Relationship between corporate governance and firm performance : an African perspective
Thesis (PhD (Business Management)—University of Stellenbosch, 2007.
Corporate Governance has engaged the attention of academics and practitioners alike for some time now. It is sad to note, however, that most of the studies carried out in this area have been conducted in countries such as the USA and the UK. In recent times, interest in Corporate Governance on the African continent has assumed heightened proportions, probably as a result of the 1997 East Asian crisis and the relatively poor performance of Corporate Africa. Melvin Ayogu who researched into governance matters around the continent pointed out that corporate governance perhaps is nothing but a mirror image of political governance bridled with a lot of corruption. In spite of the recognition that corporate governance is critical for firm performance and for sustained macroeconomic growth coupled with the heightened interest in the area, research in corporate governance has not received the needed attention on the continent. This was the main motivation for the study. In carrying out this study we considered 103 listed companies drawn from Ghana, Nigeria, Kenya and South Africa and 52 Microfinance Institutions from Ghana. Data consisted primarily of governance and financial variables. Though, most of the financial data was obtnaied through secondary sources, the governance data was essentially obtianed through questionnaire administration. Analysis of the data was done primarily within the Panel Data Framework and various shades of panel data estimations were run. This dissertation presents the results of the research work underlying seven stand-alone but related essays that focus on the relationship between corporate governance and various aspects of firm behaviour. Whilst, five of the essays dwell on corporate governance and firm attributes, one considers determinants of board size and composition by using data from Ghana and the last essay explores how corporate governance and stock market development affect economic growth. The first essay looks at corporate governance and firm performance and the second focusses on the determinants of board size and composition. The third essay concentrates on corporate governance and shareholder value maximisation. The fourth essay considers how corporate governance affects the financing choices of firms. The link between firms’ investment opportunity set and corporate governance is the subject matter of the fifth essay. While, the sixth looks at how corporate board diversity through gender affect the performance of microfinance institutions in Ghana, the last and seventh essay is devoted to an exploration of the linkage between corporate governance, stock market development and economic growth using board independence as the main governance indicator. The findings of the study indicate that large and independent boards enhance firm value and that when a CEO serves as board chair, it has negative effect on performance and such firms employ less debt. We also found that a CEO’s tenure in office enhances firms’ profitability while board activity intensity has a negative effect on firm profitability. The study also revealed that while larger boards employ more debts, the independence of a board has a significant negative relationship with short-term debt. The size of audit committees and the frequency of their meetings have a positive influence on market-based performance measures and institutional shareholding essentially sends a positive signal to potential investors thereby enhancing market valuation of firms. The study also confirmed the widely-held view that board size and its composition are functions of firm and industrial characteristics. Thus, while firm level risk has a positive relationship with board size, CEO tenure correlates negatively with board size and that firms with larger institutional shareholding employ fewer outside directors. Firms in the finance sector were seen to employ smaller board sizes and fewer outside directors partly due to the existence of other regulatory mechanisms in these institutions. More so, it was found that large board sizes enhance shareholders wealth and that both sector and country specific effects impact on shareholders value. The mining sector was seen as dominant in maximising shareholder value in terms of dividend yield. The study once again showed that shareholder value maximisation is also dependent on the level of country specific risk. Our results also point to the fact that firms with investment or growth opportunities employ large boards (high board and auditor fees), have longer CEO tenure and are profitable, and that the extent of growth response to governance structures is influenced by both country and sector specific effects. Findings again, suggest that board diversity through the inclusion of women is important for enhanced performance of microfinance institutions and the independence of corporate boards in particular is important for firm performance. These findings have important policy implications.