EFFECTS OF CORPORATE GOVERNANCE ON THE LONG-TERM SUCCESS OF UAE FIRMS OPERATING IN THE REAL ESTATE SECTOR
Table of Contents TOC o “1-3” h z u Executive Summary (800 Words) PAGEREF _Toc53563814 h 41Introduction to Corporate Governance PAGEREF _Toc53563815 h 51.1What is Corporate Governance PAGEREF _Toc53563816 h 51.2GLOBAL PERSPECTIVES ON Corporate Governance PAGEREF _Toc53563817 h 61.3Corporate Governance in the UAE PAGEREF _Toc53563818 h 102Literature Review and hypothesis development PAGEREF _Toc53563819 h 122.1Introduction PAGEREF _Toc53563820 h 122.2Corporate Governance overview PAGEREF _Toc53563821 h 132.3Corporate Governance and Financial Performance PAGEREF _Toc53563822 h 152.3.1How does Corporate Governance Help in Achieving Better Performance for Firms PAGEREF _Toc53563823 h 162.4Corporate Governance in the developing world PAGEREF _Toc53563824 h 172.4.1Observations and Findings on Corporate Governance in the Developing World Literature Review PAGEREF _Toc53563825 h 173Hypothesis Development PAGEREF _Toc53563826 h 303.1Board Size and Firms Performance PAGEREF _Toc53563827 h 303.1.1Authors Conclusion Based on Literature Review PAGEREF _Toc53563828 h 313.1.2Hypothesis PAGEREF _Toc53563829 h 313.2Board Composition and Firms Performance PAGEREF _Toc53563830 h 313.2.1Authors Conclusion Based on Literature Review PAGEREF _Toc53563831 h 313.2.2Hypothesis Question PAGEREF _Toc53563832 h 323.3Audit committee independence and Firms Performance PAGEREF _Toc53563833 h 323.3.1Authors Conclusion Based on Literature Review PAGEREF _Toc53563834 h 323.3.2Hypothesis Question PAGEREF _Toc53563835 h 334Methodology PAGEREF _Toc53563836 h 334.1Data Sources PAGEREF _Toc53563837 h 334.2Impact Measurement PAGEREF _Toc53563838 h 344.3Selection of Sector to Examine (200 Words) PAGEREF _Toc53563839 h 354.4Selection Companies within the Sector (300 Words) PAGEREF _Toc53563840 h 364.5Qualitative Analysis (500 Words) PAGEREF _Toc53563841 h 374.6Quantitative Analysis (500 Words) PAGEREF _Toc53563842 h 385Research Analysis (2500 words) PAGEREF _Toc53563843 h 425.1Research FINDINGS PAGEREF _Toc53563844 h 425.2Discussion PAGEREF _Toc53563845 h 485.3Governance Implications for the Selected Companies PAGEREF _Toc53563846 h 496Conclusion PAGEREF _Toc53563847 h 516.1Summary of governance tools PAGEREF _Toc53563848 h 516.2Presenting the results PAGEREF _Toc53563849 h 527References PAGEREF _Toc53563850 h 54Appendices PAGEREF _Toc53563851 h 59Appendix 1 PAGEREF _Toc53563852 h 59
TOC h z c “Table” Table 1: Governance Goals in the UAE – SCA PAGEREF _Toc47976972 h 6
Table 2 Summary of UK Corporate Governance Code Principles (Financial Reporting Council, 2018) PAGEREF _Toc47976973 h 7
“Being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.” – Adam Smith 1776
The purpose of this study is to investigate the effects of corporate governance on the long-term success of real estate firms operating in the UAE. Board size, board composition, and audit committee independence have been used as corporate governance mechanisms, measured against return on equity and Tobin’s Q ratio to measure a firm’s performance. Past studies have revealed that firms with smaller board sizes perform better than firms characterized by large board sizes. A simple explanation for this would be quicker decision making processes and reduced operating expenses associated with smaller size boards. Board composition deals with the proportion of non-executive directors making up the board. Boards with higher ratios of non-executive directors have been found to eliminate interest conflicts and positively influence a firm’s performance. Audit committee independence has also been found by past researchers to be a significant factor in influencing firms’ performance. Having a higher proportion of independent audit committee members implies less control and influence of managers and top executives’ financial activities. These corporate governance mechanisms aim to protect the interests of the shareholders and secure the long-term survival of the business.
The study utilizes both quantitative and qualitative approaches in an aim to determine the relationships between the variables. Study findings reveal that board size has a significant negative relationship with ROE and Tobin’s Q. This implies that an increase in board size leads to a decline in ROE and Tobin’s Q. A positive relationship was found between board composition and both ROE and Tobin’s Q. This implies that higher proportions of non-executive directors lead to higher ROE and Tobin’s Q. A positive relationship was also found between the proportion of independent audit committee members to ROE and Tobin’s Q. The results imply that higher ratios of independent audit committee members would improve the overall performance of firms.
1 INTRODUCTION TO CORPORATE GOVERNANCE
What is Corporate Governance
“Companies do not exist in isolation. Successful and sustainable businesses underpin our economy and society by providing employment and creating prosperity. To succeed in the long-term, directors and the companies they lead need to build and maintain successful relationships with a wide range of stakeholders.” CITATION Fin18 l 2057 (Financial Reporting Council, 2018)
The term “Governance” derives from the classical Greek word “Kubernetes”, which carries two meanings. The first one refers to a “steersman” of a ship. Corporate Governance, in other words, is “the art of steering organisations.” Moreover, the second meaning of the term “Kubernetes” refers to the concept of cybernetics or feedback systems CITATION Haw13 l 2057 (Hawkamah, 2013). Corporate Governance is defined as “The system by which companies are directed and controlled” CITATION Cad92 l 2057 (Cadbury, 1992). Dahya (1996), defines it as “the manner in which companies are controlled and in which those responsible for the direction of the company are accountable to the stakeholders of the company”. Another definition suggests that Corporate Governance pertains to providing confidence to financiers on their return on investments (ROI). “Corporate Governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment” CITATION Shl97 l 2057 (Vishny, 1997).
From the different definitions, it could be concluded that Corporate Governance consists of the mechanisms set in place to check and balance policies and procedures established to steer the decision-making process in corporations. The mechanisms are meant to ensure that corporations strictly work towards successful achievement of the shareholders’ best interests and achievement of sustainable long-term success. But is this truly the case? This paper aims to investigate the following statement: “Does Corporate Governance support long-term success, also known as sustainable financial performance, as suggested by various researchers and institutions?”
Before attempting to investigate the above statement, it is of paramount importance to understand the following:
* What is Corporate Governance?
* How is Corporate Governance measured?
* What does the term sustainable success for a company mean?
* How is the sustainable success of companies measured?
GLOBAL PERSPECTIVES ON Corporate Governance
One of the first codes introduced in the wake of corporate scandals was drawn up in
the United Kingdom, after several large companies went bankrupt in the late 1980s
and 1990s, including the Bank of Credit and Commerce International, Pollypeck
International and Maxwell Communication Corp CITATION The05 l 2057 (The International Bank for Reconstruction and Development, 2005). The latest update on the UK Corporate Governance Code was published by the Financial Reporting Council (FRC) in July 2018 and came into effect on 01 January 2019. The FRC emphasises the value of good Corporate Governance for the long-term sustainable success of companies. The code addresses five core subjects at the heart of Corporate Governance and sets principles and provisions for each of them.
Table SEQ Table * ARABIC 2 Summary of the UK Corporate Governance Code Principles CITATION Fin18 l 2057 (Financial Reporting Council, 2018)
Summary of Principles
Board leadership and company purpose
* An active and entrepreneurial board leads a successful company
* The board should establish the company’s purpose, values, and strategy, and satisfy itself that these and its culture are aligned.
* The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them.
* In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure active engagement with, a…