Corporate Governance And Firms Performance Accounting Essay

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Corporate governance is very important to the success of any organizations and has become one of the most common subjects these days in all companies and organizations around the world. This happened after the collapse of many companies especially in the developed countries. All these financial crises have forced all companies to think seriously about corporate governance since it is one of the main pillars that the economic units stand on. Having corporate governance rules have no meaning and no benefits without being complied with. However, there are a large amount of studies that are related to corporate governance that focused on developed countries, while a few focused on developing and emerging countries in genral and Arab Countries in particular and Saudi Arabia is one on of them which is less explored and conducted. Therefore, the purpose of this study is to examine the extent of compliance of corporate governance code in Saudi Listed companies and the reasons for possible deviations with regard to the level of compliance between the companies. In addition, to see and examine the relationship between corporate governance and firms' performance.

This proposed study will cover the following:

  1. Purpose and the Contributions of this study

  2. limitation of this study

  3. Literature Review

  4. Research Methodology

  5. Bibliography

Purpose and the Contributions of this study:

This study has two major aims. First, the researcher seeks to examine the extent of compliance of Saudi Listed Companies with Corporate Governance rules and the resons of not complying. Second, is to examine the relationship between corporate governance iternal mechanism (ownership structure, board size, board composition, CEO status and audit committee) and firms' performance. Therefore, this study will seek to answer the following questions:

  • What is the level of compliance of Saudi Listed Companies with the corporate governance rules? In other words, To what extent do the Saudi Listed companies comply with the requirements of the Saudi Code of Corporate Governance?

  • Does compliance with corporate governance in Saudi Arabia differ based on industry, size, history, and capital size of the company?

  • What is the relationship between Corporate Governance iternal mechanism (Ownership Structure, Board Size, Board Compensation, CEO status and Audit committee) and Firms' performance?

However, there are two main contributions of this study as follow: First, this study will contribute to the existing debate about the relationship between corporate governance and firm performance. Second, there are few studies about corporate governance that have been conducted so far on the Saudi listed companies. Therefore, this study will aim to reduce the knowledge gap about corporate governance in Saudi Arabia.


Limitation of this study:

As any other study, this one does have limitations. The main one is that the studies and information available regarding to this subject in Saudi Arabia is very limited. Therefore, the researcher will try his best to cover this point from the Literature Review. Morover, the data that will be collected for this study is limited and will cover the data from 2006 to 2009.


Literature Review:

There is no specific definition for corporate governance. Sir Adrian Cadbury stated that corporate governance is: "system by which companies are directed and controlled" (Mallin, 2006). However, OECD (Organization for Economic Co-operation and Development) Defined corporate governance as:

"A set of relationships between a company's management, its board, its shareholders and other stakeholders. [It] also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined" (Mallin, 2006)

From these definitions, we could see the importance of corporate governance no matter what country one is doing business in (Banks, 2004). Complying with corporate governance rules will lead among other things as the following : as has been emphasized by Cadbury, 1992; Capital, 2009; McKinsey& Company, 2002; OCED, 2008.

  1. Increase confidence in corporate performance since they ensure that companies follow specific guidelines in running its business .

  2. Reduce risk to those who are making decisions since the information given will be more reliable, those include shareholders, lenders, and current and potential investors...etc. This means that confidence has been enhanced.

  3. It will be used as criteria for the accountability for management .

  4. Facilitate listing and trading company's shares in any stock market since compliance it is requirement of any stock market authority.

Furthermore, corporate governance standards have been established and enforced in many countries to address the following issues (Corporate, 2008):

  • Ensuring that there are basis for an effective framework for corporate governance.

  • Allowing for disclosure and transparency.

  • Making sure that the Board knows its responsibilities and follows through with them.

  • Providing the equitable treatment for all shareholders.

  • Making sure that the key ownership functions and the rights of shareholders are clearly understood.

However, previous studies of corporate governance rules indicate different degrees of compliance with the rules such as: Tsipouri & Xanthakis (2004) stated that Greek companies comply with corporate governance code in a satisfactory degree. In addition, Werder et al. (2005) pointed out that the Germen companies listed on the Frankfurt stock exchange complied in a high level with corporate governance code . Moreover, a recent study about governance disclosures among U.S firms has done by Webb, Chon, Nath, and Wood. They included 50 U.S. Firms in their study by using their public disclosure packages from 2004. They found that smaller firms give littlie disclosure that relate to independence, board selections procedures, and oversight of management. on the other hand large firms gives more disclosure of independence standers, board selection procedures, audit committee matters, management control systems, other committee matters, and whistle blowing procedures. Furthermore, Werder et al. (2005) did a study about the compliance rate of the German Corporate Governance Code. They stated that company size is positively associated with compliance with the code. So, these studies show that the size of firms matters and has an effect on the compliance of corporate governance rules.

However, there is a huge debate focusing on the relationship between corporate governance and firm performance. For example, Guest (2009) found a statistically negative relationship between board size and firms' performance by using 2,746 UK listed Firms from 1981 to 2002. In addition, Haniffa and Hudaib (2006) found a negative correlation between board size and firms' performance by using 347 Malaysian Firms measured by Tobin's Q. Morover, Yermack (1996) , found a negative correlation between board size and performance based on Tobin's Q by using 452 large US firms between 1984 and 1991. On the other hand; Sanda et al. (2005) found a positive relationship between board size and profitability by using a sample of 93 Nigerian listed firms measured by (ROE).

Furthermore, Kiel and Nicholson (2003) found a positive correlation between CEO duality and firms' performance with a sample of Australian listed firms measured by Tobin's Q. In addition, , Sanda et al. (2005) found that the firms performed better when they separate the position of the CEO and the Chairman of the board. However, Haniffa and Hudaib (2006) found no significant correlation between CEO duality and performance measured by Tobin's Q.

Moreover, Demsetz and Villalonga (2001) find that in their study there is no significant relationship between ownership structure and firm performance. Sanda et al. (2005) found that there was no relationship between outsider directors and firm performance.

However, corporate governance in Saudi Arabia as required by regulator is very recent. The Royal Degree No. M/30 dated 2/6/1424AH has been issued to establish the Saudi Capital Market Authority which introduced the corporate governance guidance there. This guidance was issued by the Board of Capital Market Authority Pursuant to Resolution No. 1/212/2006 dated 12/11/2006 which has issued as a guideline ( code of best practice) ,as in most other countries, till 11/12/2008 then some of the rules became compulsory such as the disclosure by each firm in the stock market. Therefore, all Saudi listed companies have to disclose in their annual report which rules of the code they follow and which they do not with an explanation (comply or explain ) (Capital 2009).

Furthermore, research regarding to corporate governance rules in Saudi Arabia is very little and new because the subjects has been introduced recently by the regulators. In 2004, Al-harkan's research was about "An Investigation into the emerging corporate governance framework in Saudi Arabia". In 2005, Al-ajaln's research was about "Corporate Governance in Saudi Arabia: The Roles and Responsibilities of the Board of Directors in the Banking Industry." However, both researches were done before issuing Saudi corporate Governance regulations. In 2007, Al-Moataz had study 50 companies from 77 companies that were trading in 2006 and he found that the compliance of the corporate governance rules is very little and recommended to follow up a research on the extent of compliance with the rules of corporate governance in Saudi listed companies. However, the number of listed company has increase to 137 which are divided in to 15 sectors as shown in the following table.

Sectors Name:

Number of Companies:

Banks & Financial Services

11 Banks

Petrochemical Industries

14 Companies

Cement

8 Companies

Retail

9 Companies

Energy & Utilities

2 companies

Agriculture & Food Industries

15 Companies

Telecommunication & Information Technology

4 Companies

Insurance

27 Companies

Multi-Investment

7 Companies

Industrial Investment

11 Companies

Building & Construction

12 Companies

Real Estate Development

7 Companies

Transport

4 Companies

Media and Publishing

3 Companies

Hotel & Tourism

2 Companies

This table shows the number of companies in each sector in Saudi Capital Market:


Research Methodology:

In this study the researcher will use data which will be collected from the annual report and Tadawul (TDWL) website of all Saudi listed companies on the Saudi Stock Exchange between 2006 and 2009. However, to test the compliance of corporate governance rules the researcher will use the content analysis approach. In other words, the researcher will produce a table that contains all Saudi listed companies and shows whether they comply with corporate governance mechanisms or not. using this approach will allow the researcher to use quintatitve and qualitative analysis (Creswell 1994). In addition, the firm performance of these listed companies will be measured by using the financial ratios such as:

  1. Return on asset (ROA).

  2. Return on equity (ROE).

  3. Earnings per share (EPS).

  4. Profit margin (PM).

  5. Tobins'Q.

In the main time, the researcher will analyze the data that will be collected by using suitable econmatrics model such as ordinary least square regression (OLS) to find out any signifcant relationship between internal corporate governance and firm performance./p>

Bibliography:

Al-Ajlan, Waleed A.(2005). Corporate Governance in Saudi Arabia: The Roles and Responsibilities of the Board of Directors in the Banking Industry. Ph.D. dissertation, Nottingham University

Al-Harkan, Ahmed.(2004). An Investigation into the emerging corporate governance framework in Saudi Arabia. Ph.D. dissertation, Cardiff University

Banks, Erik. (2004). Corporate Governance, Financial Responsibility, Controls and Ethics. New York: Palgrave Macmillan.

Cadbury, A. (1992) Report of the Committee on the Financial Aspects of Corporate Governance. Gee Publishing, London.

Capital Market Authority. (2009). Corporate governance regulations in the Kingdom of Saudi Arabia. The Board of Capital Market Authority. www.cma.org.sa

Corporate Governance. 2009. CIPE. Center for international private enterprise. Corporate Governance. www.cipe.org/programs/corp_gov

Creswell, John. Research Design: Qualitative and Quantitative Approaches. London: Sage, 1994.

Demsetz, H and B, Villalonga. (2001). Ownership structure and corporate performance.Journal of Corporate Finance, Vol 7, pp 209- 233

Guest, P. M. 2009. The Impact of Board Size on Firm Performance: Evidence from the UK. The European Journal of Finance, Vol. 15, No. 4, Pp.385-404.

Haniffa, R. and Hudaib, M. (2006). Corporate Governance Structure and Performance of Malaysian Listed Companies. Journal of Business, Finance and Accounting, Vol. 33, No. 7 & 8, Pp.1034-1062

Holder-Webb, Lori, Chon, Jeffrey, Nath, Leda, and Wood, Dacid. (2008). A Survey of Governance Disclosures among U.S. Firms. Journal of Business Ethics, 83: 542-563.

Kiel, G. C. and Nicholson, G. J. (2003). Board Composition and Corporate Performance: How the Austrian Experience Informs Contrasting Theories of Corporate Governance.Corporate Governance: An International Review, Vol. 11, No. 3, Pp.189-205.

McKinsey and Company: (2002), Global Investor Opinion Survey: Key Findings.

Mallin, Christine.( 2006). Handbook on International Corporate Governance; Country Analyses. London: Edward Elgar.

OECD. (2008). MENA-OECD Investment Programme. Advancing the corporate governance agenda in the Middle East and North Africa: A survey of recent developments.

Sanda, A., Mikailu, A. S. and Garba, T. (2005). Corporate Governance Mechanisms and Firm Financial Performance in Nigeria. AERC Research Paper 149, Nairobi, Kenya.

Tadawul website (2010). http://www.tadawul.com.sa (Accessed in 10 February, 2010).

Tsipouri, L., & Xanthakis, M. (2004). Can Corporate Governance be Rated? Ideas based on the Greek experience. Corporate Governance, 12(1).

Werder, A., Talaulicar, T., & Kolat, G. (2005). Compliance with the German Corporate Governance Code: an empirical analysis of the compliance statements by German listed companies. Corporate Governance, 13(2), 178-187.

Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40(2), 185-211.

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