The board of directors as a governance mechanism in South Africa: an agency theory perspective.
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Date
2018
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Abstract
The changed legislative landscape of the 2008 Companies Act required a
rebalancing of the agency relationship between the board of directors and
shareholders given the more onerous statutory oversight and accountability
requirements. This study investigates the relationship between the board and firm
value of 84 companies on the SRI index between 2012 and 2014, separating the
governance role of the board into their corporate control and managerial labour
roles using uniquely constructed indexes. Fixed effects with generalised least
squares estimations were used to assess the relationship between the corporate
control and managerial labour of the board and various proxies for firm value. As
board level controls need time to filter through to firm value the study also
considered a negatively lagged relationship to firm value. The study expands on the
practice of constructing indexes in governance studies by constructing two control
indexes to measure quality assurance and company control indicators as well as the
control index (CI) representing the corporate control role of the board and the
managerial labour index (MLI) representing the managerial labour role of the
board. The results show that both the CI and MLI indexes are positively associated
to return on assets a performance measure controlled by the board but negatively
related to next year’s return on assets, suggesting a short-term focus of the board’s
governance role of a time-horizon problem. However, the CI and MLI indexes are
positively associated to enterprise value and next year’s enterprise value indicating
that the more dispersed shareholders in the market value the governance role the
board as an alternative to shareholder monitoring. The association between MLI
and Tobin’s Q and next year’s Tobin’s Q is small but negative. The latter can be
attributed to the increased statutory responsibility of shareholders regarding board
remuneration, and an upward pressure on director’s remuneration to compensate
board members for their increased liability risk. A more in-depth study on the root
cause of the changed association between return on assets and next year’s return on
assets is an area of future research.
Description
Masters Degree. University of KwaZulu-Natal, Durban.