THE INFLUENCE OF BOARD INDEPENDENCE AND INTERNAL AUDIT FUNCTION ON COMPANY’S PERFORMANCE, STUDY OF MACEDONIAN COMPANIES
Elena Bundaleska
University American College Skopje, Treta Makedonska Brigada No. 60, 1000 Skopje. North Macedonia
Aleksandra Kocheska
University American College Skopje, Treta Makedonska Brigada No. 60, 1000 Skopje. North Macedonia
Vladimir Naumovski
Commission for Protection of Competition, Kiril and Methodij No. 54 (6th floor), 1000 Skopje, North Macedonia
DOI: https://doi.org/10.31410/Balkans.JETSS.2020.3.2.112-121
Elena Bundaleska
University American College Skopje, Treta Makedonska Brigada No. 60, 1000 Skopje. North Macedonia
Aleksandra Kocheska
University American College Skopje, Treta Makedonska Brigada No. 60, 1000 Skopje. North Macedonia
Vladimir Naumovski
Commission for Protection of Competition, Kiril and Methodij No. 54 (6th floor), 1000 Skopje, North Macedonia
DOI: https://doi.org/10.31410/Balkans.JETSS.2020.3.2.112-121
Balkans Journal of Emerging Trends in Social Sciences, (2020) , Vol 3, No 2
ISSN: 2620-164X
ISSN: 2620-164X
Abstract: Corporate governance and company performance are issues that continue to raise interests of the researchers worldwide, as they provide valuable lessons for vast audience, such as company owners, company leaders, supervisors and policy makers. This study aims towards contributing to the previous literature showing that there is positive correlation between corporate governance mechanisms and company performance. It specifically focuses on the correlation between board independence and internal audit function existence with performance of the companies listed on the Macedonian Stock Exchange, for specific periods 2003-2004 vs. 2014-2018. In particular, the influence of the board independence and the internal audit function over company performance are investigated through Profit, Return on Equity (ROE) and Earnings per Share (EPS) indicators. The results of the performed research and analysis suggest that corporate governance is important for the company performance, i.e. corporate governance improvements such as board member independence and internal audit function have positive impact on the performance of the companies listed on the Macedonian Stock Exchange. However, given the fact that, other factors apart from board member independence and internal audit function can influence the Profit, ROE and EPS of companies, it is reasonable to assume that the increase of profit and of ROE and EPS indicators may not be connected exclusively with having independent board members and internal audit function. First and foremost, this study is of interest for company owners and leaders; yet, it also provides useful information for supervisors and other policy makers.
Keywords: Corporate governance, Company performance, Independent board members, Internal audit function, Listed companies.
JEL Classifications G34
REFERENCES
Abdullah, S. (2004). Board composition, CEO duality and performance among Malaysian listed
companies. Corporate Governance, 4(4), 47-61. https://doi.org/10.1108/14720700410558871
Al-Matari, E. M., Al-Swidi, A. K., & Fadzil, F. H. (2014). The Measurements of Firm Performance’s
Dimensions. Asian Journal of Finance & Accounting, 6(1), 24-49. https://doi.
org/10.5296/ajfa.v6i1.4761
Al-Saidi, M., & Al-Shammari, B. (2015). Ownership concentration, ownership composition and
the performance of the Kuwaiti listed non-financial firms. International Journal of Commerce
and Management, 25(1), 108-132. https://doi.org/10.1108/ijcoma-07-2013-0065
Ameer, R., Ramli, F., & Zakaria, H. (2010). A new perspective on board composition and firm
performance in an emerging market. Corporate Governance: The International Journal of
Business in Society, 10(5), 647–661. https://doi.org/10.1108/14720701011085607
Apostolov, M. (2011). Corporate governance in Macedonia - Micro and macro analysis. Risk Governance
and Control - Financial Markets and Institutions, 1(1), 124-134.
Bauer, R., Frijns, B., Otten, R., & Tourani-Rad, A. (2008). The impact of corporate governance on
corporate performance: Evidence from Japan. Pacific-Basin Finance Journal, 16(3), 236-
251. https://doi.org/10.1016/j.pacfin.2007.05.001
Baysinger, B. D., & Butler, H.N. (1985). Corporate governance and the board of directors: Performance
effects of changes in board composition. Journal of Law, Economics, & Organization,
1(1), 101-124.
Bhagat, S. & Black, B. (2002). The Non-correlation between board independence and long-term
firm performance. Journal of Corporation Law, 27, 231-273. Review of Quantitative Finance
and Accounting, 31(2), 461.
Christensen, J., Kent, P., Routledge, J., & Stewart, J. (2015) Do corporate governance recommendations
improve the performance and accountability of small listed companies? Journal
Accounting & Finance, 55(1), 133-164.
Coles, J., & Hesterly, W. (2000). Independence of the chairman and board composition: Firm
choices and shareholder value. Journal of Management, 26(2), 195-214. https://doi.
org/10.1177/014920630002600202
Committee on the Financial Aspects of Corporate Governance., & Cadbury, A. (1992). Report of
the Committee on the Financial Aspects of Corporate Governance. London: Gee.
Damghani, B. M. (2013). The non‐misleading value of inferred correlation: An introduction to the
Cointelation Model. Wilmott, 2013(67), 50-61. https://doi.org/10.1002/wilm.10252
El-Faitouri, R. (2014). Board of directors and Tobin’s Q: Evidence from U.K. firms. Journal of
Finance and Accounting, 2(4), 82-99. https://doi.org/10.12691/jfa-2-4-2
Eimer, J. (2008). Is electing an independent board member right for your business? Exploring
the pros and cons. Retrieved from https://www.muchlaw.com/insights/article/electing-independent-
board-member-right-your-business-exploring-pros-and-cons
European Central Bank. (2004). Annual Report: 2004. Retrieved from https://www.ecb.europa.
eu/pub/pdf/annrep/ar2004en.pdf
Garg, A. K. (2007). Influence of board size and independence on firm performance: A study
of Indian companies. Vikalpa: The Journal for Decision Makers, 32(3), 39-60. https://doi.
org/10.1177/0256090920070304
Hassan, S. U. & Farouk, M. A. (2014). Board of director’s characteristics and performance of listed
deposit money banks in Nigeria. Journal of Finance and Bank Management, 2(1), 89-105.
Hassan, R., Marimuthu, M., & Johl, S. (2015). Ethnic diversity on boards and market performance:
An empirical investigation in Malaysia. Advanced Science Letters, 21(5), 1099-
1103. https://doi.org/10.1166/asl.2015.6036
Hermalin, B., & Weisbach, M. (1991). The effects of board composition and direct incentives on
firm performance. Financial Management, 20, 101–112.
Higgs, D. (2003). Review of the role and effectiveness of non-executive directors. [PDF file]
Ho, C. (2005). Corporate governance and corporate competitiveness: An international analysis.
Corporate Governance: An International Review, 13(2), 211-253. https://doi.org/10.1111/
j.1467-8683.2005.00419.x
Hutchinson, M., & Zain, M. (2009). Internal audit quality, audit committee independence,
growth opportunities and firm performance. Modern Pathology, 7(2), 50-65. https://doi.
org/10.22495/cocv7i2p4
Klein, A. (2002). Audit committee, board of director characteristics, and earnings management.
Journal of Accounting and Economics, 33(3), 375-400. https://doi.org/10.1016/S0165-
4101(02)00059-9
Kipkoech, S. R., & Rono, L. (2016). Audit committee size, experience and firm financial performance.
Evidence Nairobi Securities Exchange, Kenya. Research Journal of Finance and
Accounting, 7(15), 87-95. https://www.iiste.org/Journals/index.php/RJFA/article/view/32732.
Leung, S., Richardson, G., & Jaggi, B. (2014). Corporate board and board committee independence,
firm performance, and family ownership concentration: An analysis based on Hong
Kong firms. Journal of Contemporary Accounting & Economics, 10(1), 16-31. https://doi.
org/10.1016/j.jcae.2013.11.002
Organization for Economic Co-operation and Development. (2004). OECD Principles of corporate
governance. Paris: OECD.
Pickett, S. (1976). The internal audit handbook. Retrieved from https://www.academia.
edu/11623270/Audit_Internal-Picket_and_Spencer_Internal_Auditing
Shukeri, S. N., Shin, O. W., & Shaari, M. S. (2012). Does board of director’s characteristics affect
firm performance? Evidence from Malaysian public listed companies. International Business
Research, 5(9). https://doi.org/10.5539/ibr.v5n9p120
Tachiwou, A. M. (2016). Corporate governance and firms’ financial performance of listed company
in the West African Monetary Union (Wamu) regional financial exchange. International
Journal of Economics and Finance, 8(8), 212. https://doi.org/10.5539/ijef.v8n8p212
Tehrani, N. (2019). Investigating the effects of corporate governance system quality on company
performance. International Academic Journal of Accounting and Financial Management,
06(01), 56-65.
Velnampy, T. (2013). Corporate governance and firm performance: A study of Sri Lankan manufacturing
companies. Journal of Economics and Sustainable Development, 4(3), 228-235.
Vo, D., & Nguyen, T. (2014). The impact of corporate governance on firm performance: Empirical
study in Vietnam. International Journal of Economics and Finance, 6(6), 11. https://doi.
org/10.5539/ijef.v6n6p1
Zraiq, M.A.A., & Fadzil, H.B.F. (2018). The impact of ownership structure on firm performance:
Evidence from Jordan. International Journal of Accounting, Finance and Risk Management,
3(1), 1-4. https://doi.org/10.11648/j.ijafrm.20180301.12
Keywords: Corporate governance, Company performance, Independent board members, Internal audit function, Listed companies.
JEL Classifications G34
REFERENCES
Abdullah, S. (2004). Board composition, CEO duality and performance among Malaysian listed
companies. Corporate Governance, 4(4), 47-61. https://doi.org/10.1108/14720700410558871
Al-Matari, E. M., Al-Swidi, A. K., & Fadzil, F. H. (2014). The Measurements of Firm Performance’s
Dimensions. Asian Journal of Finance & Accounting, 6(1), 24-49. https://doi.
org/10.5296/ajfa.v6i1.4761
Al-Saidi, M., & Al-Shammari, B. (2015). Ownership concentration, ownership composition and
the performance of the Kuwaiti listed non-financial firms. International Journal of Commerce
and Management, 25(1), 108-132. https://doi.org/10.1108/ijcoma-07-2013-0065
Ameer, R., Ramli, F., & Zakaria, H. (2010). A new perspective on board composition and firm
performance in an emerging market. Corporate Governance: The International Journal of
Business in Society, 10(5), 647–661. https://doi.org/10.1108/14720701011085607
Apostolov, M. (2011). Corporate governance in Macedonia - Micro and macro analysis. Risk Governance
and Control - Financial Markets and Institutions, 1(1), 124-134.
Bauer, R., Frijns, B., Otten, R., & Tourani-Rad, A. (2008). The impact of corporate governance on
corporate performance: Evidence from Japan. Pacific-Basin Finance Journal, 16(3), 236-
251. https://doi.org/10.1016/j.pacfin.2007.05.001
Baysinger, B. D., & Butler, H.N. (1985). Corporate governance and the board of directors: Performance
effects of changes in board composition. Journal of Law, Economics, & Organization,
1(1), 101-124.
Bhagat, S. & Black, B. (2002). The Non-correlation between board independence and long-term
firm performance. Journal of Corporation Law, 27, 231-273. Review of Quantitative Finance
and Accounting, 31(2), 461.
Christensen, J., Kent, P., Routledge, J., & Stewart, J. (2015) Do corporate governance recommendations
improve the performance and accountability of small listed companies? Journal
Accounting & Finance, 55(1), 133-164.
Coles, J., & Hesterly, W. (2000). Independence of the chairman and board composition: Firm
choices and shareholder value. Journal of Management, 26(2), 195-214. https://doi.
org/10.1177/014920630002600202
Committee on the Financial Aspects of Corporate Governance., & Cadbury, A. (1992). Report of
the Committee on the Financial Aspects of Corporate Governance. London: Gee.
Damghani, B. M. (2013). The non‐misleading value of inferred correlation: An introduction to the
Cointelation Model. Wilmott, 2013(67), 50-61. https://doi.org/10.1002/wilm.10252
El-Faitouri, R. (2014). Board of directors and Tobin’s Q: Evidence from U.K. firms. Journal of
Finance and Accounting, 2(4), 82-99. https://doi.org/10.12691/jfa-2-4-2
Eimer, J. (2008). Is electing an independent board member right for your business? Exploring
the pros and cons. Retrieved from https://www.muchlaw.com/insights/article/electing-independent-
board-member-right-your-business-exploring-pros-and-cons
European Central Bank. (2004). Annual Report: 2004. Retrieved from https://www.ecb.europa.
eu/pub/pdf/annrep/ar2004en.pdf
Garg, A. K. (2007). Influence of board size and independence on firm performance: A study
of Indian companies. Vikalpa: The Journal for Decision Makers, 32(3), 39-60. https://doi.
org/10.1177/0256090920070304
Hassan, S. U. & Farouk, M. A. (2014). Board of director’s characteristics and performance of listed
deposit money banks in Nigeria. Journal of Finance and Bank Management, 2(1), 89-105.
Hassan, R., Marimuthu, M., & Johl, S. (2015). Ethnic diversity on boards and market performance:
An empirical investigation in Malaysia. Advanced Science Letters, 21(5), 1099-
1103. https://doi.org/10.1166/asl.2015.6036
Hermalin, B., & Weisbach, M. (1991). The effects of board composition and direct incentives on
firm performance. Financial Management, 20, 101–112.
Higgs, D. (2003). Review of the role and effectiveness of non-executive directors. [PDF file]
Ho, C. (2005). Corporate governance and corporate competitiveness: An international analysis.
Corporate Governance: An International Review, 13(2), 211-253. https://doi.org/10.1111/
j.1467-8683.2005.00419.x
Hutchinson, M., & Zain, M. (2009). Internal audit quality, audit committee independence,
growth opportunities and firm performance. Modern Pathology, 7(2), 50-65. https://doi.
org/10.22495/cocv7i2p4
Klein, A. (2002). Audit committee, board of director characteristics, and earnings management.
Journal of Accounting and Economics, 33(3), 375-400. https://doi.org/10.1016/S0165-
4101(02)00059-9
Kipkoech, S. R., & Rono, L. (2016). Audit committee size, experience and firm financial performance.
Evidence Nairobi Securities Exchange, Kenya. Research Journal of Finance and
Accounting, 7(15), 87-95. https://www.iiste.org/Journals/index.php/RJFA/article/view/32732.
Leung, S., Richardson, G., & Jaggi, B. (2014). Corporate board and board committee independence,
firm performance, and family ownership concentration: An analysis based on Hong
Kong firms. Journal of Contemporary Accounting & Economics, 10(1), 16-31. https://doi.
org/10.1016/j.jcae.2013.11.002
Organization for Economic Co-operation and Development. (2004). OECD Principles of corporate
governance. Paris: OECD.
Pickett, S. (1976). The internal audit handbook. Retrieved from https://www.academia.
edu/11623270/Audit_Internal-Picket_and_Spencer_Internal_Auditing
Shukeri, S. N., Shin, O. W., & Shaari, M. S. (2012). Does board of director’s characteristics affect
firm performance? Evidence from Malaysian public listed companies. International Business
Research, 5(9). https://doi.org/10.5539/ibr.v5n9p120
Tachiwou, A. M. (2016). Corporate governance and firms’ financial performance of listed company
in the West African Monetary Union (Wamu) regional financial exchange. International
Journal of Economics and Finance, 8(8), 212. https://doi.org/10.5539/ijef.v8n8p212
Tehrani, N. (2019). Investigating the effects of corporate governance system quality on company
performance. International Academic Journal of Accounting and Financial Management,
06(01), 56-65.
Velnampy, T. (2013). Corporate governance and firm performance: A study of Sri Lankan manufacturing
companies. Journal of Economics and Sustainable Development, 4(3), 228-235.
Vo, D., & Nguyen, T. (2014). The impact of corporate governance on firm performance: Empirical
study in Vietnam. International Journal of Economics and Finance, 6(6), 11. https://doi.
org/10.5539/ijef.v6n6p1
Zraiq, M.A.A., & Fadzil, H.B.F. (2018). The impact of ownership structure on firm performance:
Evidence from Jordan. International Journal of Accounting, Finance and Risk Management,
3(1), 1-4. https://doi.org/10.11648/j.ijafrm.20180301.12
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Association of Economists and Managers of the Balkans
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www.udekom.org.rs
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www.udekom.org.rs
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