Corporate Governance and Firm Performance in Kuwait

Abstract

This thesis examines the link between corporate governance and firm performance in Kuwait. Corporate governance—the framework that defines the relationship between shareholders, management, the board of directors, and other stakeholders—is an important element associated with monitoring, evaluating, and improving firm performance around the globe. In turn, firm performance is one of the most critical considerations for firms and their relations with stockholders and stakeholders, and therefore, for societal, financial, and economic wellbeing. Good corporate governance is important everywhere, not least in Kuwait. Despite being a relatively small economy, Kuwait plays a leading economic and financial role in the Gulf states, particularly during the recovery stage of the Middle East revolutions of the early 21st century and following its own occupation during the First Gulf War in 1990–1991. Recently, Kuwaiti firms have also been subject to an extensive program of privatisation and market deregulation, aimed at very quickly stimulating stock market activity, assisting economic development and recovery, and facilitating international financial and economic integration. However, Kuwait is unique in that it has very much lagged most other neighbouring markets in terms of capital market regulation and the development of corporate governance codes and guidelines. For example, unlike Bahrain, the United Arab Emirates (UAE), Oman, Saudi Arabia, and Qatar, Kuwait lacks comply-or-explain provisions in its guidelines. Further, unlike Bahrain and the UAE with their separate corporate governance codes and guidelines for banks and insurance companies, state-owned enterprises, real estate companies, and small-and-medium-sized enterprises, Kuwait’s early efforts at reforming corporate governance have largely only concerned banks. Kuwait is also interesting in a corporate governance context given the high level of family (including the House of Al-Sabah, Kuwait’s ruling royal family) and state ownership of publicly listed firms. This thesis employs a mixed methodology, including both quantitative analysis for responding to the first of three research questions and qualitative analysis to respond to a fourth research question. The quantitative analysis primarily comprises a regression-based approach that specifies the returns on assets (ROA) and equity (ROE) and Tobin’s Q (TQ) as dependent measures reflecting firm performance and corporate governance factors, including the board of directors, audit committee, and ownership structure as independent variables. In the first research question, the nature of the relationship between ownership structure and firm performance in Kuwaiti industrial and services firms is explored. The sample comprises all Kuwaiti industrial and services firms listed on the Kuwait Stock Exchange over the period 2010–2017. The full sample period comprising 520 firm-year observations is divided into three time periods corresponding to the three separate corporate governance code regimes in Kuwait: a pre-corporate governance code regime (2010–2012) and a voluntary corporate governance code regime (2013–2015), both with 246 firm-year observations, and a compulsory corporate governance code regime (2016–2017) with 130 firm-year observations. Dummy variables identify each regime in the regression analysis. The findings indicate that ownership structure plays a significant role in determining firm performance. According to ownership types in Kuwait (family, foreign and local institutional, and government ownership), family ownership and institutional local ownership appear to have the most significant influence on firm performance, both in terms of their impact on individual firms and marketwise due to the overall extremely high level of family ownership in the Kuwaiti market. In contrast, institutional foreign ownership is only associated with significantly lower levels of firm performance and only slightly higher levels of undervaluation. The findings for institutional local shareholdings show a high positive relationship with ROA, ROE, and TQ, which may reflect their familiarity with the local investment market. In the second and third research questions, the nature of the association between board of directors’ characteristics, audit committee characteristics, and firm performance in Kuwaiti industrial and services firms is considered. The sample again comprises all Kuwaiti industrial and services firms listed on the Kuwait Stock Exchange over the period 2010–2017. The results reveal that board size positively relates to firm performance as expected, particularly in relation to the TQ. Also, the proportion of independent board members positively relates to ROA, ROE, and TQ, whereas the number of board meetings affects all of them. The qualitative analysis draws on extensive semi-structured interviews conducted with the chairpersons, general managers, and financial managers of selected Kuwaiti industrial and services firms in 2018. This provides detailed information about corporate governance processes within those firms to respond to the final research question about how cultural, social, political, and economic circumstances play a role in modifying the relationship between corporate governance and Kuwaiti firm performance. The results provide particularly interesting insights into how good corporate governance improves firm performance in Kuwait, including fostering trustworthiness, attracting foreign investors, increasing financial reporting quality, and raising the expectations of management quality. Several cultural and external factors modify the relationships between corporate governance and firm performance in Kuwait, including the recent Middle East revolutions and the adoption of International Financial Reporting Standards. The thesis contributes to the existing literature by adding knowledge about the corporate governance–firm performance relationship in Kuwait, including simultaneously investigating several dimensions of corporate governance, such as those relating to the role of boards, internal committees and processes, and firm owners. The thesis also provides Kuwaiti regulators and policymakers with important insights into the gains from good governance in Kuwaiti firms and the ways this may be achieved, and rigorous evaluation of different empirical frameworks and methods in quantitatively and qualitatively assessing corporate governance and firm performance, both in Kuwait and elsewhere.