The board of directors as a governance mechanism in South Africa: an agency theory perspective.

Abstract

The changed legislative landscape of the 2008 Companies Act required a rebalancing of the agency relationship between the board of directors and shareholders given the more onerous statutory oversight and accountability requirements. This study investigates the relationship between the board and firm value of 84 companies on the SRI index between 2012 and 2014, separating the governance role of the board into their corporate control and managerial labour roles using uniquely constructed indexes. Fixed effects with generalised least squares estimations were used to assess the relationship between the corporate control and managerial labour of the board and various proxies for firm value. As board level controls need time to filter through to firm value the study also considered a negatively lagged relationship to firm value. The study expands on the practice of constructing indexes in governance studies by constructing two control indexes to measure quality assurance and company control indicators as well as the control index (CI) representing the corporate control role of the board and the managerial labour index (MLI) representing the managerial labour role of the board. The results show that both the CI and MLI indexes are positively associated to return on assets a performance measure controlled by the board but negatively related to next year’s return on assets, suggesting a short-term focus of the board’s governance role of a time-horizon problem. However, the CI and MLI indexes are positively associated to enterprise value and next year’s enterprise value indicating that the more dispersed shareholders in the market value the governance role the board as an alternative to shareholder monitoring. The association between MLI and Tobin’s Q and next year’s Tobin’s Q is small but negative. The latter can be attributed to the increased statutory responsibility of shareholders regarding board remuneration, and an upward pressure on director’s remuneration to compensate board members for their increased liability risk. A more in-depth study on the root cause of the changed association between return on assets and next year’s return on assets is an area of future research.