Khalifa H, Abdulfattah Mohamed G (2018) The Effect of Board and Audit Committee Characteristics on the Financial Performance of United Arab Emirates Firms. Other Degree thesis, Victoria University.

Abstract

Corporate governance has received a great deal of attention because of financial scandals and corporate failures, such as with Enron, WorldCom, Global Crossing and Arthur Andersen, to name a few. Although previous studies have explored the relationship between corporate governance and financial performance, limited research exists on the effects of corporate governance on financial performance in the United Arab Emirates (UAE). The main purpose of this study was to study the effects of corporate governance—comprising board characteristics and audit committee characteristics—on the financial performance of listed companies in the UAE, covering the period from 2006 to 2015. In addition, this study undertook a comparison of the changes to corporate governance practices, based on the UAE corporate governance codes, for three different periods of time between 2006 to 2007, 2009 to 2010 and 2013 to 2014. The study sample included 47 listed firms in the UAE. This research adopted a multi-theoretic approach, incorporating agency theory and resource dependence theory, to develop a context-specific UAE corporate governance framework to guide the study. A multiple regression panel model was employed to examine the effects of corporate governance characteristics on firm financial performance. In addition, an ordinary least squaresmodel, along with analysis of variance testing, was employed to compare the effect of changes to financial performance arising from changes to the UAE corporate governance codes. The results demonstrated that board size and board meetings had a positive relationship with financial performance, while, from an overall perspective, there was no association between board composition (independent directors) and financial performance. The variables of board members’ education and board members’ experience had an insignificant relationship with firm financial performance. With respect to audit committee characteristics, there was no significant relationship between audit committee size and firm financial performance. However, there were positive relationships between both audit committee composition and audit committee members’ education and firm financial performance. Finally, the number of audit committee meetings had an overall positive association with financial performance. The two amendments made to the corporate governance code during the study period affected the audit and board committee characteristics, as intended by these amendments. Of these amendments, the second amendment had the most significant effect on board meetings, board members’ education, board members’ experience, audit committee meetings and audit committee members’ education. The potential policy implications arising from the study consist of the following: (i) rationalising audit committee size to help improve firm financial performance; (ii) firms to employ directors with a more diverse skill set to enhance board effectiveness; (iii) strengthening corporate governance reporting; (iv) specifying a maximum proportion of independent board members; (v) requiring all members of the audit committee to be independent to better monitor the performance of the board; and (vi) requiring audit committee members to have a recognised qualification in finance or significant expertise in accounting and financial affairs.

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