Corporate Governance And Firm Performance

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Corporate governance is very important to the success of any organization 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 in the last two decades; such as Enron, WorldCom, Bank Credit and Commerce International, and Barlow Clows and Levitt. All these financial crises have forced all companies around the world to think seriously about corporate governance since it is one of the main pillars that the economic units stand on. Furthermore, Kay and Silbertson (1995) stated that the corporate fraud and corporate collapse around the world led to increase the attention on the term of corporate governance.

However, there is no specific definition for corporate governance. 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".

However, there are a large amount of studies that are related to corporate governance and firms' performance which focused on developed countries while a few amount of studies focused on developing and emerging countries so that make the researcher to study some of the Saudi listed firms as they considered this country as emerging economy to contribute to the previous studies and to determine if there is any relationship between corporate governance with firms performance as it has not been explored yet from my best knowledge.

Purpose of this study:

The purpose of this study is to examine the relationship between two corporate governance mechanisms (board size and CEO status) with firm performance. Therefore, this study will seek to answer the following question:

What is the relationship between the two corporate governance mechanisms (Board size and CEO status) with the firm 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 and these different views will make us care about studying the Saudi environment because it is considered one of the emerging countries. Second, as for my best knowledge, 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.


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. The second limitation of this study is that it will only focus on the petrochemical and cement industries in the Saudi Stock Market which means that this research will not provide a comprehensive investigation about other sectors in the Saudi Stock Market. Finally, the data that will be collected for this study is limited and will cover the data for only 2009.

Literature Review:


An agency theory suggests that a large board eliminates the corporate value. Therefore, the board size should be limited in order to make the relationship between the managements and shareholders good and smooth. By limiting the board size we limit the disagreements between the two parties: managements and shareholders. Proponents of small boards agree that limiting the board size to a certain level helps to improve the firm performance. Furthermore, it is easy to organize and manage a small board because the people in a limiting board size are more joint and unified which make it easier to deal with the top management and plays the role of controlling effectively. Jensen (1993) emphasizes that a small board can help to improve the firm's performance.

CEO Duality

CEO duality means that the firm's CEO also serves as the chairman on the board. In theory, the separation of the two positions will reduce agency costs in corporations and increase the performance. Accordingly, proponents of the separation between two positions agree that the chairman of the board should be independent from the management. They also raise the concern of how boards of directors can be effective monitors when the CEO is the chairman of the board (Lorsch and MacIver 1989; Jensen 1993). Thus, this dual role suggests a certain conflict of interest between the management and the board.

Empirical result:

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. 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).

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.

Research Methodology:

In this study the researcher will use the data that will be collected from the annual report and Tadawul (TDWL) website of 23 Saudi listed companies on the Saudi Stock Exchange on 2009. The main focus, however, would be the Petrochemical and Cement Industries in Saudi Stock Market. The choosing of the petrochemical and cement sectors because these two industries plays a major role in the economy of Saudi Arabia. However, the firm performance of these listed companies will be measured by using two ratios which are:

Return on equity (ROE)= net profit/ total equity

Profit margin (PM)= net profit/ revenue*100

The research methodology will depend on the experimental method. The experimental method is chosen because this study is an empirical research and uses mainly quantitative data to investigate the correlation and relationship between two dependent variables (Return on Equity and Profit Margin) and two independent variables (corporate governance mechanisms (Board size and CEO duality)).

The main data analysis technique in this study is the regression analysis which seeks to test the relationship between one dependent variable and two independent variables as stated above by using the SPSS package. However, this study will follow the Kajola, Sunday study by adopting the economic model that he used to study the Nigerian companies and the economic model used in the study which was found in previous studies and is given as:

PERF = β0 + β1BSIZE + β2CEO + eit


Î’0:- is constant

β1BSIZE:- Board size is defined as the number of people who serve on the board as directors.

β2CEO:- Chief executive status duality

eit:- the error term