Board of Directors and Company

Date
2011-06-08
Authors
Rajcoomar, Rajendra
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Abstract
This research report set out to investigate the relationship that corporate governance, as it pertains to the board of directors, has with the financial performance of companies in South Africa. The critical corporate governance elements; total number of board members, % of independent board members as a % of total board members, % of directors who missed over 25% of meetings, Independent Chairman of board, independent of the CEO and annual performance assessment of directors were used to test the relationship with measures of financial performance, namely: Tobin’s Q, EPS, ROA and ROE. These elements encompassed the essentials of board activities, independence of directors, board size and separation of roles of the chairman and CEO. From the literature review, three propositions came to the fore; namely, board composition, board size and separation of roles of the chairman and CEO that impacted the financial performance of a company. In order to test these propositions, data was gathered from the research conducted by Grant and Motara (2006) as contained in the Deutsche Securities Report 2006. A sample of 46 companies listed on the JSE in 2006 was used. Regression equations for the measures of financial performance were estimated to test the relationship between corporate governance, as it pertains to the Board of Directors and the financial performance of the company as measured by Tobin’s Q, EPS, ROA and ROE. The results have revealed that the financial performance of the company in respect of Tobin’s Q is not strongly related to the composition of the board in terms of the number of independent directors. The size of the Board is critical in explaining EPS. It is clear that the board is pivotal in steering the company and supporting management. Separating the roles of the Chairman of the Board and the CEO has no significant relationship with the financial performance of a company as measured by the ROA however increasing the percentage of independent directors as a percentage of total directors has a significant relationship with ROA. No significant relationship between ROE and board activities could be found. The results obtained are not consistent in all respects with the results of international studies. As the Board of Directors are being called more into question, these results confirm that board structure and size has an influence on the financial performance of a company. The Board of Directors is therefore critical in steering the company towards shareholder wealth maximisation.
Description
MBA - WBS
Keywords
Boards of Directors , Company performance
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