UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business HỒ NGỌC TRÂM CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE - AN ANALYSIS OF COMPANIES LISTED IN VIET NAM’S STOCK EXCHANGE MASTER OF BUSINESS (Honours) Ho Chi Minh City – Year 2013 i UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business Hồ Ngọc Trâm CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE - AN ANALYSIS OF COMPANIES LISTED IN VIET NAM’S STOCK EXCHANGE ID: 60340102 MASTER OF BUSINESS (Honours) SUPERVISOR: Dr Phạm Quốc Hùng Ho Chi Minh City – Year 2013 ii ACKNOWLEDGEMENT First of all I would like to thank Dr Hung who has brought me this far and providing me with strength, knowledge and vitality that has helped me to make this research work a reality Secondly, I would wish to thank my family for moral and financial support, encouragement and their understanding when I was not there for them during the project period; I wouldn’t have made it this far without them COPYRIGHT STATEMENT This copy of the thesis has been supplied on condition that anyone who consults it is understood to recognize that its copyright rests with its author and that no quotation from the thesis and no information derived from it may be published without the author’s prior consent © Ho Ngoc Tram / ISB-MBUS/2010-2012 ABSTRACT Corporate governance is considered to have significant implications for the growth prospects of an economy Good corporate governance practices are regarded as important in reducing risk for investors, attracting investment capital and improving the performance of companies Numerous studies have considered the implications of corporate governance structures on company performance Although the existing literature is not unanimous in its conclusions, the weight of opinion is that there is a significant relationship between governance structures and firm performance The aim of this research is to study the effect, if any, of corporate governance structures, particularly board size, CEO duality and board structure is based on proportion independent director on the performance of selected companies listed in Viet Nam’s Stock Exchange Using samples of companies listed in Viet Nam Stock Exchange, this research aims to examine the relationship between board size, CEO duality and the proportion of independent directors on firm performance as measured by return on assets (ROA) and return on equity (ROE), using statistical techniques Results show that there is significant relationship between corporate governance structures and firm’s financial performance Key words: Return on Assets, Return on Equity, CEO Duality, Independent Directors, Board size TABLE OF CONTENTS Abstract Chapter 1: Introduction 1.1 Research background 08 1.2 Statement of problem 09 1.3 Research objective 09 1.4 Scope of this research 10 1.5 Research method 10 1.6 Research structure 10 Chapter 2: Literature Review and Hypotheses 2.1 Introduction 11 2.2 Literature Review 11 2.2.1 Corporate Governance 11 2.2.2 CEO Duality 17 2.2.3 Independent Directors 18 2.2.4 Board size 21 2.2.5 Financial performance 22 2.3 Hypotheses development 24 Chapter 3: Research Methodology 3.1 Introduction 29 3.2 Research design 29 3.3 Measurement scale 31 3.4 Target population 32 3.5 Sample 32 3.6 Data collection 33 3.7 Data screening 34 3.8 Analysis 34 3.8.1 Correlation analysis 34 3.8.2 Multiple regressions 35 3.8.3 Analysis of variances 37 3.9 Summary 38 Chapter 4: Results 4.1 Introduction 38 4.2 Descriptive statistic 38 4.3 Correlation analysis 40 4.4 Multiple regressions 40 4.5 Independent sample test 44 4.6 Analysis of variances 45 4.7 Further analysis 46 Chapter 5: Conclusion and Recommendations 5.1 Introduction 47 5.2 Conclusion 47 5.3 Limitation 49 5.4 Recommendation 49 References Appendix LIST OF TABLES Table 1: List of firms Table 2: Result of correlation between independent variables and dependent variables Table 3: Result of regression for independent variables with ROA Table 4: Result of regression for independent variables with ROE Table 5: Results of descriptive statistic of each variable Table 6: Results of descriptive statistic of each group in variables with ROA Table 7: Results of descriptive statistic of each group in variables with ROE Table 8: Model summaryb Table 9: Anovab Table 10: Summary of Regression results Table 11: Results of Independent sample test (D) Table 12: Results of Test of Homogeneity of variances (ID) Table 13: Results of Analysis of variances (ID) Table 14: Results of Multiple comparisons (ID) Table 15: Results of Test of Homogeneity of variances (BS) Table 16: Results of Analysis of variances (BS) Table 17: Results of Multiple comparisons (BS) Table 18: Results of descriptive statistic (CEO non-duality and NED 40-82) Table 19: Results of Independent sample test (CEO non-duality and NED 40-82) CHAPTER I: INTRODUCTION 1.1 Research background In today’s global business environment characterized by an increased competition, the effectiveness of corporate governance in protecting shareholders’ interests has become more vital than ever Especially, corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment The term corporate governance basically represents a set of mechanisms by which investors protect themselves against expropriation by both managers and controlling shareholders Corporate governance is the system by which corporations are directed and controlled The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as; boards, managers, shareholders and other stakeholders and spells out the rules and procedures and also decision making assistance on corporate affairs By doing this, it also provides the structure through which the company objectives are set and the means of obtaining those objectives and examining the value and the performance of the firms The relative effectiveness of corporate governance has a profound effect on how well a business performs Performance, which shows if the resources of the firm are used efficiently to fulfill the goals of the firm, is crucial in evaluating the overall success of the firm For performance evaluation firms employ both financial and nonfinancial performance criteria Financial performance measures are the starting point for most organizations’ performance measures systems; such as ROA (Return on Assets) and ROE (Return on Equity) are financial performance measures that are most frequently used at academic research 50 The main purpose of the corporate governance mechanism is to provide reassurance to shareholders that managers will achieve results which are in the best interest of the shareholders (Shleifer & Vishny 1997) One way in which this can be achieved is through an effectively structured board that ensures the interests of the managers are in line with those of the shareholders Firm performance indicators based on ROA and ROE reported above show that firm performance in Viet Nam has increased even under the adverse conditions The findings of this study provide evidence that the literature report that good corporate governance is an important factor in determining firm performance Many business failures are due to the board’s inability to address the overall company performance in an effective and consistent manner The reason for this lies in the structure of the board, particularly in relation to the structure of the decision making process which needs to be reformed to enable companies to focus on sustaining high performance in the face of a rapidly changing environment This study reported significant relationships between corporate governance practices of separate leadership structure, a majority of non-executive directors and size of board, and firm performance The growth in the economy, despite the adverse conditions, is partly due to good governance practices adopted by firms in Viet Nam The results about the significance of the relationship between separate leadership structure (CEO duality) and firm performance in Viet Nam based on ROE are supported by agency theory Separation of leadership positions of chairman and CEO is associated with agency theory, applies to this study, because separation of the roles lead to effective monitoring and management, resulting in higher profitability In an environment such as Viet Nam the separation of the two positions is not an important as other countries, because CEO duality has negative effect on financial performance In order to mitigate the risk and increase profitability of firms in Viet Nam, the chairman is not half the CEO Furthermore, as the result of this study, the proportion independent 51 director is as few as possible to firm performance with environment in Viet Nam Thus, the number of members on board does not affect to firm performance From the foregoing analysis, it is evident that corporate governance has an influence on a firm’s performance Indeed, while some of our findings are revealing, clear policy implications should not be lost For enhanced performance of corporate entities, it is important to separate positions of CEO and also firms should be encouraged to maintain proportion independent directors of 40 – 82 percents We would however like to indicate that, in trying to examine the link between corporate governance and firm performance, it would have been appropriate to use a broader spectrum of variables 52 REFERENCES Adams, R., Almeida, H., & Ferreira, D (2005) Powerful CEOs and their impact on corporate performance Review of Financial Studies, 18(4), 1403-1432 Allan Chang Aik Leng (2004) The impact of corporate governance practices on firms‟ financial performance– evidence from Malaysian companies ABI/INFORM Global, 308 Adams, R B and Ferreira, D (2007) A theory of friendly boards, Journal of Finance, 62, 217-250 Abdullah, SN 2004, 'Board Composition, CEO Duality and Performance among Malaysian Listed Companies, ' Corporate Governance, 4(4), 47-61 Benz, M., & Frey, B S (2007) Corporate governance: What can we learn from public governance? Academy of Management Review, 32(1), 92-104 Belkhir, M., 2009 “Board of Director's Size and Performance in Banking”, International Journal of Managerial Finance 5, 201-221 Byrd, JW & Hickman, KA 1992, 'Do Outside Directors Monitor Managers?', Journal of Financial Economics, 32, 195-221 Boyd, B (1995) CEO duality and firm performance: A contingency model Strategic Management Journal, 16(4), 301-312 53 Brown, D.L., Caylor, M.L (2004), “Corporate governance and firm performance”, working paper, Georgia State University Atlanta, GA, Bhagat, S., Black, B (2002), "The non-correlation between board independence and long-term firm performance", Journal of Corporation Law, 27, 231-73 Dalton, DR, Daily, CM, Ellstrand, AE & Johnson, J 1998, 'Meta-Analytic Reviews of Board Composition, Leadership Structure, and Financial Performance ', Strategic Management Journal, 19, 269-90 Daily, C., & Dalton, D (1992) The relationship between governance structure and corporate performance in entrepreneurial firms Journal of Business Venturing, 7(5), 375-386 Dang The Duc (2007) Corporate Governance in Viet Nam Eisenberg, T., S., Sundgren, and M.T., Wells, 1998 “Larger Board Size and Decreasing Firm Value in Small Firms”, Journal of Financial Economics 48, 3554 Finkelstein, S., & D'Aveni, R A (1994) CEO duality as a double-edged sword: How boards of directors balance entrenchment avoidance and unity of command The Academy of Management Journal, 37(5), 1079-1108 Fama, EF & Jensen, MC 1983, 'Separation of Ownership and Control', Journal of Law and Economics, 26, 301-25 54 Lipton, M., and J.W., Lorsch, 1992 “A Modest Proposal for Improved Corporate Governance”, Business Lawyer 48, 59-77 Klein, A 1998, 'Firm Performance and Board Committee Structure', Journal of Law and Economics, 41, 275-99 Goodwin, J., & Seow, J L (2000) Corporate governance in Singapore perceptions of investors, directors and auditors Accounting and Business Review, 7(1), 39-68 Gillan, S L (2006) Recent developments in corporate governance: An overview Journal of Corporate Finance, 12(3), 381-402 Harris,& Helfat (1998) CEO duality, succession, capabilities and agency theory: commentary and research agenda Strategic Management Journal, 19(9), 901-904 Hutchinson, M (2002) An analysis of the association between firms' investment opportunities, board composition and firm performance Asia Pacific Journal of Accounting and Economics, 9(1), 17-38 Hermalin, B.E., Weisbach, M.S (2003), "Board of directors as an endogenously determined institution: a survey of the economic literature", Economic Policy Review, (1), 7-26 John, K., Senbet, L (1998), "Corporate governance and board effectiveness", Journal of Banking and Finance, 22 (4), 371-403 55 Spanos, LJ 2005, 'Corporate Governance in Greece: Developments and Policy Implcations', Corporate Governance, 5(1), 15-30 Shleifer, A., & Vishny, R (1997) A survey of corporate governance Journal of Finance, 52(2), 737-783 Singh, M., & Davidson, W N 2003 “Agency Cost, Ownership Structure and Corporate Governance Mechanisms.” Journal of Banking and Finance, 27, 793816 Rechner, P L., & Dalton, D R (1991) CEO duality and organizational performance: A longitudinal analysis Strategic Management Journal, 12(2), 155-160 Rezaee, Z 2009, Corporate Governance and Ethics, John Wiley & Sons, Inc, USA Raheja, C.G., 2005 “Determinants of Board Size and Composition: A Theory of Corporate Boards”, Journal of Financial and Quantitative Analysis 40, 283-306 Rosenstein, S & Wyatt, JG 1990, 'Outside Directors, Board Independence, and Shareholder Wealth', Journal of Financial Economics, 26 (2), 175-91 Tanna, S., F., Pasiouras and M., Nnadi, 2008 “The Effect of Board Size and Composition on The Efficiency of UK Banks”, Economics, Finance and Accounting Applied Research Working Paper, Coventry University 56 Zahra, SA & Pearce, JA 1989, 'Board of Directors and Financial Performance: A Review and Integrative Model', Journal of Management, 15, 291-334 Yermack, D 1996 “Higher market valuation of companies with a small board of directors.” Journal of Financial Economics, 40, 185-212 Vafeas, N (1999), "Board meeting frequency and firm performance", Journal of Financial Economics, 53(1), 113-42 Weisbach, M S 1988 Outside directors and CEO turn-over Journal of Financial Economics, 20, 431–460 APPENDIX Table Variable N Mean Std.deviation Min Max ROA 199 6.8543% 10.02138% -40.00% 48.00% ROE 199 11.4774% 32.27061% -251.00% 269.00% Duality 199 Independent director 199 61.482% 20.3179% 0% 100% Board size 199 5,46 1,154 11 Table Corporate governance CEO Definition Group Mean Std Deviation N Percent CEO & Chairman are combined Duality 5.12 10.33 73 36.7 CEO & chairman are separated Non-duality 7.86 9.74 126 63.3 NED 40 7.56 9.14 4.5 NED 40-82 7.75 9.92 60 30.2 Proportion of nonexecutive directors: to Independent 40% director Proportion of nonexecutive directors: from 40% - 82% Proportion of nonexecutive directors: upper NED 82 6.39 10.16 130 65.3 Members: to M4 6.34 9.34 144 72.4 Members: from to M5-6 8.84 11.22 49 24.6 Members: upper M6 3.00 14.42 6.85 10.02 199 100 82% Board size Total Table Corporate governance CEO Definition Group Mean CEO & Chairman are combined Duality 9.46 47.47 73 36.7 CEO & chairman are separated Non-duality 12.64 18.65 126 63.3 NED 40 14.89 12.29 4.5 NED 40-82 20.43 34.55 60 30.2 NED 82 7.11 31.40 130 65.3 Proportion of nonexecutive directors: to Std Deviation N Percent 40% Independent director Proportion of nonexecutive directors: from 40% - 82% Proportion of nonexecutive directors: upper 82% Board size Members: to M4 11.78 34.16 144 72.4 Members: from to M5-6 12.10 26.45 49 24.6 Members: upper M6 -0.83 30.92 11.48 32.27 199 100 Total Table Dependent Variable ROA Dimension0 ROE Table Model Dependent Variable ROA ROE R R Square a 188 a 198 035 039 Regression Residual Sum of Squares 702.993 19181.781 196 Total 19884.774 199 Regression Residual 8061.499 198134.149 196 Total 206195.648 199 Model df Adjusted R Square 021 024 Mean Square 234.331 98.368 Std Error of the Estimate 9.92% 31.87% F Sig 196 071a 199 2687.166 1016.073 a Predictors: (constant), Board size, Duality, Independent director b Dependent variables: ROA, ROE 2.645 050a Table 10 Dependent Independent Variable Variable Result Expectation Match of Strength of effect Sign of Beta Sig expectation CEO Duality Positive (+) - Significant No Independent Director Positive (+) - Significant No Board size Negative (-) + Not significant No CEO Duality Positive (+) - Significant No Independent Director Positive (+) - Significant No Board size Negative (-) - Not significant Yes ROA ROE Table 11 ROA Equal variances assumed Levene’s Test for Equality of Variances T-test for Equality of Means F Equal variances not assumed 088 Sig T Df Sig.(2-tailed) Mean difference Std Error difference 90% Confidence Lower interval of the difference Upper df1 3 df2 196 196 Equal variances variances not assumed assumed 3.072 Equal 768 081 -1.866 -1.837 -.668 -.548 197 143.317 197 85.061 063 068 505 585 -2.7338% -2.7338% -3.1771% -3.1771% 1.4648% 1.4882% 4.7533% 5.7991% -5.6227% -5.6756% -12.551% -14.707% 15500% 20791% 6.1967% 8.3530% Table 12 Levene Statistic 521 013 ROE Sig .595 987 Table 13 ROA Between Groups Within Groups Total ROE Between Groups Within Groups Total Table 14: Bonferroni Sum of Squares 11.972 19872.802 19884.774 4761.454 201434.194 206195.648 df 196 199 196 199 Mean Dependent (I) (J) Variable Independent Independent ROA NED40 NED40-82 NED82 ROE NED40 NED40-82 NED82 NED40-82 NED 82 NED40 NED 82 NED40 NED 40-82 NED40-82 NED 82 NED40 NED 82 NED40 NED 40-82 difference (I-J) -.29347% 47619% 29347% 76966% -.47619% -.76966% 11.56668% 9.12925% -11.56668% -2.43743% -9.12925% 2.43743% Mean Square F 5.986 059 943 2.317 101 101.392 2380.727 1027.725 Std Error Sig 1.68974% 2.62629% 1.68974% 2.36942% 2.62629% 2.36942% 5.37967% 8.36142% 5.37967% 7.54362% 8.36142% 7.54362% 1.000 1.000 1.000 1.000 1.000 1.000 098 829 098 1.000 829 1.000 Sig 90% Confidence Interval Lower Upper Bound Bound 3.9148% 3.3279% 5.1524% 6.1047% 3.3279% 3.9148% 4.3084% 5.8477% 6.1047% 5.1524% 5.8477% 4.3084% 0372% 23.0961% 8.7906% 27.0491% 23.0961% -.0372% 18.6046% 13.7297% 27.0491% 8.7906% 13.7297% 18.6046% Table 15 Levene Statistic 353 2.156 Table 16 ROA ROE df1 Between Groups Within Groups Total Between Groups Within Groups Total df2 196 196 Sum of Squares 941.436 205254.212 206195.648 319.754 19565.020 19884.774 Sig .703 119 df 197 199 197 199 Mean Square 470.718 1047.215 159.877 99.822 F Sig .449 639 1.602 204 Table 17: Bonferroni Mean Dependent (I) Variable Independent ROA M4 M5-6 M6 ROE M4 M5-6 M6 (J) Independent differen ce (I-J) M5-6 M6 M4 M6 M4 M5-6 M5-6 M6 M4 M6 M4 M5-6 Std Error 2.4965% 1.63213% 3.3403% 4.11191% 2.4965% 1.63213% 5.8367% 4.26838% 3.3403% 4.11191% 5.8367% 4.26838% -.3243% 5.24542% 12.6111% 13.2150% 3243% 5.24542% 12.9354% 13.7179% 12.6111% 13.2150% 12.9354% 13.7179% Sig .384 1.000 384 519 1.000 519 1.000 1.000 1.000 1.000 1.000 1.000 90% Confidence Interval Lower Upper Bound Bound -6.4398% 1.4469% -6.5944% 13.2749% -1.4469% 6.4398% -4.4759% 16.1494% -13.2749% 6.5944% -16.1494% 4.4759% -12.9975% 12.3490% -19.3174% 44.5396% -12.3490% 12.9975% -20.2080% 46.0788% -44.5396% 19.3174% -46.0788% 20.2080% Table 18 Independent variables Mean N 6,4118% 57 Difference 8,0826% 142 CEO non-duality and NED40-82 10,2941% 57 13,0092% 142 CEO non-duality and NED40-82 Difference Dependent variables ROA ROE Table 19 ROA Equal Equal variances variances assumed Levene’s Test for Equality of Variances T-test for Equality of Means F Sig T Df Sig.(2-tailed) Mean difference Std Error difference 90% Confidence Lower interval of the difference Upper 088 not assumed ROE Equal Equal variances variances assumed not assumed 3.072 768 081 -1.866 -1.837 -.668 -.548 197 143.317 197 85.061 063 068 505 585 -2.7338% -2.7338% -3.1771% -3.1771% 1.4648% 1.4882% 4.7533% 5.7991% -5.6227% -5.6756% -12.551% -14.707% 15500% 20791% 6.1967% 8.3530% Histogram 1&2 ...UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business Hồ Ngọc Trâm CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE - AN ANALYSIS OF COMPANIES LISTED IN VIET NAM’S STOCK. .. corporate governance is considered as ensuring corporate accountability, enhancing the reliability and quality of financial information, and therefore enhancing the integrity and efficiency of capital... survey in Vietnam, only 23% of the companies surveyed understand the basic concept of corporate governance, and there remains the confusion between ? ?governance? ?? and “management” between company