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board governance and company performance
study considers a dataset from 2004 to 2015 that includes full board
members which is used to examine if these members are responsible for
risk in the company or not. Moreover, the analysis will be more
exhaustive analysing if the CEO is responsible for risk management or
how the CEO is involved in the risk management which is a key point
in the board governance and company performance analysis. As a
finding we show the correlation between these variables and the
impact that they have in the companies. It was shown that
compensation and Duality have significant positive effect on the firm
performance. The
Broad risk in the subscales of the governance show significant
negative effect on the firm performance. Among the significant
subscales the binary questions of Does the company have a separate
board risk committee, Does the company have a Chief Risk Officer
(CRO), Does the disclosure separately address reputational risk and
Does the disclosure note the board’s oversight with regard to
corporate culture was found to be highly significant in both
performance measures. The multi-level regression model shows
significant correlation between the performance of a company in
several year which suggests using auto regressive model for
improvement of the predictive model for the firm performance.
Governance, Company Performance, Compensation, Duality, Multilevel

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document will study the relationship between the board governance and
company performance based on the study on some companies. This study
aims not only to prove some methodological approach founded in the
literature review, but also provides a novel approach that can be
adopted to evaluate this topic. It will be reported novel results and
it will be show a set of recommendation that can be adopted to
monitor and evaluate the board governance and company performance.

is necessary to understand the vital role that the board’s members,
executive and non-executive member of the companies have to play in
order to have a better performance. This performance is based on a
compliance with laws and to adopt the right governance practices. It
is not just to establish the laws, the most important is to follow
the practices and check if they are fulfilled or not. Otherwise,
although the companies have many laws and guidelines the performance
can be insignificant. This is independent of size of the company, it
can by a large or small organisation, and the best performance can be
the same if the board’s member have the power and knowledge to
decide and to take the right decisions. The key points according to
the literature review is that the board’s directors need to know
the purpose of the company and the stakeholders that are relevant for
the company. In the main duties of the boards members also are
included the power to develop strategies that can be adopted to
satisfy the main goals of the company as well as to ensure the 100%
implementation of their strategies. In order to establish design
guidelines and methodology it was required to make an exhaustive
literature review that shows and highlight the importance of the
board governance, boards members, executive and non-executive member
to satisfy the company performance. To have an overview of the
structure of the boards member (executive directors and non-executive
directors) the following table summarises the relevant information
about them.


the functional business areas (major strategic importance_

earners in the company

chief executive officer (CEO) and the chief financial officer are
nearly always executive directors.

directors (NEDs)

are not employees

are independent in terms of business, financial and all that are
related of the business of the company
their main duties are: develop strategic plans, check the
performance of executive members, and resolution of conflict in
the boards members.

support the executive members

need to show high ethical standards

this brief introduction about this topic then will be showed how
boards member play a central role in the corporate governance of
companies and how to achieve the better performance, also is
highlighted some of the studies that are relevant in this topic which
is important to understand the relationship between corporate
governance and company performance. The board’s member should
monitor the fulfillment of the objectives, so these members have a
significant impact in the firm outcomes. If is implemented a good
governance practice (such as proactively manage risks, set strategic
aims, etc), it will be sure the company success otherwise it will be
reflected in less performance.

E. & Jensen M. (1983) have studied the board’s structure and
composition highlighting the performance of the superior financial
and corporate governance. Their
work shows that the main duties in terms of hiring and firing of the
top managers are for non-executive directors. They performed these
activities due to their knowledge in the company about the main
committees such as audit and remuneration. In their research the
point out that the external directors can consider as a monitor due
to their compliance in the directorial market. Core John E. et al,
(1998) have implemented regression models to achieve the relationship
between CEO and variables such as broad and ownership structure, the
negative relationship was found between these parameters (less broad
and ownership leads the CEOs to earn greater compensation). In the
subsequent of firm and stock return there was also found a
significant negative relationship between them and the compensation
component. (Core John E. et al, 1998) This negative association also
confirmed in another study was done by (Dharmadas P et al, 2014)
using hierarchical regression model. Shaukat A. & Trojanowski G,
(2017) found strong positive relationship between broad governance
index and the firm performance . this association was reported in
another study done on 73 Malaysian trading sectors, using multilevel
regression models, also it was seen that firm performance is
negatively affected by the investment opportunities, leverage and
firm size (Zuriawati Z et al, 2014). There are many studies which
analysed the relationship between internal and external board member
and firm performance, providing and highlighting different results
that can be seen in the following table:

and Caylor (2009)

show that there are not linking between the independence and firm

and McConnell (2007)

highlight the link between the firm performance

success of the companies is not guaranteed by having a high or low
number of boards member, the most important is to have an optimal
composition and a plan to evaluate the performance continuously based
on the activities and having some committees along the company in
order to report everything in the company and to have the control to
make the right decisions in a right time.

order to improve board effectiveness is necessary to construct
mechanism that allow maximise strengths and reduce weakness so that
the organisation can have a better performance. If this evaluation is
made in a way that all the board members understand their role and
also if they have the required skills will allow that the members
work to their maximum performance and capabilities. In order to
analyse this performance is required the application of some
standards such as: 1) Regular audits of the processes that the board
member developed in their work (internal and external audits), 2)
Audits of the skills that the board members have, 3) Coaching
sessions of executive and non-executive members to improve their
performance (individual and groups).

are some research papers about this topic in which is exhaustive
examined the evidence about the relationship between board’s member
and the importance of the company performance in which is highlighted
the importance of analysed the components of the companies such as
board size, executives and non-executive members, knowledge, how the
board members are monitored, strategies that are developed to improve
the company performance, etc. Chambers et al. (2013) summarised these
studies in two graphs (Figure 1 and 2) in which are showed the
country and the focus of research according board’s member and
company performance. It can be clearly seen that United States has
the higher number of studies in this topic, then a less percentage in
another countries such as United Kingdom, Italy and Spain. More of
this studies were developed using regression analysis of existing
data sets. However, there are not a guideline that shows a set of
recommendations that can be followed to analyse the company



are another works such as Nada Korac?Kakabadse,
Andrew K. Kakabadse, Alexander Kouzmin, (2001) in which is
highlighted the necessity and the importance to evaluate the board’s
member performance to facilitate the process of audits these member
and also to follow the company performance and the improvements that
could be done by the members.

Harvey Pamburai et al (2015) have used multiple regression model to
compare the relationship between board governance and company
performance based on a dataset of 158 companies in 2012. Their main
results can be summarised in the following table:

The companies which have smaller boards member have better
performance in comparison with the companies that have a high
number of boards members.

The companies with non-executive directors (NEDs) on the boards
have a better performance in comparison with companies that have a
lower number of NEDs

In order to have a better performance is required less board

It seems that large companies have a better performance in
comparison of smaller ones.

1: Relationship between board governance and company performance
Hamutyinei Harvey Pamburai et al (2015)
of these conclusions can be also found in another research papers
such as Lipton and Lorsch (1992); and Jensen 1993 in which is
highlighted that when the boards members size is larger they can show
communication problems so that less efficiency. Also, in these
studies can be found a recommendation that the board size need to be
around 8 or 9 persons (no more than that). However, there are another
studies that show that this is not necessary true because it depends
of the firm size ( Boone et al, 2007 and Linck et al 2008). There are
another studies such as Adams and Mehran, 2005 and Beiner et al 2006
that using instrumental variable techniques have shown that the
company performance is not related of the board size. However,
Wintoki (2007) highlighted that these variable techniques are not a
good way to explore the performance of a company, he point out that
the best model to evaluate these variables is to apply the GMM
estimator. But, due to the complexity of the relationship of these
variables another studies show procedures and important findings such
as that the performance of the company may differ depending of the
type of company and it is not related of the board size (Linck et al,
2008; Coles et al (2008)).

of the Study
objectives of this study can be described as follows:
Analyse the relationship between the board governance and company
performance based on the information available on some companies
Find out the relationship between ownership structure and corporate
performance, and also the relationship between board composition and
corporate performance
Find out how the CEO characteristic affect the corporate performance
Provide some tools that can be applied to evaluate the relationship
previous mentioned
Develop a set of recommendations that can be applied in any type of
company which can be used to evaluate the board governance and
company performance.

issues, Model & Data

the studies presented in the literature review, data from several
firms was studied and analysed, using hierarchical regression model,
multilevel regression model, linear models and association between
variables was tested by statistical learning methods such as ttest
for testing the difference between two groups mean value, the
association was checked using pearson correlation coefficient.
According to the distribution of the data, parametric or
non-parametric statistical hypothesis test could be used to assess
the relation between the broad governance and company performance.

the statistical model it was applied regression models such as lineal
model (LM) and generalized linear model (GLM):
= ?0 +
?1 x1 +
?2 x2 +…+
?n xn
general linear model (also called GLM, hence create confusion), there
is no g function and f functions are scalar multiplication by
numbers. So, the model is of the form:
= ?0 + ?1 x1 + ?2 x2 +…+ ?n xn
main differences between these two methods is that for general linear
models the distribution of residuals is assumed to be Gaussian. If it
is not the case, it turns out that the relationship between Y and the
model parameters is no longer linear. But if the distribution of
residuals is one from the exponential family such as binomial,
Poisson, negative binomial, or gamma distributions, there exists some
functions of mean of Y, which has linear relationship with model
parameters. This function is called link function.
the evaluation of the hypothesis it can be employed methods such as
Mann-Whitney U test. This methodology is used to compare differences
between two independent groups when the dependent variable is either
ordinal or continuous, but not normally distributed. In this method
is necessary to check if the data that will be analysed fulfil four
assumptions in order to get a valid result.

# 1

depend variable will be measured at the ordinal or continues level

# 2

independent variable should consist of two categorical,
independent groups.

# 3

observations are independent which means that there is not a
relationship between the observations in each group or between the
groups themselves.

# 4

Mann-Whitney U test can be used when your two variables are not
normally distributed.

that it will be applied the Pearson Product-Moment Correlation or
Pearson correlation coefficient which is a measure of the strength of
a linear association between two variables and is denoted by r.
In the cases that is obtained a value of 0 that means that there is
not a relationship between the variables.

useful technique to analyse the effect of different factors on a
response is to perform an Analysis of Variance. It is important to
know which type of analysis can be done in order to determine the
main factors that have a great effect in the data or how much of the
variability in the response variable is attributable to each factor.
study was developed with a dataset from 2004 to 2015 considering full
board members, and evaluating if these members are responsible for
risk, risk committee, or not. And, is evaluated if the CEO is
responsible for risk management or how the CEO is involved in the
risk management. Table 1 shows an overview of the variables that was
used to fulfil the objectives of this study. More details of this
data will be shown in the Annex.


company name

ROE during 2004-2015

Revenue from 2004-2015 in financial statement (It was used as a
Control Variable)

ROA during 2004-2015

age- how many years since the firm established (It was used as a
control variable)

Board compensation during 2004-2015


board owned percent of total share during 2004-2105

held by all BOARD officer blockholders(total share)

2004-2015, how many years are CEO and Chairman of board different?

1: Variables that was employed
that, it was analysed the sample in this way:
as a function of Governance.
is equal Net Income / Total Assets will be estimated as a function of
executive compensation, Percentage of Total Shares Owned, Duality and
is the amount of net income returned as a percentage of shareholders
equity will be estimated as a function of executive compensation,
Percentage of Total Shares Owned,
performance measures are typically considered: Tobin’s q, ROE, and

address the usual agency-theory incentive argument, we look at the
level of CEO compensation as a cause of higher firm performance. One
measure used to in the literature to test for this influence is total
CEO compensation. If effective, higher compensation (an agency cost)
will be associated with higher performance.

address the theoretical longer-run perspective of stewards and family
firms, we focused on the components of CEO compensation that reward
longer-run performance. The measure to test for this forward-looking
compensation effect is computed as: (Stock + Option) / Total
Summary Compensation Table is the cornerstone of the SEC’s required
disclosure on executive compensation. The Summary Compensation Table
provides, in a single location, a comprehensive overview of a
company’s executive pay practices. It sets out the total compensation
paid to the company’s chief executive officer, chief financial
officer and three other most highly compensated executive officers
for the past three fiscal years.
of Total Shares Owned:
It sets out the total company shares owned to the company’s chief
executive officer, chief financial officer and three other most
highly compensated executive officers.
is a measure that is set to 1 if the Board chairperson and CEO are
the same person. It is often used to identify firms presumed to
follow a stewardship governance approach.

independence; # INDEPENDENT 1 if yes////
of Directors main purpose is to protect interests of owners of a