The Impact of Corporate Governance on Financial Performance of Companies inSouthern Africa

Abstract

Purpose – The aim of this study is to investigate the relationship between corporate governance andfinancial performance of companies, by looking at the magnitude to which publicly listed companiesacross Southern African countries have implemented corporate governance “best” practices. Design/methodology/approach – Corporate governance index was created by collecting bothcorporate governance related data and financial data from annual reports of companies from 2013- 2019. Panel data was used with a set of 504 company-year observations. The corporate governanceindex and sub-indexes were used as independent variables in order to test their effect on company’sfinancial performance measured by Return on Asset (ROA) and Return on Equity (ROE). The datawas analyzed using Panel data Ordinary Least Squared (POLS) regression and dynamic GMM. Findings – The findings show that companies in Southern African countries generally comply withthe recommended corporate governance “best” practices that are included in the index. The resultsfrom both the POLS and the dynamic GMM show that; the corporate governance index has a positiveand significant relationship with the companies’ financial performance measures (ROA and ROE).The results also shows that board committees’ sub-index, Shareholders right sub-index and Disclosuresub-index are positively and significantly related to financial performance as measured by ROA andROE. Discussion – Regulators and companies in Southern Africa should put more emphasis on issuesregarding Shareholders rights, Board committees and disclosure requirements.