MGT 631: Graduate Seminar: Corporate Governance

A synopsis on: Radhe S. Pradhan, Ritu Kumari Gupta, Rupa Chand, Sabeena Sadaula, Sangita Saud and Sapana Ambai “Effect of board diversity and
corporate governance structure on operating performance: Evidence from the Nepalese enterprises”, .Nepalese Journal of Corporate Governance, A
Journal of Uniglobe College, Vol. 2, No.1, Kathmandu, pp. 1-16.
Prepared By: Group 2 (Ankit Devkota, Aparajita Pandey, Aapsara Thapa, Arun Kunwar, and Ashish Karn), MBA 3rd Trimester, Uniglobe College,
Dated: 29th august 2020.
Research context
The increasing cases of corporate scandal and failure in the recent past have encouraged greater media and public interest in corporate governance than
ever before. The aim of corporate governance is to protect the shareholders from self–interest of the directors so that they can get fair return on their
investment (Guli et al., 2012; Fama 1980). However, with the prevalence of enormous cases of corporate scandal and failure, there is doubt whether the
existing mechanisms of corporate governance effective. Core et al. (1999) argued that there will be greater agency problem, where corporate governance
mechanisms are weak. Corporate governance is defined as the set of procedures laws, policies and institutions influencing the way a corporation is
administered or managed. Corporate governance has been referred to as a collective group of people united as one body with power and authority to
direct, control and rule an organization (Ruin, 2001).Corporate governance is the system by which businesses are directed and controlled (Cadbury, 1992).
It is a set of relationships between a company’s management, its board, its shareholders and stakeholders. Hill and Jones (2001) asserted that corporate
governance from a managerial perspective refers to the control used to ensure that managers’ actions are consistent with the interest of key constituent
shareholders. The conflicts of interest among the contractual parties in a firm area main focus of corporate governance literature. The three main parties
with the potential for such a conflict are the directors, the shareholders, and debtors (Jensen and Meckling,1976). According to Kang et al. (2007) and
Ferreira(2010), corporate board structured along with demographic diversity such as gender, age, ethnicity etc. is efficient in protecting the interest of the
shareholders and other stakeholders better and add value to the performance of the firm. Board diversity as a corporate governance concept has recently
caught the attention of policymakers, managers, directors, shareholders, and academia (Johansen, 2008). Similarly, Shrader et al. (1997) examined firm
financial performance with gender diversity at the middle and upper management, and at the board of director levels for large firms. The result found that
there is positive relationship of board diversity on operating performance. Kang and Shivdasan(1995) examined the role of corporate governance
mechanisms during top executive turnover in Japanese corporations. The study found that the likelihood of nonroutine turnover is significantly related to
industry-adjusted return on assets, excess stock returns and negative operating income, but is not related to industry performance.
Shahetal. (2013) found that bigger board and audit committee size and lower frequency of board meeting and lower proportion of institutional ownership
lead to better efficiency in the commercial banks. This ideal dealing has illustrated banks to be more efficient when the frequency of board meetings is less.
Contradictions of leverage in relation with the return on asset have also been noticed. Corporate governance system is the combination of mechanisms
which ensure that the management runs the firm for the benefit of one or several stakeholders. Such stakeholders may cover shareholders, creditors,
suppliers, clients, employees and other parties with whom the firm conducts its business (Goergen and Renneboog, 2006).
Purpose of the study
The major objective of this study is to find out the impact of board diversity and corporate governance structure on operating performance on the enterprises
which are listed in Nepal. More specifically, to the study determines the impact of duality, board diversity, board size, audit committee, board meeting,
block shareholders, firm size, and leverage on the operating performance of commerical banks and insurance companies in the context of Nepal.
Significance of the study
Corporate governance is about enabling organisations to achieve their goals, control risks and assuring compliance. Good corporate
governance incorporates a set of rules that define the relationship between stakeholders, management and the board of directors of a company and
influence how the company is operating. Studies on corporate governance are scanty in Nepal. With the present study, we have at least some very useful
empirical evidences in the context of Nepal. The present study can be considered as useful to all those who are serious in promoting corporate governance.
It can be taken as useful to academicians as well as practitioners. Moreover, this study also helps other researchers to do further research on the impact of
corporate governance on bank performance. In addition to that, Good governance signals to the market that an organisation is well managed and that the
interests of management are aligned with other stakeholders. As such, it can provide businesses with a competitive advantage.
Hypothesis of the study
Based on the objective of the study the following hypothesis has been formulated and tested: H1: There is a positive relationship between board diversity
and operating performance. H2: There is a positive relationship between board size and operating performance. H3 : There is a positive relationship
between audit committee and operating performance. H4 : There is a positive relationship between board meeting and operating performance. H5 : There
is a positive relationship between block shareholders and operating performance. H6 : There is a negative relationship between CEO duality and
operating performance. H7 : There is a positive relationship between firm size and operating performance. H8 : There is a positive relationship between
leverage and operating performance.
Study methodology and model specification
The study is based on secondary data of 20 enterprises consisting of 10 commercial banks and 10 insurance companies with 100 observations for the
period: 2011/12 to 2015/16 in Nepal. The study uses two dependent variables and 8 independent variables. Therefore, the model takes the following form:
Model 1 consist ROE = β0 + β1BDVit+β2BSIZEit+ β3AUCOMit + β4BMETit + β5BHSit+ β6DUALit+ β7FMZit + β8LEVit+eit. Model 2 consist MPS = β0
+ β1BDVit+β2BSIZEit+ β3AUCOMit + β4BMETit + β5BHSit+ β6DUALit+ β7FMZit + β8LEVit+eit. Where, ROE= Return on equity, MPS = Market price
per share, BDV= Board diversity (women directors to the number of directors on the board of company), BSIZE= Board, AUCOM= Audit, BMET=
Board meeting, BHS= Block shareholders (board members who have at least 5% company’s shares, DUAL= CEO Duality, FMZ= Firm size, LEV=
Leverage (total debt to total equity), E= error term. The study
has used descriptive analysis method, correlation and regression analysis model. The main source of data used for the purpose of this study are
taken from The data for this study obtained from Banking and Financial Statistics and Bank Supervision Report published by Nepal Rastra Bank, and
the annual report of the selected Nepalese enterprises.
Major findings
The descriptive statistics shows that average return on equity is 9.46 percent while the average market price per share is Rs 818.40.Similarly, average board
diversity is observed to be 0.27 percent, average board size has been observed to 7.32 persons while the average audit committee is 3.07 percent.Average
leverage and block share are 72.45 & 0.07 respectively.Average CEO duality and firm size are 0.05 and 1.55 respectively. The average number of board
meetings has been observed to be 16.83.
The correlation results show that there is a positive relationship between board size and operating performance. It indicates that larger the board size, larger
would be the operating performance. Similarly, the board diversity is negatively correlated to operating performance. It reveals that increase in board
diversity leads to decrease in the operating performance. Audit committee has positive relationship with operating performance. This indicates that increase
in audit committee leads to increase in operating performance. Similarly, the result also shows the positive relationship firm size and leverage which means
that increase in firm size and leverage leads to increase in operating performance. However, block share holders has negative relationship with operating
performance. This reveals that increase in block shareholders leads to decrease in operating performance. Likewise, the result also shows a negative
relationship of CEO duality with performance which denotes that presence of CEO duality in an organization leads to decrease in operating performance.
The result also shows the negative relationship of board meeting with return on equity. This reveals that increase in board meeting leads to decrease in return
on equity whereas board meeting has positive relationship with market price per share.
The regression results show that the beta coefficients of board size are positive with operating performance. It indicates that board size has a positive
impact on operating performance. This finding is similar to the findings of Johl et al. (2015).
However, the beta coefficients are negative for audit committee. It denotes audit committee has a negttivenegative impact on the return on equity. This
finding is similar to the findings of Abbott and Parker (2000). On the other hand, the beta coefficients are negative for board diversity, which indicate that
higher proportion of women directors in board leads to lower the operating perofrmance. This finding is inconsistent with the findings of Carter et al.
(2003). Similarly, the beta coefficients are negative for block shareholders. This reveals that higher the block shareholders, lower would be the return on
equity. This finding is inconsistent with the findings of Shleifer and Vishny (1997). The beta coefficient for the CEO duality is also negative which
indicates that higher the CEO duality, lower would be the return on equity. This finding is similar to finding of Velnampy and Pratheepkanth (2012).
Furthermore, the beta coefficients are negative for board meeting which means that higher the number of board meeting, lower would be the return on
equity.
Conclusion
The major conclusion of the study is that audit committee and firm size have positive and significant impact on operating performance. It indicates that larger
the audit committee and firm size, higher would be operating performance. The study also shows that there is positive impact of board size, leverage and
board meeting on operating performance. However, board diversity, block shareholder and CEO duality have negative impact on the return on equity. It
indicates that higher the board diversity, block shareholder and CEO duality, lower would be the operating performance. The most dominant factor that
determine the operating performance of Nepalese enterprises is firm size, followed by total debt to total equity ratio, board diversity, board size, audit
committee, board meeting, block shareholders & duality.
Recommendations
The study found a positive impact of board size on the operating performance. Hence, commercial banks and insurance companies willing to increase
operating performance should increase the board size. Similarly, there is a positive impact of board diversity on the operating performance. Thus,
commercial banks and insurance companies willing to increase operating performance should increase board diversity. There is a positive relationship of
audit committee with operating performance, hence the banks & insurance companies willing to improve the operating performance must increase the
number of members in audit committee.
There is positive impact of board meeting on the operating performance. Thus, the commercial banks and insurance companies are willing to increase the
operating performance, must increase the absulute number of meeting held. There is a positve impact of block shareholders on the operating performance.
Thus, the commerical banks and insurance companies are willing to increase operating performance, must increase proportion of board members who have
at least 5 percent of company’s share. As there is negative impact of CEO Duality on operating performance, the banks are willing to increase operating
performance, must eliminate the CEO duality. There is positive impact of firm size on operating performance. Thus, commerical banks and insurance
companies are willing to increase operating performance must incresae the total assets of the company. As there is positve impact of leverage on the
operating performance. Hence, the commericial banks and insurance companies are wiilingwilling to increase operating performance must increase total
equity over total debt.The clarity and disclosure of information lacking which is also major issue of corporate governance.
Limitations/Suggestion
The study has used liquidity measured by total loan to total assets as the dependent variables. However, there are several other variables such as total liquid
assets to total assets, current ratio and quick ratio etc. which measure the liquidity of Nepalese commercial banks. The study has considered only the
secondary data. The primary data collection has not been taken into consideration. The study has employed the regression model for the data analysis, in
future more robust econometric models and simultaneous equation model as well as non-linear statistical tools and bidirectional causality tools can be used
for the study. The major CG variables missing are financial statements submitted on time, number of shareholders, public capital to total capital, public
director to total director, foreign ownerships, frim age, firn growth and so on. The study has become old also as the study period was up to 2015/16. Since
then, many developments have taken place in the country. Therefore, there is a need to conduct amore recent study
Critical Appreciation/ Future Scope
Even after some of the lackingslacking and weaknesses of the study, the major strength of this study is that it attempts to examine the effect of board
diversity and corporate governance structure on operating performance in the Nepalese enterprises by estimating descriptive statistics, regression &
correlation models. Despite of it, there are some weaknesses also as specified above in limitations. Hence, future studies should be based on a longer study
period, larger number of observations, more dependent and independent variables. The study estimated only the linear models only. However, it is important
to estimate non-linear equations also and indicate if the results are different or similar. Moreover, a comparison of public sector banks with private sector
banks and/ or a comparison of joint venture and non-joint venture banks would be quite useful.

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