Corporate Governance : Joining the Dots between Institutional Reform, Organisational Change and Firm Performance

Purpose — Examine the link between boards and audit committees and firm performance in Kuwaiti listed firms in the context of recent and extensive corporate governance regulatory reform. Design/methodology/approach — Panel data regression analysis with fixed effects and clustered standard errors of firm performance for 62–95 listed industrial and services firms in Kuwait over the period 2010–2017. The dependent variables are the returns on assets and equity, the debt to equity ratio and leverage and Tobin’s Q and the independent variables comprise board of directors and audit committee characteristics, including size, the number of meetings, and the numbers of independent and outside board and expert committee members. Firm size, subsidiary status, and cash flow serve as control variables.Findings — Mixed results with respect to the characteristics of the board of directors. Board size and independent and outsider board members positively relate only to Tobin’s Q and insiders only to debt to equity. For audit committee characteristics, committee size, independence and expertise positively relate to the return on equity and committee size and expertise only to Tobin’s Q. Of the five performance measures considered, board and audit committee characteristics together best determine Tobin’s Q.Research limitations/implications — Data from a single country limits generalisability and control variables necessarily limited in a developing market context. Need for qualitative insights into corporate governance reform as a complement to conventional quantitative analysis. In combining accounting and market information, Tobin’s Q appears best able to recognise the performance benefits of good corporate governance in terms of internal organisational change.Practical implications — The recent corporate governance code and guidelines reforms exert a mixed impact on firm performance, with audit committees not boards apparently of most influence. But recent reforms implied most change to boards of directors. One suggestion is that nonmarket reform may have been unneeded given existing market pressure on listed firms and firms anticipating regulatory change.Social implications — Kuwait’s corporate governance reforms likely codified corporate governance practices already in place among many of its firms in pursuit of organisational legitimacy, and while invoking substantial change to audit committees, ultimately involved little change to firm performance, at least in the short term. Some firms may also have delisted in expectation of stronger corporate governance requirements. Regardless, these direct and indirect processes both improved the overall quality of listed firm corporate governance and performance in Kuwait.Originality/value — Seminal analysis of corporate governance reforms in Kuwait, which have rapidly progressed from no corporate governance code and guidelines to an initially voluntary and then compulsory regime. Only known analysis to incorporate both board of directors and audit committee characteristics. Reveals that studies of the corporate governance–firm performance relationship may face difficulty in model specification, and ultimately empirical significance, given the complexity of corporate governance codes and guidelines, leads in changing firm behaviour, and self-selection of firms into and out of regulated markets