The role of intellectual capital in mediating the relationship between corporate governance and corporate performance

Abstract

Corporate performance can be enhanced if corporate governance contributes to the intellectual capabilities (IC) of the firms. Hence, this study examines four empirical analyses to develop a relationship between corporate governance and corporate performance through the mediation of intellectual capital. Firstly, the relationship between corporate governance measures and corporate performance is determined. Secondly, the relationship between corporate governance and intellectual capital (VAICTM) is examined. Thirdly, this study investigates the link between intellectual capital and corporate performance. Finally, the mediation effect of intellectual capital is tested in corporate governance and corporate performance relationship. Based on the data of Karachi stock exchange KSE-100 for eight years from 2005 to 2012 and use of the second-generation multivariate technique, i.e. PLS-SEM by using SmartPLS and SPSS, findings of the first analysis show a significant inverse relationship between corporate governance and the corporate performance. A possible reason is the over emphasis of the advising role of the board of directors, which results in lower corporate performance. Second and third analyses show a positive significant relationship between corporate governance and intellectual capital, and intellectual capital and corporate performance. The fourth analysis provides evidence that intellectual capital fully mediates the relationship between corporate governance and corporate performance. It can be interpreted as corporate governance influences the intellectual capital that in turn influences corporate performance. Overall, the results of this study are well aligned with the resource dependence-stewardship theories that focus on the value created in the firms through advising and coordination between directors and management. The study offers empirical evidence that an organization can use its corporate governance mechanism to enrich the intellectual capital that eventually creates more returns and productivity. The study would be valuable for corporate governors to capitalize intellectual capital resources in order to attain competitiveness, higher productivity and performance.