Abstract performance based on the study on some

Abstract

This study considers
a dataset from 2004 to 2015 that includes full board members which is used to
examine if these members are responsible for risk in the company or not.

Moreover, the analysis will be more exhaustive analysing if the CEO is
responsible for risk management or how the CEO is involved in the risk
management which is a key point in the board governance and company performance
analysis. As a finding we show the correlation between these variables and the
impact that they have in the companies. It was shown that compensation and
Duality have significant positive effect on the firm performance. The Broad risk in the subscales of the governance
show significant negative effect on the firm performance. Among the significant
subscales the binary questions of Does the company have a separate board risk
committee, Does the company have a Chief Risk Officer (CRO), Does the
disclosure separately address reputational risk and Does the disclosure note
the board’s oversight with regard to corporate culture was found to be highly
significant in both performance measures. The multi-level regression model
shows significant correlation between the performance of a company in several
year which suggests using auto regressive model for improvement of the predictive
model for the firm performance.

Keywords

Board Governance, Company Performance, Compensation,
Duality, Multilevel regression

Introduction

This document will
study the relationship between the board governance and company performance
based on the study on some companies. This study aims not only to prove some
methodological approach founded in the literature review, but also provides a
novel approach that can be adopted to evaluate this topic. It will be reported
novel results and it will be show a set of recommendation that can be adopted
to monitor and evaluate the board governance and company performance.

Literature
review

It is necessary to
understand the vital role that the board’s members, executive and non-executive
member of the companies have to play in order to have a better performance.

This performance is based on a compliance with laws and to adopt the right
governance practices. It is not just to establish the laws, the most important
is to follow the practices and check if they are fulfilled or not. Otherwise,
although the companies have many laws and guidelines the performance can be
insignificant. This is independent of size of the company, it can by a large or
small organisation, and the best performance can be the same if the board’s
member have the power and knowledge to decide and to take the right
decisions.  The key points according to
the literature review is that the board’s directors need to know the purpose of
the company and the stakeholders that are relevant for the company. In the main
duties of the boards members also are included the power to develop strategies
that can be adopted to satisfy the main goals of the company as well as to
ensure the 100% implementation of their strategies. In order to establish
design guidelines and methodology it was required to make an exhaustive
literature review that shows and highlight the importance of the board
governance, boards members, executive and non-executive member to satisfy the
company performance. To have an overview of the structure of the boards member
(executive directors and non-executive directors) the following table
summarises the relevant information about them.

 

Executive members

v
Full-time
employees
v
Have
the functional business areas (major strategic importance_
v
Highest
earners in the company
v
The chief executive officer
(CEO) and the chief financial officer are nearly always executive directors.

 

Non-executive directors (NEDs)

v
 They are not employees
v
They
are independent in terms of business, financial and all that are related of
the business of the company
v
In
their main duties are: develop strategic plans, check the performance of
executive members, and resolution of conflict in the boards members.
v
They
support the executive members
v
They
need to show high ethical standards
 

 

With this brief
introduction about this topic then will be showed how boards member play a
central role in the corporate governance of companies and how to achieve the
better performance, also is highlighted some of the studies that are relevant
in this topic which is important to understand the relationship between
corporate governance and company performance. The board’s member should monitor
the fulfillment of the objectives, so these members have a significant impact
in the firm outcomes.  If is implemented
a good governance practice (such as proactively manage risks, set strategic aims,
etc), it will be sure the company success otherwise it will be reflected in
less performance.

Fama E. & Jensen
M. (1983) have studied the board’s structure and composition highlighting the
performance of the superior financial and corporate governance. Their
work shows that the main duties in terms of hiring and firing of the top
managers are for non-executive directors. They performed these activities due
to their knowledge in the company about the main committees such as audit and
remuneration. In their research the point out that the external directors can
consider as a monitor due to their compliance in the directorial market. Core
John E. et al, (1998) have implemented regression models to achieve the
relationship between CEO and variables such as broad and ownership structure,
the negative relationship was found between these parameters (less broad and
ownership leads the CEOs to earn greater compensation). In the subsequent of
firm and stock return there was also found a significant negative relationship
between them and the compensation component. (Core John E. et al,  1998) This negative association also
confirmed in another study was done by (Dharmadas P et al, 2014) using
hierarchical regression model. Shaukat A. & Trojanowski G, (2017) found
strong positive relationship between broad governance index and the firm
performance . this association was reported in another study done on 73
Malaysian trading sectors, using multilevel regression models, also it was seen
that firm performance is negatively affected by the investment opportunities,
leverage and firm size (Zuriawati Z et al, 2014). There are many studies which
analysed the relationship between internal and external board member and firm
performance, providing and highlighting different results that can be seen in
the following table:

Brown
and Caylor (2009)

They
show that there are not linking between the independence and firm performance

Dahya
and McConnell (2007)

They
highlight the link between the firm performance

 

 

The success of the
companies is not guaranteed by having a high or low number of boards member,
the most important is to have an optimal composition and a plan to evaluate the
performance continuously based on the activities and having some committees along
the company in order to report everything in the company and to have the
control to make the right decisions in a right time.

In order to improve board effectiveness is
necessary to construct mechanism that allow maximise strengths and reduce
weakness so that the organisation can have a better performance. If this
evaluation is made in a way that all the board members understand their role
and also if they have the required skills will allow that the members work to
their maximum performance and capabilities. In order to analyse this
performance is required the application of some standards such as: 1) Regular
audits of the processes that the board member developed in their work (internal
and external audits), 2) Audits of the skills that the board members have, 3)
Coaching sessions of executive and non-executive members to improve their
performance (individual and groups).

There are some research papers about this topic
in which is exhaustive examined the evidence about the relationship between
board’s member and the importance of the company performance in which is
highlighted the importance of analysed the components of the companies such as
board size, executives and non-executive members, knowledge, how the board
members are monitored, strategies that are developed to improve the company
performance, etc. Chambers et al. (2013) summarised these studies in two graphs
(Figure 1 and 2) in which are showed the country and the focus of research
according board’s member and company performance. It can be clearly seen that
United States has the higher number of studies in this topic, then a less
percentage in another countries such as United Kingdom, Italy and Spain. More
of this studies were developed using regression analysis of existing data sets.

However, there are not a guideline that shows a set of recommendations that can
be followed to analyse the company performance.