Vous êtes sur la page 1sur 15

Effect of Corporate Governance factors on Firms Performance

in Manufacturing Sector of Pakistan

Abdul Shakoor
Master of Science in Engineering Management (MSEM)

A thesis proposal submitted in partial fulfillment of the requirements for

the award of degree of Master of Science in Engineering Management at
Abasyn University.

Dr. Imran Shafi

Department of Management Sciences

Abasyn University Islamabad Campus

September 2015

Table of Contents


Introduction. 4
Problem Statement....6
Literature Review. 6
Objectives of the Research.. 9
Research Hypothesis 9
Significance of the Research...9
Research Methodology... ..10
1. Population and Sample . 10
2. Research Framework..10
3. Corporate Governance Measurement Variables 11
4. Firm Performance Measurement Variables... 11
5. Quantitative techniques.......... 11
Conceptual framework 12
Limitations 13
Thesis Time Line.. 14
References. 15

Effect of Corporate Governance factors on Firms

Performance in Manufacturing Sector of Pakistan

(By-Abdul Shakoor)


Corporate Governance is the predetermined procedures, strategy, rules along the way
in which company is governed, manage and supervise. The term corporate governance
became famous in 1980s. Corporate governance gives the knowledge about general
principles by which the business along with the management of companies were
dictated and controlled. Those firms which exercises the sound corporate governance
their performance will be better than those firms who cannot practices corporate
governance procedures. In Pakistan, corporate entities regulated by Security and
exchange commission under Companies ordinance, the securities and exchange
ordinance 1969, SECP Act 1997 along with many other rules and regulation made
there under in order to improve corporate governance in Pakistan (Kumar and Singh,
From last twenty years, economic disaster that affects the whole world has raised a
question on the governance of the firms. This global financial disaster got the attention
of investigators towards the matter of corporate governance. Corporate sector of
Pakistan faces the challenges that are due to the reason of changes in global business
scenario. SECP emphasized on the corporations to follow good corporate governance
mechanism. SECP codes involve protection of minority shareholders rights and audit
policy provides accountability in corporate sector (Javid and Iqbal, 2010).
Failures in some organization of Pakistan due to deficiency of corporate governance:

PTCL privatization was substantial scandal. According to ex vice president, this

privatization is a huge financial scam. Another ex official of PTCL stated that,
deal done in 2.6 billion along with UFONE and PAKTEL; market value of
UFONE had more than 6 billion dollars. Pricing decisions of PTCL taken on
the basis of, old records instead of current price of company. In September
2006, there was a rumor in market, that Etisalat doesn't honor the agreement;
basically they want adjustment of $ 394 million together with reduction of
20,000 employees.
b) Crescent Bank Fraud

According to evidence, Chief executive officer of crescent standard investment

bank Anjum salam, stopped from working due to huge financial fraud. Auditors
from outside had predicted a missing amount of over Rs.6 Billion, he was also
involves in illegal parallel accounts, hiding of bank assets, illegal investments
in real estate as well as in stock. Due to these types of actions, SECP took
action against officers.
d) TAJ Company

Poor governance practices were followed by TAJ Company. This company had
a scheme on which, they was having large amount of illegal deposits. This was
Quite depressing, that this company using religious affiliation, their fraud
Activities stopped after 15 years.
e) MEHRAN Bank

In scandal of Mehran bank, Rs.1.6 billion has recovered by NAB, in this

scandal; bank chief of MEHARN bank was selling Benami property in
Islamabad. According to NAB officials, Younus Habib group also pay Rs 420
million. NAB stated that, former bank chief Younus habib has offered to sale
his Benami property along with settlement deal with national bank Pakistan of
1.6 billion. This is example of poor corporate governance Younus habib
banking activities (Dar, Naseem, Rehman, Niazi, 2011).


The concept of Corporate Governance gained importance due to many financial
disasters that occurs in past twenty years. The topic is equally important for developed
as well as developing countries rather for develop countries the concept hold greater
importance. Since regulatory bodies, laws and regulations are not well established in
case of Pakistan. The government assigned the task to Security and Exchange
Commission of Pakistan in 1999 to look after corporate governance together with other
related issues. SECP introduced many initiatives to improve corporate governance in
Pakistan. Due to these steps it is hoped that interest of shareholder will be protected
and there will be increased accountability and transparency. Moreover the minority
rights are expected to safeguard as well as there will be improvement in the Audit
The Aim of this research study is to find the relationship between corporate governance
processes and firm performance. The corporate governance processes studied include
Board size, Board composition, Audit committee composition, CEO/Chairman duality,
number of Meetings and Family ownership. The Firm performance is measured in
terms of Profit Margin (PM) and Return on Equity (ROE).


The financial crisis restores the consideration for improving the corporate governance
in order to ensure financial firmness. Investors Give up the command of firm to
qualified managers due to deficiency of expertise along with ill-mannered attitude
towards business activities. These managers have huge control over resources of
business unit (Chitana, 2012).
According to Berle (1932), in agency theory viewpoint corporate governance is
referred to as dissociation of possession together with control. Generally two
approaches are used in corporate governance, in order to keep safe rights of investors.
First approach is to give authority to investors through lawful prohibitions against

managers expropriation. Other approach is Possession by investors having large

amount of shares in firm (Porta, silanes, Shileifer and Vishny, 2002).
It is by common authority that the two last decades have been marked by growing
global financial composite (Agenor 2003, Lane, and Milesi-Ferretti 2001and Daly
2007). Families who own firms, they have no role in management. The main reason of
agency problem occurrence is actions taken by management; these actions are not in
interest of shareholders, as a result agency cost take place and this cost is additional
burden on shareholders. Cadbury committee in 1992 also recommends need of
independent audit committee together with independent directors (Larcker, 2011).
To overcome the corruption, number of control mechanism is came up internally. This
mechanism of control monitors the progression together with other activities. If
business goes in loss also takes remedial actions, take measures to maintain the inside
control mechanism that supports objective of firms internally along with its workers
and managers together with owners (Weir, Laing and McKnight, 2002). Main role of
external mechanism is to be in service of the goals of government, trade union as well
as financial institutions. These goals allows to smooth management of debt and legal
restrictions. Most of the times, External shareholders imposed external procedures in
the forms of union agreement or some guidelines about regulations it depends upon
businesses either they follow or ignore these guidelines (Weir, Laing and McKnight,
Nigeria being a nation faced many problems in diverse aspects of her national living,
mainly in dictatorship period. In 1999, when people of Nigeria returned to legislative
regulation, their business condition along with political condition had so worst.
Obasanjo stated that this is one of the most dishonest nations. Major corporations like
NITEL, NRC along with NEPA are dead, during that time some factories were running
below desired capacity. Banks with higher profits were also collapsed (Kajola and
Sunday, 2008).
Practices for improving the corporate governance processes in South Asia is still
continuing. Countries including Pakistan, Sri Lanka as well as India welcome the
corporate governance. In 2002, Code for the corporate governance issued in Pakistan,

in 2002 India issued code for governance. Analysis of four countries by Sobhan with
Wendy (2003), Highlight various lessons of risky factors along with corporate
governance. According to this study, corporate governance should not practice in
isolation from a series of different improvements (macro with micro economic, trading,
banking along with institutional) nor do all these improvements fulfill their goals
without implementing the corporate governance. To encourage the policy dialogue on
corporate governance, World Bank along with OECD used their combined efforts for
the establishment of corporate governance mechanisms on regional basis, having
partnership with regulators as well as policy makers. Number of researchers draws
lesson from Asian financial crises in 1997. For the improvements of corporate
governance formulate the common policy to achieve desired goals. In order to, raise
the corporate governance standard, Security and exchange commission of Bangladesh
along with "Chartered accountants institute" shows greater interest in implementation
of International accounting standard. Good governance in Asia gives an overview of
level of governance in both national and foreign organizations. Also through, light on
role of board of directors. Inspect the association among societal duties, value creation
together with governance (Jacobson and Tarr, 1995).
According to Weisbach (1988), if there is large number of directors in a firm from
outside, it is easy to replace chief executive officer after the worst firm's performance.
It is possible for outside directors if they want to change firm's strategy. According to
Lee (1992) positive relationship exists between performances of firm along with board
composition (Velnampy and Pratheepkanth, 2013).
Financial information provides economic implementation with the help of management
of assets efficiently. Some of examples are timely management of projects to overcome
the chances of losing and selection of better project along with protecting the rights of
investors. Lombardo with Pagano (2000) represent that the good governance demands
the continuous improvements in procedures. Improvements in governance, causes
reduction of individual benefits of managers, in this response auditing costs increases,
shareholders of firm must tolerate this cost to avoid opportunism of managers (Faiza et
al, 2013).



The following are the main objectives of the study.

To investigate the relationship between corporate governance defined in

terms of (Board Size, Board composition, Audit committee composition,
CEO/Chairman duality, Number of meetings and Family ownership ) and
firm performance indicated by (Profit Margin and Return on Equity).

b. To explore the impact of Independent variables (Board Size, Board

composition, Audit committee composition, CEO/Chairman duality, Number
of meetings and Family ownership ) on Dependent variables (Profit Margin
and Return on Equity).


H1: Profit margin and Board size is significantly related.
H2: Profit margin and Board composition is significantly related.
H3: Profit margin and Audit committee composition is significantly related.
H4: Profit margin and CEO/Chairman duality is significantly related.
H5: Profit margin and Number of meetings is significantly related.
H6: Profit margin and Family ownership is significantly related.
H7: Return on equity and Board size is significantly related.
H8: Return on equity and Board composition is significantly related.
H9: Return on equity and Audit committee composition is significantly related.
H10: Return on equity and CEO/Chairman Duality is significantly related.
H11: Return on equity and Number of meeting is significantly related.
H12: Return on equity and Family ownership is significantly related.



The present study will contribute to existing literature on topic of Corporate
Governance in Pakistan. The findings would specifically important for managers,
shareholders and Government policy makers. The findings of this study will be useful
for the firms as they will be able to figure out which of the corporate governance

factors are more important in term of their impact on profitability. The shareholder can
decide in which company to invest based on the findings of the study. The policy
makers can also get valuable insight on the factors which are crucial for firms


The main objective of this study is to explain how firm performance is influenced
by corporate governance processes. Investigate the association between corporate
governance processes along with firm's performance measures. Variables that are
used to measure firm's performance are profit margin together with return on
equity. Variables that are used to measure corporate governance processes includes
board size, board composition, audit committee composition, CEO/Chairman
duality, number of meetings as well as family ownership. Later this research study
aimed to explore the impact of governance processes on firm performance.

1. Population and Sample

Data that is used in this research is secondary. Forty companies from Karachi
stock exchange (KSE 100) are selected by using convenient sampling. Four years
of data of each firm is used. Data was collected from annual reports of firms listed
in KSE 100 from years 2010-2011, 2011-2012, 2012-2013 and 2013-2014.

2. Research framework
This research study is of a descriptive kind based on secondary data providing
empirical analysis about data. Data was collected from annual reports as well as
financial statements from year 2010-2011, 2011-2012, 2012-2013 and 2013-2014
of KSE 100 index. Two variables are dependent (Profit Margin and Return on
Equity) and six are Independent variables (Board size, Board composition, Audit
committee composition, CEO/chairman duality, Number of Meetings and Family
ownership).Statistical Package for the Social Sciences (SPSS) is used to analyze
the data that is collected from annual reports. Correlation and Regression
techniques are used to get results.

3. Corporate Governance Measurement Variables

Codes of corporate governance state that, Size of board is not too large. Perfect
size is 5 to 16 members in a board but it depends on the circumstances and firm's
condition (Dar, Naseem, Rehman and Niazi, 2011).
Board Size (BSIZE) = Total Members in the board

In Pakistan, SECP encourage the presence of non executive directors on the

to protect the rights of minority shareholders (Yasser, Entebang
and Mansor, 2011).
Board Composition (BCOMP) = Percentage of non executive directors in the Board
Total number of directors

Audit committee is important element of corporate governance. Major role of

audit committee includes selection of auditors from outside (Zahid et al, (2014).
Audit committee composition =

Proportion of non executive directors in committee

Total number of directors in audit committee

CEO/Chairman Duality= Zero for Duality and One for otherwise

Number of meetings= Total number of Meetings in a year

Family ownership= Zero for family owned and one for otherwise

4. Description of Performance Variable

Profit Margin (PM) =

Return on Equity=

Net income
Net income
Shareholders Equity

5. Quantitative techniques
In order to get results from sample data statistical software is used called SPSS.
Multiple regression and correlation techniques are used.




The figure below explains the conceptual framework of the research. The figure below
explains that Profit Margin (Dependent Variables) is influenced by Independent








CEO/chairman duality, Number of meetings and Family ownership).

Board Size

Board Composition


Audit committee

Profit Margin

CEO/Chairman Duality


Number of Meetings


Family Ownership

Fig1. Conceptual framework with PM (Dependent variables)

The figure below explains that Return on Equity (Dependent Variable) is

influenced by Independent variables (Board size, Board composition, Audit


committee composition, CEO/chairman duality, Number of meetings and

Family ownership).

Board Size

Board Composition

Audit committee
Return on Equity
CEO/Chairman Duality

Number of Meetings

Family Ownership

Fig2. Conceptual framework with ROE (Dependent variable)


This study holds some limitations. First limitation is sample size and second is
analysis period that is considered to be small and data of only manufacturing
sector is included. It is based on Secondary data which is prepared by firms
accountants and auditors therefore empirical results might be affected due to of
any reservation included in data.





Naveen Kumar and J. P. Singh (2013). Global Financial Crisis: Corporate
Governance Failures and Lessons. Journal of Finance Accounting and
Management, 4(1), PP. 21-34.
Attiya Y Javid and Robina Iqbal (2010). Corporate Governance in Pakistan:
Corporate Valuation, Ownership and Financing. Pakistan Institute of
Development Economics Working paper.
Laib A Dar, Muhammad Akram Naseem, Ramiz Ur Rehman and Dr. G. S. K.
Niazi (2011). Corporate Governance and Firm Performance a Case Study of
Pakistan Oil and Gas Companies Listed in Karachi Stock Exchange. Global
Journal of Management and Business Research, Volume 11 Issue 8 Versions
Gheorghe Chitana (2012). Corporate governance and bank performance in the
Romanian banking sector.
Rafael La Porta, Florencio Lopez-de-silanes, Andrei Shileifer and Robert
Vishny (2002). Investor Protection and Corporate Valuation. The Journal of
Finance, Vol. LVII.
David F. Larcker (2011). Introduction to corporate Governance. Center for
Leadership Development and Research, Stanford Graduate School of Business.
Charlie Weir, David Laing and Phillip J. McKnight (2002). Internal and
External Governance Mechanisms: Their Impact on the Performance of Large
UK Public Companies.
Kajola and Sunday (2008). Corporate Governance and Firm Performance: The
Case of Nigerian Listed Firms. European Journal of Economics, Finance and
Administrative Sciences.
Charles Jacobson and Joel Tarr (1995). Ownership and Financing of
Infrastructure: Historical Perspectives.


T. Velnampy and P. Pratheepkanth (2013). Corporate Governance and Firm

Performance: "A Study of Selected Listed Companies in Sri Lanka". European
Journal of Commerce and Management Research (EJCMR), Vol 2, Issue 6.
Faiza saleem, Bisma Rafique, Qaiser Mehmood, Muhammad Irfan, Rabia
Saleem, Sidra Tariq and Ghazala Akram (2013). The Determination of Capital
Structure of Oil and Gas Firms listed on Karachi Stock Exchange in Pakistan.
Interdisciplinary journal of Contemporary Research in Business, Vol 4, Issue 9.
Qaiser Rafique Yasser, Harry Entebang and Shazali Abu Mansor (2011).
Corporate governance and firm performance in Pakistan: The case of Karachi
Stock Exchange (KSE)-30. Journal of Economics and International Finance
Vol. 3(8), PP. 482-491.
Zahid saifullah, Dr. Naqvi Hamad, Dr. Najeeb Haider, Nadeem Iqbal,
Muhammad Ali, Sumera Atta Zahid and Muhammad Ali (2014). Impact Of
Corporate Governance On The Profitability Of A Firm (A Case Study Of
Tractor Manufacture Company) Listed In Karachi Stock Exchange. Research
Journalis Journal of Management, Volume 2.
Naveed Ahmad, Muhammad Nadeem, Rasheed Ahmad and Naqvi Hamad
(2014). Impact of Family Ownership on Firms Financial Performance: A
comparison study between Manufacturing Firms and Financial Firms in
Pakistan. Arabian Journal of Business and Management review (Nigerian
chapter) Vol. 2, No. 8.