The impact of board competency and ownership structure on firm performance

Abstract

This study investigates the impact of board competency and ownership structure on firm performance, using data from 80 (800 firms-year) non-financial firms listed in Muscat Securities Market of Oman between 2003 and 2012. Oman business environment is surrounded by issues like incompetent board members, poor internal controls, ownership concentration and several incidences of fraud that lead to corporate failures. Furthermore, since the issuance of corporate governance code in 2002, there has not been any rigorous study that evaluates the impact of code adoption on firm perormance. In this study, board competency has been assessed using two approaches, a composite-index approach and an individual variable approach where the impact of each of the components of the index on firm performance is examined. This study uses seven performance metrics covering firm profitability, firm short-term liquidity, firm market value and firm risk of failure. Descriptive statistics reveal that since the issuance of corporate governance code in 2003, the board competency has been enhanced. The multivariate regression results of board competency index (BCI) confirm the hypothesis that there is a positive and significant relationship between BCI and firm performance. Findings of the individual variable model reveal several novel results; firms with board comprises of 8 to 10 directors is more profitable, they enjoy better short-term liquidity and are in a secure zone from corporate failure. Findings also indicate a negative and significant impact of directors' absence and having more than 4 multiple directorships concurrently on firm performance. This study also discovers that firms having 33% or more independent members perform better. With regard to ownership structure, the study shows that institutional investors have a positive impact on firm profitability and firm‘s short term liquidity, whereas firms with government ownership display more resilience to corporate failure. Surprisingly, firms that receive more soft government funds are found to be less profitable and more susceptible to corporate failure. The outcomes of various tests for robustness and sensitivity propose that empirical results are vigorous. This study has important implications to corporations in strengthening their corporate govenance and attaining cost reduction by eliminating unnecessary corporate governance mechanisms. Policy makers and regulators can use these findings to issue regulations that may have a positive impact on firm‘s performance. Results gained also provide more avenues for further research.