Corporate Governance Mechanisms and Firm Performance in Saudi Arabia

Abstract

This paper examines the impact of corporate governance mechanisms including board size, independence, and meeting frequency, audit committee size and meeting frequency, CEO duality and ownership concentration on the operational, financial and market performance of Saudi listed firms using a contingent theoretical-based framework drawing on agency theory, stewardship theory and resource dependence theory. This study examines 210 listed Saudi Stock Exchange firms over the timeframe 2017 to 2019. The paper applies both a manual content and regression analysis approach. The results show that firm performance deteriorates with board size and independence, audit committee and meeting frequency, and the presence of CEO role duality, while performance improves with board meeting frequency and ownership concentration. Thus, Saudi firms should respond by maintaining smaller boards and more frequent meetings, keeping the Chair and CEO roles separate, and maintaining smaller audit committees with more focused meetings. Further, the appointment of independent directors only makes a meaningful contribution to firm performance where they are truly independent. Finally, more concentrated ownership tends to encourage better firm performance due to the regime of monitoring and discipline concomitant with more powerful shareholders. The implications of this paper are threefold. First, the implementation by Saudi Arabia of the latest corporate governance regulations and IFRS adoption almost certainly impact firm performance markedly. Second, corporate governance regulations should recognize the role of more frequent board meetings and more concentrated ownership in enhancing corporate performance. Third, stakeholders should apply pressure on investee firms to maintain smaller boards, engage genuinely independent directors, separate the role of Chairman and CEO, and maintain smaller audit committees with fewer and more effective meetings. The results should help corporate boards when deciding on the best corporate governance mechanisms to enhance firm performance. Further, the study should provide policy makers with a better understanding of the corporate governance structures required to promote better performance by drawing on existing theories and the empirical modelling, in an emerging economy setting such as Saudi Arabia, a new and broader data set, thereby informing better future policy and protecting shareholders’ interests.

An empirical investigation of firm performance through corporate governance and information technology investment with mediating role of corporate social responsibility: Evidence from Saudi Arabia telecommunication sector

“…According to the findings of a number of studies that have been carried out, the board of directors of a firm need to have the greatest feasible membership. Some academics, such as Boshnak (2021) , have called for smaller boards, while others have supported larger boards, the latter of which would enable increased monitoring and improved decision-making. According to Boshnak (2021) , a modest board size may assist avoid social loafing and free-riding on larger boards.…”

“…Some academics, such as Boshnak (2021) , have called for smaller boards, while others have supported larger boards, the latter of which would enable increased monitoring and improved decision-making. According to Boshnak (2021) , a modest board size may assist avoid social loafing and free-riding on larger boards. They found that this was more likely to occur on boards with larger surface areas.…”

“…But there is a cost associated with holding board meetings, including the time of management, the money spent on travel expenses, the fees paid to directors, and a variety of other resources. According to Boshnak (2021) , directors may not be able to participate in meaningful debates due to the limited amount of time allotted for meetings. Saha et al (2018) are of the opinion that boards of directors should, for whatever reason, be mainly idle and should only be pushed to act in extreme circumstances.…”

Earnings Quality as a link between Corporate Governance Implementation and Firm Performance

“…The commissioners' role is expected to minimize agency problems that may arise between the board of directors and shareholders. Boshnak's (2021) show that board size and independence, audit committee, and meeting frequency negatively impact firm performance However, Man and Wong (2013) and Nasiri and Ramakrishnan (2020) stated that an independent board of commissioners significantly affects firm value. The existence of an independent board of commissioners is a useful control tool of company performance.…”

“…During audit committee meetings, the committee reviews the company's current year's performance and offer recommendations. Boshnak (2021) examined the impact of GCG mechanisms, including board size, independence, meeting frequency, audit committee size and meeting frequency, CEO duality, and ownership concentration on Saudi listed companies' operational, financial, and market performance. They show that board size and independence, audit committee, and meeting frequency have a negative impact on company performance.…”