brainard & Tobin, 1968). Also, their considered 103 listed companies drawn index was based on six sub-indices for from Ghana, Nigeria, Kenya and South shareholder rights, board of directors in Africa. It recorded amean value of ROA general, outside directors, audit committee 0.13 and Tobin’s Q 0.30, indicating an and internal auditor, disclosure to investors, average return on assets of 13%. The and ownership parity. Each sub-index was present study similarly registered a mean an individually significant or marginally value of ROA 0.044 and Tobin’s Q 1.726, significant predictor of higher Tobin's Q and indicating an average return on assets of other performance variables. The present 4.4%. Comparatively, the difference in the study emulated Black, Jang and Kim (2003) two results is quite statistically significant in terms of methodology, performance and could be attributable to differences in variables and some corporate governance sample size. The regression results of variables. Similarly, the present study was Kyereboah-Coleman (2007) further showed also based on six sub-indices namely: that positive direction and the extent of the ensuring the basis for an effective corporate impact of governance on the performance governance framework; rights of measure being investigated was very shareholders; equitable treatment of statistically significant. The present study
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Corporate Governance and Firm Performance equally showed positive direction and Corporate Governance Index (CGI), and strong impact. firm’s performance during the financial The R-Square which showed how crisis in Poland. The model and much of the change in the target variable performance measurement variables used in (performance) was explained by the this study were the same as the ones adopted predictor variable (corporate governance), for the present study. Kowalewski (2012) in other words, the extent of the impact, had mean values for ROA, ROE and were 0.767, 0.731, and 0.753 for ROA, Tobin’s Q to be 0.410, 0.598 and 2.115 ROE and Tobin’s Q respectively (see Table respectively. The present study on the other 14, 16 and 18 respectively). hand had mean values for ROA, ROE and Besides, the results collaborated Tobin’s Q to be 0.044, 0.499 and 1.725 Garay and González (2008) which used respectively (see Table 12). Comparatively, regression analysis to examine the the difference could be linked to the number relationship between corporate governance of observations. Kowalewski (2012) had and firm value, and evaluated the relatively 1,405 observations whilst the present study understudied governance practices in had 136 observations. The results of Venezuela. They constructed a corporate Pearson Correlation analyses for both governance index (CGI) for 46 publicly- studies supported the results of the listed firms and showed strong positive regression analyses of both studies with relationship between good corporate strong positive correlation coefficients. governance and firm performance. They Similarly, the results are consistent showed that an increase of 1 per cent in the with recent study by Phan and Vo (2013) CGI results in 2.7 per cent in Tobin’s Q as which confirmed strong positive compare to 0.68 per cent in the present. The relationship between good corporate findings were consistent with the theoretical governance and firm performance. Their models that relate good corporate study used flexible generalised least squares governance practices to higher investor technique on 77 listed firms on Vietnam confidence. Similarly, the results were Stock Exchange trading over the period harmonious with Ahmad (2010) which from 2006 to 2011. Their findings revealed explored the factors that influence the a mean of 11.8% for ROA, whilst the relation between corporate governance and present study registered a mean of 4.4% for performance of 18 banks operating in ROA. Similar to the present study, their Palestine. The study relied on financial study also showed strong positive ratios, namely ROA and ROE and using correlation between ROA and corporate regression analysis, found that corporate governance. Their regression results using governance have positive statistically ROA as a performance measure, had significance impact on firm performance. adjusted R-square at 27.02% compared to The ROA and ROE regression results from present study’s adjusted R-square of 74.7%. the present study showed that corporate Comparatively, the two results seem to be governance has positive statistically pointing to the same direction except that significance impact on firm performance they were not statistically close enough. (see Table 14 and 16). This could be probably due to differences in Furthermore, the results of the the number of observations. Their study present study were congruent with recent made use of 325 observations whilst the studies which have also confirmed the present study used 136 observations. positive relationship between good Finally, the results were also corporate governance practices and firm congruent with Lodh and Rashid (2014) performance. For example, Kowalewski which also examined corporate governance (2012) investigated the relationship between mechanisms and firm performance of 87 corporate governance, measured by medium and small sized enterprises (SMEs)
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Corporate Governance and Firm Performance listed on Dhaka Stock Exchange in significant positive impacts on firm Bangladesh for the period 2000-2008. From performance. The results of the present an observation of 769 firms, they found that study supported the findings of Abor and there is a significant positive relationship Biekpe (2007), however, the scope of their between good corporate governance study was limited to SMEs in Ghana which practices and firm performance measured by were not listed firms. The present study ROA and Tobin’s Q. Their findings showed focused on only listed firms hence the means of 0.054 and 1.146 for ROA and difference between the two studies and the Tobin’s Q respectively, whilst the present need to carry out the study. study registered 0.044 and 1.726 Similarly, the results of the present respectively (see Table 12). The results of study matched Akpakli (2010) which the present study were there for every close investigated corporate governance and to that of Rashid and Lodh (2014), and organisational performance to assess the statistically significant. Their regression effectiveness of listed companies on GSE. results using ROA and Tobin’s Q as This study used a data set for 2007 financial performance measures, had adjusted R- year of a sample of six firms. ROE was used square at 57.9% and 88.4% compared to as a measure of firm performance. The present study’s adjusted R-square of 74.7% study revealed a correlation coefficient of and 72.5% respectively. Comparatively, the 0.869 between ROE as a performance two results were to be pointing to the same measure and corporate governance which direction and were relatively statistically correlates strongly with that of the present close. study of 0.855. However, the present study Though the result of the present investigates the issue in a broader study seemed to be consistent with several perspective compared to Akpakli (2010). empirical studies conducted in emerging For example, their study used a sample size economies as discussed above, it is worth to of six firms, the present study used a sample know that good corporate governance size of thirty; their study used only ROE as framework and adherence to best practice performance measure, the present study differ from country to country. For instance, used ROE, ROA and Tobin’s Q; and their La Porta et al. (1999) which investigated the study used data for just a single year (2007) differences in corporate governance but the present study used a data set for ten between countries, asserted that corporate years (2004-2013). governance depends on the legal framework Furthermore, the results of the study of the country. This is the challenge that corresponded with the empirical study of listed firms in Ghana have to overcome in Tornyeva and Wereko (2012) which other to ripe the benefits of good corporate investigated the relationship between governance. corporate governance and the financial Ghana. In the context of Ghana, the performance of insurance companies in results were likewise congruent with Ghana. Using a Panel Data Methodology empirical studies by Abor and Biekpe with a sample of 19 firms, their study (2007), Akpakli (2010), and Tornyeva and showed that corporate governance impacts Wereko (2012). Abor and Biekpe (2007) financial performance of insurance assessed how the adoption of corporate companies in Ghana. They found means of governance structures affects the 0.08 and 0.18 for ROA and ROE performance of SMEs (small to medium- respectively. Comparatively, the present sized enterprises) in Ghana. Regression study recorded means of 0.044 and 0.499 analysis was used to estimate the respectively which were relatively close to relationship between corporate governance that of Tornyeva and Wereko (2012). Their and performance of 22 SMEs. Their results regression results using ROA and ROE as showed that corporate governance has performance measures, had adjusted R-
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Corporate Governance and Firm Performance square at 63.8% and 45.9% compared to regulatory arrangements, voluntary present study’s adjusted R-square of 74.7% commitments and business practices that are and 72.5% respectively. Comparing these the result of a country’s specific two studies, the deviation between the two circumstances, history and tradition (OECD, results was meagre, however, their study 2004). OECD (2004) asserted that countries was limited in scope as it covered only seeking to implement good corporate insurance companies and with a small governance framework should monitor their sample of 19 firms as compared to 30 for framework, including regulatory and listing the present study. requirements and business practices, with Research question 1a (RQ1a). This the aim of upholding and reinforcing its research question sought to find out whether contribution to market integrity and ensuring a basis for an effective corporate economic performance. It is also essential to governance framework in a firm in Ghana take into consideration the collaborations affect performance. The result of correlation and complementarity between different analysis showed strong positive correlation elements of the corporate governance coefficient between ensuring a basis for an framework and its overall capability to effective corporate governance framework stimulate ethical, responsible and in a firm in Ghana and firm performance. transparent corporate governance practices. The correlation coefficient between the Moreover, in developing a sound corporate corporate governance variable and governance framework in Ghana, national performance measurement variables ROA, legislators and regulators should duly ROE, and Tobin’s Q were 0.856, 0.845 and consider the need for, and the results from, 0.875 respectively. The test of hypothesises effective international dialogue and carried out using ROA, ROE and Tobin’s Q cooperation (OECD, 2004). If these as performance measures had test circumstances are addressed, the statistics4.683, 4.469 and 5.112 governance system is more probable to respectively. They were all greater than the evade over-regulation, support the exercise critical value (tc) 0.632, and were of entrepreneurship and reduce the risks of statistically significant. The null hypothesis damaging conflicts of interest in both the that ensuring a basis for an effective private sector and in public institutions in corporate governance framework in a firm Ghana. in Ghana does not affect performance was The results were consistent with rejected and the alternative hypothesis DeAngelo and DeAngelo (1985), Johnson, accepted at 95% level of significance that et al. (1999), La Porta et al (2002), Klapper ensuring a basis for an effective corporate and Love (2004) and Afolabi (2013). For governance framework in a firm in Ghana example, the results were unswerving with does affect performance. Johnson, et al. (1999) which empirically With this evidence, it is essential used the Asian financial crises to revealed that the government of Ghana ensure an how legal institution affected corporate effective corporate governance framework governance and stock market performance. to boost firm performance and thereby The authors found that managerial agency stimulate economic growth and problem can make countries with weak legal development. It is necessary that an system miss the opportunity to attract the appropriate and effective legal, regulatory confidence of investors. This situation and institutional foundation is established would consequently have a negative upon which all listed companies can rely on repercussion on performance. Also, the in establishing their private contractual results are congruent with La Porta, et al relations. This corporate governance (2002) which formulated a model of the framework typically should encompass effects of legal protection of minority elements of legislation, regulation, self- shareholders and of cash-flow ownership by
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Corporate Governance and Firm Performance controlling shareholder on the valuation of shareholders in a firm in Ghana do affect firms. The model was tested empirically performance. using sample of 539 large firms from 27 From the above striking results it is developed countries. The results revealed imperative to reiterate that equity investors that firms in countries with well protection have certain property rights. For example, of minority shareholders had higher firm an equity share in a publicly traded valuation. Furthermore, the results company can be bought, sold, or transferred collaborated Klapper and Love (2004) (OECD, 2004). An equity share also which used current data on corporate warrants the investor to partake in the governance ranking in firms across 14 profits of the company, with liability developing markets. Using empirical restricted to the amount of the investment. evidence the authors found that firm-level of Furthermore, possession of an equity share governance was lower in those countries affords a right to information about the that have weak legal systems. In addition, company and a right to impact the company, better corporate governance was correlated principally by involvement in general with higher operating performance. Finally, shareholders meetings and by voting. The the results were harmonious with Afolabi corporate governance framework should (2013) which investigated challenges of protect and facilitate the exercise of corporate governance of firms in Sub- shareholders’ rights (OECD, 2004). It is Saharan African. Using correlation analysis therefore essential for GSE, Securities and to estimate the relationship between Exchange Commission of Ghana and other corporate governance legal framework and regulatory bodies to ensure that the rights of firm performance, the author recorded shareholders of listed companies in Ghana correlation coefficient of 0.721 compared to are protected and facilitate the exercise of present study’s 0.845. Comparatively, the these rights. two results were pointing to the same The results are consistent with direction, statistically significant and Black, Jang and Kim (2003) which reported relatively close. evidence that corporate governance is an Research question 1b (RQ1b). This important factor in explaining the market research question investigated whether the value of Korean public companies. Their rights of shareholders in a firm in Ghana correlation coefficient between the rights of affect firm performance. The result of shareholders and performance measured in correlation analysis showed strong positive terms of Tobin’s Q was 0.650 as compared correlation coefficient between the rights of to 0.797 for the present study (see Table shareholders in a firm in Ghana and firm 21). Similarly, the results collaborate performance. The correlation coefficient Afolabi (2013) which recorded a correlation between the rights of shareholders and coefficient between the rights of performance measurement variables ROA, shareholders and performance measured in ROE, and Tobin’s Q were 0.736, 0.768 and terms of ROA of 0.770 as compared to 0.797 respectively. The test of hypothesises 0.736 for the present study (see Table 21). carried out using ROA, ROE and Tobin’s Q Research question 1c (RQ1c). This as performance measures had test research question examined whether fair statistics3.075, 3.392 and 3.732 and equal treatment of shareholders in a respectively. They all greater than the firm in Ghana affect firm performance. The critical value (tc) 0.632, and are statistically result of correlation analysis showed strong significant. The null hypothesis that the positive correlation coefficient between fair rights of shareholders in a firm in Ghana do and equal treatment of shareholders in a not affect performance was rejected and the firm in Ghana and firm performance. The alternative hypothesis accepted at 95% level correlation coefficient between fair and of significance that the rights of equal treatment of shareholders and
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Corporate Governance and Firm Performance performance measurement variables ROA, managers and controlling shareholders may ROE, and Tobin’s Q were 0.841, 0.812 and have the chance to involve in activities that 0.853 respectively. The test of hypothesises may promote their own interests at the carried out using ROA, ROE and Tobin’s Q detriment of non-controlling shareholders. as performance measures had test Protection of small equity holders is statistics4.397, 3.935 and 4.623 currently a very central issue in developing respectively. They were all greater than the economies of which Ghana is no exception critical value (tc) 0.632, and are statistically (Aboagye, Agyemang, & Ahali, 2013; significant. The null hypothesis that fair and Berglof & Claessens, 2004). It is in this vein equal treatment of shareholders in a firm in that it is paramount for the corporate Ghana does not affect performance was governance framework of Ghana to be rejected and the alternative hypothesis aligned to support fair and equal treatment accepted at 95% level of significance that of foreign and domestic shareholders as well fair and equal treatment of shareholders in a as non-controlling shareholders on GSE to firm in Ghana does affect performance. The promote corporate performance and result of the test of hypothesis collaborated economic growth. that of the correlation analysis. The results were consistent with The results are symptomatic that a Afolabi (2013) which found out that good corporate governance framework preferential treatment of large shareholders should ensure the equitable treatment of all has a negative significant effect on firm shareholders, including minority and foreign performance and rule of law. The author shareholders (OECD, 2004). The study recorded a correlation coefficient between therefore affirmed OECD Principles’ fair and equal treatment of shareholders and position that all shareholders, including performance measured in terms of ROA of minority and foreign shareholders, should 0.527 as compared to 0.841 for the present be treated equitably by controlling study (see Table 22). The results were also shareholders, boards and management unswerving with Kim and Yoon (2007) (Jesover, 2001). Insider trading and abusive which investigated how firm performance is self-dealing should be forbidden. The related to corporate governance in Korea. OECD Principles call for transparency with Their study showed that fair and equal respect to distribution of voting rights and treatment of foreign equity owners and the ways voting rights are exercised. They minority shareholders have positive also call for disclosure of any material relationship with firm size and profitability. interests that managers and directors have in Using correlation analysis, the author transactions or matters affecting the recorded a correlation coefficient between corporation (Jesover, 2001; OECD, 2004). fair and equal treatment of shareholders and Gilson (1996) asserts that protecting performance measured in terms of ROA of minority shareholders will accelerate the 0.34 as compared to 0.841 for the present economic growth of a nation, because study. realising long-term value for the entire Research question 1d (RQ1d). This shareholders is the closest index of research question explored whether development of a national economy. All stakeholders in corporate governance in a shareholders should have the chance to get firm in Ghana affect performance. The effective resolution for abuse of their rights. result of correlation analysis demonstrated Investors’ confidence that the capital they strong positive correlation coefficient provide will be protected from misuse or between stakeholders in corporate misappropriation by corporate managers, governance in a firm in Ghana and firm board members or controlling shareholders performance. The correlation coefficient is an important factor in the capital markets between stakeholders and performance (OECD, 2004). However, corporate boards, measurement variables ROA, ROE, and
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Tobin’s Q were 0.742, 0.739 and 0.789 therefore, in the long-term benefit of respectively. The test of hypothesises organisations to adopt wealth-creating carried out using ROA, ROE and Tobin’s Q collaboration among stakeholders. as performance measures had test Governance framework should be designed statistics3.131, 3.103 and 3.632 on the premise that the interests of an respectively. They were all greater than the organisation are better served by identifying critical value (tc) 0.632, and were the interests of stakeholders and their statistically significant. The null hypothesis contribution to the long-term success of the that stakeholders in corporate governance in organisation. a firm in Ghana do not affect performance The results were congruent with was rejected and the alternative hypothesis Black et al (2009) which confirmed accepted at 95% level of significance that association between corporate governance stakeholders in corporate governance in a and firm performance using panel data on firm in Ghana do affect performance. The Korean public companies over 1998-2004. result of the test of hypothesis supported Using correlation analysis to investigate the that of the correlation analysis. relationship between the role of These inspiring results highlighted the stakeholders and firm performance, importance of the role of stakeholders in measured by Tobin’s Q, the authors economic fortunes of a firm. The results recorded correlation coefficient of were consistent with the stakeholder theory 0.75compared to present study’s 0.789 (see which advocates that performance and Table 23). Comparatively, the two results success are contingent on how well an were pointing to the same direction, organisation manages its dealings with these statistically significant and relatively close. stakeholders (Freeman & Phillips, 2002). The results were also consistent with Corporate governance framework of a Berman et al. (1999) which investigated the country should therefore recognise the relationship between stakeholder rights of all stakeholders established by law management and firm financial or through mutual agreements and inspire performance. Using regression analysis, the active co-operation between organisations authors found statistically significant and stakeholders in creating wealth, jobs, positive relationship between the two and the sustainability of financially sound variables. For instance, they found that two enterprises (OECD, 2004). The keenness stakeholder relationship variables, employee and critical success of an organisation is the (b = 0.33, p< 0.01) and customers (b = 0.27, outcome of teamwork that encompasses p < 0.05) were positively and significantly contributions from an array of different related to firm performance. The results of resource providers including investors, the present study reinforced the perception employees, creditors, and suppliers (OECD, of stakeholder theorists that emphasising 2004). This is consistent with the how a firm manages its relationships with fundamental assumption of resource stakeholders such as employees and dependency theory. The theory is of the customers (especially product safety/quality view that organisations are dependent on issues) can have a significant impact on actors outside the organisation because this financial performance (Berman et al., 1999). actor provides critical resources that lessen The results also supported previous uncertainty in achieving strategic management research containing arguments performance goals (Balkin, Beaten, & for a connection between the treatment of a Berghe, 2011). given stakeholder and firm financial Organisations should realise that the performance (Berman et al., 1999; Huselid, contributions of stakeholders form a valued 1995; Pfeffer, 1994; Graves & Waddock, resource for building competitive and 1997). profitable companies (OECD, 2004). It is Research question 1e (RQ1e). This
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Corporate Governance and Firm Performance research question searched whether company and its shareholders but also to the disclosure in firm’s financial statement in economy as a whole (OECD, 2004). Ghana affect performance. Correlation Shareholders and potential investors need analysis result demonstrated strong positive access to regular, reliable and comparable correlation coefficient between disclosure in information in adequate detail for them to firm’s financial statement in Ghana and firm evaluate the stewardship of management, performance. The correlation coefficient and make informed decisions about the between disclosure and performance valuation, ownership and voting of shares. measurement variables ROA, ROE, and Inadequate or unclear information may Tobin’s Q were 0.842, 0.837 and 0.875 hinder the capacity of the markets to respectively. Test of hypothesises carried function, increase the cost of capital and out using ROA, ROE and Tobin’s Q as result in a poor allocation of resources performance measures had test (OECD, 2004). statistics4.415, 4.326 and 5.112 The results were unswerving with respectively. They were all greater than the Black, Jang and Kim (2003) which reported critical value (tc) 0.632, and were evidence that corporate governance is an statistically significant. The null hypothesis important factor in explaining the market that disclosure in firm’s financial statement value of Korean public companies. Their in Ghana does not affect performance was correlation coefficient between disclosure rejected and the alternative hypothesis and performance measured in terms of accepted at 95% level of significance that Tobin’s Q was 0.570 as compared to 0.875 disclosure in firm’s financial statement in for the present study (see Table 24). Ghana does affect performance. The result Similarly, the results were congruent with of the test of hypothesis affirmed that of the Black et al. (2009) which confirmed correlation analysis. association between corporate governance The results showed how robust and firm performance using panel data on disclosure can influence corporate Korean public companies over 1998-2004. performance. Corporate governance Using correlation analysis to investigate the framework should therefore ensure that relationship between disclosure and firm timely and accurate disclosure is made on performance, measured by Tobin’s Q, the all material matters regarding the authors recorded correlation coefficient of organisation, including the financial 0.740compared to present study’s 0.875. situation, performance, ownership, and Comparatively, the two results are pointing governance of the organisation. A resilient to the same direction, statistically significant disclosure regime that promotes real and relatively close. Likewise, the results transparency is a central feature of market- collaborated Afolabi (2013) which recorded based monitoring of companies and is a correlation coefficient between disclosure crucial to shareholders’ ability to exercise and performance measured in terms of ROA their ownership rights on an informed basis of 0.680 as compared to 0.842 for the (OECD, 2004). Experience in countries with present study (see Table 24). large and active equity markets shows that Comparatively, the two results are pointing disclosure can also be a powerful tool for to the same direction, statistically significant influencing the behaviour of companies and and relatively close. for protecting investors (OECD, 2004). A Research question 1f (RQ1f). This robust disclosure regime can assist to attract research question investigated whether capital and uphold confidence in the capital effective fulfilment of responsibilities of markets. By contrast, weak disclosure and Board of Directors in a firm in Ghana affect non-transparent practices can lead to performance. Correlation analysis result unethical behaviour and to a loss of market established strong positive correlation integrity at great cost, not just to the coefficient between effective fulfilment of
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Corporate Governance and Firm Performance responsibilities of Board of Directors in a boards are expected to take due concern of, firm in Ghana and firm performance. The and deal equitably with, other stakeholder correlation coefficient between effective interests including those of employees, fulfilment of responsibilities of Board of creditors, customers, suppliers and local Directors and performance measurement communities (OECD, 2004). variables ROA, ROE, and Tobin’s Q were The results agreed with Afolabi 0.798, 0.806 and 0.854 respectively. Test of (2013) which recorded a correlation hypothesises carried out using ROA, ROE coefficient between roles and and Tobin’s Q as performance measures had responsibilities of Board of Directors and test statistics 3.745, 3.851 and 4.643 performance measured in terms of ROA of respectively. They were all greater than the 0.580 as compared to 0.798 for the present critical value (tc) 0.632, and were study (see Table 25). Comparatively, the statistically significant. The null hypothesis two results were pointing to the same that effective fulfilment of responsibilities positive direction, statistically significant of Board of Directors in a firm in Ghana and relatively close. The results were also does not affect performance was rejected consistent with Gillan (2006) which asserted and the alternative hypothesis accepted at that many researchers view the roles and 95% level of significance that effective responsibilities of board of directors as the fulfilment of responsibilities of Board of cornerstone of corporate governance with Directors in a firm in Ghana does affect fiduciary obligation to shareholders and the performance. The result of the test of responsibility to provide strategic direction hypothesis upheld that of the correlation and monitoring. The author in furtherance analysis. maintained that the board’s role and The results highlighted the responsibility in corporate governance is importance of the roles and responsibilities very essential. of Board of Directors in impacting firm The research question 2 performance. Corporate governance (RQ2).This research question explored framework should therefore be designed to whether there is any relationship between ensure the strategic guidance of the corporate governance framework of Ghana company, the effective monitoring of and OECD principles of corporate management by the board, and the board’s governance. Correlation analysis result accountability to the company and the revealed strong positive correlation shareholders (OECD, 2004). Coupled with coefficient between corporate governance directing corporate strategy, the board is framework of Ghana and OECD principles principally accountable for monitoring of corporate governance. The correlation managerial performance and achieving a coefficient between the two variables was sufficient return for shareholders, while 0.926. Test of hypothesis carried out had averting conflicts of interest and test statistics (ts) 6.938 which is greater than harmonising competing demands on the the critical value (tc) 0.632, and was company (OECD, 2004). In order for boards statistically significant. The null hypothesis to successfully accomplish their that there is no relationship between responsibilities they must be able to exercise corporate governance framework of Ghana impartial and independent judgement. and OECD principles of corporate Additional essential board responsibility is governance was rejected and the alternative to oversee structures designed to ensure that hypothesis accepted at 95% level of the company conforms to applicable laws significance that there is a relationship (OECD, 2004). The board is not only between corporate governance framework answerable to the company and its of Ghana and OECD principles of corporate shareholders but also has an obligation to governance.The result of the test of act in their best interests. Furthermore, hypothesis collaborated that of the
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Corporate Governance and Firm Performance correlation analysis. A detailed country assessment of the The result was symbolic of how corporate governance framework of Ghana statistically significant the corporate vis-a-vis the OECD principles of corporate governance framework of Ghana correlates governance by the World Bank (2010) with the OECD Principles of Corporate revealed that some of Ghana’s scores have Governance. The OECD Principles of improved since the last Reports on the Corporate Governance were endorsed by Observance of Standards and Codes OECD Ministers in 1999 and have since (ROSC) was carried out in 2005.The Work become an international benchmark for Bank (2010) further maintained that the policy makers, investors, corporations and average percent of implementation in the other stakeholders worldwide (OECD, shareholder rights subdivision increased 2004).They have promoted the corporate from 65 to 75, and from 52 to 61 in the governance agenda and delivered specific subdivision on equitable treatment of guidance for legislative and regulatory shareholders, reflecting in part the initiatives in both OECD and non OECD introduction of the securities depository and countries. The Principles also provide the the Securities and Exchange Commission’s basis for an extensive programme of (SEC) rules on changes in control. Also, cooperation between OECD and non-OECD disclosure percent implementation increased countries (OECD, 2004). Policy makers are from 56 to 62 (see Figure 1). These now more cognisant of the influence good remarkable improvements could be linked corporate governance makes to financial to the mandatory adoption of International market stability, investment and economic Financial Reporting Standards (IFRS) in growth. Companies now vividly 2008 by all financial institutions and listed comprehend how good corporate companies. Notwithstanding, more work governance influence their competitiveness. remains to be done. World Bank (2010) on Investors, especially collective investment the other hand averred that using the new institutions and pension funds acting in a methodology to assess compliance with the fiduciary capacity recognise they have a role OECD principles, only four principles were to play in ensuring good corporate fully implemented and 10 were broadly governance practices, thereby underpinning implemented. Also, World Bank (2010) the value of their investments (OECD, avowed that 43 principles were partially 2004). In today’s economies, interest in implemented and six were not implemented. corporate governance goes beyond that of Ghana’s scores for the board actually fell, in shareholders in the performance of large due to low awareness of and individual companies (OECD, 2004). This compliance with the SEC’s Corporate position is consistent with the stakeholder Governance Guidelines (CGG). The World theory. As companies play a fundamental Bank (2010) additionally revealed that role in economies and economies rely Ghana lags in some key areas compared to increasingly on private sector institutions to other countries in the region. For example, manage personal savings and secure when compared to other countries in Sub- retirement incomes, good corporate Saharan Africa with listed companies, governance is imperative to broad and Ghana does well in terms of enforcement growing segments of the population and institutional framework; shareholder (OECD, 2004). The OECD Principles are a rights and ownership; equitable treatment of living instrument offering non-binding stakeholders; and transparency and standards and good practices as well as disclosure, but lags in equitable treatment of guidance on implementation, which can be shareholders and, especially, responsibilities adapted to the specific circumstances of of the board (World Bank, 2010). individual countries and regions (OECD, It is therefore interesting to note that 2004). Ghana has made considerable progress in
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Corporate Governance and Firm Performance improving the legal and regulatory Conclusions and Practical framework for capital markets and the Recommendations financial system, with new acts and The study investigated whether there legislative amendments on insurance, credit, exists a relationship between corporate banks and non-bank financial institutions, governance and firm performance of listed alternative dispute resolution, and pensions firms on Ghana Stock Exchange. The study (Word Bank, 2010). The SECs long- constructed a corporate governance index standing Corporate Governance Guidelines (0~100) using all the six OECD principles (SEC CGG) remain a source of good of corporate governance as independent practice for listed companies and the Bank sub-variables for 30 of the 36 listed of Ghana has actively pursued better companies, relying primarily on survey corporate governance in banks (Word Bank, responses and secondary data. The study 2010). Listed companies are now mandated reported evidence that corporate governance to use International Financial Reporting is an important factor in explaining the Standards (IFRS) and auditors International performance of listed companies on Ghana Standards of Audit (ISA). Stock Exchange. The study revealed a Notwithstanding the high positive strong positive correlation between the correlation between the corporate overall corporate governance index and firm governance framework of Ghana and the performance measured in terms of ROA, OECD principles of corporate governance, ROE and Tobin’s Q which were robust with there are still tithing challenges. While the the results of the regression analyses. All the broader legal framework has seen six OECD principles of corporate significant change, laws for companies and governance that constituted the index, securities markets have not (Word Bank, individually showed strong positive 2010). The companies act in particular is correlation with the three performance outdated and key provisions, including those variables. The study further investigated on conflicts of interest, lack clarity. The whether there exists a relationship between SEC CGG has also not been reviewed in a the corporate governance framework of number of years, and is purely voluntary, Ghana and the OECD principles of with limited awareness and compliance corporate governance. The result indicated a (World Bank, 2010). The Bank of Ghana’s very robust relationship between the two corporate governance prerequisite is not frameworks. The study made use of control clarified in any regulation or code. Beyond variables that were not previously used in legal and regulatory requirements, there are other studies on Ghana. The combined problems with enforcement and control variables also correlated positively implementation. Capacity building for and with the performance variables and were oversight of the implementation of IFRS by statistically significant. the SEC, Bank of Ghana and Institute of It is worthy to note that Ghana has Chartered Accountants (ICAG) has been embarked on important reforms in recent minimal and there is little to ensure years. However, fully tapping the potential independence of company auditors (World of capital markets and professionalising Bank, 2010). Addressing these challenges boards and management will require that would make the corporate governance reforms continue. Good corporate framework of Ghana very robust governance ensures that companies use their comparatively to the OECD principle of resources more efficiently and leads to corporate governance. The resultant effect better relations with employees, creditors, would be a considerable increase in firm and other stakeholders (World Bank, 2010). performance with a trickling down effect on Good corporate governance is an important economic growth and development of prerequisite for attracting the capital needed Ghana. for sustained long-term economic growth
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Corporate Governance and Firm Performance and development (World Bank, 2010). The so is a more appropriate tool for measuring study therefore recommended the following the performance of commercial key reforms: organisations than profit-based ones. The Demanding all listed companies to study therefore recommends the use of EVA make annual disclosure of their as one of the performance measurement compliance to the framework to SEC; variables (dependent variables) in Equipping the SEC with the requisite investigating the relationship between resources and independence to fully corporate governance and firm performance carry out its duties and strengthening its in further research on the topic. Future capability in enforcing regulatory studies on the topic can be expanded by compliance by listed firms; incorporating other variables to control for Reviewing the Company Code 1963 factors outside of the scope of this study (Act of 179) to increase clarity and including investigating causality better protect shareholder rights, relationship between the variables. For including stronger requirements for the example, the performance of a firm is review, approval, and disclosure of influenced by a host of factors such as related party transactions; political, economic, social, technology, Improving independence and oversight environment and legal (PESTEL). The of the accounting and audit professions current study recommends that future by Bank of Ghana, SEC and other research should consider some of these regulatory bodies; factors in exploring the impact of corporate Ensuring full operationalisation of the governance on firm performance. The whistleblowing act to fight against current study focused on listed companies bribery and corruption menace that is on GES, further research could be extended detrimental to good corporate to include non-listed and smaller companies, governance practice; where it is likely that there is more variation Revising the SEC corporate governance in governance and the possibility of non- guidelines to include board linear relations between governance and responsibilities, increase non-financial performance. This would enable disclosure, and encourage posting comparative analysis to be made of company information online; corporate governance practices of listed and non-listed companies to see if corporate Increased training and awareness of sound corporate governance practices; governance really matter for intra-firm comparison. Enacting a legal instrument that would ensure better disclosure of beneficial REFERENCES ownership and trading in company Abdo, A., & Fisher, G. (2007). The shares by insiders; impact of reported corporate Encouraging capital market governance disclosure on the financial development through listing of State performance of companies listed on the Owned Enterprises and other JSE. companies and effective pension Abdullah, A., & Page, M. (2009). regulation Corporate governance and corporate Recommendations for Further Research performance UK FTSE 350 companies. World Bank (2010) asserted that Aboagye, E., Agyemang, O. S., & studies have shown that good corporate Ahali, A. Y. O. (2013). Prospects and challenges of corporate governance in governance practices have led to significant Ghana. International Journal of increases in economic value added (EVA) Scientific and Research Publications, of firms. Ryan (2011) on a related issue 3(5). avowed that EVA as a performance measure does assess the value created by managers,
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APPENDICES
Appendix A point Likert scale type of questionnaire Informed Consent based on Organisation for Economic Co- Project title: Corporate Governance and operation and Development (OECD) Firm Performance - Evidence from Ghana principles of Corporate Governance Introduction (OECD, 2004), performance measures and You are invited to join a research corporate governance framework of Ghana. study to look at whether the adherence of It is estimated that it will take about 30 Corporate Governance principles by listed minutes to complete. Upon receipt companies on Ghana Stock Exchange participants would have a period of 30 days (GSE) have any influence on the to complete the questionnaire. The performances of companies. Please take questionnaires can be either posted using the whatever time you need to discuss the study self-addressed envelope provided or with your family and friends, or anyone else collected personally by the researcher. you wish to. The decision to join is Benefits for taking part in the study voluntary. It is reasonable to expect benefits Good corporate governance has been from this research though but there is no highlighted to be vital to corporate financial benefit. However, I can guarantee organisations especially in transition and that you will receive a hard copy of the developing economies like Ghana (Akpakli, research findings for your library after a 2010). The effectiveness of a company’s successful completion of the study. Others corporate governance structure has a far- may also benefit in the future from the reaching effect on how well it performs information we find in this study. (Fooladi et al., 2014). Aboagye, Agyemang Confidentiality and Ahali (2013) asserted that corporate Your name will not be used when governance promotes effective and efficient data from this study are published. Every allocation of resources, helps corporate effort will be made to keep your corporate organisations in attracting capital at low cost governance, financial performance, research and assists corporate organisations in records, and other personal information maximising their performance as well as confidential as per APA, (2002). their capability in meeting community The researcher will take the needs. following steps to keep information about Research maintains that good you confidential, and to protect it from corporate governance practices enhance unauthorized disclosure, tampering, or firm performance through prudent allocation damage: The supervisor and the researcher of firm’s resources, efficient management, shall be the only people that would have high productivity, increase profitability and access to your information. The data would among others (Black et al., 2009; Akpakli, be described anonymously as data drawn 2010; Deku II, Kankpang & Okonkwo, from a listed company on the Ghana Stock 2012; Tornyeva & Wereko, 2012; Afolabi, Exchange. The data will not be shared with 2013). any other individual or organization. Data The study seeks to determine how good files will be kept in a locked cabinet and the corporate governance practices among listed data kept on a computer which has a companies in Ghana could address the poor password required for getting onto the performance of the 36 listed companies to system. I am the only person who has access accelerate Ghana’s economic growth and to the password for the computer. development Your rights as a research participant What is involved in the study Participation in this study is You will be asked to answer five – voluntary as per APA (2002). You have the
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Corporate Governance and Firm Performance right not to participate at all or to leave the through [email protected] if you have study at any time which is consistent with questions about the study, any problems, APA (2002). Deciding not to participate or unexpected physical or psychological choosing to leave the study will not result in discomforts, any injuries, or think that any penalty or loss of benefits to which you something unusual or unexpected is are entitled, and it will not harm your happening. relationship with Ghana Stock Exchange, Securities and Exchange Commission or Consent of Subject (or Legally Authorized any individual. If you decide to leave the Representative) study, the procedure is just to either Signature of Subject or Representative: telephone or email me. Date: CONTACTS FOR QUESTIONS OR PROBLEMS C.K. Simpson Call Caesar Simpson on 07/05/2015 +447984627201 or email Caesar Simpson
Appendix B
Survey Instrument
Section A: Questions 1-7 are related to your background. Please mark (X) only one option. 1. Gender: Male Female 2. Occupation: Board Chairman Chief Executive Officer (CEO) Non-Executive Director Executive Director 3. Years of experience in your occupation: ……… year(s) 4. Formal education: Diploma/Certificate Bachelor Degree Master Degree Doctoral Degree Professional certificate/other 5. Your location: ………………………. 6. How do you rate your knowledge on corporate governance of firms in your firm? Low Medium High 7. Type of Firm: Financial Firm Non-Financial Firm
Section B1: Statements 8-14 relate to your views on ensuring the basis for an effective corporate governance framework. Please rate the extent to which you agree with each statement by putting (X) in the box provided according to the scale below. Please this applies to all sections.
1 = Strongly disagree 2 = Disagree 3 = Do not know 4 = Agree 5 = Strongly Agree 8. The legal and regulatory requirements that affect corporate governance practices in Ghana 1 2 3 4 5 is consistent with the rule of law, transparent and enforceable. 9. The division of responsibilities among different authorities in Ghana is clearly articulated and ensure that the public interest is served 10. Supervisory, regulatory and enforcement authorities in Ghana have the authority, integrity and resources to fulfil their duties in a professional and objective manner. 11. A well-organised legislature and sound regulatory and supervisory agencies in place in Ghana promote good corporate governance. 12.A good legal system in Ghana helps to improve corporate governance in my firm 13. The ability to attract staff on competitive terms enhances the quality and independence of supervision and enforcement rule of law in my firm 14. Regulatory responsibilities in Ghana are vested with bodies that can pursue their functions without conflicts of interest and that are subject to judicial review.
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Section B2: Statements 15-21 relate to your views on the rights of shareholders
15. Shareholders should have the opportunity to participate effectively and vote in 1 2 3 4 5 general shareholder meetings and should be informed of the rules, including voting procedures, that govern general shareholder meetings 16. Shareholders should have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes 17. Shareholders should be furnished with sufficient and timely information 1 2 3 4 5 concerning the date, location and agenda of general meetings, as well as full and timely information regarding the issues to be decided at the meeting 18. Shareholders should have the opportunity to ask questions to the board, including questions relating to the annual external audit, to place items on the agenda of general meetings, and to propose resolutions, subject to reasonable limitations 19. Effective shareholder participation in key corporate governance decisions, such as the nomination and election of board members, should be facilitated. 20. Shareholders should be able to vote in person or in absentia, and equal effect should be given to votes whether cast in person or in absentia. 21. Shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights.
Section B3: Statements 22-28 relate to your views on the fair and equal (equitable) treatment of Shareholders
22. Members of the board and key executives should be required to disclose to the board 1 2 3 4 5 whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the corporation. 23. Insider trading and abusive self-dealing should be prohibited. 24. Within any series of a class, all shares should carry the same rights. All investors should be able to obtain information about the rights attached to all series and classes of shares before they purchase. 25. Minority shareholders should be protected from abusive actions by, or in the interest of, controlling shareholders acting either directly or indirectly, and should have effective means of redress. 26. Votes should be cast by custodians or nominees in a manner agreed upon with the beneficial owner of the shares. 27. Impediments to cross border voting should be eliminated. 28. Processes and procedures for general shareholder meetings should allow for equitable treatment of all shareholders. Company procedures should not make it unduly difficult or expensive to cast votes.
Section B4: Statements 29-35 relate to your views on the role of stakeholders in corporate governance
29. Stakeholders, including individual employees and their representative bodies, should be 1 2 3 4 5 able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing this. 30. The rights of stakeholders that are established by law or through mutual agreements are to be respected. 31. Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights. 32. Performance-enhancing mechanisms for employee participation should be permitted to develop. 33. Where stakeholders participate in the corporate governance process, they should have access to relevant, sufficient and reliable information on a timely and regular basis. 34. The corporate governance framework should be complemented by an effective, efficient insolvency framework and by effective enforcement of creditor rights. 35. Where stakeholder interests are not legislated, my firm make additional commitments to 1 2 3 4 5 stakeholders, and concern over corporate reputation and corporate performance often requires the recognition of broader interests.
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Section B5: Statements 36-42 relate to your views on disclosure and transparency
36. An annual audit should be conducted by an independent, competent and qualified, 1 2 3 4 5 auditor in order to provide an external and objective assurance to the board and shareholders that the financial statements fairly represent the financial position and performance of the company in all material respects. 37. Information should be prepared and disclosed in accordance with high quality standards of accounting and financial and non-financial disclosure. 38. Remuneration policy for members of the board and key executives, and information about board members, including their qualifications, the selection process, other company directorships must be disclosed 39. External auditors should be accountable to the shareholders and owe a duty to the company to exercise due professional care in the conduct of the audit. 40. Channels for disseminating information should provide for equal, timely and cost efficient access to relevant information by users. 41. Full disclosure of conflicts of interest and how the entity is choosing to manage them is encouraged in my firm 42. Disclosure of material related party transactions to the market, either individually, or on a grouped basis, including whether they have been executed at arms-length and on normal market terms is required in my firm
Section B6: Statements 43-49 relate to your views on the responsibilities of the board
43. The board should review and guide corporate strategy, major plans of action, risk policy, 1 2 3 4 5 annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures. 44. Where board decisions may affect different shareholder groups differently, the board should treat all shareholders fairly. 45. The board should apply high ethical standards. It should take into account the interests of stakeholders. 46. Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders. 47. The board should be able to exercise objective independent judgement on corporate affairs 48. In order to fulfil their responsibilities, board members should have access to accurate, relevant and timely information. 49. When committees of the board are established, their mandate, composition and working procedures should be well defined and disclosed by the board.
Section C: Statements 50-57 relate to your views on Return on Equity (ROE), Return on Assets (ROA) and Tobin’s Q as measures of firm performance.
50. Good corporate governance practices affect my firm’s sales 1 2 3 4 5 51. Good corporate governance practices affect my firm’s cost of sales 52. Good corporate governance practices affect my firm’s operating expenses 53. Good corporate governance practices affect my firm’s profitability 54. Good corporate governance practices affect my firm’s asset base 55. Good corporate governance practices affect my firm’s asset market value 56. Good corporate governance practices affect my firm’s share price 57. Good corporate governance practices affect my firm’s market capitalisation
Section D1: Statements 58-64 relate to your views on the mission of the board.
58. The mission of the board is to ensure strategic guidance of the corporate entity in 1 2 3 4 5 keeping its goals. 59. The mission of the board is overseeing or supervising the management of the business. 60. The mission of the board is identification of risk as well as the implementation of systems that manage risk.
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Continued Section D1... 61. The mission of the board is succession planning and the appointments, training, remuneration and replacement of senior management. 62. The mission of the board is supervision of internal control system. 63. The mission of the board is maintenance of the corporate entity’s communications and information dissemination policy. 64. The mission of the board is to ensure the sovereign rights of shareholders
Section D2: Statements 65-71 relate to your views on the Committees of the board.
65. Board to constitute committees such as the audit and remuneration committee as it may 1 2 3 4 5 deem appropriate to help it in carrying out its duties. 66. The membership of the audit committee should be those with adequate knowledge on finance, accounts and the basic elements of the laws under which the company operates. It further states that the chairperson of the audit committee should be a Non-Executive Director (NED). 67. The audit committee should compose of at least three directors, of whom the majority should be NEDs 68. The chairperson of the audit committee should be a NED. 69. Committee help board in developing corporate strategies that would improve board control and operating structures of the corporate organisation. 70. Remuneration committee should institute an official and clear procedure for mounting policy on executive compensation. 71. Remuneration committee should make sure that a suitable structure is instituted to give performance-oriented incentives to managers.
Section D3: Statements 72-78 relate to your views on relationship to shareholders and stakeholders.
72. Corporate governance structures employed by the board should not be geared towards 1 2 3 4 5 stakeholders’ benefit at the expense of shareholders. 73. Shareholders have the right to partake in, and to be satisfactorily informed about decisions concerning fundamental changes. 74. Equity ownership over and above specified thresholds to be disclosed. 75. Market for corporate control of listed firms functions in an efficient and transparent way. 76. All shares issued unless otherwise specified rank of equal step with other share of the same class and in the case of ordinary shares, one share bears one vote. 77. Effective corporate governance framework forbids and punishes insider trading and self- dealing 78. Effective corporate governance framework increases shareholder value by monitoring and maintaining stakeholder relationships effectively and professionally.
Section D4: Statements 79-85 relate to your views on financial affairs and auditing.
79. Board should ensure that the financial statements of the company are audited at such 1 2 3 4 5 regular intervals as described by law, regulations or internal policies of the company by experienced and well-qualified auditors. 80. Board should maintain satisfactory records for protecting the assets of the corporate organisation. 81. Board should make sure that the statutory payments payable by the corporate organisation are executed on time. 82. Board should make sure that the structures of internal control are present for monitoring risk, adherence to financial governance structures and compliance with the law. 83. The accurateness of information contained in financial statements is the responsibility of the board. 84. Board is responsible for making sure required accounting policies have been consistently employed in the preparations of the financial statement. 85. Board is to ensure that annual and interim financial statements of the company are dispersed to stockholders and regulators within the time frames described by law and regulation.
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Section D5: Statements 86-92 relate to your views on disclosures in annual reports
86. Shareholders should be provided with information on the financial and operating 1 2 3 4 5 outcomes of the corporate business. 87. Shareholders should be provided with information on the objectives of the corporate business 88. Shareholders should be provided with information on major share ownership and voting rights 89. Shareholders should be provided with information on material predictable with factors 90. Shareholders should be provided with information on material issues regarding employees and other stakeholders 91. Shareholders should be provided with information on board members and key 1 2 3 4 5 executives, and their remuneration. 92. The membership of the remuneration committee and their policies should be disclosed during annual general meetings to shareholders in their annual report.
Section D6: Statements 93-99 relate to your views on code of ethics
93. Every corporate organisation is directed to have its own code of ethics and statement of 1 2 3 4 5 business practices. 94. Code of ethics should be implemented as part of the mechanisms that ensure effective corporate governance. 95. Boards of directors are responsible for the formulation of code of ethics document 96. Content of code of ethics document must be applicable to the board and all employees. 97. Board should introduce a mechanism that monitors adherence and discipline deviations or breaches of code of ethics. 98. Board should demonstrate that they are committed to ethical standards and their application to the way they govern and conduct themselves. 99. The company has a whistle blowing process in place and is it easily accessible and makes it clear who the designated Ethics/Compliance Officer is.
Section E: Statement 100 any further comments.
100. Any further comments on issue of corporate governance of in your firm
Appendix C
Participants’ characteristics Characteristics Male Female Total Chairman/Chairperson 22 7 29 CEO 23 5 28 Non-Executive Directors 33 20 53 Executive Directors 18 8 26 Total 96 40 136
Characteristic Male Female Total Masters’ Degree Holders 65 31 96 PhD Holders 31 9 40 Total 96 40 136
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Appendix D
Distribution of firms Industry No. of Firms % Manufacturing 13 43.33% Banking 8 26.67% Oil & Gas 3 10.00% Mining 2 6.67% Technology 1 3.33% Retail 1 3.33% Publishing 1 3.33% Insurance 1 3.33% Total 30 100.00%
How to cite this thesis: Simpson CK. Corporate governance and firm performance: evidence from Ghana. Galore Knowledge Publication Pvt. Ltd; 2016. Available from: www.gkpublication.in
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