The Impact Of Board Size On Firm Performance

* The roles and responsibilities of the board of directors in corporate governance and the way the board affects a company’s operation.

There are three internal and one external governance mechanisms used for owners to govern managers to ensure they comply with their responsibility to satisfy stakeholders and shareholder’s needs. First, ownership concentration is stated as the number of large-block shareholders and the total percentage of the shares they own (Hitt, Ireland, Hoskisson, 2017, p. 317). Second, the board of directors which are elected by the shareholders. Their primary duty is to act in the owner’s best interest and to monitor and control the businesses top-level managers (Hitt, Ireland, Hoskisson, 2017, p. 319). Third, is the

One of the principals of corporate governance is to answer the questions of would the management be trusted to run the business in the best interest of the owners? How would they be held accountable for their actions? How would absentee owners keep control over the managers? So in order for corporate governance to take place and to be effective is to make sure that the elected board is doing their job.

There has been a dilemma about appointing the same person as a CEO of the company and the Chairman of the board. That person could gain too much power in their hands and act not in best interests of the company. These two roles often go side by side, conflicting one another, on the other hand. Some critics were arguing about time management and combining management control and governance in one person’s hands. Another argument is that person might gain so much power that he will not act in best interest of the company or the board won’t be able objectively evaluate his performance (in case of executive compensation).

Recent high-profile corporate failures, scandals and, in some cases, executive corruption, have focused international regulatory and public attention on the need for having appropriate corporate governance standards and practices. (Leblanc 2005) As such, much emphasis is being placed on board evaluation.

Corporate governance defined as the system of rules, practices and processes by which a company is directed and controlled. Balancing the interests of the stakeholders is essential involves in a company, which include its shareholders, management, customers, suppliers, financiers, government and community. There are five major elements of corporate governance, which are, board commitment, good board practices, functional and effective control environment, transparent disclosure, and well defined shareholder rights. To prevent corporate scandals, fraud and the criminal liability of the organization, good executed corporate governance is important and must apply and respect in the organization. There have a relationship between corporate governance and internal control, for example, the more in corporate governance, the more of internal control in the organization and the less of fraud occur. One of the tasks and goals of the corporate governance is to ensure there have adequate internal control within organization to protect the organization from any conflicts for the benefits of

There is extensive research on board composition and the importance it places on different aspects of organisation performance. (Kang H, et al 2007).

2 The Board will have a maximum of ● directors. [For so long as the Investors hold ●% of the issued share capital of the Company on an as converted basis] the Investors will have the right to appoint [one] director (the "Investor Director"). The composition of the Board on completion will be ●. There will be a minimum of ● board meetings each year.

Jensen and Meckling divided shareholders into internal investors which has management right and external shareholders investors without vote right. Theoretically, the more the internal shareholder’s share the higher the firm value. The researchers also defined firm value as a function of ownership structure. Because ownership structure has links with corporate governance, it can have both positive and negative effects on corporation governance (Jiang 2004).

Board of directors managing the corporation has occurred over a period of time and over the years. Till the 19th Century, it was assumed the general meeting of shareholders was the main part of company and the boards of directors are agent of the company and the whole company is in control of shareholders in general meeting.

Boardrooms are changing. Directors can no longer be passive. They must be alert, accountable and active. The board’s performance has come under more scrutiny. Shareholders, members and staff expect more from their boards.

Two relevant control-oriented theories, managerialism and agency, are explored by (Tosi, H., Werner, J. Katz J. and Gomez-Mejia, I., 2000). Managerialism suggests that where control and ownership are separated, conflict of interests can arise between the owner and the manager. Various authors have identified that CEO’s tend to increase the size of the organisation rather than profits despite potential loss to shareholders. This may be because they find it easier, they feel that a bigger company justifies more compensation or growth is less risky than profit improvement. The divergence of interests can be facilitated as shareholders may deal with other companies, it is difficult to control CEO’s and size becomes an easy option to set compensation. Boards may support CEO’s as they may be friends and may benefit themselves if high CEO pay drives that of all directors.

Kajola (2009) examined corporate governance and firm performance in Nigeria The result reveals that there is a significant relationship between Return on Equity (ROE) and board size as well as chief executive status. The study further reveals a positive significant association between Profit Margin (PM) and chief executive.

The quality of the chairman and CEO relationship can impact the happenings in the boardroom (Kakabadse et al. 2006, p.134). A positive relationship between chairman and CEO facilitates an open non-judgmental quality discussion in the boardroom (Kakabadse et al. 2006, p.141), thus improving board performance.

Corporate governance is characterizes a term that refers broadly to the rules, procedures or laws which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the managers, officers, stockholders or constitution of an enterprise, and also to external factors such as consumer groups, customers and government regulations. It could also be the interaction between different participants in forming corporation’s performance and the way it is continuing towards.