Assessing Corporate Governance Impact on Company Performance in HK

This report investigates the relationship between corporate governance and company performance, specifically focusing on companies operating in Hong Kong. The study begins with an introduction to the topic, outlining the background, rationale, aims, and research questions. It then delves into a comprehensive literature review, exploring agency problems, corporate governance theories, and their impact on firm performance, including board composition. The methodology section details the research philosophy, approach, design, data collection, and analysis processes, emphasizing the use of secondary data. The data analysis and discussion chapter examines company performance metrics and corporate governance practices. Finally, the report concludes with recommendations for future research, addressing the significance of corporate governance in enhancing company performance within the Hong Kong business environment. The report uses secondary data to analyze the relationship between corporate governance and company performance.

Running head: CORPORATE GOVERNANCE ON THE COMPANY PERFORMANCE IN
HONG KONG
Corporate Governance on the company performance in Hong Kong
Name of the Student:
Name of the University:
Author’s Note:

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CORPORATE GOVERNANCE ON THE COMPANY PERFORMANCE IN HONG KONG
Abstract
This paper is concerned with understanding the relationship and the impact of corporate
governance on the performance of a company. The research has concentrated on the companies
that are operational in Hong Kong. In the initial section, the background of the topic and the
country that has been selected is explained in order to introduce the topic. The aims and the
research questions that are essential in order to have an understanding of the course that will be
taken in order to complete the paper has been framed. The various theories and the variables that
are related to corporate governance and the business performance of a company are explained
succinctly so that an idea about all the theories and the framework would be known. The kind of
data that has been collected and the method of data collection is even addressed in this paper so
that the reader can have extensive knowledge about the entire process that has been used in order
to conclude this paper. In this paper secondary data has been used in order to find the desired
results. Finally, analysis of the collected data is helpful in explaining the impact of corporate
governance in performance of a business.

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CORPORATE GOVERNANCE ON THE COMPANY PERFORMANCE IN HONG KONG
Table of Contents
Chapter 1: Introduction....................................................................................................................4
1.1 Background of the Study.......................................................................................................4
1.2 Rationale of the Study...........................................................................................................6
1.3 Research Aims and Objectives..............................................................................................6
1.4 Research Question.................................................................................................................7
Chapter 2: Literature Review...........................................................................................................8
2.1 Introduction............................................................................................................................8
2.2 Agency Problems...................................................................................................................8
2.3 Corporate Governance and firm performance.....................................................................10
2.4 Board composition and company performance...................................................................12
2.5 Summary of the literature....................................................................................................13
Chapter 3: Research Methodology................................................................................................14
3.1 Introduction..........................................................................................................................14
3.2 Justification of the choice of methodology..........................................................................14
3.3 Research Philosophy............................................................................................................15
3.4 Research Approach..............................................................................................................15
3.5 Research Design..................................................................................................................15
3.6 Data Collection Process.......................................................................................................16
3.7 Process of data analysis.......................................................................................................16

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CORPORATE GOVERNANCE ON THE COMPANY PERFORMANCE IN HONG KONG
3.8 Ethical Consideration...........................................................................................................16
Chapter 4: Data Analysis and Discussion......................................................................................17
4.1 Introduction..........................................................................................................................17
4.2 Company Performance........................................................................................................17
4.3 Corporate Governance.........................................................................................................21
Chapter 5: Conclusion, Recommendation and Future Work.........................................................24
5.1 Conclusion...........................................................................................................................24
5.2 Recommendation.................................................................................................................25
5.3 Future Research...................................................................................................................25
Reference List and Bibliography...................................................................................................26

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CORPORATE GOVERNANCE ON THE COMPANY PERFORMANCE IN HONG KONG
Chapter 1: Introduction
1.1 Background of the Study
The researches on corporate governance have become extensively popular in the current
years. Corporate governance has become an issue in the developing economies after the financial
crisis and the scandals that have occurred in the past, which have led to rise in demand for
enhanced corporate governance mechanisms. Effective level of corporate governance has
become necessary for developing and improving the performance of a company, ensuring the
rights of the investors, developing the investment environment and influencing development of
the economy (Low, Roberts and Whiting 2015). Even though focus and attention has been given
to the corporate governance in the developing countries, there have been several countries that
still suffer from the inadequacy of corporate governance structure. This is looked upon as a
contributing factor for the rise in the financial crisis and financial scandals. Hence, corporate
governance in the developing and developed nations has motivated and attracted reasonable
consideration in the academic researches.
Corporate governance is the practices and the rules that administer the relationship
between the shareholders and the managers of a company as well as with the stakeholders. It
contributes to the development and financial stability by developing the confidence in the
market, financial reliability and effectiveness of the economy. As a consequence, corporate
governance distributes the obligations and the rights among the several respondents within a
firm, like the managers, boards, shareholders and the other stakeholders and confirms that the
procedures and the rules for undertaking decisions with respect to the corporate affairs are
precise and clear (Cheng, Lui and Shum 2015). The practice of corporate governance is
regarded as an internal process for controlling and monitoring the management. Effective level

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of corporate governance is good equipment for assisting a company to reach effective and better
performance.
The concept of corporate governance in the developed nations and economies like Hong
Kong has been addressed by making use of several theories and articles. In accordance to the
agency theory, the intention of corporate governance is to minimize the probable conflicts among
the managers and the shareholder’s interest (Leung, Richardson and Jaggi 2014). The
stakeholder theory even has a key role to play in addressing the governance framework as the
organizations are made conscious of all the stakeholders rather than only the shareholders. Wang
et al. (2014) have debated that stakeholder theory can be helpful in optimizing the performance
of an organization and the associated benefits of all the stakeholders by taking care of the
interests of all the stakeholders.
In the current Asian market, there are more than 65% of the listed companies that are
managed by the key shareholders and from those companies, more than 60% of the managers are
acquaintances of the main shareholders. In Hong Kong, it is seen that family business is one of
the forms of business and most of these companies have attained the mature or the developing
stage. It is seen that businesses in Hong Kong is a combination of the control and ownership and
therefore the organizations that are functional in the country have an effective and profitable
ownership framework than the companies in the other nations (Ayuso et al. 2014). This research
paper has therefore been constructed in order to have an understanding of the impact of corporate
governance on the performance of the companies from various sectors in Hong Kong. The paper
in order to assess the performance of a company would look to collect secondary data with the
help of which the researcher would be able to understand the performance of a company in
accordance to corporate governance in an effective manner.

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1.2 Rationale of the Study
The justification for undertaking research on this topic has been due to the fact that
corporate governance has been receiving greater extent of popularity among all the companies
globally and accordingly the performance of an organization plays a key role in the development
of the company as a whole (Foo 2015). There are several factors that has an impact on the
performance of an organization but special importance is given to corporate governance as this
process assists in improving internal and external relationship among the associated stakeholders
and thereby an idea can be attained as to the effectiveness of relationship of the stakeholders in
the development of the performance of a company.
1.3 Research Aims and Objectives
The aims and objectives of the research determines the elements and the aspects that would
be taken into consideration when taking the research forward and thereafter finding the results
that would be helpful in determining the impact of corporate governance in the performance of
the companies that are operational in Hong Kong. The research aims and objectives are as
follows:
 Assess the nature and the level of development of corporate governance processes in the
aspect of the business environment of Hong Kong
 Determine the relationship between the corporate governance practices and the
performance of the companies in Hong Kong.
 Recognize the theories and the concepts that are associated to corporate governance and
the extent to which they are accepted in a company in Hong Kong

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1.4 Research Question
The research question that is related to this paper is as follows:
Q1. Is the corporate governance framework of a company important to the performance of a
company in Hong Kong?
Q2. How to create an effective corporate governance policy in order to attain the optimal
performance in the companies in Hong Kong?

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Chapter 2: Literature Review
2.1 Introduction
The factors that are having an impact on the process of corporate governance is inclusive
of the structure of shareholding, composition of board and the senior level management. The
relationship between the performance of a company and the factors is the pivotal point for
various researchers and their studies. This section of the paper would address all the factors and
what other researchers have commented on these factors and the overall corporate governance
structure.
2.2 Agency Problems
Michael and Goo (2015) debated that the interest conflicts and the asymmetries among
the managers and the shareholders are the key reason that makes the shareholders suffer
increased agency costs. Their suggestion was to reinforce the governance and the legal
framework in order to evade the managers who look into their own interest and ignores the rights
of the shareholders.
Siddiqui (2015) explained agency relationship as the owner agreements with the manager
in order to perform the services on their behalf. The presence of agency problems is due to the
fact that the managers would not always act in the most precise interest of the shareholders in
order to gain individual benefits. Conversely, the shareholders look to safeguard their interests
by suffering administration costs in order to make sure that the managers will not undertake any
actions which can hamper their wealth. There are several techniques that tries to explain the
agency problems and they are inclusive of the structure of the government, managerial
ownership incentives and capital structure.

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Lins, Servaes and Tamayo (2017) stressed on the conflicts among the managers and the
shareholders and explained that these issues that are essential in a company that have sustainable
level of free cash flows. The theory of free cash flow recommends that the managers will not
always look to optimize the company value. Furthermore, free cash flow is the cash flow that is
more than the one that is needed to fund all the projects that have net present values to be
positive. On the other hand, if a company is able to create considerable fee cash flows, the
managers may spend in excess on the organizational ineffectiveness or undertake investments in
the projects with negative net present value, which in a way can hamper the wealth of the
shareholders. Furthermore, Bazrafshan, Kandelousi and Hooy (2016) cited that conflict among
the shareholders and the managers is because of the aversion of the managerial risk. The
shareholders always looks spread their investments in order to minimize the risks that are
associated with their investments. Conversely, the majority of the manager’s income comes from
the bonuses, which is reliant on the returns gained by the organization. Hence, for the same
investment project, the extent of risk that the managers and the shareholders can incur is different
(Singh et al. 2018). The managers may not look to undertake the risk that will lead to loss of
some effective investment opportunities and therefore the conflicts among the managers and the
shareholders take place.
The easiest and the most practicable way to resolve this issue of agency problem is to
terminate the separation among the control and ownership in an organization. However, the
separation of the control and the ownership is to provide advantage to the organization as it
reveals the ideal competitive response to the creation of the ownership framework of an
organization (Beatson and Chen 2017). Then, the managers are go ahead with their own interests
simultaneously without profaning the interests of the shareholders.

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2.3 Corporate Governance and firm performance
The domestic and the international agencies and authorities have given increasingly and
extensive focus to assess and modify the law of an organization after the Enron and Worldcom
scandals that occurred in USA. According to Kun (2015), Hong Kong has currently created a
precise outline of the obligated arrangements of corporate governance.
The aim of corporate governance is to organize an interest conflict among the
relationship of all the parties within a company and to create a system that can mitigate or
terminate the agency issues (Fung 2014). It debates that the agency issues become more complex
with ineffective and weaker corporate governance and restricted safeguard of the minority
shareholders within an organization and even provides the effective corporate governance that
would be able to assist the board of directors and even the managers to attain the effective
interests of the shareholders and the organization.
Furthermore, it can be debated that the performance of a company can be developed with
effective control of the corporate governance in a firm. Cuomo, Mallin and Zattoni (2016)
debated that the corporate governance does not have an impact on the performance of a
company. They discovered that most of the bigger companies with stronger and better corporate
governance controls are rewarded during the longer period of time. Olivares-Caminal et al.
(2017) studied the relationship among the value of the company and corporate governance by
making use of the Tobin’s Q and Corporate Governance Index (CGI), which looks to compute
the value of an organization. The outcome has provided that corporate governance do have an
impact on the value of a company.
Furthermore, Kula and Baykut (2014) debated that an effective corporate governance
standard is specifically vital for the banks. This is due to the fact that most of the money that the

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banks utilize for the purpose of business comes from the depositors and the creditors. The
ineffectiveness of a bank will impact not only their own shareholders but a key impact would be
observed on the other banks as well. Hence, it is essential to make sure that the banks are
functioning in an effective manner. Dias, Rodrigues and Craig (2017) even explained that
corporate governance of the banks in Hong Kong has an effective standard due to the fact that
the Hong Kong Monetary Authority has provided a guideline in association to corporate
governance for the banks.
It is seen that a various other research have been undertaken in order to have an
understanding among the relationship between performance of a company and the ownership
framework. Husted and de Sousa-Filho (2017) explained that increased ownership focus has an
optimistic effect on the performance of a company as it increases the capability of the
shareholders to effectively looking after the managers. Al-Janadi, Abdul Rahman and Alazzani
(2016) even debated that increased level of block-holder is likely to have an effect on the value
of the company. The bigger shareholders can function in an effective manner for administering
the managers in order to safeguard the probable takeover challenges.
By relying on the corporate governance framework, the directors and the board of
directors will be the key policy setters of an organization and therefore the relationship among
the board composition framework and the performance of the company is very close (Wong
2016). It is known that composition of the board is section of the corporate governance, so the
research takes a step ahead in order to assess the relationship among the composition of the
board and the performance of a company.