The impact of corporate governance reforms on board structure and board roles :an empirical study of Pakistani listed firms

Abstract

This study examines the impact of corporate governance reforms (SECP code in Pakistan) on board structural characteristics, board roles and firm performance. Related research questions are: a) how and which board roles mediate the relationship between board structural characteristics and firm performance? b) And what is the influence of corporate governance reforms on this relationship? Based upon the existing literature, a model has been developed that relates board structural characteristics (Proportion of non-executive directors, CEO Duality, Diligence and Independence of Audit Committee) with firm financial performance (ROA, Tobin Q) through intervening variables of dual board roles namely board monitoring role (Frequency of board meetings) and board resource dependence role (Board size) using multi-theoretic lens. This thesis uses an exclusive balanced panel data set of 200 companies listed on Karachi Stock Exchange to examine the impact of SECP code on the model for the two equal time windows. The first panel comprises of the data for the years from 1999-2001 which is the era before the implementation of SECP code and second panel comprises of data for the years from 2003-2005. The data set straddles the year 2002 which is the year when SECP code was enforced. The study contributes to a sparse empirical literature on boards using data from Pakistan via multi-theoretic perspective to advance some understanding that if the boards’ monitoring and resource provision roles are strengthened through board restructuring, the financial performance (Tobin Q) of the organization has shown signs of improvement. However, the main findings of the study indicate that the mediated relationship between board structural variables and firm performance is stronger in the post SECP code era. The study also shows that firm value (Tobin Q) increased in the post SECP code era; however, the implementation of SECP code didn’t reflect any improvement in the profitability of the firm (ROA). This study has significant policy implications. It recommends the constitution of independent nomination committee on the board and envisaging an evaluation criterion for the board members performance. The study concludes that overall companies adopted a box-ticking approach for reporting corporate governance. The study concludes lastly that the SECP code overall proved ground breaking and the corporate governance canvas in the country embraced the global calls for the reforms.