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