1.
0 Introduction
The chapter is going to present the background of the study, statement of the problem, research
objectives, research questions, the significance of the study, delimitation, limitations and research
assumptions.
1.1 Background of the study
The connection between corporate governance and organisational financial performance lies in the
multi-dimensional nature of good governance. Narrowly conceived, corporate governance involves
ensuring compliance with legal obligations, and protection of shareholders against fraud or
organisational failure. Without governance mechanisms in place – in particular, a board to direct and
control - managers might ‘run away with the profits’ (Samra 2016:75).
The relationship between board composition and financial performance has long been the subject of
an important debate in the corporate finance literature (Du Plessis et al. 2018). According to Shungu,
Ngirande and Ndlovu (2014) the past few years have seen an explosion in publicity about corporate
misbehavior. Every month, it seems, brings a new revelation of large-scale top management
corruption and failure of board oversight in either the corporate or not-for-profit arena. This has led
scholars and policy makers to believe that boards of directors’ attributes may have an influence in
strategic decision making and subsequently firm performance. Some scholars have argued that
different board of directors’ attributes impact organizational performance differently owing to their
different orientations (Jacoby, 2018).
Some of board of director attributes includes the ‘‘visible’’ and ‘‘less visible’’ types of diversity. The
visible diversity includes members’ age, chief executive officer duality and gender while less visible
diversity relates to underlying attributes of education, technical capabilities, skills, knowledge,
occupational background and range of industry experience (Siwadi, Miruka and Ogutu, 2015). Studies
on the determinants of board size and its composition have been relatively scanty, theoretical in
nature, and inconclusive.
Jacoby (2018) noted that the board of directors, as internal mechanism of governance, has a major
function on the limitation of managerial discretion and thereafter to manage the agency relationship
between shareholders and managers and stakeholders of company. Improvements in the management
and administration of many organizations are thus essential if the global efforts to halt corruption and
other types of irregularity are to achieve desired results. An appropriate legal framework is necessary
to define the roles of governing bodies, and chief executives and the related framework of authorities
and responsibilities of each level of corporate governance.
Board composition refers to the number and the type of board members, board demographics, board
structure, board education and evaluation, and board leadership (Maune, 2017). Board composition is
one of the important factors affecting firm financial performance. According to Dignam and Galanis
(2016), a board fulfills three major tasks; it links the organization to its environment and secures
critical resources, the board also has an internal governance and monitoring task and lastly it can
discipline or remove ineffective management teams. This study particularly focuses on various aspects
of board composition namely gender and age as part of board demographics; board leadership and
board independence as part of board structure. Samra (2016) established that an effective board
depends on both the diverse collection of skills and competencies that individual director brings with
them and the training that the board provides to help directors master board issues and develop the
skills needed to participate effectively. Effective governance also depends on an effective selection
process for new directors, which in turn rests on a clear definition of what the duties of a director are
(Organization for Economic Co-operation and Development, (OECD 2015).
According to the National Code on Corporate Governance Zimbabwe (NCCGZ 2010) as well as other
international codes like the Kings Report and Basel Committee, the composition of the board has a
great bearing on corporate governance. The board should comprise a balance of power with a majority
of non-executive directors (NEDs) appointed in terms of appropriate legislation governing
the sector. Each board should have the right mix of skills as determined by the knowledge required for
conducting the business of the organisation. Siwadi et al (2015) highlighted that often in the
Zimbabwean corporate world, it is common to find a board ‘‘full’’ of lawyers or one ‘‘stuffed’’ with
accountants. Such ‘‘elitism’’ and ‘‘exclusivity’’ has negatively affected many organisations. The size,
diversity and demographics should be such that it brings effectiveness in the way the board discharges
its mandate (Maune, 2017). Often, some appointments to boards are only a fulfilment of affirmative
interests or a window-dressing gimmick for ‘‘political correctness’’ and not motivated by a real desire
for effectiveness (Dlamini, Tapera and Chivasa, 2017).
The board should also have executive directors, one who should always be the Chief Executive
Officer, and ideally the other one responsible for finance. Being full-time employees of the company,
they are more informed about company processes, activities, functions and events than part-time
NEDs. They act as a filter of information relevant to board decision making. Under normal
circumstances, a NED (independent or not) should not serve more than five years in the board and a
third of non-executive directors should rotate every year. This is meant to improve the quality of
debates and decision making. If NEDs overstay, their independence may become compromised
(Owusu, 2020).
As the board of directors is responsible for approving crucial financial and strategic operational
decisions which are imperative to the company’s sustainability and performance (Scholtz and Kieviet,
2018) it is important to understand which attributes concerning the composition of the board of
directors can ensure the fulfilment of the required duties in a manner that results in the sustained and
improved performance of the company. Knowledge of these attributes can assist businesses in
considering which individuals to nominate for board membership, as well as shareholders when it
comes to voting in board members.
Agrawal and Cooper (2018) articulated that many institutional investors perceive corporate
governance as a tool for extracting value for shareholders from under-performing, undervalued
companies. Targeting companies that are under performing and analyzing their corporate governance
practices can lead to improvements that unlock a company's hidden value. These improvements often
include replacing poorly performing directors and ensuring that the companies comply with perceived
best practice in corporate governance.
Zuva and Zuva (2018) in their study found that corporations with active and independent boards
appeared to perform much better than those with passive, non-independent boards. Majority of
investors prepare to pay a premium to invest in a company with good corporate governance. Maune
(2019) argued that boards of well-run companies should be relatively inactive and exhibit few
conflicts. Frequently scheduled meetings generate opportunity costs in the form of management time
consumed, and cash costs in the form of traveling allowances and fees for board members. Yet real
benefits can be derived from such meetings as directors have the opportunity to confer, set strategy
and monitor management. Khan (2019) for instance found that meeting frequency was influential in
improving operating performance in a manner consistent with agency theory.
Liu and Zhang (2017) examined the effect of board composition on long-term stock market and
accounting performance. Once again, they did not find any relationship between board composition
and firm performance. Overall, there is little to suggest that board composition has any cross-
sectional relationship to firm performance. However, the work of Chimbari (2017) showed that board
composition has virtually no effect on firm performance, and that there is no relationship between
leadership structure and firm performance. Shareholder activism is the key to ensuring good corporate
governance and without this there is less accountability and transparency.
Hong and Minor (2016) investigated the roles of board independence and CEO duality on a firm’s
performance in Netherlands relying on financial ratios, namely ROA, ROE, EPS and profit margin.
The findings suggested that neither board independence, leadership structure nor the joint effects of
these two showed any relations with firm performance. Ujunwa, (2012) set out to investigate the
impact of corporate board characteristics on the financial performance of Nigerian quoted firms.
Board characteristics studied comprise board size, board skill, board nationality, board gender, board
ethnicity and CEO duality. He found that board size, CEO duality and gender diversity were
negatively linked with firm performance, whereas board nationality, board ethnicity and the number
of board members with a PhD qualification were found to impact positively on firm performance.
Maina (2015) examined the effects of board composition on firm’s performance on all quoted firms in
Kenya and found no significant relationship between firm’s performance and board composition.
Okiro (2016) examined the relationship between board size and board composition on firm
performance: A study of quoted companies at the Nairobi stock exchange. He found that there was no
significant relationship between board size and firm valuation.
Wagana and Karanja (2017) carried a similar study on corporate governance structures and
performance of the firms in the Nairobi stock exchange. The study analyzed factors relating to board
size, composition, insider ownership and executive composition, and the manner in which they have
influenced performance of firms in the stock exchange. In their study, Brako and Brown (2016)
examined the relationship between board diversity and financial performance of firms listed in the
Nairobi Stock Exchange. He analyzed data on boards’ age, gender, educational qualifications, study
specialization, and board specialization as well as the companies’ financial performance. The results
indicated a statistically not significant effect of board diversity on financial performance except for
the independent effect of board study specialization on dividend yield.
Board composition in corporate governance has been identified to be critical for corporate
performance especially in emerging and transition economies (Siwadi et al, 2015). More so, Shungu
et al (2014) established that an effective board depends on an effective selection process for new
directors, which in turn rests on a clear definition of what the duties of a director are, hence also, the
board should, therefore, be structured and composed of in such a way that it will act to monitor itself.
Wushe et al (2015) point out that another important factor that has resulted in poor board
performances in SOE’s is a lot of inconsistencies in board tenures, there are significant numbers of
cases in which boards changed with changes in line ministers, hence this affected continuity in
strategy implementation.
In 2017 a public expenditure review of SOEs was jointly undertaken and published by the
Government of Zimbabwe and the World Bank and they recognized challenges in corporate
governance. A good example is that boards of all commercial SOEs are appointed by line ministries
although the appointment process does not adhere to basic corporate governance requirements on
board composition, hence, this has resulted in relatively weak boards, leading to insufficient oversight
(Auditor General Report 2018).
Many researchers, such as (Chavanduka et al., 2014), have argued that the erosion of investor
confidence in Zimbabwe has been brought about by companies’ board composition standards and a
lack of transparency in their financial system. More so, several companies have faced difficulties
associated with board failure (Auditor General Report 2016) as evidenced by the collapse of many
SOE’s in Zimbabwe. Of note are companies like ZESA, PSMAS, ZBC to mention but a few.
Rusvingo (2016) also emphasized that SOEs are different from government departments by virtue of
incorporation, operational autonomy, commercial and quasi-commercial orientation, self- accounting
principles and accountability. However, it is almost trite to say that SOEs sector in Zimbabwe is
dysfunctional. The actual performance of SOEs has not been good both in financial terms and in the
effective and efficient supply of key inputs and services to the economy, this is because today SOEs
are operating for extended periods without full Boards as exemplified by the Professor Gudyanga one-
man board for the Minerals Marketing Corporation of Zimbabwe and the Zimbabwe Mining
Development Corporation when he was the Secretary for Mines and Mining Development, more so
board membership shifting with changes in line with ministers. Ministers responsible for SOEs
appoint directors using criteria that are not standard, resulting in seats being taken up mostly by their
cronies, friends, and relatives (Auditor General Report 2018).
As a consequence, SOEs suffer from gross mismanagement, inefficient use of productive capital,
corruption, dilapidated equipment, lack of credit lines, and debt overhang because the directors
become too powerful, lack dedication and are often compromised and conflicted in exercising their
fiduciary duties (Ministry of State Enterprises and Parastatals, 2016; Zvavahera, 2015). For instance,
the National Railways of Zimbabwe (NRZ) is a pale shadow of its former self currently operating
below 10% capacity utilization and has not been paying its workers for the past few consecutive years.
The Cold Storage Commission (CSC) has closed its plants in Masvingo, Chinhoyi, Kadoma, and
Marondera. It is currently operating below 5% capacity utilization in Bulawayo. According to the
former minister of finance, GMB was cobbling an average of US$1 million per month during the era
of the Government of National Unity (GNU) and yet it retrenched 1229 employees in 2013 alone
(Mutanda, 2016). More telling is the Zimbabwe Electricity Supply Authority (ZESA) which is unable
to generate enough power for domestic users let alone for the industry and has lost a lot of revenue
through importing expensive electricity from Eskom South Africa (Auditor General report 2018).
Thus, the performance of SOEs in Zimbabwe today has fallen far short of what is required by the
economy and the general public. On a more general note, as Zhou (2017) puts it, the majority of SOEs
in Zimbabwe are operating under untenable operational frameworks of dilapidated infrastructure and
equipment, huge debts, undercapitalization, skills deficits, vandalism and looting by top-ranking
government officials and politicians. The implication of this is that SOEs are
typically inefficient due to lack of proper board management, supervision and also boards having an
inappropriate balance of skills; Inadequate board training; Inadequately managed conflict of interest;
and some members sitting on too many boards without meritocracy or the required professional
expertise which is affecting their financial viability and also their general performance (Mdlongwa
2018).
Table 1.1 Military Board Appointments at State Owned Enterprise (SOE)
Source Adapted: Zimbabwe annual state of corruption report focused on SOE’s 2016)
According to the OECD principles on corporate governance (2005), boards must have the necessary
authority, competences and objectivity to carry out their functions of strategic guidance and
monitoring of management, and also boards must also be held accountable for their actions. As
highlighted in the Corporate Governance Bill for SOEs of 2017, SOEs must be subjected to effective
performance monitoring and they must observe high standards of transparency and accountability and
be subject to the same high quality of financial and non-financial reporting and disclosure
requirements as their private sector counterparts. Researchers such as Ndlovu et al (2015) concluded
that, more often than not, government officials, management and the board of directors are responsible
and accountable for ineffective corporate governance structures and the poor performance of public
entities, Hence, to achieve the desired effectiveness and business success,
boards in public entities need to effectively discharge their duties and observe good corporate
governance.
According to Clarke et al (2012) good corporate governance is accordingly a necessity for the modern
complex and dynamic business environment to ensure long-term sustainability, attract investment
capital, maintain economic stability and encourage growth, hence it should, as a result, be cultivated
and constantly practiced by both private and public entities. In an economy such as Zimbabwe’s,
which is faced with the challenge of restructuring for greater efficiency and attracting investment for
economic growth, this is particularly important.
1.2 Statement of the problem
According to the Finance Minister’s 2018 budget presentation, most SOE’s, in general, have been
operating and performing below par as compared to the expectations of the government and general
stakeholders for a while now. Hence, board composition and tenure of these public entities have come
into question as a result of their decline in performance in recent years. A number of corporate
governance initiatives such as the public entities Bill (2017) were introduced to govern the operations
of SOE’s and their boards. This public entities bill states that certain regulations should be observed
when the line minister appoints a board member, for example, no member should be appointed for a
term longer than four years and also a person should not be appointed to the board of the public
entities if he or she is a member of two other such boards.
The role of public entities boards is critical to performances of SOE’s hence board composition and
tenure of these boards becomes very vital to the general performance of SOE’s. Unfortunately, in
Zimbabwe at the moment, SOE’s board composition are characterized by political appointments
instead of meritocracy. Also, board members serve long terms in one board than what is required by
the law. More so, there has been a system of reshuffling same people in different public entities
boards without injecting fresh minds in the system and also these board members tend to sit on more
than three boards as required by the regulations. Although substantial research has been undertaken on
the effectiveness of boards of private enterprises, inadequate attention has been given to the
challenges being faced by boards of SOE’s in effectively discharging their duties and promoting good
corporate governance especially in developing African countries. Furthermore, there has not been
much meaningful research on the effectiveness of boards of SOE’s in Zimbabwe. It is also
questionable whether research results obtained from other regions or countries can be
extended and applied without further investigation to Zimbabwe given the differences in the country
contexts.
It was very crucial for the researcher to analyze and evaluate the effectiveness of boards' composition
and tenure in promoting better performances in Zimbabwe's SOE’s. These entities are of significant
importance to the national economy for the role they play in socio-economic transformation,
employment creation, and economic growth. This research particularly focused on- board composition
factors (Gender, Age, Experience, Expertise) and how they can be aimed at enhancing the
effectiveness of boards of SOEs in Zimbabwe with a view to establishing greater performance and
sustainable growth.
1.3 Research Objectives
To determine the effect of board composition on firm performance.
To determine relationship between board experience and firm performance.
To determine the relationship between board age and firm performance.
To determine effect of board gender and expertise on firm performance.
1.4 Research Questions
What is the effect of board composition on firm performance?
What is the relationship between board experience and firm performance?
What is the relationship between board age and firm performance?
What is the effect of board gender and expertise on firm performance?
1.5 Statement of hypothesis
For the purposes of this study, the following hypotheses were adopted:
H0: There is no relationship between board composition and firm performance
H1: There is a relationship between board composition and firm performance.
1.6 Significance of the study
The study is going to be of both practical and theoretical significance to a number of
stakeholders such as the government, investors, fellow researchers and the university.
1.6.1 To the Government
Findings of this study through testing of the hypothesis will be used in policy formulation.
The findings will aid in decision making whether Zimbabwe has to continue with its comply
or explain corporate governance approach or legislate corporate governance.
1.6.2 To Investors
Findings from this study will aid in making investment decisions, whether to invest or not.
1.6.3 Other Researchers
Although no new theories will be added, this study will add to the existing empirical
evidence on the impact of board composition on performance. This study will lay the
foundation for future research to be conducted in the same area of study.
1.7 Delimitation
1.7.1 Theoretical scope
Major areas covered included among others: components of board composition which
included; experience, gender, age, and expertise. In addition, firm performance will be looked
from the perspective of service delivery, profitability, organizational efficiency and growth
will be covered.
1.7.2 Time scope
The research will cover the period in Zimbabwe that is from 2014 to 2019. This will enable
the researcher to make a consistent comparison in performance of the SOE’s during the time
of the multicurrency regime.
1.7.3 Geographical scope
The research will be conducted in Harare, using a sample of 5 state owned parastatals namely
National Railways of Zimbabwe, TelOne, ZESA, Grain Marketing Board and Zimbabwe
Parks and Wildlife Management where all head offices of the state enterprises and parastatals
and ministries in Zimbabwe are located. The researcher chose to focus on these SOEs
because they are from different sectors of the economy which includes transport, information
and telecommunications technology, energy, food security and the tourism. All these SOEs
therefore are of strategic interest to the economy at large. In addition, Auditor General’s 2018
reported raised flagships on quite a number of governance issues and risks that arose, of key
importance to this study. The area was selected because that was where respondents with
adequate information about the study are available.
1.8 Limitations
The researcher faced resistance in accessing confidential information, however, the
researcher sought permission from the respective authorities.
The researcher was not able to access all research participants because the state-
owned enterprises were too many; therefore, the researcher used a representative
sample.
The researcher faced challenges in trying to access relevant secondary data due to
privacy issues; therefore, the researcher signed a non-disclosure agreement that
bound the researcher not to disclose information to third parties.
The researcher encountered difficulties in trying to access relevant academic
journals; however, the researcher completed early registration and accessed the
academic journals using eLearning credentials.
1.9 Assumptions
The research participants will answer the questions in a truthful, honest and unbiased
manner.
The business environment will remain the same during the course of the study.
Relevant secondary data can be readily accessible.
Cost economic factors, constant.
1.10 Chapter Summary
The chapter introduced the topic on the impact of board composition on the performance of
Zimbabwean state-owned enterprises namely National Railways of Zimbabwe, TelOne,
ZESA, Grain Marketing Board and Zimbabwe Parks and Wildlife Management. The
researcher sought to determine the effect of board composition, board age, experience, gender
and expertise on firm performance. Firm performance was looked from the perspective of
service delivery, profitability, organizational efficiency and growth. The significance of the
study to various stakeholders which included the government, investors and other researchers
was mentioned. The statement of hypothesis, scope, limitations, assumptions and
delimitations were highlighted. The next chapter will present the literature review.