Corporate governance, compliance and performance nexus : A thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy at Lincoln University

Abstract

Economic globalization has encouraged debate on the differences and similarities among national corporate governance (CG) systems. However, in today’s world, it is pivotal to study how (and to what extent) CG is shaped by institutional environments both at national and firm levels. Consequently, this study aims to explore the key institutional determinants of good CG practices in Pakistan. The study identifies the barriers and drivers of good CG practices in the distinct context of Pakistan. At the end, the study investigates the nexus between CG compliance (CGI) scores and firm performance among Pakistan Stock Exchange (PSX) listed firms. Drawing substantially on the lenses of agency and institutional theories, this study conceptualizes CG practices and structures as institutionally resolute and directed. This study adopts a mixed research (i.e. qualitative and quantitative) methodology and finds that CG models, particularly in emerging countries, are irrelevant if they are not institutionally grounded and explicated. Specifically, this study explores the extent to which certain underlying formal and informal institutional determinants, such as the political, legal and culture, values, voting, shareholders’ awareness, auditing and board, play a determining role in CG system in Pakistan. Using exploratory factor analysis (EFA), this study identified five major barriers, i.e. firm level barriers (lack of auditor independence, board ineffectiveness, lack of shareholders’ awareness), external barriers (political and governmental interference in business activities, weak legal control and enforcement, high levels of corruption), social barriers (strong social ties among different stakeholders, interpersonal connections among boards of directors (BoDs), education and training barriers (lack of professional education and training among stakeholders) and legal barriers (fewer voting rights) which restrain good CG practices in Pakistan. In addition, this study identified four major drivers i.e. internal drivers (auditors’ independence, board heterogeneity, board independence, initiation of training and educational programs to raise awareness), regulatory drivers (enhancing and empowering professional regulatory bodies), motivational drivers (encouraging participation in events and conferences related to corporate governance) and collaborative drivers (enhancing partnership with international bodies) which can promote good CG practices in Pakistan. The findings of multiple hierarchical regression analysis reveal that the CGI score has a significant positive relationship with both return on assets (ROA) and return on equity (ROE). Hence, CG practices can increase firm performance of PSX listed firms. At the end, drawing on the findings of this study, a model of good CG practices in Pakistan is proposed which not only identifies institutional determinants but also identifies the most influential barriers hindering the implementation of CG practices and reforms in Pakistan. Most importantly, drivers that can promote CG practices and ultimately firm performance are also highlighted in the proposed model. This study emphasizes the necessity to revisit the foundation of institutional and agency theories in the environment of developing countries. It also suggests the reassessment of the implication of executives in agency theory literature concerning developing countries, relying on the general lack of knowledge by shareholders with respect to benefits of CG practices and their rights.