The south African code of corporate governance. The relationship between compliance and financial performance: Evidence from south African publicly listed firms
Corporate Ownership and Control
School of Financial Management, University of Pretoria, South Africa
The paper examines corporate governance compliance by South African listed firms. The study seeks to explore if better governed firms exhibit greater financial performance than poorly governed firms. The paper employs a panel study methodology for a sample of 137 Johannesburg Stock Exchange (JSE) listed firms between 2002 and 2011. The paper provides empirical insights about the impact of corporate governance on firm performance. The results show that the compliance levels to corporate governance in South Africa (SA) has been improving since 2002 when King II came into force. However, the compliance level in large firms appears to be higher than in small firms. Further, the findings show that the market value of large firms is higher than that of small firms. These results largely support the notion that better governed firms outperforms poorly governed firms in terms of financial performance. Notably, the empirical results indicate that board size, CEO duality and the presence of Independent non-executive directors positively impact the performance of a firm, whereas board gender diversity, director share-ownership and frequency of board meetings have no impact on firm performance. Unexpectedly, the presence of internal key board committees, such as remuneration, Audit and Nomination negatively impact firm performance. Notably, the results also show that only 9 per cent of the positions in the board of SA listed firms are occupied by women. Even though the sample size for this study was the largest to date in SA studies, the sample size of 137 listed firms represents only 40 per cent of the total number of listed firms as at August 2012. As a result, generalizability of the findings might be questioned. Therefore, future research is encouraged to increase the sample size. Similar to UK, South Africa has a flexible approach to corporate governance, in which listed firms are required to comply or explain non-conformance to King recommendations. This study has policy implications as it determines whether the flexible corporate governance approach employed by SA improves corporate governance compliance than the mandatory corporate governance approach as employed by countries such as Sri Lanka and whether compliance translates into firm performance. The study also suggests that greater representation of independent non-executive director, a larger board size and the separation of CEO and Chairman should be encouraged to enhance firm performance. The significant finding of this study is that compliant firms enjoy a higher firm performance as proxied by ROA and Tobin’s Q. This implies that compliance to corporate governance code of practice matters, not just as box ticking exercise but as a real step change in the governance of South African listed firms. This paper fulfils an identified need of how compliance to corporate governance influences firm performance in South Africa. The findings have implications to JSE listing rules, policy, investor confidence and academia. © 2015, Virtus Interpress. All rights received.