An analysis of corporate governance and company performance: a South African perspective

This study examines the relationship between corporate governance mechanisms and company performance as measured by economic value added (EVA), return on assets (ROA) and Tobin's Q. A multiple regression model is used to compare the association between corporate governance mechanisms and company performance for 158 companies listed on the JSE Securities Exchange (formerly known as the Johannesburg Stock Exchange) for the year 2012. We report four main results. First, board size is found to be negatively and significantly related to EVA suggesting that firms with smaller boards perform better than those with larger boards. Second, the relationship between Tobin's Q and the proportion of non-executive directors (NEDs) on the board is both positive and significant, suggesting that companies with higher proportions of NEDs seem to perform better than those with lower proportions of NEDs. Third, frequency of board meetings is negatively and significantly related to both the ROA and the Tobin's Q suggesting that companies which hold board meetings less frequently appear to perform better than those holding board meetings more frequently. Fourth, the relationship between company size and two performance measures (EVA and ROA) is both positive and significant, suggesting that larger companies seem to perform better than smaller ones. Furthermore, the association between leverage and the ROA is negative and marginally significant, suggesting that companies with less debt appear to perform better than those with more debt. Overall, based on the number and strength of associations between board characteristics and the measures of performance, we conclude that Tobin's Q has a better association with board characteristics than both EVA and ROA. The study also shows that the majority of firms listed on the JSE comply with the King III propositions that the majority of board members be NEDs and that the majority of the NEDs be independent.