The impact of Corporate governance on firm performance: A study of high-growth companies listed on the JSE ALTX

Abstract

The study investigates the impact of corporate governance on the performance of fast-growing Small and Medium Enterprises listed on AltX of the Johannesburg Stock Exchange. Governance practices among growing Small and Medium Enterprises have not received extensive attention in previous research. The most important areas of governance investigated in this study were board size, independence of the board and its audit committee, and independence of non-executive directors. Board structure and board and audit committee independence and their impact on performance are measured by Return on Assets, Price-to- Earnings Ratio, and Tobin’s Q. Governance variables consisting of board size, board independence and audit committee independence are analysed to determine their effect on corporate performance as measured by Return on Assets, Price-to-Earnings ratio, and Tobin’s Q. This is based on agency and stakeholder theory. A total of 21 companies listed on AltX are included in the analysis, which covers the period from 2018 to 2023. The study employs panel regression methodology to analyse the relationships between governance and performance. The results show that the effect of governance on performance varies for the different performance measures used in the study. In several cases, governance variables had little or no impact. In others, particularly board and audit committee independence, the impact was negative, especially on market-based measures like Tobin’s Q. These results suggest that smaller, high-growth businesses may not always be suited for conventional governance structures, which are sometimes meant for bigger enterprises. The Small and Medium Enterprises could gain more from flexible governance systems that meet their specific needs and stage of development than from rigid frameworks. The study offers practical insight for company boards, investors, and policymakers. It highlights the need for a more flexible, context-driven approach to governance, one that supports growth and sustainability, rather than simply focusing on compliance.