Influence of Board Traits and Audit Committee Characteristics on Firm Profitability: Study of Oman’s Listed Companies

1. INTRODUCTION

Board of directors one of the basic element in the CG framework has been studied extensively from various perspectives and most importantly the intellectual capability (Shahwan & Habib, 2020). Impact of CG with its various components on the performance of business is an area which has attracted lot of research (Puni & Anlesinya, 2020). Further impact of external elements like the political linkages of various business and its consequences have been analyzed to examine how the two are correlated (Liedong & Rajwani, 2018). Businesses impact the economy of a nation this is another factor wherein the role of regulatory framework comes in to ensure that there are standardized processes in place to ensure the firms are governed in a transparent and ethical manner (Beckers, 2017). The various scams pertaining to organizations and their governance have attracted lot of media attention and negatively impacted the investor sentiments. This has led to issues of reputation on how the business is conducted in a particular economy. One looks to rescue and rely on some framework which would aid in preventing the same and CG is one of the most critical tool in achieving this objective (Bhagat & Bolton, 2019). Present conditions and the dynamism with which technology has influenced the way business are run and governed. It is very important to evaluate the various corporate governance components and keep an eye on how they are put in actual practice (Levitt & Securities, 2000). Investors wealth needs to be

This paper aims and presents its findings as tow how the board traits namely the size of the board that is number of directors on the board along with independent board members impact the profitability of the firm. Audit committee characteristics like the size of audit committee and number of audit committee meetings impact and influence the profitability of the firm. The study has analyzed twenty financial sector companies listed on the Muscat Securities market, it has further segmented the financial sector in two segments banking sector and non-banking sector. Seventy Observations over a period of ten years have been analyzed for banking sector companies, one hundred and twenty-seven observations for similar period have been analyzed for non-banking companies.

Many theories are in realm when it comes to governing the way a firm conducts its business. One of the most important being the agency theory , its conflicts and how it impacts the operation and valuation of a business (Munisi & Randøy, 2013). Voluntary introduction of CG from the perspective of institutional theory and the agent principal conflict have been studied for its impact on firm performance (Renders & Gaeremynck, 2012). Sustainability of any business is the key and facilitate the same accountability of the company‟s senior executives is the key to ensure business are profitable and sustainable. CG ensure that is basis desire of shareholders is met with as part of the process (Al Hammadi & Nobanee, 2019). This is the era of brand image; companies strive to ensure their brand reputation is enhanced using various marketing approaches coupled with understanding customer needs. From the perspective of conducting the business and ensuring its process does not pose a threat to brand reputation, CG comes to the rescue (Salvioni & Gennari, 2019). Role of corporate governance goes beyond the realm of its own business and covers area such as its obligation to the society it operates in. Its shapes up the business to be a good citizen as a corporate (Rendtorff, 2019). Corporate governance is well established and respected framework facilitated by adequate regulation. Researchers have come up with concept of CG Deviance. This is vital from the shareholders perspective to evaluate how the firm is operating and to what extent the deviations are there in implementation of CG norms as against what are desired (Aguilera et al., 2018). The impact of CG on the performance and the profitability of the firm has been studied extensively and owing to wide popularity it is also attracting the attention of various business Economy of a country is driven by various sectors. However, the importance of financial sector and its impact on the economy is very critical. Banking sector as part of the financial sector played a key part in financial liberalization especially with advent of central banks (Hahm, 2004). In case of non-banking financial companies it is important they follow the CG norms duly supported by various internationally accepted standard on the similar like BASEL (Adams & Mehran, 2003b) Board – directors as part of the board play a significant role in ensuring corporate governance norms are introduced and followed. Further, their role in providing support and guidance to the management in coping up with various challenges is worth noting (De Andres & Vallelado, 2008).

On the contrary researchers in United States discovered a positive relationship between board size and company profitability. Networking of board members a key in driving the conclusion (Adams & Mehran, 2003a). Studies in case of Australian firms did indicate a positive correlation between the board size and profitability of the firm (Kiel & Nicholson, 2003). Apart from size, the trait of board member is also important. Is the director involved in the day to day running of the business or is he a non-executive director? Corporate governance recommends that directors should be non-executive. Many researches have indicated a negative impact when the chairman performs dual role as CEO and Chairman (Governanace & Hampel, 1998) (Jizi & Nehme, 2018).

Shareholders put in their money which is referred to as equity, their key intent is to ensure and maximize the returns on their investments which is equity. Investors referring the ROE get a fair idea on how their returns are (Damodaran, 2007) (Ichsani & Suhardi, 2015). Returns on the total assets employed by the company also referred to as ROA, Researchers have found a positive relationship (Ismi & Linda, 2016).

This paper aim at enriching the academic literature which is scarce when it comes to studies conducted in Oman with respect to corporate governance. The paper analyses the financial sector listed companies and studies the impact of board traits and audit committee characteristics on the profitability of the firm. The paper focuses on four corporate governance attributes: I. Board Size - Board size and Business Profitability Researchers in Turkey discovered no relationship between board size and business profitability (Topak, 2011). On the contrary a positive impact was observed between board size and business profitability in case of companies in Lebanon (Chahine & Safieddine, 2011). The null hypotheses to start with is taken as: Ho1- Board Size has no relation with Business Profitability Investigators in Kuwait discovered no relation between Board Independence and Business Profitability (Al-Saidi, 2010). On the contrary researchers in Thailand (Pathan et al., 2007) and in Malaysia (Alhaji et al., 2013) concluded a positive relationship between Board Independence and Business Profitability. The null hypotheses to start with is taken as: Ho2- Board Independence has no relation with Business Profitability III. Audit Committee Size - Audit Committee Size and Business Profitability Various research in different part of the world have discovered that smaller audit committees have a negative impact on profitability of the firm. Key rational is scarcity of the skills available as audit committee (Hermawan, 2011) (Akhtaruddin & Haron, 2010). The null hypotheses to start with is taken as: Ho3- Audit Committee Size has no relation with Business Profitability IV. Audit Committee Meetings - Audit Committee Meetings and Business Profitability Researchers in India discovered no relationship between Audit Committee Meetings and Business Profitability (Bansal & Sharma, 2016). However, investigators in United Kingdom found a positive relationship between Audit Committee Meetings and Business Profitability (Zábojníková, 2016). The null hypotheses to start with is taken as: Ho4- Audit Committee Meetings has no relation with Business Profitability

The key components and methodology which was adopted to conduct the research is highlighted. Sample Size – Since the paper intends to conduct a study on financial sector where in companies from this sector listed on the Muscat Securities Market have been taken. In total twenty companies were taken. The duration is ten years from year 2010 until 2019. Seventy Observations over a period of ten years have been analyzed for banking sector companies, one hundred and twenty-seven observations for similar period have been analyzed for non-banking companies. Profitability is the main dependent variable as part of this study. Profitability is arrived by taking the average of return on equity and assets. The study intends to find how various independent variables influence the dependent variable that is profitability. Board Size[bs]; Board Independence[ind]; Audit Committee Size[acs] and Audit Committee Control variables are also considered as part of the study, firm size measured as log of sales/revenue [S1] and firm size measured as log value of assets [S2]. Further the time in years the firm is listed in the stock exchange referred to as Age and the extent to which the business is leveraged is also considered as part of the control variable. STATA has been used to conduct the data analysis. Primarily three tools were used a) Descriptive Statistics b) OLS Regression [Taking One Independent Variable at a time along with control variables] c) Correlation between the all the variables

Since the study is split into two categories that is Banking and Non-Banking firms. To start with key findings for non-banking sector is presented.

** Descriptive statistics all variables: non-banking sector The return on assets has a mean value of 1.4%, the range being 29.7% to -21.9%. The return on equity had an average of 3% with 35.4% as the maximum return and -53.8% as the minimum return. Board size for the firms taken as part of the study on average was found to be seven. 96% of the companies had 100% independence of board members. The average size of audit committee was just above three members. On an average four audit committee meetings were held which is line with regulatory framework of conducting at least one audit committee meeting per quarter. In some case the number of audit committee meeting went up to 9 per calendar year.

** Influence of board size on firm profitability As evident from above table, with R squared at 6.4% it suggests that board size has no explanatory power on the profitability. The F value at 0.064 which is greater than 0.05 aids in deciding to accept the null hypotheses, that is board size has no relation with business profitability.

** Influence of board independence on firm profitability As evident from above table, with R squared at 8.4% it suggests that board size has no explanatory power on the profitability. The F value at 0.055 which is greater than 0.05 aids in deciding to accept the null hypotheses, that is board independence has no relation with business profitability.

** Influence of audit committee size on firm profitability As evident from above table, with R squared at 6% it suggests that board size has no explanatory power on the profitability. The F value at 0.177 which is

** Influence of audit committee meetings on firm profitability As evident from above table, with R squared at 10.5% it suggests that board size has lower explanatory power on the profitability. The F value at 0.017 which is lower than 0.05 aids in deciding to reject the null hypotheses and concluding that audit committee meetings have relation with business profitability.

** Correlation As evident from above table, ROA and ROE have degree of positive correlation which is in line with the theoretical framework. ROA has negative correlation with bs, acs and nacm. However, ROE has positive correlation with all the four independent variables.

** Descriptive statistics all variables: banking sector return and -7.4% as the minimum return. Board size for the firms taken as part of the study on average was found to be eight. 95% of the companies had 100% independence of board members. The average size of audit committee was just above four members. On an average five audit committee meetings were held which is higher than regulatory framework of conducting at least one audit committee meeting per quarter. In some case the number of audit committee meeting went up to 10 per calendar year.

** Influence of board size on firm profitability As evident from above table, with R squared at 27.5% it suggests that board size has explanatory power on the profitability. The F value at 0.0007 which is lower than 0.05 aids in deciding to reject the null hypotheses and concluding that board size has relation with business profitability.

** Influence of board independence on firm profitability As evident from above table, with R squared at 22.8% it suggests that board size has explanatory power on the profitability. The F value at 0.0045 which is lower than 0.05 aids in deciding to reject the null hypotheses and concluding that board independence has relation with business profitability.

** Influence of audit committee size on firm profitability As evident from above table, with R squared at 23.8% it suggests that board size has explanatory power on the profitability. The F value at 0.0032 which is lower than 0.05 aids in deciding to reject the null hypotheses and concluding that audit committee size has relation with business profitability.

** Influence of audit committee meetings on firm profitability As evident from above table, with R squared at 23.6% it suggests that board size has explanatory power on the profitability. The F value at 0.0035 which is lower than 0.05 aids in deciding to reject the null hypotheses and concluding that number of audit committee meetings has relation with business profitability.

** Correlation As evident from above table, ROA and ROE have degree of positive correlation which is in line with the theoretical framework. ROA and ROE has negative correlation with ind and nacm.

Board Size has no relation with Business Profitability Accept Reject Board Independence has no relation with Business Profitability Accept Reject Audit Committee Size has no relation with Business Profitability Accept Reject Number Audit Committee meetings has no relation with Business Profitability Reject Reject The findings are not uniform across both the sectors. One can assume in case of banking sector stringent controls owing to BASEL III and other international regulatory framework had complimented the corporate governance mechanisms. The findings of this study are in alignment with various studies across the globe. Above study has considered internal factors of an organization, external factors mainly the socio-economic environment does play a significant role in the profitability of an organization. The study brings forth the basic premise that there in universally proven fact when it come to the impact of corporate governance components on business profitability. The study does invoke thinking and contemplation on part of various stakeholders seeing the stark differences in the same economy based on sector wherein the firm is operating.

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Research Scholar, Banasthali Vidyapith University, Rajasthan