ABSTRACT
The study investigated the influence of corporate governance
on firm performance using listed financial institutions on the Ghana Stock
Exchange. The study also investigated the influence of board composition on
firm performance. Ex-post factor research design was adopted for the study and
purposive sampling was used in selecting sample for the study which comprises all
financial institutions listed on Ghana Stock Exchange. The study revealed that
there is a positive and significant relationship between managerial/insider
ownership and firm performance. It was also discovered that there is
statistically significant positive relationship between board size and firm
performance. In relation to board composition (independence) and firm
performance, the result was not statistically significant and negative.
Finally, it was discovered that audit committee both in size and independence
are important ingredient to fostering accountability and transparency which are
the lubricants and catalyzing agents for firm’s performance. It was recommended
that listed corporations should diversify shareholding as a way of attracting
diverse skills and competencies among shareholders and more importantly,
entrenchment and incentive of managers should be balanced so as not to allow
them pursue self-interest to the detriment of the corporation.
CHAPTER ONE
INTRODUCTION
Background to the Study
In recent times, corporate governance has gained global
significance. According to Ibrahim, Rehman and Raoof (2010), literature reveals
that improvement in corporate governance practices is an important ingredient
in enhancing long-term economic performance of corporations. Organization for
Economic Cooperation and Development [OECD] (2009) defines corporate governance
as the set of processes, customers, policies, laws and institutions affecting
the way a company is directed, administered or controlled.
Fortunato (2007) on the other hand, sees corporate governance
as an economic, organizational and legal series of issues related to systems,
principles, mechanisms or institutions through which firms are owned, managed
and financed. In their study, Vives (2000) described corporate governance as
the rules and incentives through which the management of a firm is directed and
controlled with the sole aim of maximizing profitability and long-term value of
the firm to the shareholders and at the same time giving due cognition to the
interests of other shareholders.
Moore (2012) posits that optimum financial performance of any
corporation is linked to corporate governance because it helps shareholders
decipher how to assure themselves of getting a return on their investment.
Helps shareholders get managers to return some of the profits to them and
scrutinize the activities of managers so that they do not steal the capital
provided them by shareholders or invest in bad projects. More importantly,
corporate governance facilitate the ability of the shareholders to adequately
monitor and control managers. Essentially, companies or corporations with
corporate governance is managed and controlled in accordance with the
principles of responsibility and transparency.
However, Jensen and Meckling (1976) and Myer and Majluf
(1984) contended that the separation of ownership and control creates a
conflict of interests between shareholders (owners) and managers as obtainable
in the agency theory with negative impact on firm’s performance. Identifying
contributive factors to conflicts, Khatab, Masood, Zaman, Saleem and Saeed
(2011) stated that manager’s superior access to insider information and the relatively
powerless position of the several and dispersed shareholders are contributive
to the managers having upper hand in firms’ control.
Marashdeh (2014) also indicated that in the event of
asymmetric information problems and imperfect contractual relations between
managers and shareholders, managers have incentives to pursue their own
objectives at the expense of shareholders. For instance, instead of increasing
the value of the company, managers might implement financial and investment
strategies or could spend more on luxury projects for their own interest.
Marashdeh posits that conflict of interest may be as a result of transfer
pricing, wherein assets of the company that could have been managed by managers
are sold to another company that they own below the market value. This
situation lowers firm’s performance.
However, Jensen and Meckling (1976) and Yeboah-Duah (1993)
and Moore (2012) contended that situations wherein managers hold a proportion
of shares in the firm (managerial ownership), the interests of shareholders and
managers are tallied or aligned resulting in inability of managers to pursue selfish objectives. Moreover, agency problems decreases and
firm performance increases.
Notwithstanding, the findings of Wiwattanakantung (2001)
study affirmed that managerial shareholders do not always encourage a firm’s
performance. Wiwattanakantung contended that there is an inverse relationship
behind the assumption of the linear relationship between managerial ownership
and a firm’s performance.
In view of the widespread corporate scandals and failures
around the world as enumerated above, interest in the impact of corporate
governance on corporate performance has increased. Though, findings of
Wiwattanakantung and several studies (Shleifer & Vishny, 1997; OECD, 2009;
Hermalin & Weisbach, 2003) revealed that the absence of good corporate
governance is a major cause of failure of many well performing companies and
ample evidence exists in literature supporting the position that good corporate
governance has a positive impact on organizational performance, some
researchers such as Marashdeh, contended that the composition of board of
directors, ownership concentration and managerial ownership could either mar or
make company’s performance. This suggests that the mode of corporate governance
is an important determinants of corporate performance. As a result, the present
study conducted an in-depth investigation into the impact of corporate
governance in the context of managerial ownership on corporate performance in
Ghana using financial institutions listed on Ghana stock exchange as the focus
of study.
Statement of the Problem
In their studies Shleifer and Vishny (1997) and Limpaphayom
(2001) indicated that ownership structure is an important mechanism for
mitigating agency problem and improving corporate governance. A thorough
analysis of various ownership structures, according to Baah (2011), revealed
that managerial ownership seems to be the most controversial. Notwithstanding,
several studies (Baah, 2011; Raji, 2012; Marashdeh, 2014) indicated that it is
a potent tool for aligning managerial interests with those of shareholders
because increase of managerial ownership provides managers ample opportunity to
employ monetary incentives to maximize profit.
However, several other studies (Demsetz & Villanonga,
2001; Numazu
Kerman, 2008; Ezazi, Sadeghisharif, Alipour & Amjadi,
2011) shows that managerial ownership hampers or it is inversely proportional
to corporate performance. Some studies (Jensen & Mecklings (1976; Kajola,
2008; Demsetz
Villalonga, 2001) also shows that managerial ownership as a
means of corporate governance, depending on the approach, could either make or
mar the financial progress of a corporation.
The gap in literature, according to Okougbo (2011),
necessitates further study into the influence of corporate governance in the
form of managerial ownership influence firm’s performance. As a result, this
study investigated the influence of corporate governance in the form of
managerial ownership on firm’s performance with some listed companies in Ghana
Stock Exchange as the focus of study.
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