International Letters of Social and Humanistic Sciences Online: 2014-09-20

ISSN: 2300-2697, Vol. 40, pp 35-40

doi:10.18052/[Link]/ILSHS.40.35
© 2014 SciPress Ltd., Switzerland

Relation of Corporate Governance with Financial

Performance

Naveed Ahmad1,*, Nadeem Iqbal2, Muhammad Sulaman Tariq3

1Faculty of Management Sciences, Indus International Institute, D. G. Khan, Pakistan
2Faculty of Management Sciences, Ghazi University D. G. Khan, Pakistan
3Finance Manager, Research and Development Solution, Islamabad, Pakistan
*E-mail address: naveeddgk2010@[Link]

ABSTRACT
The intention of the work is to prove that corporate governance is essential to uninterrupted
operation of any corporation, while more consideration to the process such that governance. Hence it is
transparent what is commonly intermediate by corporate governance. This work proves a link with the
corporate governance and firm financial performance in insurance industry of Pakistan. It included three
variables which are Audit committee independence, board independence and CEO duality for corporate
governance. The degree of firm’s performance is limited by return on equity and asset. This work gives
a positive direction for exploring this concept.

Keywords: Corporate Governance; insurance; Pakistan; Financial Performance

1. INTRODUCTION

Corporate Governance has become pertaining to the current and local events due to its
infinite addition in economic growth and for the progress of Nations. The opposed to presence
of good Corporate Governance is main reason of failure in popularity of all good companies.
In reality that insurance companies have understanding that it has great impact on economic
growth of Pakistan. It is necessary to study such authoritative things. The insurance sector is
significant part of the financial industry of the economy due to its financial inter-mediatory
aspect. They offer safety to policy holder assuring the protection of their capital, In case of
accident and invest their capital in business activities in the country. Such a result of the
particular qualities of the insurance industry and the important addition, that is making to
expand the economy to link between non presence of such study.
Overall, all the insurance companies are bounded to rules and regulations must protect
their customers. The main sites of compulsion added rectification of board of directors
according to the shareholders and best reveling added better internal and external audit for
insurance companies. Every company included free-float market capitalization for index
calculation. However, simultaneously interpret their affection and the index fluctuations.
In this paper we have never ended discussion to examine a link that retain among
Corporate Governance and firm performance. From secondary data we examine collective
findings, from those countries which are developed.

This is an open access article under the CC-BY 4.0 license ([Link]
36 Volume 40

Wolfeusohn who was the President of the WORLD BANK to explain the corporate
governance as techniques and process to state corporate fairness, clarity and accountability.
Commonly we can determine the corporate governance to begin the rules of process techniques
and ways to prescribe and restrain the corporate affairs in such method to make secure the
individual and combine interest of all the stake holders. Good corporate governance constantly
increase the confidence of investors and lenders on company and have expressive authority on
the strategic decision of the company. Consequently the variables of corporate governance (e.g.
Board independence CEO duality and audit committee) works without limitations that influence
on financial position of firms. Without regarding, to specific definition the expressive of
corporate governance spread in a corporation due to disjunction of ownership and restrain.
Besides agency theory describe that one who seeks favourable attitudes of individuals who
posses powerful eagerness to in crease their own interest and is convenient to things.
Consequently a contradictory occur between managers and owners. Logically that main reason
of agency anticipation is what required to do to ignore opportunistic attitude since, the owner
of firms recompense management to invest their capital in business. Knowledge a summitry
happened due to managerial approach to all confidential knowledge then shareholders of
company. It yields the companies get to utilize the wealth of firm for exterior benefits.
Consequently, agency theory proposed to corporate governance is a mechanism to
eliminate these contradictions of interest by controlling management position and regulate is
objectives which shareholders consequently Board of Directors is expressive factor for
controlling the management and board members having freedom of some dimensions. Board
independence assign comparatively relation of independent all directors in board. It found out
positive link between board independence and firms position. The second expressive
controlling instruments is to distinguish the role of CEO and chairman of board. No disjunction
guide to CEO duality that is doubtful for organization because CEO has authority to control
and evade the process. CEO duality occur the question who will control the management.
Duality gives importance to CEO an board decision. Audit committee independence prefer to
independent non executive directors, due to then occurrence of frauds in financial report will
be less. It is also transfer for expressive governance. Klein find a negative link between earnings
management and audit committee independence. Independent audit committees have low debt
financing. Cost also find a positive and expressive link between ROE board composition and
audit committee.
Pak Qatar Family Takaful is the pioneer of family takaful in Pakistan, being established
in 2006 and commencing operation in 2007. PQFT Limited. Is chaired by share Ali Bin
Abdullah al-thani, member of Qatar’s Royal Family, sponsored by some of the strongest
financial institution from the state of Qatar. The outgoing year was the first profitable year
PQTF, made profit after tax of Rs.45.44 million, with PQFT limited posting a profit after tax
of Rs.26.67 million and following course of Rs.18.77 million. Total contribution stood at
Rs.3,873.4million, with PQFT at Rs.3,324.3 million & PQGT at Rs.549.1 million.
The main purpose of this study is to explore the link between corporate governance and
firms position. On the behalf of previous study, This study wants to examine influence on firms
financial position that choose the corporate governance practices. Now we want to explore
influence of corporate governance and firm financial position at Broadway. For this purpose
particular variables of corporate governance (e.g. board independence CEO duality committee
independence being pointed on by taking standards (e.g ROA, ROE).
 International Letters of Social and Humanistic Sciences Vol. 40 37

2. LITERATURE REVIEW

Corporate Governance having all the standards of enterprise to support the economic
agents to participate in the productive procedures, to produce excess beyond what is needed
within the organization and maintain a good contribution among the partners, capturing into
attention what they bring for organization. There were many researches about the link between
Corporate Governance and firm performance in insurance sector and some findings added in
this review which are given below.
Shleifer et al. (1989) Find out that it is exciting, usually these managers to take themselves
surrounding to the strong position, managers can disposes partners by surrounding themselves
and restraining with job even if they have no more ability for survival of firm. The management
disposes the funds and can easily work with labour than capturing cash outside like to shift from
one person to another.
Davis et el. (1997) In their research find out five parts about the philosophy of
management, a man employed to manage domestic concerns as trust, direct correspondence, to
license, taking forever remaining steps and authoritatively increase achievement level. Daily et
al. (2003) Assume as true that with in reach to inputs that will increase organizational
achievement level, power of the action and keep continuity in performing functions for
increasing firm performance.
Cheema et al. (2003) Investigated that firm progress history of Pakistan, to take measures
about the right of possession, rank of financial institutions and also about the dynamics of the
market and also participated to the scattered data in Pakistan by examining the different factors
of corporate structure in the similar way that are important for corporate governance. Zingales
(1998) In his study described corporate governance as extensively wide, multifaceted notion
that is excessively applicable, however hard to do, because sort of its one aim to contain .
Lang et al. (1998) Investigated that shareholders, posses condensation in firms , having a
vital role to restrain and guide the management to show interest in favour of the condensation
group. While, corporate governance having authority to give permission to shareholders for the
guidance of management for achieving more desirable position of their investment. Klein
(2002) Stated that there is an opposite link among earnings management and audit committee
independence.
Anderson et al. (2004) In their research described that independent audit committees in financial
markets have lower debt financing costs. Fooladi (2011) Also examines that important
performance of Corporate Governance is to minimise the contradictions of interest between
owners and managers of firm. Corporate Governance attach the owners interest with managers
to enhance the firm activity.
Khan et al. (2011) Stated in their study the influence of Corporate Governance on firm
position. They selected insurance company of Pakistan for analysis purpose. They take
authority condensation, CEO duality and board independence as a part and sequences of
Corporate Governance measure the firm position by using ROA and ROE. They reached to the
point that CEO duality have low achievement level and board independence increase the
financial position of firms.
Mukhtar et al. (2009) Studied the link between Corporate Governance and firm position
and for this reason they used Mann –Whitney U test to analyse position of companies that leads
good governance with those companies which did not leads good corporate governance.
Measures of any company used for the identification of good and bad corporate governance of
companies. The measures of any firm performance are Financial ratios such as return on asset,
return on equity, earning per share and profit margin Results of study showed that performance
38 Volume 40

between companies which practise good corporate governance and companies that did not
practise good corporate governance are similar.
Bhagat and Black (1999) investigated that there is opposite link among structure of the
board, and firm financial position. This research also find out the result that in large public
companies, there is no clear proof that board independence leads to firm profitability. Their
study further investigated that there is no favour of the link among independent board and
greater firm financial position. They said that board should be gathered with one of dependent
& independent directors, so they may bring wide range of knowledge and skills which assures
the best financial position of the firm.
Yasser et al. (2011) In their research investigated the link among four corporate
governance processes (board size, board composition, CEO/chairman duality and audit
committee independence) and firm financial position measures ( return on equity and profit
margin ). The result have the positive interlink among the Corporate Governance procedures
(board composition, board size and audit committee and performance measures, return on
equity and profit margin). The impact of study is that, the size of the board should be small
with in measurable limit and executive and non-executive directors must be present in the
board. The research did not find out the affectionate link among the firm financial standards
and CEO duality.
Kumar (2012) in his research examined the impact of outside directors on firm activity in
157 non-financial companies in India. It specially focused the importance of controlling by
(non-executive non-independent) and independent directors on firm position. The conclusion
is that presence of dependent and independent directors in board has determined effect on firm
position while the presence of independent directors has no significant impact on firm value.

3. METHODOLOGY

The research engaged mixture of primary and secondary facts and figures to find out the
results. These facts gathered by the use of financial statements of the companies for the period
2009-2012. In this study various factors have an impact on the linkage among corporate
governance and firm’s financial position. While in our research we just have following variables
that are stated below.

3. 1. Independentble variable
• CEO Duality: It prefers toward the two officers as one person was like CEO and other was
Chairman.
• Board Independent: If board of the company depends one third or more upon the non
executives’ directors so we can say that board is independent, in case of less than one third,
it is not independent.
• Audit Committee Independence: It included non-executives in the audit committee.

3. 2. Dependent variable
• ROA: We calculate this by dividing, net income divided by total assets of the company.
• ROE: We calculate this by Net Income divided by shareholders equity of the company.
 International Letters of Social and Humanistic Sciences Vol. 40 39

3. 3. Sample and Data Collection

For exploring the facts we have taken a listed company of insurance sector named as Pak
– Qatar Family Takaful. Annual reports from 2009-2011 of this company studied for the
collection of data.

Analysis of Insurance Company

Company Year CEO Duality Board Independence Audit Committee

Pak Qatar 2009 No Yes Yes

Family Takaful 2010 No Yes Yes
2011 No Yes Yes
2012 No Yes Yes

Performance Measures

Year ROA ROE

2009 (14.39 %) (15.45 %)

2010 (18.02 %) (19.88 %)
2011 (1.96 %) (2.16 %)
2012 5.22 % 6.00 %

4. DISCUSSION

The analysis tells that financial performance of the Pak-Qatar Family Takaful is on rise
due to good corporate governance as proved by No CEO Duality, but board independence and
audit committee independence have positive impact.
After analysing the Pak-Qatar Family Takaful insurance company, we find out that there
is no CEO Duality, Board is independent and audit committee is also independent but the
performance of the company has decreased in the last years but now is positive. Performance
was decreasing due to government regulations, high taxes and energy crisis. Performance
increased when number of non-executive directors decreased (from 6 in 2009 to 4 in 2012).
On the base of above discussion, the study results that corporate governance is positively
associated with the firm financial performance. So it is proved that there is a positive
relationship between the corporate governance and firm’s financial performance. After
analysing the data we find that the ROA of Pak-Qatar Family Takaful has increased from (14.39
%) in 2009 to 5.22 % in 2012. Similarly the ROE was (15.45 %) in 2009 and increased to 6.00
% in 2012. The equity has been improved.

5. CONCLUSION – DIRECTIONS FOR FUTURE RESEARCH

The study of Insurance has proved that there is positive relationship between the corporate
governance and financial performance. However this study has focused on only three
determinants of corporate governance (CEO Duality, board independent and audit committee
independence). There exist other internal and external factors and determinants of corporate
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governance that need to be investigated. Further investigation also can be carried assuming
other factors to examine the relationship between the corporate governance and firm financial
performance. It can also be extended by considering other measures of performance.

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( Received 07 September 2014; accepted 15 September 2014 )