Corporate governance structures: the performance of Zambian listed companies
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Corporate governance, which hinges on integrity, transparency and accountability, has been globally recognised. Despite this recognition, corporate scandals, corporate failures and poor financial performance of companies have continued to affect the corporate and non-corporate world and thus corporate governance has become a topical issue. There has been limited research on the relationship between corporate governance structures and the financial performance of listed companies in Zambia. This research, therefore, investigated the relationship between corporate governance structures and the financial performance of the selected Lusaka Stock Exchange (LuSE) listed companies for the period 2009 to 2017. With the wide range of stakeholders of the LuSE listed companies in Zambia and the need to grow and develop Zambia’s economy, measuring the financial performance of the companies is vital. Additionally, the growth and development of the Zambian economy is at the heart of Zambia’s economic policies - aimed at eradicating poverty and gender- related inequalities in income. The aim of the research was to adjust the existing framework of corporate governance structures that would enhance the financial performance of the Lusaka Stock Exchange listed companies. This research study has adopted the stakeholder theory to corporate governance, as there are many stakeholders (shareholders, banks, suppliers, customers, government, and employees, amongst others) interested in corporate governance and financial performance for companies. The study employed a mixed research methods approach that involved the collection and analyses of secondary and primary, quantitative and qualitative data. A total of 19 Lusaka Stock Exchange listed companies was used in the descriptive and inferential statistics while 46 self-administered questionnaires were analysed. A total of 15 interviews were held with key role players comprising Chief Executive Officers of the selected key institutions. The random effects panel regression model was used to investigate the relationship between corporate governance structures (board of directors and managerial ownership) and financial performance (proxied by the Return on Capital Employed and Tobin’s Q). Self-administered questionnaires and interviews were conducted to provide insight into corporate governance structures, including the relationship between corporate governance structures and financial performance. All the self-administered questionnaires’ participants indicated that separation of the chief executive officer and board chairperson roles improved financial performance. The random effects panel regression tests using the Return On Capital Employed and Tobin’s Q showed that separation of chief executive officer and board chairperson roles showed had no statistically significant relationship with financial performance of selected the Lusaka Stock Exchange listed companies. Similarly, the study has revealed that the majority of non-executive directors and the number of board meetings do not have any statistically significant relationship with the financial performance of the selected Lusaka Stock Exchange listed companies. However, the insights from key role players have revealed that the majority non-executive directors and the holding of frequent (quarterly) board meetings positively relate with the financial performance of the selected Lusaka Stock Exchange listed companies. A small board of directors (averaging seven board members) has a statistically significant positive relationship with financial performance of the selected Lusaka Stock Exchange LuSE listed companies. Furthermore, insights from self- administered questionnaires revealed that large boards have a positive relationship with financial performance. The contrasting results mainly stem from the argument that insights from key role players could have been premised on the need to comply with LuSE Lusaka Stock Exchange Code of Corporate Governance and international corporate governance best practices. The major implications of the research results regarding the separation of the CEO and the chair of the board as well as having a majority NEDs are contradictory. The quantitative research revealed no relationship between financial performance, the division of the two roles and a majority NEDs, yet the opinions of key role players indicated the opposite. The contradiction in findings mainly stems from the fact that the application of corporate governance in Zambia as is fairly new and the stock market is not yet fully developed. The board processes such as the number of board committees, the establishment of audit and risk committees and internal and external audits relate with financial performance of the selected Lusaka Stock Exchange LuSE listed companies in different ways. The results of the random panel regression analysis, using Tobin’s Q, have revealed that the establishment of an audit committee has a statistically significant positive relationship with financial performance. The insights from key role players revealed that the establishment of an audit committee, internal and external audits as internal corporate governance structures have positive relationships with the financial performance of Lusaka Stock Exchange listed companies. Furthermore, the results of the random effects panel regression analysis showed that the establishment of a risk committee does not have any statistically significant relationship with the financial performance of the LuSE listed companies. Conversely, the insights from interviews revealed that the establishment of a risk committee has a positive relationship with financial performance. Finally, insights from the self-administered questionnaires and interviews revealed that managerial ownership positively relates with financial performance as managers align their interests with shareholders’ interests. The major implications are that a continued focus on the use of audit committees as well as internal and external audits can contribute positively to the financial performance of the LuSE listed companies. The author makes the following major recommendations for shareholders, board of directors, senior management, practitioners and academics: - It is recommended that the shareholders of the two Lusaka Stock Exchange Companies, that didn’t have the separation of the two roles, should approve the separation of the two roles while the 17 Lusaka Stock Exchange listed companies that had the two role separated should continue separating the two roles; - The board of directors should ensure that a greater proportion of non- executive directors form part of the boards in the Lusaka Stock Exchange listed companies; - Senior management should facilitate the holding of the recommended four annual board meetings; and - The Securities Exchange Commission should use the research report as one of the key documents that to revise of the Lusaka Stock Exchange Code on Corporate Governance in Zambia. This study’s limitations included limited financial data for the descriptive and inferential statistics, the young age of the Lusaka Stock Exchange, the limited number of listed companies and the developing nature of the country. In this regard, the study recommends that future research is required when the number of LuSE listed companies has increased; to include other companies (companies listed on both the main and alternative Lusaka Stock Exchange markets, private sector and state owned entities); as a comparative study for corporate governance in Zambia (Lusaka Stock Exchange listed companies) and South Africa (Johannesburg Stock Exchange listed companies). Given the contrasting results, future research is critical to investigate the relationship between board size and financial performance.