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P { margin-bottom: 0.08in; }AbstractThisstudy considers a dataset from 2004 to 2015 that includes full boardmembers which is used to examine if these members are responsible forrisk in the company or not. Moreover, the analysis will be moreexhaustive analysing if the CEO is responsible for risk management orhow the CEO is involved in the risk management which is a key pointin the board governance and company performance analysis. As afinding we show the correlation between these variables and theimpact that they have in the companies. Also is highlighted theimportance of this type of analysis. KeywordsBoardgovernance, company performance, lineal model, generalized linearmodelIntroductionThisdocument will study the relationship between the board governance andcompany performance based on the study on some companies.

This studyaims not only to prove some methodological approach founded in theliterature review, but also provides a novel approach that can beadopted to evaluate this topic. It will be reported novel results andit will be show a set of recommendation that can be adopted tomonitor and evaluate the board governance and company performance. LiteraturereviewItis necessary to understand the vital role that the board’s members,executive and non-executive member of the companies have to play inorder to have a better performance.

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This performance is based on acompliance with laws and to adopt the right governance practices. Itis not just to establish the laws, the most important is to followthe practices and check if they are fulfilled or not. Otherwise,although the companies have many laws and guidelines the performancecan be insignificant. This is independent of size of the company, itcan by a large or small organisation, and the best performance can bethe same if the board’s member have the power and knowledge todecide and to take the right decisions. The key points according tothe literature review is that the board’s directors need to knowthe purpose of the company and the stakeholders that are relevant forthe company. In the main duties of the boards members also areincluded the power to develop strategies that can be adopted tosatisfy the main goals of the company as well as to ensure the 100%implementation of their strategies. In order to establish designguidelines and methodology it was required to make an exhaustiveliterature review that shows and highlight the importance of theboard governance, boards members, executive and non-executive memberto satisfy the company performance. To have an overview of thestructure of the boards member (executive directors and non-executivedirectors) the following table summarises the relevant informationabout them.

Executive members Full-time employees Have the functional business areas (major strategic importance_ Highest earners in the company The chief executive officer (CEO) and the chief financial officer are nearly always executive directors. Non-executive directors (NEDs) They are not employees They are independent in terms of business, financial and all that are related of the business of the company In their main duties are: develop strategic plans, check the performance of executive members, and resolution of conflict in the boards members. They support the executive members They need to show high ethical standards Withthis brief introduction about this topic then will be showed howboards member play a central role in the corporate governance ofcompanies and how to achieve the better performance, also ishighlighted some of the studies that are relevant in this topic whichis important to understand the relationship between corporategovernance and company performance. The board’s member shouldmonitor the fulfillment of the objectives, so these members have asignificant impact in the firm outcomes. If is implemented a goodgovernance practice (such as proactively manage risks, set strategicaims, etc), it will be sure the company success otherwise it will bereflected in less performance.

FamaE. & Jensen M. (1983) have studied the board’s structure andcomposition highlighting the performance of the superior financialand corporate governance.

Theirwork shows that the main duties in terms of hiring and firing of thetop managers are for non-executive directors. They performed theseactivities due to their knowledge in the company about the maincommittees such as audit and remuneration. In their research thepoint out that the external directors can consider as a monitor dueto their compliance in the directorial market. Core John E. et al,(1998) have implemented regression models to achieve the relationshipbetween CEO and variables such as broad and ownership structure, thenegative relationship was found between these parameters (less broadand ownership leads the CEOs to earn greater compensation). In thesubsequent of firm and stock return there was also found asignificant negative relationship between them and the compensationcomponent.

(Core John E. et al, 1998) This negative association alsoconfirmed in another study was done by (Dharmadas P et al, 2014)using hierarchical regression model. Shaukat A. & Trojanowski G,(2017) found strong positive relationship between broad governanceindex and the firm performance . this association was reported inanother study done on 73 Malaysian trading sectors, using multilevelregression models, also it was seen that firm performance isnegatively affected by the investment opportunities, leverage andfirm size (Zuriawati Z et al, 2014). There are many studies whichanalysed the relationship between internal and external board memberand firm performance, providing and highlighting different resultsthat can be seen in the following table: Brown and Caylor (2009) They show that there are not linking between the independence and firm performance Dahya and McConnell (2007) They highlight the link between the firm performance Thesuccess of the companies is not guaranteed by having a high or lownumber of boards member, the most important is to have an optimalcomposition and a plan to evaluate the performance continuously basedon the activities and having some committees along the company inorder to report everything in the company and to have the control tomake the right decisions in a right time. Inorder to improve board effectiveness is necessary to constructmechanism that allow maximise strengths and reduce weakness so thatthe organisation can have a better performance. If this evaluation ismade in a way that all the board members understand their role andalso if they have the required skills will allow that the memberswork to their maximum performance and capabilities.

In order toanalyse this performance is required the application of somestandards such as: 1) Regular audits of the processes that the boardmember developed in their work (internal and external audits), 2)Audits of the skills that the board members have, 3) Coachingsessions of executive and non-executive members to improve theirperformance (individual and groups). Thereare some research papers about this topic in which is exhaustiveexamined the evidence about the relationship between board’s memberand the importance of the company performance in which is highlightedthe importance of analysed the components of the companies such asboard size, executives and non-executive members, knowledge, how theboard members are monitored, strategies that are developed to improvethe company performance, etc. Chambers et al. (2013) summarised thesestudies in two graphs (Figure 1 and 2) in which are showed thecountry and the focus of research according board’s member andcompany performance. It can be clearly seen that United States hasthe higher number of studies in this topic, then a less percentage inanother countries such as United Kingdom, Italy and Spain. More ofthis studies were developed using regression analysis of existingdata sets.

However, there are not a guideline that shows a set ofrecommendations that can be followed to analyse the companyperformance. Figure 1 Figure 2 Thereare another works such as Nada Korac?Kakabadse,Andrew K. Kakabadse, Alexander Kouzmin, (2001) in which ishighlighted the necessity and the importance to evaluate the board’smember performance to facilitate the process of audits these memberand also to follow the company performance and the improvements thatcould be done by the members. HamutyineiHarvey Pamburai et al (2015) have used multiple regression model tocompare the relationship between board governance and companyperformance based on a dataset of 158 companies in 2012. Their mainresults can be summarised in the following table: 1) The companies which have smaller boards member have better performance in comparison with the companies that have a high number of boards members. 2) The companies with non-executive directors (NEDs) on the boards have a better performance in comparison with companies that have a lower number of NEDs 3) In order to have a better performance is required less board meetings 4) It seems that large companies have a better performance in comparison of smaller ones.

Table1: Relationship between board governance and company performanceHamutyinei Harvey Pamburai et al (2015)Someof these conclusions can be also found in another research paperssuch as Lipton and Lorsch (1992); and Jensen 1993 in which ishighlighted that when the boards members size is larger they can showcommunication problems so that less efficiency. Also, in thesestudies can be found a recommendation that the board size need to bearound 8 or 9 persons (no more than that). However, there are anotherstudies that show that this is not necessary true because it dependsof the firm size ( Boone et al, 2007 and Linck et al 2008). There areanother studies such as Adams and Mehran, 2005 and Beiner et al 2006that using instrumental variable techniques have shown that thecompany performance is not related of the board size. However,Wintoki (2007) highlighted that these variable techniques are not agood way to explore the performance of a company, he point out thatthe best model to evaluate these variables is to apply the GMMestimator. But, due to the complexity of the relationship of thesevariables another studies show procedures and important findings suchas that the performance of the company may differ depending of thetype of company and it is not related of the board size (Linck et al,2008; Coles et al (2008)). Objectivesof the StudyTheobjectives of this study can be described as follows:1)Analyse the relationship between the board governance and companyperformance based on the information available on some companies2)Find out the relationship between ownership structure and corporateperformance, and also the relationship between board composition andcorporate performance3)Find out how the CEO characteristic affect the corporate performance2)Provide some tools that can be applied to evaluate the relationshipprevious mentioned3)Develop a set of recommendations that can be applied in any type ofcompany which can be used to evaluate the board governance andcompany performance.

Empiricalissues, Model & Data Inthe studies presented in the literature review, data from severalfirms was studied and analysed, using hierarchical regression model,multilevel regression model, linear models and association betweenvariables was tested by statistical learning methods such as ttestfor testing the difference between two groups mean value, theassociation was checked using pearson correlation coefficient.According to the distribution of the data, parametric ornon-parametric statistical hypothesis test could be used to assessthe relation between the broad governance and company performance. SampledescriptionForthe statistical model it was applied regression models such as linealmodel (LM) and generalized linear model (GLM):g(E(Y))= ?0 +?1 x1 +?2 x2 +…+?n xnAgeneral linear model (also called GLM, hence create confusion), thereis no g function and f functions are scalar multiplication bynumbers. So, the model is of the form:Y= ?0 + ?1 x1 + ?2 x2 +…+ ?n xnThemain differences between these two methods is that for general linearmodels the distribution of residuals is assumed to be Gaussian. If itis not the case, it turns out that the relationship between Y and themodel parameters is no longer linear.

But if the distribution ofresiduals is one from the exponential family such as binomial,Poisson, negative binomial, or gamma distributions, there exists somefunctions of mean of Y, which has linear relationship with modelparameters. This function is called link function.Forthe evaluation of the hypothesis it can be employed methods such asMann-Whitney U test.

This methodology is used to compare differencesbetween two independent groups when the dependent variable is eitherordinal or continuous, but not normally distributed. In this methodis necessary to check if the data that will be analysed fulfil fourassumptions in order to get a valid result. Assumption # 1 The depend variable will be measured at the ordinal or continues level Assumption # 2 The independent variable should consist of two categorical, independent groups. Assumption # 3 The observations are independent which means that there is not a relationship between the observations in each group or between the groups themselves. Assumption # 4 A Mann-Whitney U test can be used when your two variables are not normally distributed.

Afterthat it will be applied the Pearson Product-Moment Correlation orPearson correlation coefficient which is a measure of the strength ofa linear association between two variables and is denoted by r.In the cases that is obtained a value of 0 that means that there isnot a relationship between the variables. Auseful technique to analyse the effect of different factors on aresponse is to perform an Analysis of Variance. It is important toknow which type of analysis can be done in order to determine themain factors that have a great effect in the data or how much of thevariability in the response variable is attributable to each factor.Thisstudy was developed with a dataset from 2004 to 2015 considering fullboard members, and evaluating if these members are responsible forrisk, risk committee, or not. And, is evaluated if the CEO isresponsible for risk management or how the CEO is involved in therisk management.

Table 1 shows an overview of the variables that wasused to fulfil the objectives of this study. More details of thisdata will be shown in the Annex. Variables The company name Average ROE during 2004-2015 Average Revenue from 2004-2015 in financial statement (It was used as a Control Variable) Average ROA during 2004-2015 Firm age- how many years since the firm established (It was used as a control variable) Average Board compensation during 2004-2015 Board size Average board owned percent of total share during 2004-2105 Percentage held by all BOARD officer blockholders(total share) During 2004-2015, how many years are CEO and Chairman of board different? (Duality) Table1: Variables that was employedAfterthat, it was analysed the sample in this way:Performanceas a function of Governance. ROAas a function of executive compensation, Percentage of Total SharesOwned, Duality and INDEPENDENCE.ROEas a function of executive compensation, Percentage of Total SharesOwned,Duality,and INDEPENDENCEPerformance:Threeperformance measures are typically considered: Tobin’s q, ROE, andROA. GOVERNANCE(COMPENSATION):Toaddress the usual agency-theory incentive argument, we look at thelevel of CEO compensation as a cause of higher firm performance.

Onemeasure used to in the literature to test for this influence is totalCEO compensation. If effective, higher compensation (an agency cost)will be associated with higher performance. Toaddress the theoretical longer-run perspective of stewards and familyfirms, we focused on the components of CEO compensation that rewardlonger-run performance. The measure to test for this forward-lookingcompensation effect is computed as: (Stock + Option) / Totalcompensation.Executivecompensation:TheSummary Compensation Table is the cornerstone of the SEC’s requireddisclosure on executive compensation. The Summary Compensation Tableprovides, in a single location, a comprehensive overview of acompany’s executive pay practices. It sets out the total compensationpaid to the company’s chief executive officer, chief financialofficer and three other most highly compensated executive officersfor the past three fiscal years.

Percentageof Total Shares Owned:It sets out the total company shares owned to the company’s chiefexecutive officer, chief financial officer and three other mosthighly compensated executive officers.Duality:is a measure that is set to 1 if the Board chairperson and CEO arethe same person. It is often used to identify firms presumed tofollow a stewardship governance approach. INDEPENDENCE:Boardindependence; # INDEPENDENT 1 if yes////Boardof Directors main purpose is to protect interests of owners of acompany.


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