Effect of Corporate Governance Structure on the Financial Performance of Johannesburg Stock Exchange (JSE)-Listed Mining Firms

Isaih Dzingai,Michael Fakoya

doi:10.3390/su9060867

Abstract

There have been many corporate collapses and financial crises in recent years linked to a lack of effective corporate governance. The South African King IV Code of Corporate Governance recommends that corporate governing bodies should be comprised of an appropriate balance of knowledge, diversity, and independence for discharging their duties objectively and more efficiently. This study examines the effect of corporate governance structures on firm financial performance. The secondary data of selected Johannesburg Stock Exchange (JSE), Socially Responsible Investment (SRI) Index-listed mining firms’ sustainability reports, and integrated annual financial statements are used. Using panel data analysis of the random effects model, we determined the relationship between board independence and board size and the return on equity (ROE) for the period 2010–2015. Results indicate a weak negative correlation between ROE and board size, and a weak, but positive, correlation between ROE and board independence. Additionally, there is a positive, but weak, correlation between ROE and sales growth, but a negative and weak relationship between ROE and firm size. The study suggests that effective corporate governance through a small effective board and monitoring by an independent board result in increased firm financial performance. We recommend that South African companies see compliance with the recommendations of the King IV Code on Corporate Governance not as a liability, but an ethical investment that may likely yield financial benefit in the long-term. Although complying with corporate governance principles does not necessarily translate into a significant economic benefit, firms should, however, continue to adopt corporate governance for ethical reasons to meet stakeholder’s social and environmental needs for sustainable development.

Highlights

Modern corporate governance principles support an approach that considers and balances the legitimate and reasonable needs, interests, and expectations of its stakeholders in an inclusive, ethical, and sustainable manner as part of its decision-making
The descriptive statistics suggest that Johannesburg Stock Exchange (JSE) Socially Responsible Investment (SRI)-listed mining firms are moving towards practising good corporate governance, as shown by the majority (50%+) of independent non-executive directors on the board
This study examines the effect of the corporate governance structure on firm financial performance

Summary

Introduction

Modern corporate governance principles support an approach that considers and balances the legitimate and reasonable needs, interests, and expectations of its stakeholders in an inclusive, ethical, and sustainable manner as part of its decision-making. Corporate boards include those that pursue wealth creation as the sole objective, and ethically responsible individuals who seek to improve social and environmental performances. Interest in corporate governance has increased since the turn of the century due to corporate fraud, managerial misconduct, and negligence and massive loss of shareholder wealth [2]. There are many reasons for such an explosive interest in this subject, but the main reason is corporate scandal [3]. Such explosive interest has resulted in heightened interest in the issue among researchers and policy-makers due to a series of unexpected corporate failures that has reignited and increased concerns regarding the effectiveness of board oversight [4]

Methods

Discussion

Conclusion