Professional Documents
Culture Documents
Supervisor
Dr. Imran Shafi
September 2015
Table of Contents
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.
Introduction. 4
Problem Statement....6
Literature Review. 6
Objectives of the Research.. 9
Research Hypothesis 9
Significance of the Research...9
Research Methodology... ..10
1. Population and Sample . 10
2. Research Framework..10
3. Corporate Governance Measurement Variables 11
4. Firm Performance Measurement Variables... 11
5. Quantitative techniques.......... 11
Conceptual framework 12
Limitations 13
Thesis Time Line.. 14
References. 15
(By-Abdul Shakoor)
I.
INTRODUCTION
Corporate Governance is the predetermined procedures, strategy, rules along the way
in which company is governed, manage and supervise. The term corporate governance
became famous in 1980s. Corporate governance gives the knowledge about general
principles by which the business along with the management of companies were
dictated and controlled. Those firms which exercises the sound corporate governance
their performance will be better than those firms who cannot practices corporate
governance procedures. In Pakistan, corporate entities regulated by Security and
exchange commission under Companies ordinance, the securities and exchange
ordinance 1969, SECP Act 1997 along with many other rules and regulation made
there under in order to improve corporate governance in Pakistan (Kumar and Singh,
2013).
From last twenty years, economic disaster that affects the whole world has raised a
question on the governance of the firms. This global financial disaster got the attention
of investigators towards the matter of corporate governance. Corporate sector of
Pakistan faces the challenges that are due to the reason of changes in global business
scenario. SECP emphasized on the corporations to follow good corporate governance
mechanism. SECP codes involve protection of minority shareholders rights and audit
policy provides accountability in corporate sector (Javid and Iqbal, 2010).
Failures in some organization of Pakistan due to deficiency of corporate governance:
a) PTCL
Poor governance practices were followed by TAJ Company. This company had
a scheme on which, they was having large amount of illegal deposits. This was
Quite depressing, that this company using religious affiliation, their fraud
Activities stopped after 15 years.
e) MEHRAN Bank
II.
PROBLEM STATEMENT
The concept of Corporate Governance gained importance due to many financial
disasters that occurs in past twenty years. The topic is equally important for developed
as well as developing countries rather for develop countries the concept hold greater
importance. Since regulatory bodies, laws and regulations are not well established in
case of Pakistan. The government assigned the task to Security and Exchange
Commission of Pakistan in 1999 to look after corporate governance together with other
related issues. SECP introduced many initiatives to improve corporate governance in
Pakistan. Due to these steps it is hoped that interest of shareholder will be protected
and there will be increased accountability and transparency. Moreover the minority
rights are expected to safeguard as well as there will be improvement in the Audit
process.
The Aim of this research study is to find the relationship between corporate governance
processes and firm performance. The corporate governance processes studied include
Board size, Board composition, Audit committee composition, CEO/Chairman duality,
number of Meetings and Family ownership. The Firm performance is measured in
terms of Profit Margin (PM) and Return on Equity (ROE).
III.
LITERATURE REVIEW
The financial crisis restores the consideration for improving the corporate governance
in order to ensure financial firmness. Investors Give up the command of firm to
qualified managers due to deficiency of expertise along with ill-mannered attitude
towards business activities. These managers have huge control over resources of
business unit (Chitana, 2012).
According to Berle (1932), in agency theory viewpoint corporate governance is
referred to as dissociation of possession together with control. Generally two
approaches are used in corporate governance, in order to keep safe rights of investors.
First approach is to give authority to investors through lawful prohibitions against
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in 2002 India issued code for governance. Analysis of four countries by Sobhan with
Wendy (2003), Highlight various lessons of risky factors along with corporate
governance. According to this study, corporate governance should not practice in
isolation from a series of different improvements (macro with micro economic, trading,
banking along with institutional) nor do all these improvements fulfill their goals
without implementing the corporate governance. To encourage the policy dialogue on
corporate governance, World Bank along with OECD used their combined efforts for
the establishment of corporate governance mechanisms on regional basis, having
partnership with regulators as well as policy makers. Number of researchers draws
lesson from Asian financial crises in 1997. For the improvements of corporate
governance formulate the common policy to achieve desired goals. In order to, raise
the corporate governance standard, Security and exchange commission of Bangladesh
along with "Chartered accountants institute" shows greater interest in implementation
of International accounting standard. Good governance in Asia gives an overview of
level of governance in both national and foreign organizations. Also through, light on
role of board of directors. Inspect the association among societal duties, value creation
together with governance (Jacobson and Tarr, 1995).
According to Weisbach (1988), if there is large number of directors in a firm from
outside, it is easy to replace chief executive officer after the worst firm's performance.
It is possible for outside directors if they want to change firm's strategy. According to
Lee (1992) positive relationship exists between performances of firm along with board
composition (Velnampy and Pratheepkanth, 2013).
Financial information provides economic implementation with the help of management
of assets efficiently. Some of examples are timely management of projects to overcome
the chances of losing and selection of better project along with protecting the rights of
investors. Lombardo with Pagano (2000) represent that the good governance demands
the continuous improvements in procedures. Improvements in governance, causes
reduction of individual benefits of managers, in this response auditing costs increases,
shareholders of firm must tolerate this cost to avoid opportunism of managers (Faiza et
al, 2013).
IV.
V.
RESEARCH HUPOTHESIS
H1: Profit margin and Board size is significantly related.
H2: Profit margin and Board composition is significantly related.
H3: Profit margin and Audit committee composition is significantly related.
H4: Profit margin and CEO/Chairman duality is significantly related.
H5: Profit margin and Number of meetings is significantly related.
H6: Profit margin and Family ownership is significantly related.
H7: Return on equity and Board size is significantly related.
H8: Return on equity and Board composition is significantly related.
H9: Return on equity and Audit committee composition is significantly related.
H10: Return on equity and CEO/Chairman Duality is significantly related.
H11: Return on equity and Number of meeting is significantly related.
H12: Return on equity and Family ownership is significantly related.
VI.
factors are more important in term of their impact on profitability. The shareholder can
decide in which company to invest based on the findings of the study. The policy
makers can also get valuable insight on the factors which are crucial for firms
profitability.
VII.
RESEARCH METHODOLOGY
The main objective of this study is to explain how firm performance is influenced
by corporate governance processes. Investigate the association between corporate
governance processes along with firm's performance measures. Variables that are
used to measure firm's performance are profit margin together with return on
equity. Variables that are used to measure corporate governance processes includes
board size, board composition, audit committee composition, CEO/Chairman
duality, number of meetings as well as family ownership. Later this research study
aimed to explore the impact of governance processes on firm performance.
2. Research framework
This research study is of a descriptive kind based on secondary data providing
empirical analysis about data. Data was collected from annual reports as well as
financial statements from year 2010-2011, 2011-2012, 2012-2013 and 2013-2014
of KSE 100 index. Two variables are dependent (Profit Margin and Return on
Equity) and six are Independent variables (Board size, Board composition, Audit
committee composition, CEO/chairman duality, Number of Meetings and Family
ownership).Statistical Package for the Social Sciences (SPSS) is used to analyze
the data that is collected from annual reports. Correlation and Regression
techniques are used to get results.
Codes of corporate governance state that, Size of board is not too large. Perfect
size is 5 to 16 members in a board but it depends on the circumstances and firm's
condition (Dar, Naseem, Rehman and Niazi, 2011).
Board Size (BSIZE) = Total Members in the board
Family ownership= Zero for family owned and one for otherwise
Return on Equity=
Net income
Sales
Net income
Shareholders Equity
5. Quantitative techniques
In order to get results from sample data statistical software is used called SPSS.
Multiple regression and correlation techniques are used.
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VIII.
(Board
size,
Board
composition,
Audit
committee
composition,
Board Composition
H1
H2
Audit committee
Composition
H3
Profit Margin
CEO/Chairman Duality
H4
H5
Number of Meetings
H6
Family Ownership
11
Board Size
Board Composition
Audit committee
composition
Return on Equity
CEO/Chairman Duality
Number of Meetings
Family Ownership
IX.
LIMITATIONS
This study holds some limitations. First limitation is sample size and second is
analysis period that is considered to be small and data of only manufacturing
sector is included. It is based on Secondary data which is prepared by firms
accountants and auditors therefore empirical results might be affected due to of
any reservation included in data.
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X.
13
XI.
REFERENCES
Naveen Kumar and J. P. Singh (2013). Global Financial Crisis: Corporate
Governance Failures and Lessons. Journal of Finance Accounting and
Management, 4(1), PP. 21-34.
Attiya Y Javid and Robina Iqbal (2010). Corporate Governance in Pakistan:
Corporate Valuation, Ownership and Financing. Pakistan Institute of
Development Economics Working paper.
Laib A Dar, Muhammad Akram Naseem, Ramiz Ur Rehman and Dr. G. S. K.
Niazi (2011). Corporate Governance and Firm Performance a Case Study of
Pakistan Oil and Gas Companies Listed in Karachi Stock Exchange. Global
Journal of Management and Business Research, Volume 11 Issue 8 Versions
1.0.
Gheorghe Chitana (2012). Corporate governance and bank performance in the
Romanian banking sector.
Rafael La Porta, Florencio Lopez-de-silanes, Andrei Shileifer and Robert
Vishny (2002). Investor Protection and Corporate Valuation. The Journal of
Finance, Vol. LVII.
David F. Larcker (2011). Introduction to corporate Governance. Center for
Leadership Development and Research, Stanford Graduate School of Business.
Charlie Weir, David Laing and Phillip J. McKnight (2002). Internal and
External Governance Mechanisms: Their Impact on the Performance of Large
UK Public Companies.
Kajola and Sunday (2008). Corporate Governance and Firm Performance: The
Case of Nigerian Listed Firms. European Journal of Economics, Finance and
Administrative Sciences.
Charles Jacobson and Joel Tarr (1995). Ownership and Financing of
Infrastructure: Historical Perspectives.
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