Assignment No 1

Subject: Corporate Governance

Submitted To: Mr. Main Sajid Nazir
Submitted By: Name CMS No.
Awais Qasim 401960

Submission Date: 21 July, 2017

Riphah International University

Faculty of Management Sciences,
Lahore
Outline of Essay: Corporate Governance and Finance
Definitions of Corporate Governance
Importance of Corporate Governance
Agency Theory
Stewardship Theory
Stakeholder Theory
Corporate Governance and Firm Performance
Board Structure and Firm Performance
Board Leadership Structure
Board Committees
Board Size
Firm Size
Total Assets
Firm Performance
Return on Assets
Return on Equity
Earnings Per Share
Net Profit Margin
Leverage
 An Essay on Corporate Governance and Finance

Corporate governance is a set of relationships between a company's management, its

board of directors, its shareholders and other stakeholders. It also provides the structure
that sets the company's goals and determines the means to achieve those goals and
monitor performance. Good corporate governance must provide the right incentives for
management and management to achieve goals that are in the interests of the company
and shareholders, and must effectively facilitate supervision, thus encouraging companies
to use resources more efficiently. (OECD principles of corporate governance, 1999).
Although corporate governance issues have recently become important, the origins have
come back to many years since ownership and management of companies were only
divorced. At that time, it was necessary for owners to implement mechanisms to monitor
drivers' performance.
According to Heenetigala (2011, Chowdary 2003), it is also true that corporate
governance in developed market economies gradually progressed over several centuries
due to the economic development of industrial capitalism. As a result, there are various
corporate governance structures developed in different business forms to pursue new
opportunities or solve new economic problems.
Today corporate governance is considered complex and a mixture of laws, regulations,
politics, public institutions, professional associations and an ethical code. In particular,
even in emerging markets of developing countries, many details of these structures are
still missing.
Corporate governance is involved in the balance between economic and social objectives,
and between individual and common goals. The governance framework is to encourage
efficient use of resources and also to demand liability for the management of these
resources. The goal is to align the interests of individuals, companies and society
(Cadbury 2000) almost as far as possible.
According to Keong (2002), good corporate governance is better managed; Prudent
allocation of assets and increases corporate performance that will significantly contribute
to the company's share price, which increases the value of a shareholder.
(Agency theory) Since the beginning of the work of Berle and Means (1932), Corporate
Governance focuses on the separation of ownership and control, resulting in serious
problems because of spread ownership in modern society. Even the most basic corporate
governance question, how the principal (shareholder) in the state? means (usually
management) whose own interests (Jensen and Meckling avoid maximize 1976; Fama
and Jensen, 1983). So monitoring system is designed to protect shareholders' interests as
if the agent tries to maximize its interests; This could be the objectives in conflict used to
improve business performance.
In contrast to the agency theory, the theory of business management (Management
Theory) model is different, good managers evaluate its managers have the benefit of the
owner (Donaldson and Davis, 1991) act. The basic principles of management theory in
social psychology, which focuses on the behavior of executives based. In this model,
managers are more likely to serve as personal organizational goals more as needs based
on growth, performance, and self-realization; They identify with their organization and
stay strong in the values of the organization (Davis et al., 1997).
According to Smallman (2004), in which the shareholder wealth maximized, Steward
services for organizational success are optimized, main requirements are (including better
performance) union representatives have a clear mission. He also says that supervisors
balancing the tension between the beneficiaries and other stakeholders. Therefore,
management theory is the argument for a strong performance which meets the
requirements of the stakeholders, which provides a dynamic balance of power for
balanced management.
(Stakeholder Theory) With a view to discussing the firms responsibility in relation to the
wider community, the Stakeholder theory is used. A stakeholder is any group of
individuals who can affect or is affected by the activities of the firm while trying to
achieve its objectives. As such, a firms objective could be achieved through balancing
the conflicting interests of these various stakeholders. The stakeholder theory is, in fact,
an extension of the agency perspective, where the responsibility of the board of directors
is increased from shareholders to other stakeholders interests (Smallman 2004).
In fact, the stakeholder theory provides a vehicle for connecting ethics and strategy
(Phillips, 2003), and that firms, which thoroughly seek to serve the interests of a broad
group of stakeholders will create more value over time and in fact, perform better. This is
also because a firms decisions, and hence its performance, can be affected by the
stakeholder activities.
Many corporate governance reforms have been taken to increase it to enhance investor
confidence in the capital market, which in turn a strong performance. Among these are
reports on corporate governance such as Cadbury, Hampel-, Greenbury- and Higgs in the
United Kingdom, the Bosch report in Australia, the Business Roundtable in the US and
the OECD Principles of Corporate Governance (Haniffa and Hudaib 2006).
In addition, Khan et al. (2011) studied the impact of corporate governance on the
performance of Pakistani tobacco industry companies with year-to-year data showing use
in 2004 and 2008. The results show that there is a strong positive impact of corporate
governance on corporate performance.
Azam et al. (2011) survey of the impact of corporate governance on corporate
performance in the oil and gas sector in Pakistan. A sample of the 14 oil companies and
governance for the period 2005-2010. The results show that corporate governance is an
important and positive impact on the company's performance and concluded that a
company's performance can be increased by improving corporate governance.
Brown and Caylor (2004) conducted a study titled "Governance and Performance of
Corporate Affairs". He examined the study of whether companies with weaker corporate
governance are performing weaker than companies with the strongest companies
governance. It was found that the company did with poor corporate governance weaker.
In addition, there may be evidence that the relationship between the corporate governance
structure and corporate performance suggests positive (Morck et al., 1989), negatively
(Lehman and Weigand 2000), or not (Bolton and Thadden, 1998).
Heenetigala (called 2011 Berle and 1932 Mace 1971) found that there are more ways in
which counseling can be tailored to meet the organization's needs. The change in
management structures reflects the following competitive outlook; Where it is assumed
that local authorities are trained to maximize the management control of the board of
directors of the company, because the information leads to better performance and the
better understanding of business needs as much as possible with external independent
directors. If foreign investors experience corporate governance to influence leads to an
important factor in their investment decisions, how to improve risk management and
good performance (Davis 2002). Management structures that are addressed in this study
are: the consultants, the composition of the Board of Directors, the committees of the
Board of Directors and board size.
A review of the existing Research on the structure and management supported
investigated influence of the board may be have different organizational results (Laing
and Weir 1999).
The results of a study recommended by Weir and Laing (2001) in the United Kingdom
with Businesses, the management structures of the Cadbury Commission that meet no
correlation between the recommended structure and performance depend on the extent of
non-accounting ROAs. They found that the most successful companies have the lowest
incidence of Cadbury's preferential management structures consists of separating the
CEO and the Chairman and the directors of the majority of representatives of non-
executive directors and committees. However, the best performing companies tend to
prefer bad tax law. He argued that a suitable structure for a society that is not suitable for
others is not possible.
An important mechanism of the structure of the leadership reflects, its leadership
positions is President and CEO (Heenetigala, 2011). Usually, a combined management
structure comes when the CEO and President (Cadbury2002) refer to the combined
direction. Alternatively, a separate management, when two different people (1991 Dalton
Rechner) occupy the position of president and CEO. The separation of the role of Chief
Executive Officer and the Chairperson was also largely attributed to agency theory
(Dalton et al., 1998). This theory is supported by the clear separation of the
responsibilities of the Chief Executive Officer and the chairman and seems to have a
separate management structure (Jensen and Meckling 1976 Fama and Jensen 1983,
Jensen 1993). The reason for this is the chief executive officer led by the head of the
company, the chief executive officer will take day-to-day management decisions,
monitoring of the recruitment process, retrenchments and evaluation (Brickley et al.,
1997). If the CEO and the Chairperson are the same people, it would be another to look at
his behavior and CEO is very strong and maximize his own interests at the expense of
shareholders.
In contrast, the defenders of the theory of management support that managers are
inherently reliable and good stewards of stable sources and work to achieve a higher level
of corporate profits (Donaldson and Davis, 1991, 1994). On the other hand, it is a benefit
to the two roles that the driver, improves (Surya Narayana 2005).
Therefore, we can say that the agency theorists argue that the same person as the chief
executive officer and chairman also reduces the effectiveness of the board's management.
The agency theory and corporate governance guidelines also emphasize the importance
of the independence of managing their own administrative structure. The results of
Rahman and Haniffa (2005), Chen et al. (2005), Kula (2005) and Rebeiz and Salami
(2006) are in line with the theoretical expectation of a positive relationship between the
individual administrative structure and performance.
Baliga et al. (1996) found that evidence of executive duality has an impact on the
performance of US companies over the long term. In addition, they analyzed Haniffa and
Hudaib (2006) by analyzing 347 listed companies Kuala Lumpur Stock Exchange
(KLSE) companies, not as well as their peers playing duality at its own board meeting.
Brown and Caylor (2004) also support the idea that companies divide more value record
as president and executive positions.
Daily and Dalton (1992) reported no relationship between the combined management
structure and performance indicators and the Rechner and Dalton (1991) also reported
that a company has its own management structure, higher performance combined with
management structures.
Cyril (2008) examines the impact of corporate governance in the practice of Malaysian
listed company with data for the years 1999 and 2005. The business development in
terms of the independence of duality and a list of those who have the independence of
duality and Board Shortcomings. The results indicate that there is no significant link
between corporate governance (management structures) and companys performance.
Important mechanism of board structure is the composition, which refers to the executive
and non-executive representation on the board. Both agency theory and stewardship
theory apply to the board composition. Bode dominated by non-executive directors is
mainly based on agency theory. According to agency theory, an effective board must
consist of a majority of non-executive directors (their main responsibility for controlling),
which are supposed to deliver better performance due to their independence of business
management (Dalton et al. 1998). In contrast, the stewardy theory determines that the
board of directors is comprised of a majority of executive directors (whose responsibility
is the company's daily operation, such as finance and marketing), this theory assumes that
managers are good stewards. From the organization and works to achieve higher profits
and shareholders returns (Donaldson and Davis 1994).
If the representation on the board of non-executive directors increases the effectiveness of
the audit, it must improve the performance of the company. Studies by Fama (1980) and
Fama and Jensen (1983) show that non-executive directors have more incentives to
protect stakeholders as a result of the importance of maintaining their reputation in the
outdoor management market.
Empirical evidence reports mixed results in relation to non-executive directors and solid
performance. However, appointment of non-executive directors is generally accepted.
Studies conducted by Rosentein and Wyatt (1990) concluded that the appointment of
outside directors results in significant and positive stock price responses. Companies
dominated by non-executive directors will dominate the CEO when their company's
performance is weak (Boeker 1992. Studies by Hillman and Dalziel (2003) and
Yoshikawa and McGuire (2008) state that the expertise and knowledge of non-executive
Bringing drivers to the firm helps to perform better.
So, as per Kiel and Nicholson, 2003; Florackis and Ozkan, 2004; Le et al., 2006;
Williams et al., 2006, the agency theory recommends that independent non-executive
directors involved in any self-motivated action by managers and to reduce agency costs
(Mohammed et al., 2009).
The use of a nomination committee enables the board to evaluate independently the value
of a potential new councilor.
. Using the nomination is a real assessment of a potential member of the Board of
Directors based on their experience, their income, and industry or other skills that they
can give advice.
Research into the relationship between agencies and committees of company
performance is rare (Dalton et al., 1998). However, a review of the committees of the
Board of Directors and the strong performance of Klein (1998) showed that the presence
of the remuneration committee was positively related to business performance, but the
relationship was not strong. Laing and Weir (1999) found that the Audit and
Remuneration Committee contributed positively to the performance. All this means that
the number of sub committees for a company that performs the company's performance
can offer that application.
Council size is usually used as an indicator of both monitoring and advisory role (Small
1998). Empirical results on optimal board size are unstable. Large board size is criticized
for increasing costs and controversies about insignificant matters during meetings. It is
also argued that smallboard size may not be able to effectively control powerful
managers.
Limit board size is assumed to improve solid performance, as the benefits of larger discs
(increased monitoring) are generated by the weaker communication and decision-making
of larger groups (Lipton and Lorsch 1992; Jensen 1993).
Even Brown and Caylor (2004) showed that companies with board sizes between 6 and
15 have a higher return on equity and higher net profit margins than companies with
other board sizes.
Zahra and Pearce (1989) and Kiel and Nicholson (2003) also show that the board size is
positively related to corporate performance.

According to agency theory, Jensen (1983) and Florackis and Ozkan (2004) mention that
signs with more than seven or eight members are likely to be ineffective. They further
expanded the fact that large records result in less effective coordination, communication
and decision making and more likely by the CEO. Yoshikawa and Phan (2003) also point
out that larger shelves tend to be less coherent and more difficult to coordinate because
there may be many potential interactions and conflicts between the Group members. In
addition, she also stated that large boards are often made by executives because the board
of directors distributed the councilors to spread power in the boardroom and reduce the
opportunities for coordinated action by directors and to leave the chief CEO as the ruling
figure.
Different researchers have also suggested an optimal board size that can reduce the
impact of management on advisory decisions. For example, Mak and Li (2001, Jensen
1983) suggest a board size of seven to eight to ensure effective supervision. In addition,
Yoshikawa and Phan (2003) emphasize that a CEO will deliberately make a larger board
size to ensure that he or she is only the strongest person and the board will be difficult to
coordinate effectively because of the larger size. So smaller plate size seems to be better.
The findings of Yermack (1996), Eisenberg et al. (1998), Mak and Kusnadi (2004) and
Andres et al. (2005) support a negative relationship between the size of the board and the
company's performance.
Firm size may be related to corporate governance and can be correlated with fixed
performance. The book value of the company's total assets can be used as a fixed-size
proxy.
As mentioned earlier, fixed size can also be measured at the book value of companies'
total assets. Earlier research has used the total assets to represent company size. Firm size
can be related to other governance variables. Pathan et al. (2007) states that a statistically
significant correlation for board size and balance sheet total has been reported. Keil and
Nicholson (2003) positively correlated the total assets of a company with the size of the
board of directors and the board of directors. Therefore, the total assets are considered to
have an impact on the variables used in this study. According to Tornyeva and Wereko
2012, the firmware variable variable has a positive relationship with performance, but not
statistically significant.
Companies may not be able to work or exist if they do not have access to primary capital.
In such cases, business operations will not be relevant, as there will be no capital
providers. (Banks, 2004).
In order to evaluate performance, it is necessary to determine the ingredients of good
performance by using performance indicators. To be useful, a performance indicator must
be meaningful, measurable, relevant and important to the performance of the
organization.
There are many measures of solid performance. Financial standards of corporate
performance used in empirical research on corporate governance are consistent with both
accounting standards and market-based benchmarks (Kiel and Nicholson 2003). Most
commonly used accounting-based benchmarks are the return on ac
Return on assets (ROA) is also a certain amount of performance commonly used in
accounting literature for accounting-based standards (Kiel and Nicholson 2003; Weir and
Laing 2001). It is a measure that employs asset efficiency (Bonn, Yoshikawa and Phan
2004) and shows investors the profits generated by the company from its capital
investment (Epps and Cereola 2008). Effective use of an enterprise asset is best reflected
by the return on its assets. As managers are responsible for operating the company and
using the assets, ROA is a benchmark that allows users to determine how well a
company's corporate management system works to ensure and motivate business
management efficiency (Epps and Cereola 2008 ); (Heenetigala, 2011).
A study by Al-Haddad et al. (2011) found that there is a direct and positive relationship
between the performance measured by ROA and corporate governance.
Heenetigala (2011) found that another important level of fixed performance used in
corporate governance research is Return On Equity (ROE), which is also an accounting
measure (Baysinger and Butler 1985; Dehaene et al. 2001). The primary objective of an
organization is the operation to generate profits for the benefit of investors.
Consequently, return on equity is a criterion that investors generate the proceeds from the
money invested by shareholders (Epps and Cereola 2008).
The study considered by Heenetigala (2011) provides further evidence to support a
positive relationship for individual management, board composition, board committees
and fixed performance based on ROE.
Even earnings per share (EPS) can be used as a measure of fixed performance. To be an
accounting measure, try to indicate whether the company changes earnings per share over
a given period.
Aggarwal et al. (2008) has verified the relationship between performance and governance
for companies. They found that the ratio was generally not significant between
performance scores and accounting data, making EPS one of the proxies.
Marn and Romuald 2012 examined the relationship between corporate governance and
business performance of 20 listed companies in Malaysia. They found that Council Size
one of the CG variables has a significant effect on solid performance.
The net profit margin (NPM) is used as a performance indicator because it indicates the
ability of an enterprise to withstand unfavorable economic conditions and the
effectiveness of cost control. Normally, shareholders see the net profit margin now, as it
also shows how well a company is to earn revenue in profits that are available to
shareholders.
The higher the net profit margin, the more effective the company will convert revenue
into real profits.
As mentioned earlier, the study by Azam et al. Having used NPM as a permanent
performance measurement proxy, it has concluded that a company's performance can be
enhanced by improving corporate management structure.
Leverage (LR) is used as a measure of fixed performance as it tries to assess the long-
term financial position of an enterprise. Identifying the extent to which a company uses
debt to finance its assets and the use of various financial instruments or borrowed capital,
such as margin, to increase the potential return of an investment.
In addition, according to the deviation theory of capital structure, that higher gearing
(with more debt) will increase the fixed value due to the tax deductibility of interest. The
debt-to-equity ratio is used as a measure of financial leverage. Here is shown which part
of the company's equity and debt uses to finance its assets.
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