Corporate Governance and Sustainability Review/ Volume 2, Issue 2, 2018 CORPORATE GOVERNANCE AND VALUE OF FAMILY-OWNED BUSINESS: A CASE OF EMERGING COUNTRY Sabeen Sikandar *, Waqas Mahmood ** * Corresponding author Institute of Business Management (IoBM), Pakistan Contact details: Institute of Business Management, Korangi Creek, Karachi, Sindh, 75190 Pakistan ** Institute of Business Administration (IBA), Pakistan Abstract How to cite this paper: The article focuses on analyzing the relationship between practices of Sikandar, S., & Mahmood, W. (2018). Corporate governance and corporate governance in family-owned firms that are listed in Pakistan value of family-owned business: A Stock Exchange (PSX) with their value (firm value). Nearly 70% of listed case of emerging country. cement companies are family-owned. The cement industry in Pakistan Corporate Governance and is in boom phase because of international construction projects in Sustainability Review, 2(2), 6-12. http://doi.org/10.22495/cgsrv2i2p1 collaboration with China, China-Pakistan Economic Corridor (CPEC). Moreover, family-owned firms have a long history of contributing their Copyright © 2018 by Virtus best towards Pakistan’s economy since inception after the Interpress All rights reserved independence. The firm’s market value is an indicator of overall performance and health of the firm. This paper uses data from annual reports of the firms from 2013-2017, including corporate governance metrics like board size, board composition and composition of the audit committee. The dependent variable firm value has calculated using Tobin’s Q. The analysis involves panel least squares method ISSN Online: 2519-898X using Eviews9. Results indicate a positive relationship between firm ISSN Print: 2519-8971 value and corporate governance metrics, and closely consistent with a number of researches in the similar geographical framework. It has Received: 01.05.2017 Accepted: 27.07.2018 been however recommended for future researchers to have a deeper view of a firm’s performance metrics in the cement industry keeping JEL Classification: L25, L32, G30, in view the gigantic projects upcoming. G34, G38 DOI: 10.22495/cgsrv2i2p1 Keywords: Firm Value, Corporate Governance, Pakistan, Cement Sector, Family-owned Firm 1. INTRODUCTION interest. The practitioners, regulatory bodies and the general public, therefore, are much concerned Corporate Governance (CG) is meant to provide fair regarding the developments in CG. The corporate welfare to the interests of the stakeholders. This is financial scandals, like that of Enron, were the because CG predominantly contests fraudulent turning point for the corporate regulations & activities within or by the corporates. Whether it is practices worldwide. Enron Corporation was an the firm owners or the shareholders, CG provides a American energy firm, founded in 1985. Due to the transparency between the two. CG controls and misrepresentation of billions of US dollars in monitors how corporates are being ruled and financial reports, the corporation was able to hide the operated; specifically when an organization is a failures and disgrace in several projects and deals. publically listed company (Balachandran & Faff, Also, the audit firm was pressurized to conceal the 2015). A number of amendments are recorded in the financial ambiguities in these reports; on the recent Companies’ act of Pakistan, 2017, which are revelation of which, the stakeholders had filed a supposed to strengthen CG practices in the region. lawsuit. The stock price of Enron Corporation thus The following research is aimed at investigation, dropped to USD 1 from over USD 90. As a result of analysis and study of the relationship between CG which, the codes of corporate governance were first practices (board size, board composition, the introduced to the World in 1999, by the Organization composition of audit committee) (Azhar & Mahmood, for Economic Cooperation & Developments (OECD); 2018) and firm valuation specifically of the listed which had caught the interest of the listed firms, family-owned firms in Cement sector of Pakistan. their stakeholders, regulatory authorities in the These days, corporate governance is one of the Governments and policy makers. This helped in areas where researchers are globally taking much 6 Corporate Governance and Sustainability Review/ Volume 2, Issue 2, 2018 safeguard of the stakeholders from damages like that 2015). To be specific, a firm with the chairperson or of Enron case. majority directors (BODs) or from a single family, or Since Pakistan got its independence in 1947, a those having prominent ownership and voting rights number of companies emerged as the true pillars of 25% and 50% in the firm are family-owned businesses the new economy. The size of Pakistan’s industry has (George Stalk & Foley, 2012). In Pakistan, owners of been growing rapidly. A number of businesses the family-owned firms usually hold more than 50% emerging in the private sector have exceeded the shareholdings. The family-owned businesses have a number 50,000 as reported by SECP (Securities and significant contribution size in the Global economies. Exchange Commission of Pakistan (SECP), 2017). It Although family-owned firms are large in number has become much essential to adhere to the concept worldwide, also, a concise understanding has not yet of good governance, as the economic expansion is developed to what constitutes them actually. bearing fruit for Pakistan. A huge number of the Commonly, family-owned businesses are the ones public listed companies are the family-owned firms initiated and managed primarily and predominantly in clear majority across Pakistan. Those are being led by the family members. The total economic impact of by a group of family members (Zaidi & Aslam, 2006). family businesses to global GDP is over 70% (The The leadership is involved in decision making, Economist, 2004). direction, operation and management of the firms. Today, the largest of the world’s revenue Thus changes happening in such firms are a result of generating firms are family-owned. Globally, family- the family members’ consensus, disagreement of owned businesses thrive quite well. It averages nearly shrinkage or expansion. In many cases, it has been 50% per country. Pakistan has 80% firms family- observed that the family businesses do not thrive owned, commonly known as Seth Company throughout generations. Families work hard in 2nd (Abouzaid, n.d.). Although, the capital market and 3rd generations to remain an intact unit for regulators are striving hard to bring significant mutual cooperation and betterment of the firm. The betterments in the corporate governance practices good corporate governance although helps family- throughout Pakistan (Ali et al., 2015; Safdar Husain owned firms to relieve major control issues; but also Tahir & Sabir, 2015; Zaidi & Aslam, 2006); but also, supports the firms to move in the better phase of their efforts have been met with sheer defiance. A business lifespan (Ali, Tahir, & Nazir, 2015; Gulzar & number of Managers at the listed firms hold the view Wang, 2010a). Family businesses are said to further that the cost of adopting good corporate governance strengthen and integrate, with improved credibility practices hinders escalated firm value (Ali et al., and better succession plans if good governance is 2015). Thus it is practical if the impact of the observed within the organizations (Ali et al., 2015). It corporate governance practices on firm valuation is happened thus in 2008 that the Center for precisely known. International Private Enterprise (CIPE), Pakistan Institute of Corporate Governance (PICG) and 2.2. Economic growth in Pakistan & the cement Institute of Chartered Accountants Pakistan (ICAP) industry joined hands together and worked alongside the stakeholders for development of a guideline for Economic growth in Pakistan has always lacked family-owned businesses. This guideline helps stability and made economic condition uncertain. family-owned businesses to stay relevant to the The historical data indicates the thriving economy of current market trends and fulfils the needs of the Pakistan during 1954-1955 and then 1969-1970 stakeholders. where the growth rate of nearly 10% was observed. In The relationship between corporate governance recent times, the economy had a rise during 2004- and firms’ financial performance has been a subject 2005 in Musharraf’s reign to about 7.5%. The current of interest for many researchers. The firms (of any government took power in 2013, with a prime focus business nature) are being valued according to their on stabilizing of Pakistan’s destabilized economic historical data available in their reports. A number of conditions. Since then, the economic growth of valuation techniques are available in the accounting Pakistan has been trending upwards to nearly 5% in principles (Wallace, Wright, & Hyde, 2014), which are 2016-2017 (Wajid & Shah, 2017). The economic being utilized as per the nature of business, sector potential of Pakistani market has been acknowledged and other detail. Public listed companies usually on the Global scale. According to a report published show their data in annual, semi-annual or quarterly by Price Water House Coopers in 2017, Pakistan is reports on their respective websites. At least 5-year projected to become the world’s 20th largest data is required for near approximation (Cherewyk, economy by 2030 and 16th largest by 2050. This is 2011). Usually, the valuation methods