Size Of Board Of Directors Of Banks
The banks’ versatile and crucial role in the economic system has attracted, not without valid reasons, much regulatory attention in an effort to inspire sound corporate governance standards and address the unique features of and risks faced by credit institutions. Since banks act as middlemen governing supply and demand of monetary assets, they rely on absolute confidence within the credit business and the protection of investor’s savings. For a stable and growing global economy efficient financial systems are fundamental. Usually Financial crises cause liquidity crunches and bankruptcies of banks as it has been observed over the last few years.
Up to now, there are many studies on corporate governance, yet only a few papers focus on banks’ corporate governance (e.g., Tod and Anil, 2005; Michael, Steven and Paul Mitchell, 2007), however the key elements of corporate governance can be applied to banks. The problems of collective action faced by stakeholders who wish to ensure the efficient allocation of resources. Poor performance will cause insiders to leave the board and outsiders to join the board. Since exiting an industry is commonly the result of bad performance, the market-structure effects can also be explained similarly (Hermalin and Weisbach, 1988).
However, the relevance of banks in the economic system and the nature of the banking business make the problems involved in their corporate governance highly specific and different. Banks are a key factor in the payment system and play a major role in the execution of economic systems. Banks are also highly leveraged firms, primarily to the deposits taken from customers. Because of these reasons, banks are entitled to more intense regulation than other firms, as banks are accountable for protection of depositors’ rights, ensuring the stability of the payment system, and reducing systemic risk.
A lot of of the transactions within the capital markets are done between the banks and therefore, credits that have been given by one bank to a customer are bought by other banks through different financial instruments. The role of boards as a mechanism for corporate governance of banks takes on special importance in a framework of limited competition, strong regulation, and superior informational asymmetries due to the complexity of the banking business. Thus, the board becomes a key mechanism to monitor managers’ performance and to direct them on strategy recognition and execution.
The composition and size of the board of directors comprise of the most vital corporate governance subject and have been able to attract the attention of many researchers. Many researches have appeared remarkably confident that smaller and more outside directors boards are critical drivers of better corporate execution and, therefore, contribute positively to corporate performance. The present research consist of the board structure (in terms of board size and composition), while performance is measured in terms of most commonly used ROA as performance measure of banks.
Already many researches have been conducted in the field of corporate governance and financial performance; and many industries have been discussed already. Hence, especially considering today’s situation with the financial crisis spreading from the United States of America into the whole world, this dissertation will focus on the size and composition board of directors and the performance of financial institutions.
A bank which becomes less attractive for investors will soon lose employees and customers. In addition, it will become an applicant for acquisition. Based on that, bank directors continuously plan new concepts and products to increase the bank’s performance.
Due to the unstable developments in the bank sector during the last few years it is vital to consider the leaders, in particular the board of directors, of financial institutions who are in charge of decisions mainly affecting the survival of their company and, moreover, bear a massive responsibility for the entire economy because “a small leak will sink a big ship.”
Based on this, the focus of this thesis will be on the composition and size of board of directors of banks. To expand the outcome previous studies have already shown, this study investigates the association of the board composition with the company performance that has been studied before now, but only in other industry sectors. Banks are generally excluded from this type of research.
The objective of the thesis is to study the relationship between the composition of the board of directors, and the firm performance of financial institutions. This will be researched through an empirical study of annual reports of seventeen banks of the fifty largest banks in the world for a time span of three years. This is an important study because this study can be helpful to determine the optimal composition of boards and their decisions concerning central firm matters.
1.4 Study Question
How does the composition of the board of director’s impact the performance of the company?
The thesis continues as follows: The theoretical framework and review of related research on board diversity and firm performance relevant to this study are presented in Chapter 2, whereas the observed data and methodology are described in Chapter 3. The thesis is concluded in Chapter 4 with a discussion about the practical relevance and implications of our results as well as suggestions for future research work.
Many researchers have studied corporate governance from different views and in different environments. The following ones were very interesting and useful for this study:
(Tod and Anil, 2005) Study examined that companies with a majority of outside directors are expected to begin asset reformation and employee layoffs and that the decline in the scale of operations is larger for these firms than firms with minority of outside directors. ROA has been used as the performance indicator in this research and have found significant results. This study also compared median total assets, market-adjusted stock returns, and change in pretax ROA. This research find that firms whose boards have a majority of outside directors are twice as likely to respond with operational events, including asset reformation and other cost-cutting initiatives. The study found enhancement in operating performance for firms with a majority of outside directors and conclude that board composition has a significant influence on corporate performance.
(Michael, Steven and Paul Mitchell, 2007) this research empirically studies the association between director’s composition and firm performance. They studied regression analyses to observe the nature of the relationships between firm performance and director’s composition. The financial indicators include in this research are Tobin’s Q and ROA, market to book value ratio. Board composition variables studied in this paper are board size, average board tenure, average director age and average outside directors.
Opposite to the hypothesis developed in this research paper the study found that a high average proportion of directors who have outside Board positions are associated with decreased levels of firm performance. The relationship between a firm’s performance and the number of directors in the Board is negative. This study concluded that modest levels of diversity on Boards, standard deviation of Board member tenure and age respectively, smaller Boards, and average Board tenure are correlated with firm performance.
(Sharon L. and John S. Jahera, 1991) in there research work examined the relationship between ownership structure and firm performance in the context of the agency theory. The methodology in this research has been derived from prior research from both the finance and the management literature. In this paper, ownership is measured in terms of stockholdings of both officers and directors. The addition of both officers and directors is larger than most former studies. Performance indicators used in this study includes the average return on assets, the average return on equity and the average monthly excess return.
To empirically examine the relationship between size, ownership and performance, analysis of variance (ANOVA) is used to the mean monthly portfolio returns for each portfolio. It improves upon previous research by use of a risk-adjusted performance measure, a larger sample size, and by controlling for firm size differences. The results support and fortify earlier research which observed similar differences in the performance of manager controlled and owner controlled firms. The results indicate a significant effect of ownership on performance.
(Sharon and Greg Filbeck, 2006) this study, discusses the inefficiencies in the supervising role of directors when the board size is too big. Several studies have found a negative association between board size and firm performance in big firms. However, in this study small U. S. firms have been used to analyze the relationship between board size and small firm’s performance. Regression analysis is used to test the relationship between board size and firm profitability among the sample of small firms. Return on Assets, adjusted by industry, and used as the profitability measure.
The return on assets measure (ROA) is adjusted by industry, by taking the difference between the firm ROA and the industry ROA, or ΔROA. Model will control for firm size (the log of total assets). They have found an opposite association between board size and performance in small companies. For the sample group, a significant inverse relation between board size and firm value could mean that inefficiencies in communication and monitoring of a large board of directors negatively effects firm performance.
(Zubaidah, Nurmala and Jusoff, 2009) discussed the relationship between board composition and corporate performance, where performance is defined as the value added (VA) efficiency. The VA efficiency of the firm’s is calculated by the Value Added Intellectual Coefficient (VAIC) method that was developed by Ante Pulic (1998). Board characteristics that are of concern in this study are board composition, directors’ ownership, CEO duality and board size. In this study board composition is referred to the number of independent non-executive directors on the board relative to the total number of directors.
Research states that by having independent non-executive directors on the board, these directors would help to monitor and control the opportunistic behavior of management, and assist in evaluating the management more objectively. The multiple regression analysis is performed on the dependent variable, VAIC, to test the relationship between the independent variables (board structure features) with VA efficiency of firms’ total resources. This study concludes that value of outside directors on the board by The Malaysian Code on Corporate Governance is estimated significant to the long-term corporate performance.
(Hermalin and Weisbach, 1988) hypothesized that the CEO succession process and firm performance will effect board composition and their finding were consistent with the hypothesis they developed. When firms perform badly, they tend to remove insiders and add outsiders to the board. Two explanations of these results were presented. They argued that firms may fire the insiders held responsible for poor performance. They have argued if firms have insufficient senior personnel then there might be no potential CEO within the company to fill the vacancy, so they fill it with and outsider. This study has examined a correlation between poor performance and the removal of insiders and the hiring of outsiders. So, Poor performance will cause insiders to leave the board and outsiders to join the board. Since exiting an industry is commonly the result of bad performance, the market-structure effects can also be explained similarly.
(Mike W. Peng, 2004) examined that outsider directors are helpful to increase firm performance. The performance is measured by sales growth, and another financial indicator which is used in many empirical researches, return on equity (ROE). This article not only draw attention towards the need to incorporate multiple theories beyond just agency theory in corporate governance research, but also empirically examine recent trend toward having more outside directors on corporate boards in emerging economies.
To test Hypotheses weighted generalized least-squares procedure has been used in this study.
While the discussion on the relationship between board composition and firm performance is barely resolved in developed countries, employing outsiders to corporate boards has become gradually more extensive practice in emerging economies going through institutional transitions such as China. Institutional transitions have been defined in this study as ‘fundamental and comprehensive adjustments introduced to the rules of the game that affect organizations as players”.
(W. Barnhart and S. Rosenstein, 1998) the goal of this research is to study the sensitivity of simultaneous equations techniques in corporate governance. The article examines the mutual effects of ownership structure and board composition on corporate performance, by means of an instrumental variables approach. The findings in this study show the sensitivity of corporate governance models to a variety of experimental technique and specifications. This article studies the relationship between managerial ownership, board composition, and firm performance by applying a three-equation system. Methodology in this article is developed to explore the sensitivity of systems technique to modifications in specification. Also the findings strongly recommend that sensitivity analysis is crucial in the majority of corporate governance study.
(J. K. Kang and Anil Shivdasani, 1995) studied the role of corporate governance system for the period of top executive turnover in Japanese companies. The importance of different corporate governance structures in Japan are examined in this article. The goal is to provide some logical proof on the extent to which different governance forces control performance of managers. It is possible that outside succession relative to an inside appointment is slightly significantly higher for companies with negative pre-tax operating income. Also possible that non routine turnover is significantly inversely connected to firm performance, mainly when performance is measured in relation to other industry firms. It is found that outside succession in Japan is more possibly for firms with larger shareholders. The article concludes that performance enhancement following to outside succession and non routine turnover.
(Filatotchev and K. Bishop, 2002) this articles major goal was to analyze and predict an incorporated model of corporate governance advancement procedure in an IPO firm and its successive influence on its short-term stock market response. In this research multiple regression analysis is used to verify the research plan. To avoid the occurrence of specious correlation, several controls were used. According to this research outside directors can be helpful to provide resources, information and vital social interactions that facilitate development and implementation of successful strategies. Particularly, a higher percentage of non executive directors and the power of their added social links decrease the degree of under pricing of the share issue.
(Julie I. and siciliano, 1996) this article examines that ample diversity in board structures presented as a means of enhancing organizational performance by giving boards with new insights and outlook. The boards are vital part of the organization and its environment. By giving resources and social info to the organization, boards help to counter against an indecisive environment. The study has considered following measures of organizational performance. First one consists of social performance. The second performance measure considered fiscal performance and used the ratio of total revenues to total expenses for the sample data and the third performance measure concerned the level of donations accessible to each organization in the industry. The variety in board member ages was related to higher level of donations. This research was different in that it considered many measures of performance to enhance evaluation of the board’s impact on organizational outcomes.
(Kiel and Nicholson, 2003) article studies the associations between board structure and corporate performance in 348 of Australia’s largest publicly listed companies and describe the characteristic of these companies and boards of these companies. This article finds, after controlling for size of firm, board size is positively associated with value of firm. They also discover a positive association between the ratio of inside directors and the market-based assessment of firm performance. Thorough agency theory, they argued that a larger board is more likely to be watchful for agency problems merely because a larger number of people will be assessing management.
ROA has been used as a measure of corporate performance as ROA is a most commonly used ratio in the literature. The empirical findings support the prior theories that have a majority of outside directors on the board, but boards only consist of outside directors is not supported. The article demonstrates that too small directors and too large a board both might be negatively related to performance.
(Daily and Dalton, 1994) studied the associations among governance structure and corporate bankruptcy. Articles say boards with majority of outsiders have much more capability than other boards to develop strategies avoid further performance declines and, finally, bankruptcy. Because the dependent variable used in this study is dichotomous and a number of control variables and nature of the independent variables have been used in this study, therefore researcher used logistic regression analysis.
Empirical analysis show that compared to the control firms, the bankrupt firms contain less profitability, a smaller amount of liquidity, institutional holders has less equity in their hands, and less CEOs or board chairpersons on the boards. Article show bankrupt firms comprise higher percentage of affiliated directors. The results presented in this research mirror the position of governance structures five years earlier to actual bankruptcy.
(Agoraki, Eleni, Delis, Manthos D and Staikouras, 2009) paper explore the affiliation between board structure, in terms of board size and composition, and bank performance.
Paper shows that board size is negatively connected to banks’ cost and profit efficiency, where as the impact of board composition on profit efficiency is non-linear. A stochastic frontier method has been used to explore the possible relationship between bank performance, risk and board structure, which is a subject of important debate in the recent literature. The paper recommends that an optimum blend of executive and non-executive directors likely be more efficient in protecting value for banks than overload independent boards. Paper concludes the negative impact of board size is linear and growing the number of non-executives is negatively linked with banks’ profit efficiency.
(Mark s. beasley, 1996) this research practically tests the prediction that the addition of larger extent of outside directors on the board considerably reduces the possibility of financial statement fraud. Researcher used logit cross-sectional regression analysis to observe dissimilarity in board of directors composition between 75 no-fraud firms and 75 fraud that are comparable in size, national exchange where common stock is traded, industry, and time period. The directors receive its power for internal control and further decisions from stockholders of corporations.
They conclude the more outside director possession in the firm and outside director tenure increase, and as the number of outside directorships in other firms occupied by outside director’s decreases, the chances of financial statement fraud decreases. Also as size of the board decreases, the probability of financial statement fraud decreases. According to this study definition of financial statement fraud is consisted of two types. The first type contains events where management intentionally issues considerably misleading financial statements to outside users. Second type comprise incidence of misuse of assets by top management.
(Dalton, Daily, Ellstrand and Johnson, 1998) because of interest and practical consideration to corporate governance structures and their associations to financial performance, researchers used meta-analyses for both board leadership structure and boards of director composition and their associations to financial performance. Meta-analysis is defined as statistical technique which by correcting for a variety of statistical relic, allows for the collection of results across researches to find an estimate of the true association between two variables in the population. According to agency theory, effective boards will consist of outside directors. The non management directors are expected to provide greater performance benefits to the firm as an outcome of their independence status from firm management. For the meta-analysis of board leadership structure, researchers also considered both nature of the performance indicator and firm size. Article concludes with findings, the association between board composition, structure of board leadership, and financial performance show little regularity in results.
(Charu G. Raheja, 2005) this article presents the relations of firm inside directors and outside directors on a corporate board and concentrates on the issue of the board's optimal size and composition. Also express that the ideal board structure and the usefulness of the board in monitoring depend on the firm characteristics and its directors. The incentives of board members are influenced by Board size and composition and also both play a critical role in board effectiveness.
This study also considers the impact of CEO compensation on optimal board structure. Optimal combined decisions of CEO compensation and optimal board structure can by very much beneficial. The most favorable board structure is determined by maximizing the incentive for insiders to disclose their private information, reducing synchronization costs among outsiders and enhancing the capability of outsiders to refuse inferior projects.
(David Laing and Charles M. Weir, 1999) examined the effect of Cadbury compliance on performance. Audit and remuneration committees supervise board performance, it is anticipated that their existence will encourage the board to achieve improved performance and so should enhance the confidence of investors in company's financial statements. There are a number of studies which have studied the association between firm performance and board leadership structure and they found quite mixed results.
Hence Cadbury’s recommend, unclear impact of duality on firm performance.
Cadbury Committee suggested that there must be at least three non-executive directors on the boards of studied companies. It’ll enable non-executive directors to be independent over decisions concerning to board. They predict that non-executive directors will be useful supervisors of the executive directors and thus the ratio of non-executives on a board must be positively associated to performance. Also, Cadbury propose that company boards must have separate committees for managing the remuneration of executive directors and the assessment of the financial statements.
(O. Abdelsalam and A. El-Masry, 2008) study explored precious new insight into the corporate internet reporting timeliness by studying sample of Irish-listed companies. The effect of board independence and ownership structure was studied on the behaviour of TCIR. Board composition measured by the proportion of independent directors, duality and avg. tenure of directors. The findings suggest that TCIR is positively related with board of director’s independence and CEO ownership after controlling for audit fees, size and performance. In spite of the growing impact of the internet as a source of corporate information by companies, the timeliness of the information presented on web sites vary greatly. The findings show that TCIR behaviour of firms is influenced by ownership structure and board composition. Results of the study can be valuable for international corporate community.
(Imen Khanchel, 2007) objective of this paper is to explore the determinants of good governance in the US firms. Multiple regressions analyses have been applied in the study to discover the determinants of quality governance. Findings of the study show statistically significant and positive relationship between each governance index and investment opportunities, firm size and officer’s ownership. Two major contribution of this study includes. First of all, it develops corporate governance rating as a substitute for firm specific governance quality by using data as the characteristics of the board of directors, the audit committee and the board committees. Secondly, it recognizes each firm’s characteristics related to governance quality.
Study supports the hypothesis that the boards with higher ratio of independent directors are more efficient in supervising management. The quality of corporate governance has been shown to be heavily influenced by board size. Also study presents evidence that governance quality is enhanced by higher institutional and managerial ownership.
(A. Gupta, D. Otley and Steven Young, 2008) objective is to test whether executive directors of superior performing firms are consequently rewarded with superior quality outside directorships, keeping the number of outside directors constant. The outside directorship standard is examined using an index formed from series of apparent firm particular characteristics proxy for the subsequent feature of quality: monetary rewards, reputation risk and prestige. Research is conducted on a sample of UK executive directors who possess at least one fresh outside board seat explain that the excellence of newly owned outside directorships is directly proportional to past and simultaneously performance at the executive’s company. Study suggests that uniqueness of individuals who are outside directors, collectively with the factors inspiring them to accomplish their monitoring responsibility successfully, are concern of rising attention. Study also present a positive relationship among the quality of recently attained outside directorships and simultaneous enhancements in ROE.
(D. Koufopoulos, V. Zoumbos, M. Argyropoulou and J. Motwani, 2008) the objective of this research is to investigate importance of boards in their contribution to organizational performance and to practically study the association between major board composition variables, the chairman and performance. In this study relationship between the board of chairmen’s demographic characteristics, board composition, and organizational performance has been examined. The researcher has used the traditional measures of performance which include return on assets (ROA), total sales growth, return on sales and also common measures: on the whole performance and competitive position of firm.
Also study recommend that the educational background of the top management, particularly their academic knowledge, is mirrored in the characteristics of their firms. The empirical examination showed inconsistency between associations of chairmen demographic characteristics and organizational performance. Study also explored that if the chairman of the board is older than the firm is prone to be in a much better place as compare to competitors.
(Shamsul Nahar Abdullah, 2004) research paper examines the responsibility of board of director’s independence and CEO duality on organizational performance by using financial ratios: EPS, ROE, ROA and profit margin. Study suggests that board of directors is presented in literature as a panel of persons with particular duty of leading and directing an organization, with aim to defend shareholders interests. Therefore, a board of directors’ major objective should be to ensure long term shareholders value and setting up goals at the corporate level. The study found that Malaysian companies’ boards had the majority of outside directorship and non-dual leadership structures were noticed in the majority of Malaysian companies. As a consequence, this verify that majority of the boards in Malaysia consist of directors who are independent of management.
(N. Van der Walt, C. Ingley, G.S. Shergill and A. Townsend, 2006) aim of this study is to discover the plan that diversifying the board in terms of ethnicity, gender or skill may need to consider particular strategic environment the organization operates in. Research paper study the financial performance of New Zealand companies for the period of five year and spotlight changes in board composition and proposition for corporate performance. Considering level of complexity in strategic activities, the degree of diversity in the boardroom will influence quality of board decisions; consecutively it will be mirrored in organizational performance. Insight may propose that diversity increase the performance of the board directorship when an organization experience complex situations. The findings showed varied results in the performance for board diversity and strategic complexity even after using controlled variables.
(Mohamed Belkhir, 2009) the study used a variety of statistical tools, including panel data techniques and univariate analyses, with the aim to observe the association between size of the board of directors’ and performance in banking industry. Researcher hypothesized practical investigation should picture a negative correlation between performance and board size in banking firms. Findings of the study found no proof of inverse relationship between board size and performance. On the whole, findings recommend that unlike to what is recommended in the corporate governance literature, larger boards are not outperform by banks with smaller boards of directors. In comparison, there is strong evidence that larger boards can accomplish a better performance. Hence, bank may notice negative effect on performance if intend to reduce the number directors in the bank. Yet, research paper identify that couple of aspect which are not controlled in the regression technique might cause this positive relationship between size of board and performance.
(Elizabeth Webb, 2006) this study utilizes both univariate analyses and multivariate equation in order to test governance index that measures the firm’s takeover defenses and a board of director’s. As firms continue to face considerable information irregularity between managers and shareholders, therefore firms should decide how to diminish agency problem by using different methods of governance. Two major mechanisms consist of takeover defenses and the board of directors. The findings show that these two mechanisms of corporate governance must be analyzed as a set rather than as individual components. Study suggested that a firm’s prospect for growth is associated to the strength of board of directors, however not to its governance provisions. Supervising effectiveness of the board can be improved by particular characteristics of the directors, as independence increased. Strength of governance structure can be increased by having a higher ratio of outside directors on the board. Outside directors are those individuals who have no ties to the firm external to their directorship. The organizations where strength of the relationship between board of directors and the number of takeover defenses are strong tend to have greater growth opportunities.
(A. Kyereboah-Coleman and Nicholas Biekpe, 2006) objective of this study is to analyze how corporate governance influences performance of organizations in non-traditional export sector in Ghana. Study defined Corporate Governance systems as method for launching ownership nature and control of organizations within a country. The major difference between economies corporate governance systems is the variation in the ownership and control of firms that survive across economies. In fact, method of corporate governance can be differentiated on the basis of degree of ownership and control and the uniqueness of controlling shareholders. In this research paper return on assets (ROA) also used as performance measure and observed comparatively high marginal performance as compare to others. In the earlier analysis in NTE sector, findings represented mixed results concerning governance structure and different performance measures. Yet, for well-organized performance, firms in Ghana’s NTE sector should have higher ratio of non-executive directors on their boards.
(R. Zeitun and G.G. Tian, 2007) this study analyzes the association between ownership structure and organization performance and also relationship studied between default risk and ownership structure. In this research work Tobin’s Q, MBR (market value of book value of equity), ROE and ROA have been used as performance measures. There is stronger positive impact of ownership structure found on performance measures ROE and ROA as compare to Tobin’s Q and MBR ratios representing market performance measures. In contrast of prior theories this study not only examined the association between ownership structure and firm’s performance, but goes further by examining the governance structures and blend of non-defaulted firms compared with defaulted firms. It was found that a firm within government ownership less prone to default, but has negative relationship with firm’s performance. Hence, theory recommended privatization should go gradually with the support of government. Ownership concentration was found positively related with non defaulted firms as well as with defaulted firms.
(Steven A. Murphy and Michael L. McIntyre, 2007) study asserts that boards of directors are teams that have characteristics similar to many other types of teams. As a result, there are some factors that enhance board effectiveness and other team’s effectiveness similarly. By reviewing literature on governance structure and organizational behavior, an ample model of board of directors has been presented by the researcher. Performance of board of directors is usually evaluated on the basis of firm performance, rather than other objectives that boards can be expected to achieve. Board’s performance can also be reviewed, by their capability to examine the opportunities and threats for the organization. The model presented in this research proposed that performance can be influenced by each functionality and board of director’s characteristics independently and functionality can also be influenced by board characteristics, which ultimately impact firm performance.
(Benjamin I. Ehikioya, 2009) The purpose of this paper is to examine the link between corporate governance structure and firm performance in Nigeria. The present study uses the regression model to analyze publicly available data for a sample of 107 firms quoted in the Nigerian Stock Exchange for the fiscal years 1998 to 2002.
Corporate governance is concerned with the processes and structures through which members interested in the overall well being of the firm take measures to protect the interests of the stakeholders. To examine the relationship between corporate governance structure and firm performance in developing economies, a panel data regression model was adopted in the analysis.
Corporate governance structures deals with the composition of the board of directors, such as the proportion of non-executive directors, board skill and the size of the board. Good corporate governance shields a firm from vulnerability to future financial distress. The regression results further suggest that firms with higher levels of ownership concentration have a higher market valuation. The results of the study have not shown any link between board composition and firm performance. The adverse effect of CEO duality on performance indicates the need for firms to separate the post of CEO and Chair in order to ensure optimal performance.
(R.J. Bennett and P.J.A. Robson, 2004) in this research paper size and structure of board of directors have been examined and their effect on performance of small firms rather than large firms, which are already examined several times before. There are two major objectives of this paper: first, to study how boards of directors, use of external advice, and internal development of staff perform as alternate strategies for small and medium enterprises, secondly, to examine how long firm performance influence by these strategies. For small firms, board is a key process through which resources and external expertise can be fetched into the firm, for ongoing basis and in search of creating strong personal relations. This research paper does not show strong association between board variables and firm performance.
(A. Kyereboah-Coleman and Kofi A. Osei, 2008) the objective of this research paper is to study how corporate governance impact on profitability of microfinance institutions. The study showed that a major role is played by governance in the performance of microfinance institutions and also presented that board independence has a positive relation with performance measures used in the study. ROA was applied as a measure of microfinance institutions performance and calculated by taking the ratio between earnings before interest and taxes and net total assets. As observed in prior research, this research paper also recommends separation of board chairman and CEO position suggesting importance of two tier board structure. Study presented clear evidence that performance of the microfinance sector is influence by governance.
(Sanjai Bhagat and Bernard Black, 1999) study recommends that within the variety of board structure exist now in large public firms, this research paper has not found strong evidence that higher firm performance correlates with higher board independence. Also, the empirical findings does not support the current hypothesis that firms must have supermajority of independent boards with very few inside directors (e.g. one or two). On opposite, there is a little evidence that organizations with supermajority of independent boards are not as profitable as other firms with optimal number of inside directors. Hence, it is better for firms to have a reasonable number of executive directors.
Bhagat and Black, describe a board “majority of independent board” with at least 50% independent directors and boards having simply one or two executive directors a “Supermajority of independent board”.
(Fathi Elloumi and Jean-Pierre Gueyie, 2001) aim of this study was to explore association between board structure, composition and to an enlightenment of financial distress status. This study suggests that outside directors are supposed to offer several advantages, as compared to inside directors. Hence, this research proposes there would more likely be smaller ratio of outside directors in financially distressed firms. Therefore, the boards which are dominated by inside directors may possibly be explanation of financial distress. The study also recommends that there is very small possibility that financially distressed firms will experience a change in CEO, if their boards contain majority of inside directors.
(N. K. Kakabadse, A. K. Kakabadse and A. Kouzmin, 2001) study propose that there is a rising awareness that firms are social entities, accountable to social communities and the corporate governance responsibility is to pay attention to the interest of such political and social constituents. Stakeholders' interests, structure, Political opportunity, mobilization, and social infrastructure all have impact on corporations and stakeholders, therefore necessitating governance consideration. Study recommends the most common financial performance measures used in the prior literature related to board and governance include: ROA, EPS, ROE; stock price; net income, return on investment; income/equity, profit margins on sales, profit margins; and income/sales. Composition of board refers to the board size and the blend of various directors’ demographics (male/female, insiders/outsiders) and the level of association directors occupying with the firm.
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