Introduction
Corporate governance directly affects a firm’s financial position in competitive market environments. It is defined as “a system in which companies are directed and controlled” (Naimah and Hamidah, 2017, p. 2). It is, in essence, the sum of the influences on institutional processes that dictate the development, production, and sale of specific goods and services (Kyere and Ausloos, 2021). The structures and activities used to protect shareholder interests are a key component of financial success. Organizations are obligated to ensure that shareholders reap meaningful returns from their investments.
The manner in which the aforementioned objective is met is the subject of intense debate. Research studies on the subject offer divergent views and perspectives. This exercise aims to consolidate the existing literature and fill the research gap regarding the application of the aforementioned measures in the local setting. The evaluation of the impact of the aforementioned corporate governance tactics is therefore fundamental in exceedingly competitive market contexts such as those in Kazakhstan. The optimization of governance strategies, such as CEO duality, board composition, and audit committee autonomy, determines the effectiveness with which organizations achieve financial success.
Importance of Corporate Governance
Corporate governance strategies are designed to resolve any form of conflict of interest between management and shareholders, as well as between large and small shareholders, as a means of reducing agency costs. The agency theory posits that organizations with strong corporate governance procedures achieve higher performance due to lower agency costs and greater efficiency (Rani, Yadav, and Jain, 2013). A study conducted by Rani, Yadav, and Jain (2013) demonstrated that organizations with excellent corporate governance achieved positive short-term returns, improved financial performance, and higher valuations.
On the contrary, Rani, Yadav, and Jain (2013) found that organizations with poorer corporate governance scores recorded lower financial performance and reduced valuations. A similar study in Bangladesh, conducted by Islam, Siddique, and Hurira (2023), demonstrated that corporate governance was inextricably linked to profitability. Islam, Siddique, and Hurira (2023) note that the CEO’s status and the board of directors’ effectiveness directly affect the financial position of organizations in Bangladesh. It is evident that an institution’s management decision to address all aspects of corporate governance to guarantee meaningful financial returns warrants exploration in Kazakhstan’s business environment.
CEO Duties
The Chief Executive Officer and Chairman ought to work together to guide an organization. The concept of CEO duality, in which the chief executive also serves as the chairman, is also viewed as a strategy for financial success. This premise is supported by stewardship theory, which posits that directors are in a position to achieve organizational goals by maximizing utility rather than prioritizing self-serving interests (Kyere and Ausloos, 2021).
The aforementioned position is supported by Mahmood and Khan (2023), whose findings demonstrated that CEO duality increased a firm’s performance by 5.6 units. This view was further emphasized by Shahzad et al. (2015), who found that in 91% of the cases in which companies experienced financial success, the CEO served as the chairman and managing director. However, Mohan and Chandramohan (2018) demonstrate the need to separate the CEO and chairman roles, as their study found an inverse relationship between CEO duality and performance. CEO duality remains a contentious issue, given the varied findings on its overall impact on an organization’s financial position.
Role of Board Size
The board size is an important determinant of an organization’s financial success. The general view, as highlighted by Kyere and Ausloos (2021), is that firms with large boards often have effective governance mechanisms designed to improve overall performance. The argument is that large boards are likely to have individuals with specialized skills capable of propelling a company to success (Kyere and Ausloos, 2021). Authorities with an opposing view contend that a small board size is ideal because it enhances communication and decision-making.
However, the study by Kyere and Ausloos (2021) demonstrated a positive statistical association between large board size and financial performance. The significance of the board size was further highlighted by Shahzad et al. (2015), who demonstrated that large boards were associated with better financial performance. Mohan and Chandramohan (2018) note that if board size exceeds a certain threshold, inefficiencies outweigh the initial advantages. However, Naimah and Hamidah (2017)ascertained that board size did not have a significant impact on profitability. The aforementioned view highlights the variety of evidence regarding the impact of a board on a firm’s financial position.
Necessity of Independent Audit
The independence of audit committees is a noteworthy determinant of financial success. The highlighted department is responsible for assessing and monitoring the accounting procedures to facilitate the delivery of relevant and credible information to all stakeholders (Naimah and Hamidah, 2017). Audit committee independence is intended to boost the organization’s performance by enabling the provision of credible accounting information. According to Naimah and Hamidah (2017), previous studies show that audit committee independence is statistically significantly related to dividend yield.
PeiZhi and Ramzan (2020) note that well-organized audit committees have a positive impact on the company’s ability to comply with regulations. The aforementioned departments are closely tied to the size of insider shareholding, which directly impacts an organization’s financial performance. According to Kyere and Ausloos (2021), the highlighted effect is the direct result of reduced agency costs, seeing as managers who own shares are unlikely to invest in destructive or extremely risky ventures. Therefore, their focus will be on projects with a high likelihood of yielding good returns. Audit committees need the independence to operate in a highly competitive market environment.
Conclusion
Businesses are required to ensure that shareholders receive substantial returns on their investments. The manner in which the previously mentioned objective is achieved is the subject of much dispute. Divergent points of view and opinions are presented in research works on the topic, which is central to the effectiveness with which organizational activities are conducted. Governance strategies such as CEO duality, board size, and audit committee autonomy ought to be optimized to ensure that firms achieve their financial goals effectively.
It is, therefore, prudent to integrate the current literature and close the research gap on the deployment of the aforementioned strategies in the local context. As indicated in the preceding sections, there is a research gap regarding the impact of corporate governance processes on organizational performance in Pakistan. There is a need to identify the specific elements that impact performance in the Pakistani context and to determine the extent to which each corporate governance element affects financial performance.
Reference List
Islam, M.N., Siddique, F. and Hurira, A. (2023) ‘Corporate governance mechanisms and financial performance: evidence from the listed bank in Bangladesh’, International Journal of Management, Accounting and Economics, 10(9), pp. 2383–2126.
Kyere, M. and Ausloos, M. (2021) ‘Corporate governance and firms financial performance in the United Kingdom‘, International Journal of Finance & Economics, 26(2), pp. 1871–1885.
Mahmood, Z., Khan, K.M. and Mahmood, Z. (2023) ‘Impact of corporate governance on firm performance: a case of Pakistan stock exchange’, Liberal Arts and Social Sciences International Journal (LASSIJ), 7(1), pp. 24–38.
Mohan, A. and Chandramohan, S. (2018) ‘Impact of corporate governance on firm performance: empirical evidence from India’, IMPACT: International Journal of Research in Humanities, Arts and Literature, 6(2), pp. 209–218.
Naimah, Z. and Hamidah (2017) ‘The role of corporate governance in firm performance‘, SHS Web of Conferences, 34(13003), pp. 1–6.
PeiZhi, W. and Ramzan, M. (2020) ‘Do corporate governance structure and capital structure matter for the performance of the firms? An empirical testing with the contemplation of outliers’, PLOS ONE, 15(2), pp. 1–14.
Rani, N., Yadav, S.S. and Jain, P.K. (2013) ‘Impact of corporate governance score on abnormal returns of mergers and acquisitions‘, Procedia Economics and Finance, 5, pp. 637–646.
Shahzad, F. et al. (2015) ‘Corporate governance impact on firm performance: evidence from cement industry of Pakistan’, European Researcher, 90(1), pp. 37–47.