Corporate governance in Gulf Cooperation Council (GCC) countries : ownership structure, executive compensation and firm performance

Alresheedi, Salman Duhaim Mutni

Business
July 2015

Thesis or dissertation


Rights
© 2015 Salman Duhaim Mutni Alresheedi. All rights reserved. No part of this publication may be reproduced without the written permission of the copyright holder.
Abstract

Gulf Cooperation Council (GCC) countries showed a remarkable economic growth in the past decade due to being a major oil exporter, attracting significant foreign investment, becoming a major global trading partner and integrating further to the global economy. These developments have resulted in the need to institute advanced corporate governance norms for GCC companies. However, corporate governance systems and practices in the GCC countries are of recent origin and, albeit the importance of corporate governance practices in transforming GCC economies, there is a dearth of academic research on corporate governance in GCC countries. Our motivation for this research is the increasing importance of GCC economies within the world economy and the lack of research on corporate governance mechanisms in these countries. We believe we make a significant contribution to the existing research by providing comprehensive empirical insights into different aspects of corporate governance practices and firm performance in the GCC countries. In particular, our focus is on how corporate performance is affected by ownership structure and executive compensation. We test these relationships using a uniquely constructed and hand collected data of 349 listed companies in Kuwait, Saudi Arabia, Oman, Qatar and United Arab Emirates for the years between 2006 and 2011.

We start by formulating a theoretical base for the study through a discussion on how major theories of corporate governance evolved over time and reviewing the state of empirical research in corporate governance in general as well as in the context of the GCC region. We find that the corporate governance practices and standards prevailing in the GCC countries are not comparable to those followed in other developed countries because of many challenges identified by previous research. We also find that there is a large scope for the implementation of globally comparable corporate governance practices in the GCC countries.

In our first empirical analysis, we investigate the impact of ownership structure on firm performance. The issue as to whether ownership structure matters for the performance of firms has been an important subject of debate in the corporate finance literature. Our objective here is to explore in more detail the factors that motivate particular types of ownership structure and the potential impact of ownership structure and firm performance in the Gulf region. We find that higher insider ownership leads to better performance, especially when insider owner is the Chairman. A larger ownership by institutional investors has a positive impact on firm performance. On the other hand, we find that GCC firms with high family ownership perform does not perform well.

In our second empirical analysis, we examine the key determinants of the executive compensation to top five executives in GCC firms. We find that larger firms and firms with potential future growth pay higher total compensation to their executives. Concentrated ownership structure leads to lower compensation levels while firms with high family ownership as well as external ownership tend to pay higher compensation. We also find that managerial as well as institutional ownership of companies tends to lead to higher salaries. Companies that have more growth potential seem to pay higher bonuses. We also find that the choice between behaviour versus outcome oriented compensation is mainly influenced by firm size, the presence of executive members on the board, and managerial ownership. Larger companies prefer to pay bonus as part of executive compensation. Companies that have higher number of executives or owned by managers are also tend to pay more compensation through bonuses.

In our third empirical analysis, we examine the relationship between executive compensation and firm performance. We find that higher total executive compensation leads to better firm performance. On the other hand, we do not find any significant relationship between the components of compensation (salary and bonus) and performance. We point out that specific GCC economic environment and features peculiar to this region has more impact on the firm performance rather than the executive compensation.

Overall, findings of our study is valuable in assisting key decision-makers, such as the shareholders or policy makers, in enhancing firm performance through diversifying their ownership structures and utilising the right policies in compensation of executives in GCC countries.

Publisher
Business School, The University of Hull
Supervisor
Kara, Alper; Ozkan, Aydin (Professor of finance)
Qualification level
Doctoral
Qualification name
PhD
Language
English
Extent
1 MB
Identifier
hull:16513
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