Impact of corporate governance on firm performance published

Impact of Corporate
Governance on Firm
Performance
September 5
2016
A key objective of a corporate governance system should be the
enhancement of shareholder wealth Abstract
By: Muhammad Usman *
Masters: Human Resource Management
Department of Management and sciences
COMSATS Institute of Information and Technology
*Corresponding author: 0320-6640581 or Usman2skp@gmail.com
International Journal of New Technology and Research (IJNTR)
ISSN: 2454-4116, Volume-1, Issue-15, Oct 2016
© 2016. Muhammad Usman This is a research/review paper, distributed under the terms of the
Creative Commons Attribution-Noncommercial 3.0 Unported License permitting all non-commercial
use, distribution, and reproduction in any medium, provided the original work is properly cited

COMSATS Institute of Information and Technology | Corporate Governance
1
Impact of Corporate Governance
On Firm Performance
Mr. Shahzad Ghafoor
PhD: International Business (Continue)
Lecturer, Department of Management Sciences
COMSATS University Lahore, Pakistan
Co Authors:
Saba Amanat
Masters: Human Resource Management
COMSATS Institute of Information and Technology Lahore
Management and Sciences
Asima Akram
Masters: Accounting & Finance
COMSATS Institute of Information and Technology Lahore
Management and Sciences
Under The Supervision of
Respected Teacher:
:

2
Abstract
In the light of corporate financial scandals, there is an increasing attention on corporate
governance issues. The investors look for emerging economies to diversify their investment
portfolios to exhaust the possibilities of returns. This paper examines the impact of
corporate governance variables on firms’ performance. This Research found that there is a
direct positive relationship between profitability measured either by Earnings per share
(EPS) or Return on assets (ROA) and corporate governance, also have a positive direct
relationship between each of liquidity, dividend per share, and the size of the company with
corporate governance, finally the study found a positive direct relationship between
corporate governance and corporate performance. Various studies have been conducted in
developing countries including Pakistan to investigate the relationship among corporate
governance and firm performance. This study indicates that corporate governance can be
measured through the following elements.
(1) board size (2) Female Member (3) CEO duality (4) Education of Directors (5) Board
working experience(6) independent directors (7) board compensation (8) Board ownership
(9) Audit committee (10) Board composition(11)Leadership Structure.
Key words: Corporate governance, firm performance,
conceptual framework, financial performance, Independent
directors, block holders, duality.

3
INTRODUCTION
he corporate scandals of the early 2000s, including Enron, WorldCom, Tyco and
others, led to a wave of regulation aimed at anticipation similar problems in the
future. The culmination of every financial crisis academicians, regulators,
governments tend to focus on the corporate governance more dynamically in order to
enhance investors’ confidence that would attract investments. Corporate governance
measures like board structure, compensation structure and ownership structure are
determined by one another, and by variables such as risk, cash flows, firms’ size and
principles etc. These variables also strongly affect a firm’s performance (Jensen and
Mackling, 1976).
Firm risk play an important role in the firm performance because firms that take more risk
generally have higher returns. Due to their volatile nature, firm-specific risks hinder the firm’
s policy makers and planning department’ s ability to forecast and plan their cash flows and
related activities, etc. These risks are generally related to the returns on the firm’s stocks
(Bloom and Milkovich,-1998).But, firm-specific risks are also directly related to the
performance of the firm (Nguyen, 2011).Corporate governance is an important research
area, which deals with the many governance arrangements used to control the corporation
within the objective of maximizing shareholders wealth. A literature review discloses this
importance, and highlights problems with conflict of interest between shareholders and the
management (Jensen and Mackling, 1976). Effectiveness of corporate governance
essentially guarantees shareholders value and make sure the appropriate usage of firms'
resources, allowing access to capital and improving investor confidence (Denis and
McConnell, 2003).
Corporate governance depends on internal organization and external market conditions;
firm‘s responsiveness to external conditions is largely dependent on the way the firm is
managed as well as the effectiveness of the firm‘s governance structure (Gregory and
Simms, 1999). Several authors (e.g. Rwegasira, 2000; Nam et al., 2004) have debated that
good corporate governance prevents the expropriation of company resources by managers,
ensuring better decision making and efficient management. This results in better allocation
of company resources and, ultimately, improved performance. In the light of corporate
financial scandals, there is an ever increasing attention on corporate governance issues.
Investor’s always aspect for emerging economies to diversify their investment portfolios to
maximize Returns they are equally worried about governance factors to decrease risks in
these economies. Corporate social responsibilities are one of the aspects of this governance
framework which is voluntary and softer in nature. The compulsory governance issues are
enforced by the lawsuit or compliance with the legal provisions. Softer social issues are
T

4
required by stakeholders‟ pressure, boycotts, compliance with the self-regulatory codes of
conduct.
LITERATURE REVIEW
Superior corporate governance leads to healthier operating performance (Drobetz,
Schillhofer and Zimmermann, 2003) Firms with inferior governance ratings are observed to
have produced higher returns because of more exposure to risk Pakistan is a country where
the field of corporate governance is up till now at early stages and a lot of work is still
needed to be done for the effective corporate governance and control. Securities and
Exchange Commission of Pakistan is the regulatory authority that supervises the
performance of corporate sector. Emphasis of the past researches in this field especially in
Pakistan has been mostly upon the quantitative and conservative measures like Ownership
concentration, board size, board composition, CEO/Chair duality, role of audit and other
committees. However the objective of this study is to develop a conceptual model by
including the factors of corporate governance which are related to instructions that govern
the board of director, executives of the firms and other stakeholders. The implementation
of these regulatory measures along with the conventional tools will strengthen the
corporate governance system which will increase the firm performance.
Corporate governance plays a major role in macroeconomic stability provide the suitable
environment for economic growth as well as society welfare, therefore international
institutions give major attention and concerns to this issue at the level of macro and micro
parts, because of the importance of corporate governance at both the country and the
corporate levels. Corporate Governance is “a set of relationships between a company’s
management, its board, its shareholders, and other stakeholders. Corporate governance
provides the structure through which the companies set their objectives, and the means of
achieving those objectives and monitoring performance are determined. Good corporate
governance should provide proper motivations for the board and management to follow
objectives that are in the interests of the company and shareholders and should facilitate
effective monitoring, in that way boosting firms to use resources more efficiently.”
(OECD Principles of Corporate Governance 1999).
Corporate governance deals with the behaviors in which suppliers of finance corporations
reassures themselves of getting a return on their investment and is about promoting
corporate fairness, clearness and accountability. And establishes how the several
participants’ shareholders and other stakeholders, management, the board of directors
interact in determining the direction and performance of corporations. Good governance
holds management accountable to boards and boards accountable to the owners and other
stakeholders. In the case of banks, significant stakeholders contain depositors and the
banking supervisor such as the Central Banks. (2003). Internal corporate governance factors
are interrelated to the effectiveness of the collaboration among a company’s management,

5
board, shareholders and stakeholders. Good corporate governance is not an end in itself,
but instead facilitates a company’s capacity to define and achieve its purposes. The board
must agree on the company’s values (what it stands for), and the strategy to achieve its
purpose. It must account to shareholders and be responsible for relations with its other
stakeholders, Denis, D. and J. McConnell (2002).
Family and non-family companies’ performance also effect on CG the family companies
controlled by the formation family have greater value, operated more efficiently and carry
less debt than other companies. Miller and Breton-Miller (2006).That family Companies
perform better than non-family companies when the family companies have the intention
to keep the business for next generations. A study by Maury (2006) in 13 Western European
countries found that active family control continued to outperform non-family control in
terms of profitability in different legal regimes. In 2008, a survey conducted by Pakistan
Institute of Corporate Governance (PICG) indicated that 80% of firms cannot reach the third
generation of their founders in Pakistan. Family companies have several incentives to
reduce agency costs (Fama& Jensen, 1983; Demsetz & Lehn, 1985; Anderson & Reeb, 2003)
Research also claims that executives who are agents are motivated to act in the best
interests of their principals (Donaldson & Davis, 1991) it is very difficult for family companies
to avoid the misalignment between principal and agents. The agency cost in family
companies can take place between minority owners and the major family owners.
Board Size: The Different Researchers have
different point of view about the size of board a
too small or too large board size have negative
impact on firm performance. Guest (2009)Board
size was measured by the number of directors on
the board and firm performance was measured by
profitability, return on equity and Tobin’s The first
school of thought claims that a smaller board size
will contribute more to the success of a firm
(Lipton and Lorsch, 1992; Jensen, 1993; Yermack,
1996). However, the second school of thought
considers that a large board size will improve a
firm’s performance (Pfeiffer, 1972; Klein, 1998;
Coles and ctg, 2008). This research indicate that a
large board will support and advise firm
management more efficiently because of a
complex of business environment and an
organizational culture (Klein, 1998).Garg (2007)
investigated the influence of board size and board on firm performance on a sample of
Indian firms. Firm performance was measured by Tobin’s Q, return on assets and total
However from the Asian countries
perspective Watering’s and
Swagerman ( 2011) conducted a
study to trace out the impact of
board size on firm value using a
sample of 155 property firms and
real estate investment trust listed
in the exchanges of Singapore,
Hong Kong and Malaysia. A
positive relationship was
observed between board size and
firm value form the property
firms. However the results forreal
estate investment trust was
insignificant.

6
assets turnover the research results recommend that there is an inverse relationship
between board size and firm performance.
CEO Duality: If the firm Chief executives are also
the chairman of the board this represents the CEO
chair duality. CEO duality will weaken the control
mechanism and negatively influence the role of
board members evaluating the activities of firm
managers. The Research of Ujunwa (2012)
Heenetigala & Armstrong (2007), Yasser et al.
(2011) found that CEO chair duality have a negative impact upon the performance of the
firm. According to Hewa-Wellalage and Locke 2011 study, in Sri Lanka, the Sri Lankan code
of best practice on corporate governance give emphasis to the balance of power within a
firm to minimize any one individual’s influence to the decision making process.
Frequency Table
CEO duality has a negative impact on firm performance.
Frequency Percent Valid Percent Cumulative
Percent
Valid Strongly Agree 14 23.3 23.3 23.3
agree 25 41.7 41.7 65.0
Partially Agree 11 18.3 18.3 83.3
disagree 9 15.0 15.0 98.3
Strongly Disagree 1 1.7 1.7 100.0
Total 60 100.0 100.0
In Europe, 84 per cent of firms separate
the roles of a chair of a board and a CEO
of a firm
(Hedrick and Struggles, 2009)

7
These rules provided recommendation that when there is a duality in a firm, a number of
independent directors on a board should be a majority to provide balance and an effective
and efficient operation of a board.
Education Level of Board Members:
A board is also called a control system in a business (Fama and Jensen, 1983) the basic role
of a board is the internal corporate governance of a firm (Fama, 1980). so we have need of
each board member to be fully equipped with management knowledge such as finance,
accounting, marketing, information systems, legal issues and other interrelated areas to the
decision making process. This requirement suggests that the quality of each board member
will contribute significantly and positively to management decisions which is then translated
into the firm’s performance (Nicholson and Kiel, 2004; Fairchild and Li, 2005; Adams and
Ferreira, 2007).so if the firm’s directors have related professional education and have
acquired professional training they can perform much better as compared to those
members who does not have the related education and skills.

8
Board Working Experience: Competency of Directors is essential factors as they
contribute positively to the working of the Companies (Johannisson
andHuse,2000).Experience is expected to positively contribute to boost the performance of
a firm. However, older-age board member seems to be more aggressive with decisions.
These characteristics of board members may result in risky decision making, which may
undermine a firm’s performance (Carlson and Karlsson, 1970)The board of director must
establish the regulations regarding executives of the firm especially about the Firm CEO to
ensure that executives are pursuing the goal of shareholders. Directors play a significant role
in deciding the strategic direction and overall policy making of the firm so the corporate
regulatory authority must establish some important regulation in order to confirm the
better functioning of the governance mechanism.
Table 1 Summary of Role of Board of Directors
Theory Role of Board Implications for board
Agency Managerial control Independent boards mechanism for
shareholders to preserve ownership,
control rights and monitor
performance
Stewardship Managerial empowerment The board controlled by management
is empowered and manages.
Resource
Dependence
Search for external resources Board with strong external links is a
co-optation tool for firms to access
external resources.
Board members with a higher age average may face more limited pressures to a changing
business environment and this may hinder the implementation of more strategic decisions
[Note]
Every firm must establish a defined rules and
regulation regarding the retirement age of a board
member so that older members could be replaced by
energetic directors that can contribute better than
their elder counterparts.

9
(Child, 1975).Moreover Berube (2005) notes that companies can no longer be deal with
directors who simply put in a token of appearance. Companies search for qualified directors,
with their expertise. A report from Christian & Timbers in New York also reflects the tough
competition for qualified outside directors (Bates, 2003).A survey conducted in America by
Ernst & Young reports that a lot of companies in Europe and America they are worried and
complaining that they struggle to find qualified directors for their boards but it’s very
difficult to get a board according to your requirements (The Economist, 2006). Hendry
(2002).
Board Compensation: shareholders should attach their financial benefits to
compensation which is paid to a firm’s management. Once management behavior is not
favorable, then compensation is a corporate governance mechanism to encourage
management to run a firm in the interest of shareholders. Board Compensation solves
agency issue between shareholders and management and contributes positively to a firm’s
performance (Jensen and Murphy, 1990; Mehran, 1995).
Board Ownership: Brickley et al. (1988) concluded that the board’s ownership is an
encouragement for board members to do best efforts. This encouragement will help board
members administrate management in a more efficient way. Consistent with this view,
Jensen and Murphy (1990), Chung and Pruitt (1996) considered that, board’s ownership will
improve firm’s performance. Mehran (1995) Presented empirical evidence that there is a
positive correlation between board ownership and firm’s performance. Fama and Jensen
(1983) argued that contribution of board’s ownership is measured as a “two-edged knife” in
which there is an optimal level of board ownership which contributes positively to a firm’s
performance.
Independent Directors :Non-executive directors on the board of directors, performing
on the part of external shareholders, are generally expected to monitor firm’ s strategy and
decision-making in this regard. (Fama, 1980) and Mak and Kusnadi (2005) disclose that a
higher fraction of independent directors on the board is linked to greater firm
value.Yammeesri, J., &Herath, S. K. (2010) said at their research that it is still debatable
whether non-executive directors will perform well in monitoring firm management and
whether their performance could reflect an increase or decrease in corporate performance.
Elloumi and Gueyié (2001) concluded that firms with high ratio of independent directors in a
board face less financial pressure. In addition, when a business environment go downhill,
firms with many independent directors have had lower probability of filing for bankruptcy
(Daily et al., 2003)

10
Frequency Table
Non-executive directors’ performance could reflect an increase in corporate performance.
Percent
agree 32 53.3 53.3 68.3
disagree 6 10.0 10.0 96.7
Total 60 100.0 100.0
But another side also can be discuss in which the chief executive officer (CEO) may feel
uncomfortable to discuss all the strategic matters with the non-executive directors, which
will create a gap between the firm’s decisions and the participation of its independent board
members. So, a negative relationship may be expected in this situation
Block Holders: Small shareholders will bear serious consequences from block holders who
may abuse the power how to run a business. Second, strict control from block holders to a
firm’s management will hinder the firm’s performance due to restriction in work and
decisions. If firm’s management will become inflexible with business environment. The

11
decision making process is no longer an initiative from the firm’s management and this
results in lowered firm performance (Burkartet. Al., 1997; Myers, 2000). Denis and
McConnell (2003) and Becker et al. (2011) considered that, centralizing managerial power in
block holding individuals will generally positively affect the performance of the firm.
Female Member: The female board members Shows a diversified characteristic of the
board (Dutta và Bose, 2006).Female board members will convey better images in the
perception of the community for a firm and this will contribute positively to firm’s
performance.
Frequency Table
Female members have a positive impact on firm performance.
Percent
agree 22 36.7 36.7 70.0
disagree 5 8.3 8.3 95.0
Total 60 100.0 100.0

12
Other board members will have improved understanding of the business environment
when female board members are appointed.
Audit Committee: Directors and audit committees that are independent from
management can improve the firms' reporting system and the quality of reported earnings.
Siagian and Tresnaningsih (2011). Generally, independent directors also serve as
experienced professionals in other large organizations and therefore, care about their
reputation (Nguyen and Nielsen, 2010).The committee should contains independent board
of director along with other members. Islam, M. Z., Islam, M. N., Bhattacharjee, S., & Islam,
A. Z. (2009).Independent audit committee is one of the important mechanisms. It is
expected to satisfy the need of both internal and external users of financial statements, and
previous studies have documented the importance of the independence of audit committee
members for maintaining the integrity and quality of the corporate financial reporting
process. Auditors play a important role in their clients’ disclosure practices and procedures.

13
Concerns regarding the quality of financial information and its association with the quality
of the auditing process have grown with the time, given the rising incidence of fraud in big
businesses, failures, and litigation (Chambers, 1999; Tie, 1999)
Frequency Table
The audit committee oversees management’s procedures for enforcing company’s code of conduct.
Frequency Percent Valid Percent Cumulative Percent
agree 35 58.3 58.3 70.0
disagree 3 5.0 5.0 100.0
Total 60 100.0 100.0

14
Thus, auditing may reduce misreporting and mispricing in financial reporting and control
managerial discretion with respect to earnings management. There are some proxies for
measuring audit quality, including the size of the auditing firm (DeAngelo, 1981), the
auditor’s contract with its clients (Johnson, Khurana, & Reynolds, 2002), and the presence of
an industry-specific auditor. However, there is sufficient evidence Received that the size of
the auditing firm is a good representation for audit quality (see Francis, Maydew, & Sparks,
1999; Becker, DeFond, Jiambalvo, &Subramanyam, 1998; Chia, Lapsley, & Lee, 2007).
Board Composition: Existence of outside board member has a positive relationship with
firm performance. The board develops the mission, policies, and overall track for an
organization. People with distinct values, opinions, and relationships to different people and
communities comprise the board of directors and it follows that the individual
characteristics of the people who serve on the board will influence the mission, policies, and
overall direction of an organization. Therefore, having representatives of diverse
populations on a board of directors will have a direct impact on the mission, policies, and
overall direction of a nonprofit organization.

15
Some Alternation made By SECP in 2002 code and introduced 2012 code of corporate
governance
Table 2 2002 and 2012 Code Of CG
Particulars Code 2002 Code 2012
Independent Director Encouraged a least of one
independent director on the
board of a listed company.
One independent director is
compulsory while preference
is for 1/3rd of the total
members of the board to be
independent directors.
Criteria for assessment of
independence
Very small criteria provided Criteria has been
significantly expanded
Executive Directors Number of Executive
Directors
not to be more than 75% of
elected directors including
CEO
Maximum number of
Executive
Directors cannot be more
than
1/3rd of nominated directors
including CEO.
Number of directorships
A director can be on the
board of no more than 10
listed companies at same
time.
A director can be on the
board of 7 listed companies
at one time. However, the
limit does not include
directorship in listed
subsidiaries of a listed
holding company
Board evaluation
Within two years of the
execution of the Code 2012,
the Board has to put in place
a mechanism for undertaking
annual evaluation of the
performance of the
Board.
The Chairman of a listed
company shall preferably be
selected form among the
The Chairman and CEO shall
not be the same person,
unless specifically provided

16
Office of Chairman and
CEO
nonexecutive directors of
the listed
company.
in any other law. The
Chairman shall be elected
from the non-executive
directors of the listed
company.
Training of the Board of
Directors
It is compulsory for directors
of listed companies to attain
certification.
In the beginning, the PICG
was to provide the training
but later it was opened to
other institutions, provided
they met the criteria
specified by the SECP.
It will be mandatory for
directors of listed companies
to attain certification under
any director training
program (DTP) offered by
any institution (local or
foreign), which meets the
criteria specified by the
SECP. The criteria are
available at the websites of
the stock exchanges and the
SECP.
Appointment and
removal and qualification
criteria for Chief Financial
Officer (CFO) and
Company Secretary (CS)
Appointment, remuneration
and terms and conditions of
employment of CFO and CS
determined by CEO and
approved by Board. The
same mechanism followed
for removal.
The appointment,
remuneration and
terms and conditions of
employment of the CFO, CS
and the Head of Internal
Audit (IA) of listed
companies shall be
determined by the Board.
The removal will also be by
the Board for CS and CFO.
The Head of Internal
Audit (IA)
Qualification introduced for
Head of IA. The removal of
Head of IA is with the
approval of the Board only
upon recommendation of
the Chairman of the Audit
Committee.
“Corporate governance principles and recommendations with 2010 amendments”
Board Meetings: Boards meet officially at least four times per year, supplemented by
additional monthly executive committee meetings attended by directors, the chairman, the
CEO and senior managers (Ward, 1991).The board should decide the number of board
meetings held in a year and the details of attendance of each individual director. They
should also maintain minutes of meetings. Pakistani Code of Corporate Governance (2002)

17
proposes that the board should meet regularly, with due notice of issues to be discussed but
should meet at least once in a quarter.
Leadership Structure: The corporate governance perspective views the CEO duality to
arise when the post of the CEO and Chairman are managed by one person. The agency
theory claims that there must be a separation between ownership and control. The separate
leadership structure can control agency problems, and enhance the firm’s value (Fama&
Jensen, 1983).In contrast, duality leadership is common among family companies (Chen,
Cheung, Stouraitis & Wong, 2005). The founder CEOs as more alarmed about the survival of
their companies are willing to protect their inheritance for future generations. In the US,
Moore (2002) finds that some companies have the CEO as the board chairman in order to
focus the company’s’ leadership. In addition, by splitting the role of the chairman and CEO,
it reduces the CEO’s freedom of action (Felton & Watson, 2002). Other researchers find that
stewards who hold the positions of a board executive and a chairman concurrently have
significantly higher corporate performance (Donaldson & Davis, 1991; Finkelstein & D’Aveni,
1994).
The board‘s role is to display entrepreneurial leadership of the company within a frame
work of prudent and effective controls which allows risk to be assessed and managed. The
board should set the company‘s strategic aims, make sure that the necessary financial and
human resources are in place for the company to meet its objectives and evaluation of
management performance. The board should set the company‘s values and standards and
ensure that its obligations to its shareholders and others are understood and met‖. (UK
Combined Code, 2006, p. 3) and Directors ‘responsibilities have been classified into three
groups: control, services and resource dependence. Because the managers ‘responsibility is
to work in the best interest of shareholders, the control role demands the directors to be
liable to hire and fire the managers and the CEO and to ensure that managers are working in
the best interests of the shareholders (Monks and Minow, 1995).

18
Conceptual Frame work
Figure 1 Conceptual Model
The purpose of an effective governance system is securing the rights of the shareholders. So
the shareholders must have right to call special meeting on the matters which they
considers that its importance. Furthermore the firm must reply properly towards the rights
of the society and must fulfill its social responsibility. A socially responsive firm will be able
to develop its image in front stakeholders. The code of ethics must be clearly defined that m
framework the rights and responsibilities of various stakeholders of the firm. The firm must
have a policy to rotate the external auditor to make sure the true and fair view of financial
information. On other hand the firm must disclose the compensation paid to the directors
and executives of the firm.so performance of the firms is the independent variables which
EffectiveCorporate
Governance
Female Member
Independent
Director
Leadership
Structure
Board
Compensation
Education of
Directors
CEO duality
Board working
Experience
Audit Committee
Board ownership
Board
Composition
Board size

19
depend on other factors which includes the board compensation, female board members,
education and experience of Directors.
Role of Effective Corporate Governance:
Figure 2 Role of the corporate governance
Role of corporate governance start from investment of the shareholders when
shareholders invest their money they want to get the profit and to protect the shareholder
corporate governance plays an important role to make the superior performance of firm so
when the performance of firm is superior so we can say that it will earn highest profit and
obviously he will pay higher profit to shareholders so it’s become the reason of satisfaction
of shareholders and stakeholders so when all shareholder are satisfy so its encourage them
to invest more money in the firm.

20
Descriptive Statistics
Model Summary
Model R R Square Adjusted R
Square
Std. Error of the
Estimate
1 .414a .172 -.062 .61395
This table provides the R and R2
values. The R value represents the simple correlation and is
0.414 (the "R" Column), which indicates a high degree of correlation. The R2
value (the "R
Square" column) indicates how much of the total variation in the dependent variable, can be
explained by the independent variable. In this case, 17.2% can be explained.
a. Predictors: (Constant), CEO duality has a negative impact on firm performance.
Because its goes towards the favoritism and become the cause of fraudulent activities
and Female members have a positive impact on firm performance. Because its create
competiveness between the members of the board of directors. The role of internal
auditors and audit committee is much important for good corporate governance and
Independent director has a positive impact on audit committee because they create
check and balance on them
b. Dependent Variable: Good Corporate Governance increase firm performance.
The above stated findings revealed that there is a significance relationship between Role
of corporate governance and variables. The value of R is less than one and round to .414
which shows very strong positive relationship of our variable with the corporate
governance and shows that our research The overall P value of the model is < 5% & 1%
which shows that the overall model is significant (Smith, 1996; Huson, 1997; Nesbitt,
1994; Carleton et al., 1998; Strickland et al., 1996). P-value of board size and number of
meetings < 5% show that both are significantly positively and negatively related to return
on equity respectively (Alexander, Fennell, & Halpern, 1993; Goodstein, Gautam, &
Boeker, 1994).

21
ANOVA
Female member’s representation in board is pressing for more diversity and
good governance
Sum of Squares df Mean Square F Sig.
Between Groups 20.259 4 5.065 5.686 .001
Within Groups 48.991 55 .891
Total 69.250 59
This is the table that shows the output of the ANOVA analysis and whether we have a statistically
significant difference between our group means. We can see that the significance level is 0.001 (p =
.001), which is below 0.05. This shows positive result of study.
CEO duality has a negative impact on firm performance. * Good Corporate Governance
increase firm performance
Crosstab
Good Corporate
Governance increase firm
performance
Total
Strongly
Agree
agr
ee
Partiall
y
Agree
CEO duality has a
negative impact
on firm
performance.
Strongly Agree Count 8 6 0 14
Expected Count 7.2 6.1 .7 14.0
agree Count 14 11 0 25
Expected Count 12.9 10.
8
1.3 25.0
Partially Agree Count 5 4 2 11
disagree Count 3 5 1 9
Strongly
Disagree
Count 1 0 0 1
Expected Count .5 .4 .1 1.0
Total Count 31 26 3 60
Expected Count 31.0 26. 3.0 60.0

22
Chi-Square Tests
Value df Asymp. Sig. (2-
sided)
Pearson Chi-Square 27.708a
16 .034
Likelihood Ratio 23.643 16 .098
Linear-by-Linear
Association
.066 1 .797
N of Valid Cases 60
a. 21 cells (84.0%) have expected count less than 5. The minimum expected
count is .03.
Chi square test is used to check the validity of relationship between dependent and
independent variables. If the value of Pearson chi-square is less than 0.05 then the
relationship between dependent and independent variables proves to be valid. Here in our
research the value of chi-square is .034 which is less than 0.05 which shows that the Positive
relationship.
Research Focus and Methodology
The research undertaken is interpretive in nature (Gephart, 2004), capitalizing on in-depth
interviews with researchers of Corporate governance to explore their interpretations and
perceptions of central role of Corporate Governance in Pakistan. Interpretive research is
qualitative seeking to unearth collective frames of reference, or construed realities that
guide the attribution of meaning and help account for how Corporate governance give
benefits to its stake holders. A purposeful sample comprising 5 researchers’ corporate
governance was used for this research. According to Patton (2002), qualitative inquiry
usually focuses in-depth on relatively small samples, selected purposefully (whereas
quantitative methods focus on larger samples selected randomly). “The logic and power of
purposeful sampling lie in selecting information rich cases to study in depth; Information
rich cases are those from which one can learn a lot about issues of central importance to the
purpose of the inquiry” (Patton, 2002, p. 230).
Under this logic, this study selectively included five researchers who have vast experience
and knowledge about corporate governance. Sampling was intentional in the sense that
only researchers of corporate governance who had accumulated relevant experience were

23
selected. As illustrated in Table, researchers were taken from different age groups (e.g., 25
to 65 years old). All researchers are expert in their own research area and have valuable
information regarding corporate governance.
Researchers Area of
research
Qualification Past Experience Work
Status
1 Management
sciences
PHD HOD
2 Human Resource
Management
MBA in HR, MS in
Project management
Lecturer
3 Management
and corporate
governance
Master in management
science
4 years experienced at
corporate sector
Industrial
Manager
4 Marketing Masters in Marketing lecturer
5 Management
and corporate
governance
Master in management
science
3 years experienced at
corporate sector
Industrial
Manager
An interview guide was prepared based on the literature review presented above. The
interview guide addressed the factors and central role of corporate governance on the
firm’s performance as reflected in Table II. The interview guide served the purpose of
steering discussions around common themes (relating for example to opportunity
identification, motivation, financing strategies, performance, role, legal environment,),
while also leaving the interviewer to decide on the sequence and wording of questions in
the course of the interview. All interviews were conducted in English and Urdu, lasted on
average 10 min, and was tape recorded and transcribed.
Table II
Factors Dimension Description
Role Of the Corporate
Governance
Central role central role of Corporate governance is the
protection of shareholders and
stake holders wealth
Corporate Social
Responsibilities
Corporate governance also work for CSR
which is most important for development
of the country

24
Government role
Current Governments Make it difficult to
Operate
Role of government is to provide code of
corporate governance
Independent Director
Ratio of Directors
One independent director is
compulsory while preference is for
1/3rd of the total members of the
board to be independent directors.
Power of take Decisions
It’s necessary that they Must have power
of decisions for making fair and free
working
Director in others companies A director can be on the board of 7
listed companies at one time. However,
the limit does not include directorship
in listed subsidiaries of a listed holding
company
Contribution in the internal
affairs
Positive affect Positive affect in sense that they have a lot
of experience in other companies so their
decisions will be more accurate
Negative affect Negative in sense that its Dangerous and
can become the cause of leakage
information and loosing competitive
advantage
Research Findings
This research shows the role of the independent director he is no less than as stated in the
preceding section, and to recommend otherwise would be inaccurate. What, however, is
clear is that non-executive directors are not involved in and not expected to be involved in
the day-to-day management of the company. Instead, they are expected to be observant
guardians of the activities of the board as a whole these are some important points that’s
discuss during the interviews by highly professionals.
The main task of independent directors is to accept an oversight role and to ensure that the
corporate assets are used only for the company. This task includes:
a. become aware with the fundamentals of the business in which the company is involved
and continue to be informed about the activities of the company,
b. revising the accounts of the company,
c. calling for further information where the accounts show less than the full picture,
d. acting as a check on planned corporate strategy bearing in mind the economics of any
potential transaction,
e. regular appearance at board meetings to ensure ability to generally monitor of corporate
affairs and policies

25
f. Contributing in the selection, assessment and remuneration of directors generally.
g. Where an error or carelessness is discovered, whether on the part of the board or
otherwise, the independent director cannot hide behind a coat of ignorance.
Independent directors cannot close his eyes to what is happening in the company and
assume that the executive directors are accomplishment their responsibilities to the
company.
h. The independent director's main role is not to protect the interest of the minority
shareholders, but to act as a check and balance on the performances of the board and
management of the company. His duty is to investigation and queries anything which has
the appearance of being inappropriate in the company. Indirectly, of course, the role the
independent director plays has the impression that it is promoting the best interests of
minority shareholders; when in fact the reality is that it is encouraging the interest of all
shareholders as a whole.
Conclusion
This paper shows the association between corporate governance and performance of the
firms, converging on possible differences in results before and after 2012. A significant part
of SECP and other exchange requirements tried to increase the role of independent board
members. The impact of corporate governance on firm performance and firm risk has been
broadly discussed.
corporate governance, containing female board members, board’s working experience
Education of the Directors, Board composition and board’s compensation etc. all have
positive correlations with firm’s performance. Female board members show a diversification
of board membership and this diversified nature will contribute positively to firm’s
performance.
 There should not be large number of members on the board because a larger
board’s size will contribute negatively to firm’s performance.
 Board should appoint female board members because these females will make a
Vital contribution to firm’s performance. This study proves that female board
members Shows a diversified characteristic of the board. Female board members will
convey better images in the perception of the community for a firm and this will contribute
positively to firm’s performance. Other board members will have improved understanding
of the business environment when female board members are appointed.
 This study also Shows that board’s compensation will positively
Contribute to firm’s performance. Accordingly, it is necessary for listed firms to
consider an appropriate and competitive compensation level of board’s members. Once
management behavior is not favorable, then compensation is a corporate governance
mechanism to encourage management to run a firm in the interest of shareholders. Board

26
Compensation solves agency issue between shareholders and management and contributes
positively to a firm’s performance
 The compensation will provide association between shareholders and firm’s
Management and this association will enhance firm’s performance to maximize
Shareholders value.
 Education level of board members contributes positively because professional
education will make them able to use their professional techniques and minimize the
risk and protect the shareholder and timely decisions. we have need of each board
member to be fully equipped with management knowledge such as finance,
accounting, marketing, information systems, legal issues and other interrelated
areas to the decision making process. This requirement suggests that the quality of
each board member will contribute significantly and positively to management
decisions which is then translated into the firm’s performance
 Experience is expected to positively contribute to boost the performance of a firm.
However, older-age board member seems to be more aggressive with decisions.
These characteristics of board members may result in risky decision making, which
may undermine a firm’s performance
 It is concluded that the board’s ownership is an encouragement for board members
to do best efforts. It’s confirmed that contribution of board’s ownership is measured
as a “two-edged knife” in which there is an optimal level of board ownership which
contributes positively to a firm’s performance.
 It’s concluded that CEO duality will weaken the control mechanism and negatively
influence the role of board members evaluating the activities of firm managers. And
it is found that CEO chair duality have a negative impact upon the performance of
the firm.
 Board working experience also contribute a lot in the highest performance of the
firms because the experience will make them able to make highly accurate decisions
at critical situations.
It’s also found that Role of corporate governance start from investment of the shareholders
when shareholders invest their money they want to get the profit. And for protection the
shareholder corporate governance plays an important role to make the superior
performance of firm so when the performance of firm is superior then we can say that he

27
will be able to earn highest profit and obviously when he will pay higher profit to
shareholders so it’s become the reason of satisfaction of shareholders and stakeholders
when all shareholder are satisfy so its encourage them to invest more money in the firm.
The above stated findings revealed that there is a significance relationship between Role of
corporate governance and variables. The value of R is less than one and round to .414 which
shows very strong positive relationship of our variable with the corporate governance and
shows that our research The overall P value of the model is < 5% & 1% which shows that the
overall model is significant (Smith, 1996; Huson, 1997; Nesbitt, 1994; Carleton et al., 1998;
Strickland et al., 1996). P-value of board size and number of meetings < 5% show that both
are significantly positively and negatively related to return on equity respectively
(Alexander, Fennell, & Halpern, 1993; Goodstein, Gautam, & Boeker, 1994).
IMPLICATIONS
The study has some important implications for firms in order to improve their performance.
Firms should aim at non-family directors on the board and should not permit banks to be
their major shareholders since both negatively impact the firm’s risk-taking abilities and its
performance. Firms should also motivate its directors to have more ownership in its stocks
since that would encourage them to make decisions catering for their incentives also.
FUTURE DIRECTIONS
Future research should be directed at exploring more corporate governance variables for
their relations with firm risk and firm performance using the dynamic panel approximation
techniques. Also, an effort should be made to increase the sample size in this regard. Sector-
wise analysis may also be done in order to explore the sector specific firm risk metrics.
Researchers should try to implement modern econometric techniques in order to establish
causality between the corporate governance variables. Future research should also try to
include more firms into the analysis so that the issues like selective sampling bias could be
catered for which at present is not possible because of the data unavailability. And explore
the other factors which contribute to increase the performance of the firm and protection
of stakeholders and shareholders.

28
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