The mediating role of board size, philanthropy and working capital management between basic corporate governance factors and firm's performance

Muhammad Naeem Shahid,Aamir Abbas,Khalid Latif,Ayesha Attique,Safwan Khalid

doi:10.1108/jabes-07-2018-0050

Muhammad Naeem Shahid, Aamir Abbas + Show 3 more

Open Access

https://doi.org/10.1108/jabes-07-2018-0050

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Abstract

PurposeThis study aims to identify the impact of corporate governance on performance of sugar mills. In order to study this relation, a model is constructed in which ownership structure and independent directors are taken as independent variables. Whereas firm performance is analyzed by using proxy variables such as return on asset (ROA), return on equity (ROE) and sales growth. Moreover, size of board, working capital management (WCM) and philanthropy are taken as mediating variables between governance variables and firm performance.Design/methodology/approachThe data of 32 sugar mills listed at Pakistan Stock Exchange for the period of four years (i.e. 2014–2017) is used for this research. Moreover, to investigate the model, generalized least squares statistical method is used to measure the relationship between variables.FindingsThe results revealed that there is significant but positive relationship between independent directors and ROA while ownership structure and ROE have significant but negative relationship. Thus, the board of directors should make it sure that all stakeholders and organizations should increase the nonfamily ownership in firms for better corporate performance. Moreover, philanthropy and WCM mediate the relationship between corporate governance and firms' performance.Practical/implicationsThis research work will be helpful in the corporate governance, and further researchers can conduct their study by considering executive/nonexecutive director and institutional owners as governance variables.Originality/valueThis paper fulfills an identified need to study how Corporate Governance effect the performance of firm.

Highlights

The corporate sector and Institute of Chartered Accountant of Pakistan (ICAP) [1] are the main controlling bodies of capital market secretarial profession of Pakistan
Independent directors have a significant relationship with the board size; board size mediates the relationship between ownership structure (OS) and sales growth; it does not mediates the relationship between independent directors and other dependent variables (ROA and return on equity (ROE)) because board size has insignificant relationship with return on asset (ROA) and ROE
Sales Growth significant relationship with the board size; board size mediates the relationship between OS and sales growth; it does not mediate the relationship between independent directors and other dependent variables (ROA and ROE) because board size has insignificant relationship with ROA and ROE

Summary

Introduction

In 2002, there were major frauds in WorldCom and Enron after that Sarbanes–Oxley act was issued; a code of conduct regarding the corporate governance (CG) system in Pakistan was introduced by SECP and that code was mentioned compulsory to be adopted within the same year 2002. CG consists of different areas such as ownership structure, board size, Chief Executive Officer (CEO) compensation, CEO duality, audit committee and ratio of board conferences and so on These areas are studied by (Bhagat and Black, 1999; Ali and Mohtasham, 2011; Yasser et al, 2011), but they do not find similar results. Corporate governance directly affects the firm performance and ability of firm to access the capital market. CG is a proper set of processes applied in favor of economic agents and urging them to take part in productive process within the social entity (Maati, 1999)

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