Corporate Governance and the
performance of firms
in
Trinidad & Tobago
Varuna L. Ramlal & Patrick K.
Watson
SALISES, St. Augustine
Objectives
1. Construct a Corporate Governance (CG)
Index for firms listed on the Trinidad &
Tobago Stock Exchange (TTSE)
2. Examine relationship between CG and
performance of TTSE firms
3. Policy implications & Conclusions
CG defined
• Many definitions…
• Sir Adrian Cadbury (1992): “Corporate
Governance is the system by which companies
are directed and controlled.”
• Cornelius (2005): “corporate governance can
be defined as the stewardship responsibility
of corporate directors to provide oversight
for the goals and strategies of a company
and foster their implementation.”
CG defined cont’d
• OECD (2010): corporate governance refers to
“procedures and processes according to
which an organisation is directed and
controlled. The corporate governance
structure specifies the distribution of rights
and responsibilities among the different
participants in the organisation – such as the
board, managers, shareholders and other
stakeholders – and lays down the rules and
procedures for decision-making.”
CG defined cont’d
• Fahy et al (2006): “Put in its simplest form,
corporate governance is the systems and
processes put in place to direct and control an
organisation in order to increase performance
and achieve sustainable shareholder value.”
• Kaen (2003): “Corporate Governance is about
who controls corporations and why”
Assessment of CG
• CG is relevant in the marketplace but one of
the major concerns of researchers - the
measurement of CG
• The literature has proposed the use of CG
Indices (Ananchotikul 2008, Black et al
2003, Cornelius 2005, Garay and Gonzalez
2008, Klapper and Love 2002, Carvalhalda-Silva and Leal 2005, Mallin 2006.)
Assessment of CG cont’d
• However, most of these indices have two
shortcomings – (i) they have been produced
for developed countries only and (ii) they
rely on questionnaires issued to the firm
being assessed.
• Researchers have found that when firms are
asked to respond to questionnaires they put in
what information they think is the ‘right
answer’
Assessment of CG cont’d
• OR what they intend to do instead of what
actually happens in their firm: self-report bias.
• OR they may not respond at all: self-selection
bias.
• For this reason there has been some movement
away from reliance on questionnaires
administered to firms to use questionnaires which
use public information only (Ananchotikul
2008, Bebczuk 2005, Black et al 2006, Carvalhalda-Silva and Leal 2005, Cheung et al 2007)
Index creation
• Quantitative questionnaire used
• Covers major aspects of CG
– Board Responsibility
– Board Structure
– Shareholder Rights
– Transparency and Disclosure
– Audit Committee
Index creation cont’d
• Questions based on the CBTT’s CG Guideline
and generally accepted CG procedures.
• Yes – 1, No – 0
• Missing values not counted except for
Transparency section where the absence of a
value is equivalent to a lack of transparency
• Final index value weighted to be between 0
and 1 for ease of firm comparison
Index Creation cont’d
•
•
•
•
•
•
•
Total – 143 questions
Board Responsibility – 38
Board Structure – 25
Shareholder Rights – 10
Transparency & Disclosure – 53
Audit Committee – 17
Sub-indices as well as total CG index
calculated
Financial Ratios - Performance
•
•
•
•
•
•
•
•
•
•
Many calculated…
Earnings per share
Price/Earnings
Dividend per share
Dividend yield
Dividend cover
ROA
ROE
Stock return
Share price also used as an indicator
Data
• Firms on first and second tier of the TTSE
used
• Years: 2008, 2009, 2010
• CGITT used as the dependent variable
• Ratios – main explanatory variables of interest
• Control variables included –age, size
Method of analysis
• Dependent variable is the CGITT index and its
sub-index values
• Due to the nature of the data a fixed effects
panel data model was used
• This was supported by the use of the Hausman
test
• CGITTit=Cit+ β1ROAit+ β2STKRETit+
β3EPSit+ β4AGEit+ εit
Results
• Summary statistical measures:
• Maximum CG value – 0.87 in the year 2010,
expected because expect firms to improve CG as
they get more familiar with CG requirements
• Minimum CG value – 0.209 in 2008, also
expected for same reason as above
• The average values of the CGITT also show an
increase over the years. In 2008 it was 0.56, in
2009 the value was 0.68 and in 2010 it was 0.76
Results cont’d
Mean values
1
0.9
0.8
0.7
BS
0.6
CGITT
BR
0.5
AC
0.4
TD
SR
0.3
0.2
0.1
0
2008
2009
2010
Results cont’d
• The CGITT variable was tested with all the
performance indicators as dependent variables.
However, only some of the variables were
found to be significant.
Independent
Coefficient
P-value
ROA
0.063
0.006
StkRet
-0.033
0.003
EPS
0.001
0.000
Age
0.008
0.000
Results cont’d
• Some conflict in the results: operating
performance positively affects CG but stockrelated measures have dual effects.
• Diagnostic checks:
• R-squared: 0.7393
• Autocorrelation test: indicates that there is no
autocorrelation in the model
Results cont’d
• Error term: Kernel Density Graph, plots of
normal vs residual
Results cont’d
• Sub-indices were also used as dependent
variables
• Significant values that held up to the
diagnostic tests were only found for the
Shareholder Rights sub-index
• For all other sub-indices the residuals were
unable to pass the diagnostic tests
Results cont’d
• Shareholder Rights
Independent
Coefficient
P-value
ROA
-0.131
0.008
Age
0.005
0.004
• The results here indicate that an increase in
ROA results in a decline in Shareholder Rights
and an increase in Age, an increase.
Results cont’d
• SR error term: Kernel Density Graph, plots of
normal vs residual
Results cont’d
• Mixed results: performance increases some
types of governance but restricts others
• Certain types of performance have different
effects on governance
• Older firms tend to have better governance
Policy implications &
Conclusions
• Overall there has been an improvement in CG
in Trinidad & Tobago over the three years
• This is also true for the sub-indices
• Positive result since it shows that firms are
becoming more aware of the CG requirements
• Should encourage firms to continue to improve
governance so there will be less missing values
in the index (AC and BS had minimum values
of zero)
Policy implications &
Conclusions cont’d
• Operating performance has a positive effect on
overall governance BUT a negative effect on
shareholder rights.
• Firms should be wary of restricting
shareholder rights while boosting profits
• Stock performance has a mixed effect on
governance
The End