Impact Of Corporate Governance Principles Of Entity Financial Performance

Impact Of Corporate Governance Principles Of Entity Financial Performance

1. INTRODUCTION

(a) Background

South Africa experienced socio-economic and political changes in the late 1980s’and early 1990s’ (Ntim, 2009) as the apartheid era came to an end through extensive negotiations. Part of the economic changes that were being crafted included improving how entities are governed. South Africa’s efforts at improving its corporate governance were also at the same time with other developed countries in enhancing the efficacy of corporate governance around the world (Rossouw, et al., 2002). The international response to develop legislation, regulations and/or codes to guide corporate governance in different jurisdictions had been a direct response to scandals that led to the failures at Enron, Parmalat, Tyco, Worldcom etc. These company failures have been largely attributed to the breakdown in corporate governance within the

As a response to all these scandals, South Africa through the Institute of Directors Southern Africa set up a committee that was chaired by retired Judge Mervyn King (Ntim, 2009). The committee issued its first report in 1994 which is the Code of Corporate Governance and popularly referred to as King I report. Enhancements and improvements have been made to the original report and reports issued/published in 2002, 2009 and 2016 which are referred to King II, King III and King IV reports respectively. The Code of Corporate Governance is required to be mandatorily implemented for all public entities and any listed entities on the Johannesburg Stock Exchange (King Committee, 1994, 2002, 2009, 2016).

South Africa has recently experienced scandals of its own at the Public Investment Corporation (PIC), VBS Mutual Bank, African Bank, and Steinhoff. This has called into question if the corporate governance principles being followed are safeguarding the interests of owners of the entities. Research about the board leadership, composition and the audit committees has been in the spotlight as the scandals are supposed to be prevented by these governance principles in place.

(b) Research Rationale

Corporate Governance has been a widely researched topic in the developed countries and has built sufficient empirical evidence as to its impact on an entity’s performance from an accounting perspective or entity valuation. However limited research has been performed for emerging/developing countries such as South Africa) to determine the relationship that exists between corporate governance principles and entity financial performance. Ntim (2009)’s studies were based on King Committee (2002), which was published in 2002. Enhancements have been performed on this King Committee (2002) (King II) report, in 2009 which is known as King Committee (2009) (King III) and in 2016 which is known as King Committee (2016) (King IV). No empirical research has been identified as been done since 2009 to determine the relationship that the enhancements to the King III: Code of Corporate Governance to the entity financial performance. This is also the period after the 2008 Global Financial Crisis.

Research/studies performed on corporate governance in Africa or emerging markets has been mainly performed on a cross country sample (Klapper & Love, 2002; Coleman 2007 etc), which tends to lead to bias in the sample selection as the researchers focus on the entity’s size and investor’s interest, and therefore the research has not looked on South Africa exclusively and therefore are affected by the different cultures, business environment and 4 economic set-up. This research will contribute to empirical evidence that has been obtained from a sample of exclusively South African entities.

(c) The Purpose of the Research

The research/study being undertaken is meant to highlight the effect that corporate governance principles has had since its introduction in 1994 on the financial performance of listed entities that has been adopted in South Africa. The King Committee which first published the Code of Corporate Governance in 1994 has constantly updated and reviewed the code so that there is greater clarity on its principles as King II was published in 2002, King III was issued in 2009 and recently King IV was issued in 2016 (King Committee, 1994, 2002, 2009, 2016). Limited empirical studies have been carried out to determine the relationship between corporate governance and financial performance with regards to King II but no empirical studies have been performed after King III was published. This therefore provides an opportunity for new empirical studies on corporate governance that have been limited in Sub-Saharan Africa and have not identified any data that has been collected post 2009 when King III was published. This research will therefore provide new empirical evidence on the relationship between corporate governance principles and entity financial performance from listed South African entities. The financial performance will cover both the accounting ratios as well as firm valuation.

(d) Research Question

The questions that this research will address is to determine the relationship that exists between corporate governance principles and entity financial performance in South Africa. The specific question being is, what is the relationship between Board Leadership, Board Composition, Audit Committee and Financial Performance? 

The main objective of this study is to determine relationship between the corporate governance principles and financial performance in South Africa where the Code of Corporate Governance by the King Committee has been adopted. The specific objectives are:

1. To determine the relationship between board leadership and financial performance?

2. To determine the relationship between board composition and financial performance? 

3. To determine the relationship between audit committees and financial performance?