Abstract
This paper examines the impact of the government and its agencies’ ownership on the effectiveness of one the main internal governance mechanisms, namely; board of directors, for a sample of 140 energy and petrochemical Saudi listed firms over 2012-2019. The Saudi Arabia provides an interesting context due to the domination of government-linked corporations’ ownership. This setting arranges for the impact of such ownership on the board of directors’ monitoring and advisory roles. The board of directors’ effectiveness is measured as an interaction term of the board size and meetings of the board of directors. The study finds that government-linked energy and petrochemical corporations’ ownerships are inversely related to the board of directors’ effectiveness. This result is sensitive to the measurement of the board of directors’ effectiveness as each variable consisting of the board of directors’ effectiveness was examined individually. The study also finds that government-linked corporations’ ownership had a strong negative impact on the board size. In contrast, the proposed model does not provide any evidence supporting the relationship of the government-linked corporations’ ownerships with board meetings. Overall, the evidence supports the substitution hypothesis on the relationship of government-linked corporations and board of directors’ effectiveness.
Highlights
Ownership structures are an essential element of governance, when a well-designed legal framework is not present
Using a sample of 140 firm-year observations from energy and petrochemical industries, this study has examined the impact of the government-linked corporations’ ownership on the power of their board of directors in Saudi Arabia
This result is sensitive to the measurement of the board of directors used in the study which is the interaction term of the board size and meetings
Summary
Ownership structures are an essential element of governance, when a well-designed legal framework is not present. Dominant controlling shareholders are not incentivized to promote board control or audit committees, since the more intensely the environment is monitored, the more expensive it will be for them to leverage the situation for private gain (Leftwich et al, 1981; Shleifer & Vishny, 1997) Owing to this, these shareholders become a controlling force in the company and employ their influence over directors for the advancement of their own interest (Mendez & Garcia, 2007). The research showed that the ownership of corporations linked with the government has a negative influence in the moderation of the correlation between corporate government elements, i.e., voluntary disclosure, board size, and non-executive directors. This indicates that corporations linked to the government are negatively impacted in terms of effective corporate governance.
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