The joint effect of board characteristics on financial performance: Empirical evidence from Egypt

Abstract

Purpose – This paper aims to investigate the joint effect of board characteristics on financial performance. Most of the existing literature implicitly assumes that the relationship between either board composition, or board leadership structure and financial performance is direct.

Design/methodology/approach – The generalized least squares method was performed as a panel data analysis on a sample of 40 Egyptian listed firms during the period from 2008 to 2010.

Findings – The results demonstrated that under board leadership structure that assigns the duties of the CEO and chairman to the same person, increasing the proportion of non-executive members to the total number of directors has a negative impact on firm financial performance.

Practical implications – First, corporate governance structures do not operate in a vacuum, and therefore, corporate governance mechanisms must be considered and assessed altogether. Second, failure to understand the underlying interdependency among corporate governance mechanisms may result in arguments that blame some corporate governance designs for poor financial performance. Third, there is no single board governance mechanism that can be considered ideal, but there are combinations of these mechanisms that are preferred.

Originality/value – The paper adds to the corporate governance literature by providing empirical evidence from the emerging market of Egypt. The evidence shows that the relationship between board characteristics and financial performance is not a monotonic relationship. Consequently, these findings imply that existing evidence explaining the relationship between board characteristics and financial performance needs to be interpreted with some caution.