An investigation of the impact of corporate governance mechanisms and corporate governance indexes on the firm performance: A case study of FTSE 350 non-financial companies
The primary aim of the study is to explore the corporate governance (CG) compliance of FTSE350 non-financial companies (NFCs) and to investigate the impact of various corporate governance mechanisms (CGMs) and corporate governance indexes (CEGEIs) on the firm performance (FMPE) of FTSE350 NFCs. The data is collected for NFCs because the financial reporting (FR) practices and regulatory requirements for the financial sector differ significantly from the non-financial sector. Panel data (data collected for 237 companies from 2003 to 2018) is collected for the study. Various analytical tools are used for the data analysis, including descriptive analysis, correlation, and multiple regression analysis.
For investigating the impact of various CGMs on the FMPE, the study has used different CGMs (board independence (BDIE), board size (BDSE), CEO duality (CEODY), board diversity (BDDY), board meetings (BDMS) presence of audit committee (PEAC), presence of nomination committee (PENC) and presence of remuneration committee (PERC)) in isolation. The impact of various CEGEIs has been explored on FMPE. Three CEGEIs have been developed, including CEGEI1, CEGEI2 and CEGEI3. CEGEI1 is generated using the Combined code (CC) provisions 2003, 2006 and 2008. CEGEI1 is used to explore the CG compliance of companies from 2003 to 2018. The second CG index (CEGEI2) is generated using the provisions of the CG code of the UK 2010, and it is used to explore CG compliance from 2011 to 2018. CEGEI3 is developed using CG codes of UK 2012 and 2014, and CG compliance is examined for companies from 2015 to 2018.
The variables are divided into three categories, such as dependent, independent and control variables. FMPE is the dependent variable, and it is measured by using three accounting ratios such as return on assets (ROA), return on equity (ROE) and Tobin’s Q (TQ). Various CGMs BDIE, BDSE, CEODY, BDDY, BDMS, PEAC, PENC, and PERC), CEGEIs (CEGEI1, CEGEI2 and CEGEI3) and control variables (firm age (FMAE), firm size (FMSE), leverage (LEGE), liquidity (LITY) and sales growth (SEGH)) are independent variables.
The degree of compliance for various CGMs and CEGEIs is explored. Results have highlighted that compliance has enhanced significantly between 2004 and 2018 for all the CGMs and CEGEIs for UK companies. The mean for compliance was 86.6% in 2004, but it reached 92% in 2018. The minimum value for average compliance was 72.8% in 2004, and it increased to 76.9% in 2018. 100% compliance has been observed for PEAC, PENC and PERC from 2004 to 2018. The compliance for AC chairman independence is 100% from 2009 to 2018. PEAC, PENC and PERC have 100% compliance and violated one of the main conditions of the variable for regression analysis, so these variables are eliminated from the regression analysis.
The fixed effect model (FEM) is used to explore the impact of various CGMs on the FMPE of UK NFCs from 2003 to 2018. The results for CGMs have shown that TQ has a positive relationship with CEODY and BDDY and a negative relationship with BDSE. BDIE and BDDY positively correlate with ROA and have a negative relationship with BDSE, while BDIE and BDSE positively correlate with ROE.
The regression model is also used to explore the impact of three CEGEIs on the FMPE. A positive relationship exists for three CEGEIs (CEGEI1, CEGEI2 and CEGEI3) with TQ and ROA. In comparison, no relationship exists for three CEGEIs (CEGEI1, CEGEI2 and CEGEI3) with ROE. It can be stated that a positive relationship exists between the three CEGEIs and FMPE (when measured by TQ and ROA) for UK companies.
- School of Management