significant role in firm performance but the board meetings negatively impact on the financial
performance.
Good corporate governance does not only enhance the profitability but also increases firm performance.
By enhancing the overall performance of companies and increasing their access to outside capital, good
corporate governance contributes toward economic stability that reduces the vulnerability of the financial
crises. It reduces cost of capital and transaction cost. Corporate governance concerns with the relationship
among management, board of directors, controlling shareholders, monitoring shareholders and other
stakeholders (B.Latif, Shahid, Haq, Waqas, & Arahad, 2013).Poor corporate structure results indiscipline,
both on the part of management and workers. Poorly governed corporations not only pose a risk to
themselves, but they also cause barrier to others and could indeed pull down capital market. For instance,
the poor governance of a systematically important firm would pose a threat to the economy. Irrespective
of how sound macroeconomic policies are, if entities are not well governed, the macro-economic
objectives may not be attained (Ganiyu & Abiodun, 2012). Thus, corporate governance is important for
all types of business entities.
In context of Nepal, (Rawal, 2003) identified protection of shareholders rights, clarity in duties and
responsibilities of all stakeholders involved, disclosure and transparency, legal frameworks that
sufficiently address good governance mechanism are all important to ensure a healthy growth of financial
sector. Also, governance has been the topic of much recent academic work and policy discussion
(Khatiwada, 2002), (Rawal, 2003), (Kafle, 2004).
The purpose of this study is to investigate the impact of corporate governance in profitability of Nepalese
enterprise. The study includes both financial and non financial institutions of Nepal.
The remainder of this study is organized as follows: section two describes the samples, data and
methodology. Section three presents the empirical results and final section draws the conclusions and
discusses the implication of study findings.
Methodological aspects
The study is based on secondary sources of data which were gathered for 30 enterprises of Nepal. The
main sources of data were annual reports of the respective enterprises, NRB supervision report and
websites of the enterprises. The data were collected for profitability, board meeting, non executive
directors, board size, audit committee members and directors remuneration. Table 1 presents the list of
sample enterprise along with study period and number of observations.
Table1: List of enterprise along with study period and number of observations
S.No.
1
2
3
4
5
6
Study period
Observation
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
3
3
3
3
3
3
7
Security Board of Nepal
8
Neco Insurance Company Limited
9
Butwal Power Company Limited
10
Hydroelectricity Investment & Development Company
11
Chilime Hydropower Company Limited
12
Nepal Life Insurance Company Limited
13
Arun Valley Hdropower Development Company
14
Guras Life Insurance Company Limited
15
Sagarmatha Insurance Company Limited
16
Nepal Investment Bank
17
Bank of Kathmandu
18
Global IME Bank
19
Sunrise Bank
20
Nepal SBI Bank
21
Everest Bank
22
Machhapuchhera Bank
23
NMB Bank
24
NABIL Bank
25
Laxmi Bank
26
Agriculture Development Bank
27
Citizen Bank
28
Nepal standard and charter Bank
29
Nepal Bank Limited
30
Siddartha Bank
Total observations
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
2012/13 - 2014/15
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
90
H1: There is significantly positive association between board size and profitability.
Number of Board Meetings
It is assumed that regular board meetings have a positive impact on bank performance. If board meetings
are held frequently, more discussions will be held on problems and prospects of business and business can
be expected to run more efficiently. Based on it, the study develops the following hypotheses:
H2: There is significantly positive association between board meetings and profitability.
Board Independence
Empirical evidence suggests more active and independent directors make better monitors. As for the
relation between board independence and form performance, if outside directors are independent and have
professional ability, they could be more objective to make decisions and monitor managers. Weisbach
(1988) and Huson, Parrino, & Starks (2001) corroborate that the higher ratio of independent directors
accounts for boards, the better the firm performance of the banks. It also means that if the board contains
more of executive directors, who lacks professional ability and could not make objective decisions and
monitor managers. Based on it, the study develops the following hypotheses:
H3: There is significantly positive association between non executive directors and profitability.
Audit Committee
In literature, some authors reported negative correlation between independence of audit committee and
earning management (Klein, 1998). Some researcher found that audit committee has positive and
significant impact on performance of the firm (Klein, 1998). According to some researchers it was found
that cost of debt financing can be lowered if there is entirely independent audit committee (Anderson,
Mansi, & Reeb, 2004). In some researches it was found that audit committee has positive and significant
impact on profit margin and return on equity of the firm (Yasser, Entebang, & Mansor, 2011). Based on
it, the study develops the following hypotheses:
H4: There is significantly positive association between audit committee members and profitability.
Directors Remuneration
Director remuneration has become one of the prominent topics in contemporary corporate governance due
to its controversial nature (Kabir, 2008). Based on it, the study develops the following hypotheses:
H5: There is significantly positive association between directors remuneration and profitability.
3. Presentation and analysis of data
Descriptive statistics
The number of board size ranges from 4 to 11, leading to the average of 7.6 persons. Likewise, the
number of audit committee member ranges from 3 to 5 persons, the number of non executive directors
ranges from 1 to 4. The average audit committee has been observed to 3.34 persons while the average non
executive director is 1.76 persons. The number of board meeting in a year ranges from 7 to 67 times,
leading to the average of 22.05 times in a year. Similarly, the amount of directors remuneration ranges
from Rs. 134000 to Rs. 448000. The average directors remuneration is Rs.964920. And the average
profitability is observed to be Rs. 1.1678 billion.
Table 1: Descriptive Statistics for the selected variables
BS
ACM
BM
NED
DR
PAT
N
90
90
90
90
90
90
Minimum
4
3
7
1
134000
4510000
Maximum
11
5
67
4
4480000
15200000000
Mean
7.6
3.3444
22.0556
1.7667
964920
1167800000
Std. Deviation
1.53462
0.65619
9.75009
0.76511
735139
2738720000
Correlation analysis
Having indicated the descriptive analysis Pearson correlations analysis is computed and results are
presented in table 2. Board size (BS), number of board meeting in a year (BM), non executive director
(NED) and directors remuneration (DR) are positively related with profitability. This indicates that
increase in board meeting, non executive directors and directors remuneration leads to decrease the
profitability of the Nepalese enterprise. Audit committee member (ACM) is positively related with
profitability of Nepalese enterprise indicating that increase in member of audit committee leads to
increase the profitability.
Table 2: Computation of Pearsons correlation coefficients among the selected variables
BS
1
ACM
ACM
0.138
0.193
BM
.213*
0.044
0.008
0.944
NED
-0.071
0.507
0.028
0.796
.347**
0.001
DR
0.088
0.407
.386**
0
0.068
0.524
0.046
0.665
PAT
0.145
0.171
.540**
0
0.051
0.633
0.19
0.072
0.047
0.661
BS
BM
NED
DR
PAT
Model
Intercept
BS
ACM
BM
NED
DR
-8.05
2.596
-0.552
1.379
-6.374
2.255
2
-4.997***
6.024***
8.52
1.432
3
1.183
0.479
-3.568
6.812
4
-0.5
1.818*
9.993
174.581
5
2.081**
0.44
-7.213
1.286
2.213
6
-4.350***
0.794
5.843***
-7.332
1.159
2.217
9.321
7
-4.315***
0.695
5.820*** 0.359
-8.409
1.715
2.178
7.058
8
-4.810***
1.034
5.819***
2.057**
-8.916
1.806
2.497
7.195
9
-5.154
1.111***
6.298
2.139**
Note: * and ** shows that the levels of significance 1% and 5% respectively.
1
Adj. R2
SEE
0.01
2.724
1.902
0.284
2.318
36.283
0.009
2.7506
0.229
0.025
2.7039
3.307
0.009
2.7512
0.194
0.281
2.322
18.38
0.274
2.3341
12.174
0.300
2.2915
10.531
0.328
2.2458
9.67
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