Effect of Corporate Governance on Corporate Performance: Sri Lankan Evidence

I R H M T P Rajakaruna Rajakaruna,R M N C Swaranapali

doi:10.4038/wjm.v12i2.7545

I R H M T P Rajakaruna Rajakaruna, R M N C Swaranapali

Open Access

https://doi.org/10.4038/wjm.v12i2.7545

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Abstract

Effective corporate governance practices contribute significantly to various aspects of an organization as a strategic direction. This study examines the impact of corporate governance practices on corporate performance. The top fifty companies from five industries listed in the Colombo Stock Exchange were selected as the sample. Secondary data was extracted from financial statements covering a five year period from 2014 to 2019. Six corporate governance practices; financial acumen, board independence, board size, CEO duality, board committees, and board gender diversity were tested against corporate performance indicators: return on assets, return on equity, and Tobin’s Q. Results of multivariate analysis indicated that board size and committees positively impact on corporate performance, while other variables do not provide any significance. The findings of the study will fill some gaps in extant literature in the corporate governance field. It may also facilitate significant policy implications relating to corporate governance by strengthening existing rules and regulations in the institutional framework.

Highlights

IntroductionCorporate governance practices (CGPs) ensure the alignment of objectives of the firm among the board of directors, shareholders, and other stakeholders when setting objectives, determining the ways of achieving them, and measuring performance
Corporate governance is a mechanism that ensures that the management takes appropriate measures to safeguard the stakeholders'interests (Anandasayanan, 2018).corporate governance practices (CGPs) ensure the alignment of objectives of the firm among the board of directors, shareholders, and other stakeholders when setting objectives, determining the ways of achieving them, and measuring performance
As per the findings of the study, it was able to identify that the financial acumen represented a compliance mean of 100%, board independence showed a mean of 69%, chief executive officer (CEO) duality depicted a mean of 86%, board committees showed a mean of 45% while gender diversity represented a mean of 11%

Summary

Introduction

Corporate governance practices (CGPs) ensure the alignment of objectives of the firm among the board of directors, shareholders, and other stakeholders when setting objectives, determining the ways of achieving them, and measuring performance. As a result of major corporate collapses that tookplace around the world, such as Enron, WorldCom, and Sathyam, the extensive amount of regulatory consideration was focused on CGPs (Jackling & Johl, 2009). This would develop the quality and reliability of financial reporting and reduce the opportunistic behavior of the management (Niu, 2006). By aligning the shareholders’ interests with the management, corporate governance contributes to the success of an organization (Anandasayanan, 2018)

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