sustainability

Article
Effect of Corporate Governance Structure on the
Financial Performance of Johannesburg Stock
Exchange (JSE)-Listed Mining Firms
Isaih Dzingai and Michael Bamidele Fakoya *
Africa Centre for Sustainability Accounting and Management (ACSAM), School of Accountancy,
University of Limpopo, Polokwane 0727, South Africa; isaih.dzingai@ul.ac.za
* Correspondence: michael.fakoya@ul.ac.za; Tel.: +27-152-683-312

Academic Editor: Yongrok Choi

Received: 6 May 2017; Accepted: 17 May 2017; Published: 8 June 2017

Abstract: There have been many corporate collapses and financial crises in recent years linked to a
lack of effective corporate governance. The South African King IV Code of Corporate Governance
recommends that corporate governing bodies should be comprised of an appropriate balance of
knowledge, diversity, and independence for discharging their duties objectively and more efficiently.
This study examines the effect of corporate governance structures on firm financial performance.
The secondary data of selected Johannesburg Stock Exchange (JSE), Socially Responsible Investment
(SRI) Index-listed mining firms’ sustainability reports, and integrated annual financial statements
are used. Using panel data analysis of the random effects model, we determined the relationship
between board independence and board size and the return on equity (ROE) for the period 2010–2015.
Results indicate a weak negative correlation between ROE and board size, and a weak, but positive,
correlation between ROE and board independence. Additionally, there is a positive, but weak,
correlation between ROE and sales growth, but a negative and weak relationship between ROE
and firm size. The study suggests that effective corporate governance through a small effective
board and monitoring by an independent board result in increased firm financial performance.
We recommend that South African companies see compliance with the recommendations of the King
IV Code on Corporate Governance not as a liability, but an ethical investment that may likely yield
financial benefit in the long-term. Although complying with corporate governance principles does
not necessarily translate into a significant economic benefit, firms should, however, continue to adopt
corporate governance for ethical reasons to meet stakeholder’s social and environmental needs for
sustainable development.

Keywords: corporate governance; firm financial performance; return on assets; return on equity;
Johannesburg Stock Exchange

1. Introduction
Modern corporate governance principles support an approach that considers and balances the
legitimate and reasonable needs, interests, and expectations of its stakeholders in an inclusive, ethical,
and sustainable manner as part of its decision-making. Corporate boards include not only those
that pursue wealth creation as the sole objective, but also ethically responsible individuals who
seek to improve social and environmental performances. Corporate governance has now become a
mainstream concern of discussion in corporate boardrooms, educational meetings, and policy circles
the world over [1]. Interest in corporate governance has increased since the turn of the century due to
corporate fraud, managerial misconduct, and negligence and massive loss of shareholder wealth [2].
There are many reasons for such an explosive interest in this subject, but the main reason is corporate

Sustainability 2017, 9, 867; doi:10.3390/su9060867 www.mdpi.com/journal/sustainability

Sustainability 2017, 9, 867 2 of 15

scandal [3]. Such explosive interest has resulted in heightened interest in the issue among researchers
and policy-makers due to a series of unexpected corporate failures that has reignited and increased
concerns regarding the effectiveness of board oversight [4].
Worldwide financial crises have prompted much government regulation, for example, the
Sarbanes-Oxley Act, and have led to the persistent need for enhanced governance [5]. Since the
formation of the King Committee in 1992 in South Africa with the objective of making recommendations
on effective implementation of corporate governance, there have been developments in the reviewing
of corporate governance standards. Due to a series of financial crises and corporate collapses in the
past decade, people have lost confidence in the business sector [1]. Corporate collapses, like Enron and
WorldCom, have led to the realisation of the effect and importance of a strong corporate governance
system on financial performance of companies [6–9]. The 2009 global economic recession called for
an increasing need to promote good corporate governance across the globe [10]. However, recent
corporate scandals and business failures have spurred a lively debate on whether firms are adequately
governed [11]. However, studies on corporate governance have focused more on developed countries,
and little has been done in developing countries [7,8].
In this study, we examine the influence of corporate governance structures on firm financial
performance in South Africa among selected mining companies listed on the Johannesburg Stock
Exchange (JSE). We chose the South African JSE because the King IV Code on Corporate Governance
has become a major listing requirement for firms. The major impetus for investigating corporate
governance of emerging economies is due to the significant growth in the number of companies
from emerging economies listing on international stock exchanges to attract more foreign direct
investments [8]. With the evidence of corporate scandals in South Africa, like Macmed, Leisurenet,
and Regal Treasury Bank, in 1999, 2002, and 2001, respectively, there is, therefore, a need to investigate
the impact that corporate governance has on firm financial performance. Since the mining industry
contributes significantly to the gross domestic product of South Africa, and as a major force for
advancing its economy, it is appropriate to analyse the effect of corporate governance on firm financial
performance in this important sector. The study is structured as follows: the methods section follows
the review of the literature, then results, discussion and, lastly, the conclusion.

2. Theoretical Framework: Agency Theory

Agency theory has become the cornerstone of corporate governance. It is the dominant theory to
explain corporate governance, as per Akbar et al. [12]. Agency theory explains the conflicts of interests
between the shareholders and managers, as explained by Ehikioya [8]. Due to conflicts of interest
between agents (managers) and principals (owners), agency costs may arise. Misalignment of interests
between managers and companies result in agency costs, and because of managers’ preference for
on-the-job perks, or by making self-entrenched decisions that may reduce shareholder’s value, as per
Ang et al. [13]. Due to this misalignment in objectives, agency costs are inevitably going to arise.
There is a need to align managers’ interests to the firm’s interest through a code of governance. Sarens
and Abdolmohammadi [14] explain that agency theory allows the agent to have more information
than principals and that information asymmetry adversely affects the principals’ ability to monitor if
agents are properly serving their interests. Whatever the objective of a company, separating ownership
and control may reduce agency problems, notably the asymmetry of information that arises between
the agents and principals [15]. Hence, there should be an approach whereby the actions of firm’s
managers are monitored to avoid agency problems. Connelly et al. [16] suggest that because there
is information asymmetry between agents and principals, there is the possibility that agents will act
opportunistically in their interest rather than those of the principals. Principals do not have access
to all of the information at the time agents make a decision; therefore, they are unable to determine
whether the agents’ actions are in the best interests of the firm. Information asymmetry is the heart
of agency theory [15] resulting in managers pursuing their personal interests, which might be at the
expense of the company.
Sustainability 2017, 9, 867 3 of 15

Related Literature
Corporate governance is essentially about effective leadership, which characterised by the ethical
values of responsibility, accountability, fairness, and transparency [15]. It is the system or process of
giving direction or control to companies [17]. A clear and functioning corporate governance system
helps the firm to attract investment, raise funds, and strengthen the foundation for firm performance [6].
However, investors are more likely to be attracted to companies that disclose favourable corporate
governance issues since they perceive well-governed firms to be less risky [7]. Hence, a company with a
sound corporate governance structure will have improved performance [18]. Kyereboah-Coleman [19]
found that outsized independent boards are likely to result in increased corporate value from a sample
of African countries.
There has been a growing interest in the subject of corporate governance amongst various scholars.
Although these studies have focused on the relationship between corporate governance and firm
performance, the results have not been convergent [20]. Studies have concentrated on the link between
corporate governance and firm financial performance with some showing a positive link, while others
indicate a negative link or no association. For example, a study that examined if good corporate
governance practices generate returns for firms on the Lima Stock Exchange (LSE) in Peru indicate that
investors positively value the adoption of good corporate governance practices by companies listed on
the LSE [21]. Their study concludes that an incentive existed for moneychangers in Peru, which added
companies with good corporate governance to their equity portfolios. Another study established that
the influence of good corporate governance on profitability varies across African countries, indicating
that good corporate governance is more important for the stability of firms’ profitability in countries
with higher levels of good corporate governance ratings than those with lower ratings [22]. As such,
good corporate governance can be an antidote to firm risk [23] and volatility of firm profits. Likewise,
a significant and positive relationship between corporate governance practices and Tobin’s Q exists in
a study on South African listed corporations [24]. Better governed South-African corporations tend to
be associated with higher financial performance as the study found that good corporate governance
practices reduce corporate failure, attract foreign direct investment and facilitate economic growth and
development in South Africa [24].
A study that examined publicly-listed firms across Sub-Saharan African countries that have
adopted good corporate governance practices, and its effect on firms’ financial performance and
market valuation, found companies complying with good corporate governance practices achieve
higher financial performance [25]. Corporate governance is the process by which a company’s business
and affairs are managed to enhance business prosperity and shareholder wealth [20]. In their study on
the link between corporate governance and firm performance, the results show a negative relationship
between corporate governance and firm performance using Tobin’s Q, price to book value, and
price earnings [20]. However, Vintila and Gherghina [20] found no correlation between corporate
governance and return on assets (ROA). A similar study in Sri Lanka examined the relationship
between corporate governance and firm performance among 100 listed firms on the Colombo Stock
Exchange for 2010–2012 financial years found a negative association between board size and firm
performance [26]. Separating the role of the Chief Executive Officer (CEO) and chairman has a
significant relationship with company performance, and having more non-executive directors on the
board has no association with firm performance among listed firms in Sri Lanka.
Corporate governance impacts on cash holdings of companies with different investment
policies comprising 1500 American Standard and Poor’s firms show that CEO ownership and board
independence affect cash holdings in listed firms differently [27]. However, there are indications
that large boards result in the loss of productivity due to increased difficulties in coordinating the
efforts of multiple individuals [27]. As such, Salvioni et al. [28] believe that sustainability can bring
real convergence between outsider and insider corporate governance systems. Another study on the
relationship between board committees and corporate performance that utilises publicly-available data
Sustainability 2017, 9, 867 4 of 15

of 346 firms of public firms in Hong Kong for the period 2001–2003 indicate that boards are perceived
to be efficient and productive if they are comprised of independent non-executive directors [29].
The control and effectiveness of independent non-executive directors in Malaysian publicly-listed
firms using a qualitative research design with interviews with board members of Malaysian-owned
public limited firms suggest that non-executive directors are crucial to safeguarding interests of smaller
investors, thereby contributing to the financial performance [30]. In establishing a relationship between
corporate governance and firm performance in Pakistan oil and gas firms for the period 2004–2010,
using panel data analysis and the ordinary least squares (OLS) method of estimation Dar et al. [31]
found a significant and positive relationship between ROE and board size. Their result suggests that
board size should be limited to a sizeable limit and that the CEO position rotates more often.
In emerging markets, in the link between corporate governance and firm valuation, it was
established that there is usually a positive and significant relationship between corporate governance
and valuation using regression analysis and that investors tend to invest in countries that practise good
corporate governance [32]. An indication that money spent on improving firms’ governance is worth
the cost. Similarly, a study examining the relationship between firm-level corporate governance and
firm value based on data from Governance Metrics International for 2300 companies from 22 developed
countries for the period 2003–2007, concludes that corporate governance is an opportunity rather than
an obligation and real cost factor [33].
However, some studies on the relationship between corporate governance and firm financial
performance have shown neutral and mixed results. For instance, the correlation between corporate
governance and firm financial performance was found by Li et al. to be mixed, prompting the
conclusion that an executive’s personality can affect both corporate governance structures and firm
performance [34]. Although many studies show positive and mixed results on the relationship
between corporate governance and firm financial performance, it concludes that there is no significant
relationship between corporate governance and firm financial performance [35]. Of the 125 banking
and finance firms listed on the Nepal Stock Exchange from which 59 firms were randomly selected
using the Disclosure Index to collect data about mechanisms, commitment, transparency and attributes
of corporate governance, results indicate a significant relationship between corporate governance and
firm size, leverage, and foreign ownership [36]. Similarly, corporate governance is a social rather than
a purely economic reality. Hence, the authors reiterate that due to the constant change and flow of
corporate governance, driven by impetus and external factors, corporate governance cannot be limited
to shareholder and stakeholder fixed mindsets, as this cannot fully capture the fluidity of corporate
governance in reality [36].
Moreover, the relationship between board structure and firm performance using the Generalised
Method of Moments (GMM) estimator in a panel of 6000 firms over a period of 1991–2003 suggests
that there is no causal relationship between board structure and current firm performance [37]. Despite
various studies showing positive and neutral results on the effects of corporate governance and firm
economic performance, there are also studies which show a negative relationship. A study on corporate
governance and firm value show that businesses that are less compliant with the provision of corporate
governance earn positive abnormal returns compared to companies that are more compliant [18].
The study found evidence that rules associated with board independence and internal controls do not
enhance the value of small businesses, rather, small companies suffer larger costs from implementing
corporate governance practices than large corporations. Likewise, increases in the Governance Index
level may result in economically-significant reductions in firm valuations with large negative abnormal
returns during the period 1990–2003 [38].
In considering the mixed results and incongruities surrounding the relationship between corporate
governance and firm performance from previous studies presented above, this study tests the effect
of corporate governance on firm financial performance particularly using the return on equity (ROE)
as a dependent variable. Although most studies on the link between corporate governance and
firm financial performance have focused on developed economies’ stock markets, such as America,
Sustainability 2017, 9, 867 5 of 15

Asia-Pacific, and Europe, few studies have focused on developing and emerging economies. A few
exceptions, such as [24,39], examined the link between corporate governance and firm performance in
emerging stock markets. The reason for the unavailability of literature on corporate governance in
emerging nations is due to the lack of evidence from African stock markets [39]. However, South Africa
has a mature business sector, deep equity culture, and strong regulatory and corporate governance
frameworks compared to those of developed and other established markets [24].

3. Materials and Methods

The study used ten JSE SRI-listed mining companies to determine a relationship between corporate
governance and firm financial performance. This study made use of mining firms listed on the JSE
SRI because they are required, as part of their listing, to adhere to and apply the King IV Code of
Corporate Governance in their business activities. The selected listed companies were consistent on
the JSE SRI Index which only entered into force in 2009 with publicly-available data from 2010–2015.
Data were analysed over six (6) years to enable the use of a balanced panel data analysis to determine
whether the observed relationship between corporate governance structure and firm performance
holds over time. The study employs corporate governance variables as the independent variables and
company financial performance indicators as the dependent variables. This study extracted data from
annual integrated and sustainability reports of selected companies. The annual integrated reports
were from the INET BFA website [40]. Financial indicators employed in this study were from the INET
BFA website.
Two corporate governance variables, namely, board size and board independence were used as
the independent variables. Regarding the board size, the King IV Code of Corporate Governance
recommends the governing body to be comprised of an appropriate mix of knowledge, skills, and
business and industry experience needed to govern the organisation. The King Code of Corporate
Governance also recommends that the governing body be comprised of an appropriate balance of
knowledge, diversity, and independence for it to discharge its duties objectively and efficiently. All
JSE-listed firms are required to comply and explain the application of the corporate governance
recommendations. For financial performance indicators, ROE was a proxy for the dependent variable.
Given the nature of the data for this study and to allow for time series and cross-sectional data
observations, the study employed a balanced panel data analysis. In line with previous studies, such
as [41] and [24], the study employs two-panel data techniques, which are the fixed-effects model and
the random effects model, to control for possible unobserved firm-level heterogeneities. The Hausman
test is used to identify if the individual effects are fixed or random, in cases where individual effects
exist. In determining a relationship between corporate governance and firm financial performance,
we formulated the hypothesis and regression equation below:

H1: Corporate governance structure influences return on equity (ROE) among selected JSE
SRI listed mining firms

Following previous studies, such as [27,42], the following regression equation is used:

ROEit = αi + + βBoardIndepit1 + βBSIZEit2 + βSIZEit3 + βSGrowthit4 (1)

where ROEit = return on equity, BoardIndepit1 = proportion of non-executive directors, BSIZEit2 = board
size, SIZEit3 = firm size, SGrowthit4 = sales growth, αi = intercept, and β = gradient/slope.
In testing the hypothesis above, corporate governance variables are the independent variables,
while ROE was a proxy for financial performance, which is the dependent variable. Firm size and
sales growth are control variables since different characteristics of a firm can affect both a company’s
financial performance and its corporate governance practices in various ways.
This study employed ROE as the financial performance indicator following previous studies,
such as [27,43]. This study made use of ROE as a measure of financial performance since investors are
Sustainability 2017, 9, 867 6 of 15

more interested in ROE and its changes, which provide an indication of the firm’s efficiency. Moreover,
stakeholders, such as investors, are more interested in the appreciation of the value of the company’s
equity. The use of board size and board independence as corporate governance variables in this study
follows the recommendations of the King IV Code of Corporate Governance that the board should be
comprised more of independent non-executive directors. This study also follows previous studies,
such as [30,31]. The use of board size as a corporate governance variable follows previous studies, such
as [44,45], which suggest larger boards with high levels of links to the external environment to improve
the firm’s access to various resources which, in turn, positively influence corporate performance.
Previous studies, such as [25,46], opine that large firms have more competitive power when compared
to smaller businesses and can profit more. This study employs firm size as a control variable since it
also affects the financial performance of a firm [47]. Following previous studies, such as [12,48], this
study also uses sales growth as a control variable, which also affects firm financial performance.

4. Results
The section presents and discusses the study findings. Table 1 shows the data for the
descriptive statistics.

Table 1. Summary of the descriptive statistics.

Variable Obs Mean Std. Dev. Min Max

Roe 60 11.76127 27.84148 −66.9384 107.636
Board size 60 11.38333 2.415288 6.00 17.00
Board indep 60 78.48033 9.231522 52.94 92.86
Sales growth 60 7.540982 18.70769 −49.5868 65.3452
Firm size 60 21,010.3 42,145.88 27.875 282,333
Source: Authors’ result of descriptive statistics from Stata.

The descriptive statistics allow the researcher to describe the many pieces of data with a few
indices. The panel data captured data for ten firms for the period 2010–2015 (which is six years) making
60 observations in total. Table 2 shows results of the independent t-test of the study variables.

Table 2. Two-sample t-test with equal variances (t-test sales growth = firm size, unpaired).

Variable Obs Mean Std. Err. Std. Dev. [95% Conf. Interval]
Salesgrowth 60 7.540982 2.415153 18.70769 2.708272 12.37369
Firmsize 60 21,010.3 5441.009 42,145.88 10,122.87 31,897.74
Combined 120 10,508.92 2875.007 31,494.13 4816.12 16,201.72
Diff −21,002.76 5441.01 −31,777.44 −10,228.08
Note: diff = mean(salesgrowth) − mean(firmsize); t = −3.8601; Ho: diff = 0; Ha: diff < 0; Ha: diff! = 0; Ha: diff > 0;
degrees of freedom = 118; Pr(T < t) = 0.0001; Pr(|T| > |t|) = 0.0002; Pr(T > t) = 0.9999; source: Authors’ result of
t-test from Stata.

Table 2 presents an independent t-test that was run on a sample of 120 combined obs of
independent variables (sales growth and firm size) to determine if they influence ROE differently.
Both IVs consisted of 60 randomly-assigned observations. The results showed that sales growth
had statistically significantly lower (7.54 ± 2.42) influence on ROE compared to firm size
(21,010.3 ± 5441.00). Hence, sales growth and firm size were not statistically significant with respect to
influencing ROE.
Table 3 shows the correlations between the dependent variable (ROE) and independent variables
(board size, board independence, sales growth, and firm size).
Sustainability 2017, 9, 867 7 of 15

Table 3. Correlations between individual variables.

Roe Board Size Board Indep Sales Growth Firm Size

Roe 1
Boardsize −0.07 1
Boardindep 0.15 0.0742 1
Salesgrowth 0.27 −0.0251 0.0018 1
Firmsize −0.1 0.4324 −0.3193 −0.0537 1
Source: Authors’ result of correlation between individual variables from Stata.

Tables 3 and 4 above show a weak negative correlation between ROE and board size of −0.07.
The results imply that adding more directors on the board will decrease the financial performance
of the firm, suggesting that a large board may not necessarily increase the value to the company.
Previous studies by Azeez [26], Bliss [49], and Chen [27] support our result. Our results suggest
that a small board is likely to lead to a higher performance because it avoids the problem of free
riding which occurs among large boards. Two critical issues likely to be affected by a large board
are the issues of responsibility and accountability. It may be difficult to have cohesiveness and easy
communication amongst a large group. In their studies, Azeez) [26] found that a small board leads
to higher performance due to close monitoring of the few directors on the board. Tables 3 and 4 also
show a weak positive correlation between ROE and board independence of 0.15. The supervisory
role provided by non-executive directors helps to safeguard shareholders’ wealth and ensures that
there is no conflict of interest between agents and principals (Annuar and Rashid) [30]. Non-executive
directors bring independence to the board, adding to the diversity of skills and expertise of the directors.
Moreover, non-executive directors alleviate agency problems and reduce managerial self-interests
due to the separation of ownership and control. The results of this study are consistent with studies,
such as Chen, which advocate that firms should include more independent directors on their boards
to ensure profitability and efficient operations. Independent non-executive directors should oversee
directors’ actions and protect the shareholders’ investments. Table 4 presents result of the mixed-effects
multi-level (ML) regression analysis.

Table 4. Mixed-effects multi-level regression.

Roe Coef. Std. Err. z p>z [95% Conf. Interval]

Boardsize −0.487473 1.618894 −0.3 0.763 −3.660447 2.685502
Boardindep 0.491414 0.4030682 1.22 0.223 −0.2985855 1.281413
Salesgrowth 0.40181 0.1828395 2.2 0.028 0.0434508 0.7601686
Firmsize 0.000017 0.0000978 0.17 0.862 −0.0001746 0.0002086
_cons −24.64363 32.92556 −0.8 0.454 −89.17654 39.88928
Random-Effects Parameters Estimate Std. Err. [95% Conf. Interval]
sd(Residual) 26.23195 2.394639 21.93446 31.3714
Note: Number of obs = 60; Wald chi2(4) = 6.46; Log likelihood = −281.155; Prob > chi2 = 0.1672. Roe: return on
equity; Std. Err.: standard error; z: z-score; p: p-value; source: Authors’ result of ML-Effects from Stata.

The results suggest that a small board is likely to lead to a higher performance because it avoids
the problem of free riding which occurs among large boards. Two critical issues affected by a large
board are the issues of responsibility and accountability. Having cohesiveness and easy communication
amongst a large group is difficult. In their studies, Chen [27] and Chen [45] found that a small board
leads to higher performance due to close monitoring of the few directors on the board. Where there
are close monitoring and excellent communication amongst the board members, there is more likely
to be higher productivity. To reap greater rewards in business is a matter of taking risks. Lam and
Lee [29] found that larger boards mean lower profitability because these boards of directors are more
conservative with less risk taking. With a large board that is more conservative with less risk taking, an
Sustainability 2017, 9, 867 8 of 15

entity will not be able to be financially successful and competitive in the market. Our analysis agrees
with studies, such as [32], which suggest that the size of the board must be restricted and monitored for
it to be efficient and to add value to the firm. A small board will be able to exercise sound judgments
and set a level of risk and tolerance for the company that will lead to an increase in firm success.
The results of this study suggest that effective monitoring by an independent and efficient board
motivates managers to perform in the interests of the shareholders, thereby improving the ROE.
However, the results are inconsistent with previous studies of Azeez [26] and Syriopoloulos and
Tsatsaronis [50], who suggest that there is no relationship between board independence and firm
performance. In his study, Azeez [26] found that increasing the number of non-executive directors does
not contribute to adding value to the firm. Additionally, Li et al. [34] opine that outside independent
directors do not contribute to corporate performance unless the board is gender-diversified.
To sum all of this up, the results support the hypothesis that corporate governance influences firm
financial performance.
Furthermore, there is a positive, but weak, correlation between ROE and sales growth of 0.27,
but a negative and low relationship between ROE and company size of −0.10. It is plausible that an
efficient use of the business’s assets (resources) will generate positive earnings that may be available to
equity holders. A negative, but insignificant, correlation exists between board size and firm size and
the dependent variable (ROE). There appears to be no multi-collinearity as this has been eliminated
using Stata. Although board independence and sales growth have a positive correlation, they are
insignificant with respect to influencing the dependent variable.
Given the above result, it is evident that board size and board independence are important factors
that affect firm performance. Monitoring of the board size is necessary for it to be effective. Board
independence is also crucial for the functioning and profitability of the company. Such monitoring
by independent directors is in line with the King IV recommendation for firms to include most
independent non-executive directors on the board for effective oversight and transparency.
The study used two models of panel data analysis, which are the fixed effects model and the
random effects model.
In testing the relationship between corporate governance variables and ROE, we ran the fixed
effects model and random effects models. Tables 5 and 6 below shows the panel data results using the
fixed effects model for return on assets (ROE).

Table 5. Input for the fixed effect model for ROE.

Fixed–Effects (within) Regression Number of Obs = 60

Group variable: firmcode Number of groups = 10
R2 : Obs per group
Within = 0.1927 min = 6
Between = 0.0151 avg = 6.0
Overall = 0.0249 max = 6
F (4,46) = 2.74
Corr (u_i, Xb) = −0.8009 prob > F = 0.0395
Note: number of Obs = 60: total number of observation (rows); Number of groups = 10: total number of groups
(entities); If this number is <0.05 then your model is ok. F (4.46) = 2.74, prob > F = 0.0395: this is a test (F) to see
whether all the coefficients in the model are different than zero; Corr (u_i, Xb) = −0.8009: the errors ui are correlated
with the regressors in the fixed effects model.
Sustainability 2017, 9, 867 9 of 15

Table 6. Fixed effects model for ROE.

ROE Coef. Std. Err. t p > |t| [95% Conf. Interval]

Board size −1.850736 2.379191 −0.78 0.441 −6.639798 2.938326
Board indep. 0.4987432 0.5422147 0.92 0.362 −0.5926785 1.590165
Sales growth 0.3601961 0.1323431 2.72 0.009 0.0938032 0.626589
Firm size −0.0012114 0.0007551 −1.60 0.115 −0.0027314 0.0003085
-cons 11.29327 41.67712 0.27 0.788 −72.59842 95.18496
Sigma_u 38.60104
Sigma_e 18.499271
Rho 0.81322388 (fraction of variance due to u_i)
Note: sigma_u = sd of residuals within groups ui; sigma_e = sd of residuals (overall error term) ei; Rho = 81.3% of
the variance is due to differences across panels; ‘rho’ is known as the intra-class correlation; t = t-values test the
hypothesis that each coefficient is different from 0. To reject this, the t-value has to be higher than 1.96 (for a 95%
confidence). If this is the case then you can say that the variable has a significant influence on your dependent
variable (y). The higher the t-value the higher the relevance of the variable; p > |t|=two-tail p-values test the
hypothesis that each coefficient is different from 0. To reject this, the p-value has to be lower than 0.05 (95%, you
could choose also an alpha of 0.10), if this is the case then you can say that the variable has a significant influence on
your dependent variable (y); Source: Authors’ result of fixed effects model for ROE from Stata.

4.1. Fixed Effect Model for ROE

From Table 6 above the relevant statistics to take note of are the coefficient of the regressors and
p-values. The significance level is set to 95% significant levels with p-values greater than 0.05 interpreted
to be insignificant. The above results in Table 6 show that there is a negative, but insignificant,
correlation between board size and ROE represented by a coefficient of −1.85 and p-value of 0.441.
The result shows that board size has a negative and insignificant influence on ROE.
The results also show that there is a positive, but insignificant, correlation between board
independence and ROE indicated by a coefficient of 0.50 and p-value of 0.36, an indication that
board independence has a positive and insignificant influence on ROE.
The results also show a positive correlation between sales growth and ROE indicated by a
coefficient of 0.36 and p-value of 0.009. Moreover, the results also show that there is a negative
correlation between firm size and ROA represented by a coefficient of −0.0012114 and p-value of 0.115.
Tables 7 and 8 present the results for the random effects model for ROE.

Table 7. Random effects model for ROE.

Random Effects GLS Regression Number of Obs = 60

Group variable: Firm Code Number of groups = 10
R2 : Obs per group:
Within = 0.1625 min = 6
Between = 0.0216 avg = 6.0
Overall = 0.638 max = 6
Wald Chi2 (4) = 9.25
Corr (u_i, X) = 0 (assumed) prob > Chi2 = 0.0551

Table 8. Random effects model for ROE.

ROE Coef. Std. Err. Z p > |z| [95% Conf. Interval]

Board size −1.118868 2.078363 −0.54 0.590 −5.192364 2.954628
Board indep 0.195052 0.4395305 0.44 0.657 −0.666412 1.056516
Sales growth 0.3675898 0.1300185 2.83 0.005 0.1127583 0.6224213
Firm size −0.0002423 0.0003319 −0.73 0.465 −0.0008927 0.0004081
_cons 10.4826 38.63017 0.27 0.786 −65.23114 86.19635
Sigma_u 27.226071
Sigma_e 18.499271
Rho 0.68414516 (fraction of variance due to u_i)
Source: Authors’ result of random effects model for ROE from Stata.
Sustainability 2017, 9, 867 10 of 15

From the above table, the vital statistics to take note of is the coefficient of the regressors and
p-values. The significant levels have been set to 95% significant levels with p-values greater than 0.05,
interpreted to be insignificant. The results show that there is a negative, but insignificant, correlation
between board size and ROE, demonstrated by a coefficient of −1.12 and p-value of 0.59. An indication
that, for any increase in the board size by one director, there is a decrease in ROE by 1.12%.
Results indicate a positive, but insignificant, correlation between board independence and ROE
demonstrated by a coefficient of 0.20 and p-value of 0.66. The result shows that, for any independent
non-executive director added to the board, there will be an increase of ROE by 0.195%.
The results indicate that there is a positive, but insignificant, correlation between sales growth
and ROE demonstrated by a coefficient of 0.37 and p-value of 0.005 and a negative, but insignificant,
correlation between firm size and ROE demonstrated by the coefficient of −0.0002423 and p-value
of 0.47.
In deciding between fixed effects or random effects models for ROE, we ran the Hausman test,
where the null hypothesis confirms that the preferred model is the random effects model, while the
alternative is the fixed effects model. Table 9 below shows the Hausman test results for ROE.

Table 9. Hausman test for ROE.

(b) (B) (b-B) Sqrt (diag (V_b-V_B))

Fixed Random Difference S.E.
Board size −1.850736 −1.118868 −0.731868 1.158015
Board indep 0.4987432 0.195052 −0.3036912 0.3175055
Sales growth 0.3601961 0.3675898 −0.0073937 0.0246962
Firm size −0.0012114 −0.0002423 −0.0009691 0.0006783
Note: b = consistent under Ho and Ha; obtained from xtreg; B = inconsistent under Ha, efficient under Ho; obtained
from xtreg; Source: Authors’ result of Hausman test for ROE from Stata. Test: Ho difference in coefficient not
systematic. Chi2 (3) = (b-B)’ [(V_b-V_B) ˆ (-1)] (b-B) = 2.38; Prob > = 0.6668.

4.2. Hausman Tests for ROE

The results below are the results for the Hausman test for ROE.
The above results from the Hausman test run emphasise the use of the random effects model
since prob > Chi2 = 0.67 is greater than 0.05. Therefore, for this study, the results from the
random-effects model are used to establish the correlation between the dependent variable (ROE) and
the independent variables.
The following section discusses the findings.

5. Discussion
The descriptive statistics suggest that JSE SRI-listed mining firms are moving towards practising
good corporate governance, as shown by the majority (50%+) of independent non-executive
directors on the board. Having a majority of independent board members is in line with King
IV recommendations for firms to include a larger number of independent non-executive directors
for independence on the board. These results also are consistent with Chen [27] who found that Sri
Lankan-listed firms are also moving towards practising good corporate governance mechanisms by
incorporating a higher proportion of non-executive directors on corporate boards. Sri Lanka is also an
emerging economy, like South Africa, which seeks to promote sound governance among listed firms,
improve investor confidence, and foster economic development. Sound governance is to ensure that
corporate boards are seen to be acting independently in its conduct and operations.
The descriptive statistics also suggest that JSE-listed firms are incorporating a good number
(50%+) of non-executive directors on corporate boards as shown by the mean. Having independent
majority members on corporate boards is also consistent with the King IV recommendations for the
Sustainability 2017, 9, 867 11 of 15

boards to have sufficient and qualified members to serve on corporate boards. A board with diversity
provides collective skills, knowledge, and expertise, which are necessary for company financial success.
The results from the Hausman test suggest the use of the random effects model in testing both
hypotheses for this study.

5.1. Random Effects Model: Board Size and Firm Performance (ROE)
The results from the random effects model suggest that there is a negative relationship between
board size and firm performance when measured by ROE, as indicated by a coefficient of −1.118868.
The results imply that adding more directors to the board will decrease the financial performance of
the firm, suggesting that a large board may not necessarily increase the value to the company. This is
supported by previous studies by [27,29,49,51]. Boubaker et al. found that large boards result in a loss
of productivity and losses are mainly due to increased difficulties in coordinating the efforts of multiple
individuals, which also results in slower decision-making and more free riding [52]. The results of this
study by Boubaker et al. also indicate that, for a firm to be profitable, a small, effective board which is
easy to manage and, thus, enhancing quick decision-making, may just be enough [52].
It is the duty of the board to maximise shareholder wealth. Therefore, optimal board size is
essential to the financial success of a firm. The King IV Code of Corporate Governance emphasises
that good governance hinges on ethical culture, effective control, good performance, and legitimacy.
Our results are inconsistent with previous studies, such as that of Bebchuk et al. [38], who suggest that
there is a positive relationship between board size and firm performance. Their study suggests that
the knowledge and expertise of a large board can be utilised for strategic decision-making, thereby
enhancing business value. Large boards have been argued to increase information sharing which leads
to more strategic ideas. However, our results suggest that the benefits caused by a large board outweigh
the many problems caused by having too many directors on the board. Succinctly, our results support
the hypothesis that corporate governance influences firm performance, as measured by ROE, implying
that investors are willing to invest in companies which comply with sound corporate governance
principles to increase the value of the enterprise. Our results suggest that investors are likely to be
attracted to firms which are listed on the JSE since they comply with the King IV Code of Corporate
Governance principles.

5.2. Random Effects Model: Board Independence and Firm Performance

However, results of the random-effects model suggest a positive relationship between board
independence and firm performance, as measured by ROE, an implication that the more independent
non-executive directors added to the board, the more profitable the firm becomes. Per King IV,
the board of directors should consist mostly of independent non-executive directors to ensure
transparency and monitoring by non-executive directors for efficiency in running the business of
the firm, thereby reducing agency costs. The results are consistent with previous studies, such as
Byrd et al. [53] and Lam and Lee [29], who also found that there is a positive relationship between board
independence and firm performance. In support, Annuar and Abdul Rashid [30] found that boards
are perceived as efficient and productive if they are comprised of more independent non-executive
directors. A suggestion that a board which comprises mostly of independent directors increases the
likelihood that decisions made will likely be in the best interests of the firm. Independence of the board
and close monitoring by the non-executive directors may prevent management from agency problems,
like abusing the use of the company’s funds on paying out excessive benefits, such as generous salaries,
pension entitlements, bonuses, and share options to executive directors.
The monitoring role provided by non-executive directors helps to safeguard shareholders’
wealth and ensures that there is no conflict of interest between agents and principals, as opined
by Dar et al. [31]. An implication that non-executive directors bring independence onto the board add
to the diversity of skills and expertise of the directors. Moreover, non-executive directors alleviate
agency problems and reduce managerial self-interests due to the separation of ownership and control.
Sustainability 2017, 9, 867 12 of 15

In this regard, our results are consistent with studies, such as Doğan [46], who advocate that firms
should include more independent non-executive directors on their boards to ensure profitability and
efficient operations. As such, we believe that by having more independent non-executive directors
on corporate boards to oversee directors’ actions will likely protect shareholders from directors who
pursue self-interest over firm objectives.
Our results imply that by having more independent non-executive directors on corporate boards
will ensure effective monitoring of executive directors’ actions and this will likely motivate managers
to perform in the interests of the shareholders, thereby improving ROE. However, the results are
inconsistent with previous studies of Chen [27] and Syriopoulos and Tsatsaronis [50], which suggest
that there is no relationship between board independence and firm performance. In his study, Chen [27]
found that increasing the number of non-executive directors does not contribute to adding value to
the company. Additionally, Hsu and Wu [4] conclude that independent directors do not contribute to
corporate performance unless the board is gender-diversified.
To sum up, our results support the hypothesis that corporate governance influences firm financial
performance. The following section below is the summary of this study.

6. Conclusions
This study examines the effect of the corporate governance structure on firm financial performance.
Given the above evidence, one can say that board size and board independence are important factors
that affect firm performance. The size of the board matters and the firm should monitor it to be
effective. Board independence is also crucial for the functioning and profitability of the company
which aligns with the King IV recommendation for firms to include more independent non-executive
directors on the board for efficient monitoring and transparency. Results indicate that mining firms in
South Africa are complying with the requirements of the King IV code of governance.
This study addresses some of the key recommendations of the King IV Code of Corporate
Governance on board size and board independence regarding profitability. The descriptive statistics
suggest that JSE SRI-listed mining firms are moving towards practising good corporate governance
as shown by the majority of independent non-executive directors on the boards. The results also
indicate that JSE-listed firms are incorporating a good number of independent non-executive directors
on corporate boards, as shown by the statistical analysis. The result is consistent with King IV
recommendations for firms to have a diverse corporate board consisting of more independent
non-executive directors. There are indications that mining companies advocate and support sound
governance through policies and strategies to achieve and maintain international corporate governance
standards to implement sound ethical practices. A sign that mining firms in South Africa are working
towards long-term growth and sustainability by adapting to changing demand trends, as recommended
by the King IV Corporate Governance Code. Results from the random effects model suggest that
there is a negative relationship between the board size and firm performance, as measured by ROE,
implying that adding more directors to the board may decrease the financial results of the company,
an indication that having a large board does not increase the value to the enterprise.
However, the results from the random-effects model suggest that there is a positive relationship
between board independence and firm performance, as measured by ROE. An implication is that the
more independent non-executive directors there are on the board, the more profitable the firm is likely
to become. Per King IV, the board of directors should consist mostly of independent non-executive
directors with the likelihood that its decisions will be in the best interests of the firm. Overall, our
results indicate that by complying with the recommendations of the King IV Code on Corporate
Governance to have more independent non-executive directors on their boards, mining firms tend
to have a higher financial performance. As such, compliance with the corporate governance codes is
crucial for corporate success. Compliance with sound corporate governance principles will not just
benefit mining firms, but the economy as a whole. Such compliance is premised on the assertion that
the South African mining sector is crucial for to its economic growth, development, and transformation.
Sustainability 2017, 9, 867 13 of 15

Not only will sound corporate governance compliance reduce mining firms’ failures, but also improve
foreign direct investment and employment.
Despite this, compliance with corporate governance principles does not necessarily translate into a
significant economic benefit, and firms should, however, continue to comply with the King IV code for
corporate governance for ethical reasons to meet stakeholder’s social and environmental information
needs. This study is one of the few studies on the relationship between corporate governance and
firm financial performance in a developing country context, specifically in the South Africa mining
industry, which is a key sector of its economy. However, the non-availability of data beyond 2010 may
have limited the depth of this study. We suggest that complying with the recommendations of the
King IV Code on good corporate governance by firms in South Africa should not be seen as a liability,
but an ethical investment that may likely yield financial benefit in the long-term. Complying with
good corporate governance should be included in strategy formulation by firms across industries as it
has long-term results. Further studies are encouraged as more data become available on the JSE about
firms’ compliance with the King IV Code on Corporate Governance.

Acknowledgments: We wish to express our gratitude to the African Centre for Sustainability Accounting and
Management (ACSAM), School of Accountancy, University of Limpopo for making funds available to cover the
costs to publish our paper in open access.
Author Contributions: Isaih Dzingai is a graduate student under the supervision of Michael Bamidele Fakoya.
This manuscript is the output from the dissertation that both authors have worked on.
Conflicts of Interest: The authors declare no conflict of interest. The founding sponsors had no role in the design
of the study; in the collection, analyses, or interpretation of data; in the writing of the manuscript, and in the
decision to publish the results.

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