Corporate governance and the characteristics of the board of directors: Evidence from an emerging market

Ahmed S Alanazi

doi:10.22495/cbv15i1art2

Abstract

The aim of this paper is to investigate the impact of the characteristics of the board of directors on the quality of corporate governance. The paper attempts to uncover the board characteristics that contribute to better corporate governance quality. The paper exploits a unique dataset of the corporate governance index developed by the Corporate Governance Centre for the 92 largest Saudi listed firms for the fiscal year of 2015. Several board characteristics are regressed on the corporate governance scores to find an association. The size of the board of directors is positively associated with better corporate governance quality. In other words, large boards have better corporate governance. Furthermore, large block-holders and government ownership contribute significantly to better corporate governance quality. Contrary to expectations, independent members are negatively linked to corporate governance quality. Companies with a large number of independent members show lower corporate governance quality. Finally, other characteristics of board committees and boards meetings do not show links to corporate governance quality. To the best of the author’s knowledge, this is the first paper to attempt to uncover the association between the characteristics of the board of directors and corporate governance quality in the Middle-East (the emerging market of Saudi Arabia). Several papers attempted to study governance issues in the Middle-East, but no direct examination of board characteristics and governance quality was conducted. Most studies investigated the issue of corporate governance and firm performance.

Highlights

In the wake of the global financial crisis and scandals in 2007, the board of directors was often the first to be accused and blamed
I believe this is linked to the fact that large corporations with large boards tend to have a better ability to comply with corporate governance standards
The number of independent members on the board is negatively associated with the overall corporate governance score

Summary

Introduction

In the wake of the global financial crisis and scandals in 2007, the board of directors was often the first to be accused and blamed. This was the case with the collapse of Enron, Worldcom and Parmalat. The Enron and Parmalat boards of directors were held liable for fraud (Adams, Hermalin & Weisbach, 2010). In emerging markets and in Saudi Arabia in particular, a weak institutional framework and the lack of strong protection for investors place much pressure on the board of directors. When things go wrong with a corporation, the board of directors becomes the centre of attention The 2014 accounting scandal involving Mobily, the second largest Saudi telecommunications corporation, led to the firing of the company’s chief executive officer (CEO).

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