The Impact of Corporate Governance and Ownership Structure

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Table of Contents

Study Objectives
Significance of the Study
Research Problem and Research Gap
Kuwait’s Ownership
Research Gap
Study’s Aims
Contribution to Current Knowledge
References

In the past years, the world has been exposed to many of the global financial crises that have influenced the economies of countries. These crises led to the collapse of global stock exchanges, the fall of the stock market, and the bankruptcy of many companies. They happened due to the lack of transparency and reliability of management. Therefore, there was a need to issue many rules, systems and regulations to control financial markets in order to protect the economy.

One of these systems is the application of corporate governance principles and standards. Corporate governance has been defined as “the system by which companies are directed and controlled” (Committee on the Financial Aspects of Corporate Governance, 1992, p. 14). In addition, the Organization for Economic Co-operation and Development (OECD) defines corporate governance as a system that “involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders” (OECD, 2004, p. 11). It is also noted that “corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined” (OECD, 2004, p. 11). These definitions emphasize the importance of implementing specific principles to protect all stakeholders that deal with corporations as well as to ensure more transparency and supervision of organizational performances.

Currently, many investors are looking to invest in companies and banks that are characterised by the existence and application of good governance rules. These companies ensure a high level of disclosure and transparency of their business in addition to accuracy, control, and high quality of their financial statements. Through implementing the standards of corporate governance, investors will feel that their properties will become more protected. This production will lead to the flow of more domestic and foreign investments, which will develop and expand the economy.

Understanding the key role played by corporate governance rules in supporting the economy of the country, Kuwait adopted these norms in the banking sector in 2012. Moreover, in 2016, Capital Market Authority (CMA) implemented the code of corporate governesses for listed companies in Kuwait’s stock market. The main roles of both codes were to add transparency to attract more investments and to support the country’s growth.

Study Objectives

The primary goal of this thesis is to practically examine the effect and connection between such a notion as corporate governance and the performance of some banks in Kuwait’s stock market. An additional objective is to study the influence of the ownership structure on Kuwaiti Banks’ productivity. By questioning this crucial goal, the efficiency and effectiveness of banks performance will improve, which, in its turn, will lead to expanding the trust, reliability, and confidence in local and international investors in this sector. To facilitate the primary goal, the following specific objectives will be closely examined and applied.

The specific objectives of this thesis are:

To evaluate the connection between the board size and Kuwaiti banks performance.
To discover the influence of the audit committee on Kuwaiti banks performance
To examine the impact of CEO duality on Kuwaiti banks performance.
To evaluate board meeting frequency on Kuwaiti banks performance
To examine the influence of governmental concentration on Kuwaiti banks performance.
To evaluate the impact of institutional concentration on Kuwaiti banks performance.
To examine the influence of corporate governing principle and ownership structure on Kuwaiti banks performance.

Significance of the Study

Kuwait’s case study in the field of corporate governance applications is one of the most remarkable and interesting studies. Kuwait is considered to be one of the world’s developing countries, and the concept of corporate governance has recently been implemented in the economic and business fields. As a result, there are only a few relevant studies that focus on the influence of such a type of governance and ownership structure in Kuwait. The findings of this research will provide a major input for the effectiveness of applying the 2012 code of corporate governance in addition to the 2010 ownership structure standards.

Firstly, the findings of this research will help the Central bank of Kuwait (CBK), the regulatory board of banks, to recognise the impact of applying the recently implemented code of corporate governance. It will be beneficial to study if the code needs to be enhanced and improved in order to achieve further development and transparency in the considered sector. Secondly, the capital market authority (CMA) will understand the effect that the ownership structure has on the performance of the banking sphere, which will help to revise the ownership structure articles to develop the productivity and profitability of banks. Thirdly, the management and investors of banks will benefit from the results of this research by developing their performance to achieve their goals. Finally, the study will provide data and figures to other stakeholders such as international, local investors, and suppliers, which will help to take their decisions.

Research Problem and Research Gap

Many countries seek to protect their banking sector from financial collapse because this sphere is considered to be one of the main pillars of countries’ national economies since it effectively contributes to financial and economic transactions. In addition, the banking sector provides the deposit, financing, and investment services to the financial system, which heavily contributes to developing the economic system of the state. Therefore, many countries around the world seek to maintain the good performance of their banking sphere by preparing and implementing the principles of corporate governance in this vital sector. They take these measures to avoid collapse and problems resulting from poor financial performance and insufficiently successful governance system.

Corporate governance has become an outstanding concern in many developed and developing countries, including Kuwait. Many financial crises that stroke banks and such large corporations as Enron and WorldCom, Inc. led to a decline in confidence in the quality of their institutional performance. The financial crisis in 2008 was the evidence of the importance of applying these principles to avoid a collapse in major corporations.

Kuwait’s Ownership

The situation with Kuwait’s ownership deserves particular attention. As Al-Saidi and Al-Shammari (2015) note, it is heavily concentrated. The authors argue that large shareholders own more than 50% of the assets of companies, which is a very high indicator (Al-Saidi & Al-Shammari, 2015, p. 111). Also, in this study, there is a table with the corresponding figures for the period from 2005 to 2010 where the ownership structure for non-financial firms is reflected. According to the data of 2010, institutions (45%) and minority shareholders (44%) occupy the highest positions in this list (Al-Saidi & Al-Shammari, 2015, p. 111). This ratio is non-standard, but it is prevalent in Kuwait, and this order should be taken into account in order to effectively allocate funds and monitor cash flows.

Kuwait’s Stock Exchange (KSE) suffered from weak governance applications during the 2008 financial crisis, which led to significant losses for most banks and companies. For example, Gulf Bank lost around $1.2 billion due to losses in derivative contracts, investment portfolios, and loan portfolios (“Statement by the board of directors,” n.d.). For this reason, in 2012, the Central Bank issued and introduced the updated code of corporate governance which came into force in July 2013. The premise for this release was to develop the rules of governance in order to preserve the banking sector and reduce the risk of collapse. Also, in 2010, the State of Kuwait issued the Capital Market Authority Law to legalise the Kuwait stock market and apply the rules of good governance with a view to protecting the national economy and protecting the bourse’s investors (“Law no. 7 of 2010,” 2018). This measure was aimed at preventing further crises and maintaining the country’s financial system.

Research Gap

Kuwait is the country where the gap in the study of corporate governance features is obvious. According to Al-Saidi and Al-Shammari (2015), “most studies ignore ownership composition when they examine the relationship between firm performance and ownership concentration” (p. 109). Nevertheless, this sphere can be interesting for researchers for several reasons. Thus, for instance, the peculiarities of shareholders’ market are an important aspect of studying the topic under consideration since the Western and Asian norms differ in this direction. It explains the need to consider the financial market of Kuwait and other neighbouring countries separately so as not to draw analogies with the world systems. Furthermore, the difference in approaches requires comparing the ownership programs, which is rarely done by modern researchers and forms a gap in this area caused by insufficient attention to this issue.

Similar problems are observed in other Asian countries. Alhazaimeh, Palaniappan, and Almsafir (2014) focus on Jordan and also argue that there is a gap in the study of the local financial market and the specifics of its corporate governance. Due to the fact that the lack of information in the academic literature is noted, the conclusions of many researchers can hardly be called completely satisfactory for drawing up the full picture. In this case, the Western market, in particular, American, British, and others are often considered in research. It may be because the economies of these countries are stronger and more interesting from a practical point of view. Alhazaimeh et al. (2014) claim that initiatives that come from the financial institutions of these states are interesting to the world community, while the Asian market with developing countries has not yet gained such stability. Therefore, a research gap may be due to this factor.

Finally, the practical use of Kuwait’s corporate governance data also did not receive sufficient disclosure. Thus, for example, Al-Saidi and Al-Shammari (2015) cite the digital indicators of the country’s financial market and the share of shareholders. However, this information can hardly be used as a mechanism for analysing potential changes and innovations that could be made. The emphasis on the parameters of the governance does not allow making valuable links with the nature of the ownership and significantly slows down the study of this financial sphere. Accordingly, the more information about the intersection of the concepts under consideration will be presented, the higher the chances are that a research gap will be erased. Therefore, the study aims at finding the relationship between the concepts of governance and ownership and seeks to describe problem areas in detail.

Study’s Aims

The Capital Market Authority Law stipulates that companies should disclose their major shareholder’s control (5%) or more of company capital (“Law no. 7 of 2010,” 2018). This article aims to indicate the major shareholders to regulate disclosure procedure. This process will protect the financial market from conflict of interest transactions and categorise ownership structure in order to add more transparency to the business environment. Based on the mentioned information, due to the current implementation of both codes, this study seeks to demonstrate the impact of applying the rules of good governance and reasonable ownership structure on the productivity and efficiency of Kuwaiti banks.

Contribution to Current Knowledge

This study presents a number of distinctive additions to the existing literature related to the corporate governance, ownership structure, and performance in general and particularly to Kuwait’s situation especially. Previous studies focused on the influence of corporate governance and ownership structure in such developed countries as the US, the UK, Germany, and some others. The concept of corporate social responsibility (CSR) is often referred to as one of the factors of the new policy. Jizi, Salama, Dixon, and Stratling (2014) note that “board independence and board size positively affect CSR disclosure by large US banks” (p. 602). This approach to the organisation of work allows allocating funds efficiently and at the same time provides sufficient funding. Aguilera and Crespi-Cladera (2016) remark that the economies of such developed countries as the USA, the UK, Germany, Japan, and some others are characterised with market competitiveness, which, however, does not harm local financial institutions. These articles confirm the interest of researchers in the topic of corporate governance.

Nevertheless, few studies examine this relationship in such a developed country as Kuwait. Shibani and De Fuentes (2017) present the difference between the Western and Islamic banking systems. They claim that “the governance of Islamic banks is multi-level governance system where the religious elements play a considerable role in the governance structure” (Shibani & De Fuentes, 2017, p. 1018). This approach is also typical for Kuwait’s financial system, which is essential when considering the current management program.

Moreover, this research will add empirical evidence and facts for Gulf Co-Cooperation countries (GCC) and developing states in this filed. Abdallah and Ismail (2017) note that in the GCC countries, the relationship between corporate governance and ownership “reaches its highest level when the government or local corporations are the firm’s major shareholders” (p. 99). It proves that the two concepts under consideration have a significant influence on the financial sphere and determine the course of work. By investigating and analysing the impact and association of governance practices and ownership structure on the performance of banking sector, stakeholders will make decisions in an informed manner. Kuwait relies on the successful implementation of corporate governance standards to the banking sector so that it could maintain its competitiveness while allowing foreign banks to operate in the country. Bank performance may be enhanced depending on recommendations of this study.

References

Abdallah, A. A. N., & Ismail, A. K. (2017). Corporate governance practices, ownership structure, and corporate performance in the GCC countries. Journal of International Financial Markets, Institutions and Money, 46, 98-115.

Aguilera, R. V., & Crespi-Cladera, R. (2016). Global corporate governance: On the relevance of firms’ ownership structure. Journal of World Business, 51(1), 50-57.

Alhazaimeh, A., Palaniappan, R., & Almsafir, M. (2014). The impact of corporate governance and ownership structure on voluntary disclosure in annual reports among listed Jordanian companies. Procedia – Social and Behavioral Sciences, 129, 341-348.

Al-Saidi, M., & Al-Shammari, B. (2015). Ownership concentration, ownership composition and the performance of the Kuwaiti listed non-financial firms. International Journal of Commerce and Management, 25(1), 108-132.

Committee on the Financial Aspects of Corporate Governance (1992). The financial aspects of corporate governance. London, UK: Burgess Science Press.

Jizi, M. I., Salama, A., Dixon, R., & Stratling, R. (2014). Corporate governance and corporate social responsibility disclosure: Evidence from the US banking sector. Journal of Business Ethics, 125(4), 601-615.

Law no. 7 of 2010 regarding the establishment of the Capital markets Authority and regulating securities activities and its amendments. (2018). Web.

OECD. (2004). OECD principles of corporate governance. Paris, France: OECD Publications Service.

Shibani, O., & De Fuentes, C. (2017). Differences and similarities between corporate governance principles in Islamic banks and Conventional banks. Research in International Business and Finance, 42, 1005-1020.

Statement by the board of directors. (n.d.). Web.

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