Board diligence, independence, size, and firm performance: Evidence from Saudi Arabia

Sultan Altass

doi:10.5267/j.ac.2022.1.001

Abstract

The aim of this paper is to examine the possible association between the effectiveness of Board of Directors (BOD) and firm performance (FP). For the purpose of this analysis, data is derived from firms listed in the materials sector of the Saudi Exchange Market’s Tadawul All Share Index (TASI). Using pooled OLS regression analysis and the dependent variables of ROA and ROE as a proxy for FP, while board meetings (BMEET), independence and board size (BSIZE) are used as explanatory variables, the results reveal that frequent BMEET may not lead to improved FP. Moreover, the results show that BMEET frequency is negatively associated with FP. Independent members do not provide additional efficiency leading to better FP. As for the BSIZE, the findings indicate that larger boards are associated with lower FP. Such findings offer insights into the effect of BSIZE on FP. The results are of interest to decision makers, policymakers and investors.

Highlights

Firm corporate governance (CG) is an essential control and management tool which safeguards the owners’ interests and helps establish robust financial oversight and improved performance
Using pooled OLS regression analysis and the dependent variables of ROA and ROE as a proxy for firm performance (FP), while board meetings (BMEET), independence and board size (BSIZE) are used as explanatory variables, the results reveal that frequent BMEET may not lead to improved FP
The aim of this paper is to examine the possible association between firm performance and the characteristics of Board of Directors (BOD), namely, BMEET, the independence of board members, and BSIZE utilizing data derived from firms listed in the materials sector of the Saudi Exchange Market’s Tadawul All Share Index (TASI)

Summary

Introduction

Firm corporate governance (CG) is an essential control and management tool which safeguards the owners’ interests and helps establish robust financial oversight and improved performance. The collapse in the first decade of the century of high-profile corporations such as the US energy giant Enron, WorldCom (MCI Inc.) the second largest telecommunication in the United States at that time, and the fourth largest investment bank in the US, Lehman Brothers are prime examples of the main cause of the growing scrutiny worldwide regarding firms’ management and their role in harming public interest (Zamansky, 2011; Sunderland, 2010; Sikka, 2008a, 2008b, 2009; Weir et al, 2002) This was, in part, due to the apparent malpractices of corporate directors, in the form of misrepresenting corporate financial reality. Management may engage in opportunistic practices and exercise their power in order to achieve personal objectives These practices are driven by economic pressures to meet market expectations, enhancing the firm’s performance indicators, including profitability and earnings (Graham et al, 2005). The aim of this paper is to examine the possible association between firm performance and the characteristics of BOD, namely, BMEET, the independence of board members, and BSIZE utilizing data derived from firms listed in the materials sector of the Saudi Exchange Market’s Tadawul All Share Index (TASI)

Objectives

Methods

Conclusion