Impact of Compliance with Principles on Board of Directors and Corporate Performance: Empirical Evidence from Sri Lankan Listed Companies

Abstract

Board of directors in corporate governance is conceptualized as the perceived ability of a firm to constrain and direct corporate power so that it efficiently creates economic value and equitably distributes economic wealth. Accordingly, this study examines the relationship between the level of compliance with the principles on corporate governance related to the board of directors and corporate performance of listed firms in Sri Lanka using secondary data related to 133 listed companies from 2009 to 2016. This study constructed Board Index related to dimensions (principles): Chairmanship, Nomination Committee, Audit Committee, Remuneration Committee, and Re-election of directors, Company Secretary, Role of the Board, Board Meetings and Board Independence. This study employs panel regression model to examine the relationship between the Board Index (BI) and their relationship with corporate performance and performed with Hausman test for random and fixed effects. The findings indicated that the compliance with these principles are positively related to the financial performance and negatively related with market performance. Thus, this study provides empirical support for the agency perspective in the context of compliance requirements of board of directors leading to higher corporate performance. Insights of this research are offered to listed firms by the compliance of corporate governance principles have the potential to improve company performance.