CHAPTER ONE

Introduction

1.1 Background of the Study

The concept of corporate governance has become a popular topic in today’s world.
And also most researchers tend to research about corporate governance. Corporate
governance started in United Kingdom. Good corporate governance is centered on the
principles of accountability, transparency, fairness and responsibility in the
management of the firm.

Corporate governance structured according to the agency theory. Agency theory

explains the conflict of interests between the shareholders and managers. The
relationship between the shareholders and manager of a corporation fit the definition
of a pure agency relationship it should be no surprise to discover that the issues
associated with the “separation of ownership and control” in the modern diffuse
ownership corporation are intimately associated with the general problem of agency.
(Jensen and Meckling, 1976)

The Cadbury Committee's draft report on "The Financial Aspects of Corporate

Governance" was issued on the 27 May 1992 and comments were requested by the 31
July 1992. There is almost universal agreement as to the progressive decline in the
standards of UK corporate governance, indeed which is the reason for appointing your
Committee. There is also widespread agreement that one factor contributing to this
decline is the absence of effective ownership. Both institutional and individual
shareholders perceive many obstacles in the way of their performing effectively their
ownership role (Cadbury Report, 1992).

The Organization for Economic Co-operation and Development (OECD) Principles of

Corporate Governance were originally developed in response to a call by the OECD
Council Meeting at Ministerial level on 27-28 April 1998, to develop, in conjunction
with national governments, other relevant international organizations and the private
sector, a set of corporate governance standards and guidelines. The Principles are
intended to assist OECD and non-OECD governments in their efforts to evaluate and
improve the legal, institutional and regulatory framework for corporate governance in
their countries and to provide guidance and suggestions for stock exchanges,

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investors, corporations, and other parties that have a role in the process of developing
good corporate governance. Corporate governance is one key element in improving
economic efficiency and growth as well as enhancing investor confidence. Corporate
governance involves a set of relationships between a company’s management, its
board, its shareholders and other stakeholders (OECD Principles of Corporate
Governance, 2004).

Corporate Governance is a broader concept. It includes main seven principles and

there are sub principles under those main principles. This research study is intended to
examine about directors’ remuneration under corporate governance principles while
considering firm age, directors’ qualifications and board size. Corporate governance
principles affect to firms’ performance. Most researchers have said good corporate
governance affects to increase firms’ performance and also The Institute of Chartered
Accountants of Sri Lanka (ICASL) have mentioned it in Code of Best Practice (CBP)
on corporate governance.

Corporate governance refers to a set of rules and incentives by which the management
of a company is directed and controlled. Hence, good corporate governance
maximizes the profitability and long term value of the firm for shareholders
(Velnampy, 2013). Good corporate governance practices are regarded as important in
reducing risk for investors, attracting investment capital and improving the
performance of companies. The positive relationship between corporate governance
structures, separate leadership, board composition, board committees and firm
performance indicate that firms have implemented corporate governance strategies,
which have resulted in higher profitability and share price performance (Heenatigala,
2011). Miyienda et al., (2013) suggested that, the firm has to consider fair
remuneration for its directors that is based on firm performance, in order to discharge
its duties effectively. The study demonstrates the existence of a positive link between
directors’ remuneration and firm performance. Further, they said through their study
that, the directors’ remuneration is invariably and closely linked to the issue of
corporate governance. Good and sound corporate governance should constrain
excessive payments being made to directors and remuneration should be largely
determined by the firm performance.

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1.2 Motivation of the Study
The concept of corporate governance has become a significant topic area among
researchers and also it is a popular topic in today’s world. More researches on
corporate governance are available in foreign countries but very little researches on
corporate governance are available in Sri Lanka and need to be a special attention on
corporate governance by Sri Lankan Companies. Corporate governance is organized
differs between countries, depending on their economic, political and social contexts.
Therefore, the findings of those studies in foreign countries can not apply directly to
Sri Lankan companies. That is the main reason to do this study. In addition to, most of
researchers have done their research regarding to board characteristics but there were
few researches on directors’ remuneration.

1.3 Statement of the Problem

The determination of the directors’ remuneration has mentioned in CBP on corporate
governance. According to CBP the directors’ remuneration is determined by the
remuneration committee. But most of the managers and shareholders in Sri Lankan
companies’ did not know about corporate governance. Therefore, they do not know
about the effect of corporate governance on firms’ performance.

The relationship of directors’ remuneration and firm performance of companies lead

to identification of a research problem that is worth to study. And also this study was
intended to find out the effect of board size, firm age and firm size on firm
performance.

The problem statement addressed in the present study is,

Is there a relationship of directors’ remuneration and firm performance of top 40

companies listed in Colombo Stock Exchange (CSE)?

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1.4 Research Questions
The following research questions were addressed in this research study,

 Is there a significant relationship between directors’ remuneration and firm

performance?
 Is there a significant relationship between board size and firm performance?
 Is there a significant relationship between firm age and firm performance?
 Is there a significant relationship between firm size and firm performance?

1.5 Objectives of the Study

The present study was aimed to achieve the following general objective and specific
objectives.

1.5.1 General Objective

To investigate the relationship of directors’ remuneration and firm performance of top
40 companies listed in CSE.

1.5.2 Specific Objectives

 To examine the relationship between directors’ remuneration and firm
performance.
 To examine the relationship between board size and firm performance.
 To examine the relationship between firm age and firm performance.
 To examine the relationship between firm size and firm performance.

1.6 Significance of the Study

This study was intended to examine the relationship between directors’ remuneration
and firm performance of top 40 companies listed in CSE. All companies are taken
their decisions by the board of directors. And also, the directors’ remuneration
directly affect to their dedication for company’s success. Therefore, company’s
management has to pay an attention for directors’ remuneration.

The findings of this study can be used as a tool for reviews. And, this study will
provide information that will be used to the managers, shareholders, competitors,
investors, regulatory users, other professional institutions, researchers and others. This

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study was expected to explain the relationship between directors’ remuneration and
firm performance through findings.

1.7 Scope of the Study

This study was intended to discuss mainly the relationship between directors’
remuneration and firm performance and also, control variables namely board size,
firm age, firm size and firm performance. Corporate governance is a broader concept
and it has introduced many aspects such as board size, board composition, CEO
duality, directors’ remuneration, internal control etc. Directors’ remuneration is one of
them that, the corporate governance covers and this study only consider about the
directors’ remuneration.

This study was considered directors’ remuneration as the independent variable and
also board size, firm age and firm size was considered as the control variables. Firm
performance was considered as the dependent variable. This study was used two
accounting measures such as Return on Assets (ROA), Return on Equity (ROE) and
one market based measure such as Tobin’s Q and these measurement use to measure
firm performance.

There are 291 companies listed in CSE when the sample was selected but in this
study, it was selected only forty companies which have the highest market
capitalization and considered the period of 2012 and 2013.

1.8 Research Methodology

To investigate the relationship between the directors’ remuneration and firm
performance, in this study was employed mainly three analysis techniques for the
methodology of this study which have used in previous researches in this area. Most
studies investigated this relationship has used quantitative techniques to analyze data
and data were collected from secondary sources. There were three measurements used
to measure firm performance such as ROA, ROE and Tobin’s Q.

The population of this study consists nearly 291 listed companies in CSE when the
sample selected. Forty highest market capitalized companies listed in CSE were
selected as the sample without banking and finance companies. The data were
collected from secondary sources such as annual reports of the companies. This study

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was intended to explain two years behavior from 2012 to 2013 of the sample. MS
Office Excel and Statistical Package for Social Science (SPSS) 16.0 were used to
analyze data in this study.

There are three analysis techniques were selected for the method of data analysis.

 Descriptive Statistics.
 Correlation Analysis.
 Regression Analysis.

1.9 Organization of the Study

1.9.1 Chapter One - Introduction

This chapter was included a brief introduction about background of the study,
motivation of the study, statement of the problem, research question, objective of the
study, significant of the study, scope of the study and the research methodology.

1.9.2 Chapter Two - Literature Review

This chapter was included firstly brief introduction about the chapter and then,
theoretical background of corporate governance, various theories on corporate
governance including agency theory, cadbury report, greenbury report and then,
reviewing of the literature including relationship between directors’ remuneration and
firm performance, relationship between control variables and firm performance and
finally a summary of the chapter.

1.9.3 Chapter Three - Methodology

This chapter was included introduction about the chapter, sample selection, data
collection including data collection methodology and types of data collection then,
design of the variables, conceptual framework and hypotheses, analysis techniques
and finally a summary of the chapter.

1.9.4 Chapter Four - Results and Discussion

This chapter was included a brief introduction about the chapter, presented the results
of analysis data and the discussion about the results by using descriptive statistics,
correlation analysis and regression analysis and finally a summary of the chapter.

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1.9.5 Chapter Five - Conclusion and Recommendation
This chapter was included a brief introduction about the chapter, overall conclusion
about the results and then, the direction for future researches.

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 CHAPTER TWO
Literature review

2.1 Introduction
This is a most important part in this study. This chapter intent to discuss about
definitions of the variables, theoretical background about the research topic, and the
relationship between variables which are used in this study based on the past studies.
Mostly this chapter expects to discuss about the relationship between variables of this
study and provides a considerable idea about the study by using past literature.

2.2 Theoretical Background of Corporate Governance

The concept of corporate governance started in 1992 with the Cadbury Report in the
UK. The corporate governance concerned primarily with protecting weak and widely
dispersed shareholders against self-interested directors and managers. The objective
of this concept is to improve corporate governance practices across the global and to
mitigate corporate governance risk and failure. There are four principles of corporate
governance. They are, accountability, fairness, transparency and independence. The
concept of corporate governance need to an organization for better access to external
finance, lower cost of capital-interest rates on loans, improved company performance-
sustainability, higher firm valuation and share performance and also reduce risk of
corporate crisis.

The survival of organizations in which important decision agents do not bear a

substantial share of the wealth effects of their decisions. The separation of decision
and risk-bearing functions observed in large corporations is common to other
organizations such as large professional partnerships, financial mutual, and
nonprofits. The separation of decision and risk-bearing functions survives in these
organizations in part because of the benefits of specialization of management and risk
bearing but also because of an effective common approach to controlling the agency
problems caused by separation of decision and risk-bearing functions. An
organization is the nexus of contracts, written and unwritten, among owners of factors
of production and customers. These contracts specify the rights of each agent in the
organization, performance criteria on which agents are evaluated, and the payoff
functions they face. Agency problems arise because contracts are not causelessly

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written and enforced. Control of agency problems in the decision process is important
when the decision managers who initiate and implement important decisions are not
the major residual claimants and therefore do not bear a major share of the wealth
effects of their decisions. Without effective control procedures, such decision
managers are more likely to take actions that deviate from the interests of residual
claimants. An effective system for decision control implies, almost by definition, that
the control (ratification and monitoring) of decisions is to some extent separate from
the management (initiation and implementation) of decisions. Individual decision
agents can be involved in the management of some decisions and the control of
others, but separation means that an individual agent does not exercise exclusive
management and control rights over the same decisions. When it is efficient to
combine decision management and control functions in one or a few agents, it is
efficient to control agency problems between residual claimants and decision makers
by restricting residual claims to the decision makers (Fama and Jensen, 1983).

2.3 Theories on Corporate Governance

2.3.1 Agency Theory

Agency theory raises a fundamental problem in organization self-interested behavior.
Mainly there are two parties. They are, shareholders (principals) and directors,
managers (agent). A corporation’s managers may have personal goals that compete
with the owner’s goal of maximization of shareholders wealth. Since the shareholders
authorize managers to administer the firm’s assets, a potential conflict of interest
exists between the two groups. This theory viewed corporate governance as a
mechanism where a board of directors is an essential monitoring device to minimize
the problems brought about by the principal-agent relationship.

Principle-agent problems are the specific result of this separation of ownership and
control. More generally, the essence of the ownership and control agency problem is
the separation of management and finance. This is because an owner or manager of an
enterprise can raise funds from investors either to put into production or to cash out
their holdings in the company. Financiers expect and require the managers’
specialized capital to generate returns on their funds. In contrast, the manager needs
financiers’ funds because owners’ funds are either not enough to pursue investment

9
opportunities or are necessary to meet the financial obligations of the company. Thus,
the agency problem has placed governance issues at the forefront of financiers’
concerns (Shan and Lei Xu).

Agency cost are defined as those cost borne by shareholders to encourage managers to
maximize shareholder wealth rather than behave in their own self-interests. Their
three major types of agency costs. First one is expenditure to monitor managerial
activities such as audit cost. Second one is expenditures to structure the organization
in a way that will limit undesirable managerial behavior such as appointing outside
members to the board of directors or restructuring the company’s business units and
management hierarchy. And, third one is opportunity cost which are incurred when
shareholder-imposed restriction such as requirements for shareholder votes on
specific issues, limit the ability of managers to take action that advance shareholder
wealth.

The agency costs arise in any situation involving cooperative effort by two or more
people even though there is no clear cut principal-agent relationship. Agency costs are
as real as any other costs. The nature of agency costs associated with outside claims
on the firm both debt and equity. The level of agency costs depends among other
things on statutory and common law and human ingenuity in devising contracts. Both
the law and the sophistication of contracts relevant to the modern corporation are the
products of a historical process in which there were strong incentives for individuals
to minimize agency costs. (Jensen and Meckling, 1976). Corporate governance
involves a set of relationship between a company’s management, its board, its
shareholders and other stakeholders and also the structure through which objectives of
the company are set, and the means of attaining those objectives and monitoring
performance are determined (OECD Principles of Corporate Governance, 2004).

2.3.2 Cadbury Report

The Cadbury Committee's draft report on "The Financial Aspects of Corporate

Governance" was issued on the 27 May 1992 and comments were requested by the 31
July 1992. There is almost universal agreement as to the progressive decline in the
standards of UK corporate governance indeed that is the reason for appointing the
committee. There is also widespread agreement that one factor contributing to this
decline is the absence of effective ownership. Both institutional and individual
10
shareholders perceive many obstacles in the way of their performing effectively their
ownership role. The Cadbury Report focus on three areas. They are, Board of
Directors, Auditing and Shareholders (Cadbury Report, 1992).

2.3.3 Greenbury Report

Discuss the recommendations of the Greenbury Committee on the remuneration of
directors in public companies. Specifically comments on the following issues: the
establishment, membership and status of remuneration committees and also the
determination of remuneration policy for executive directors; the disclosure and
approval of the details of remuneration policy; the length of service contracts and the
determination of compensation. The committee was formed in 1995 after widespread
concern that excessive amount of remuneration is paid to the directors of some
companies and also the directors whose performance had been down but they still
draw hefty pay packages from the company. There are no prescriptions on how to
determine the directors’ remuneration is provided by CBP on corporate governance.
However, the report was mentioned that the board through the remuneration
committee should design a remuneration package that is capable of attracting and
retaining executive directors with their performing well. The Greenbury Report
recommends that remuneration committee should consist of non executive members
who do not have any personal financial interest in the company (Greenbury Report,
1996).

2.3.4 Hampel Report

The corporate governance debate remains high on the agenda in the UK. The
committee on the corporate governance (Hampel Committee) released is final report
in 1998. For the most part, the report covers ground similar to that dealt with by, and
endorses the approach of its predecessors the committee on the financial aspects of
corporate governance (Cadbury Committee) and the study group on directors’
remuneration (Greenbury Committee). The Hampel Report favoured greater
shareholder involvement in company affaires (Hampel Report, 1998).

2.3.5 Code of Best Practice on Corporate Governance (CBP)

The concept of corporate governance was introduced by the ICASL to Sri Lanka. The
first code, CBP on matters related to financial aspects of corporate governance was
issued in December 1997. This was a voluntary best practice code, guided by

11
corporate governance publications, then globally applicable. Thereafter this code was
updated to be in line with the combined code of U.K. The updated code was issued in
March 2003 as the CBP on corporate governance. Then a revised CBP on corporate
governance was issued in June 2008 and also joint initiative between the Securities
Exchange Commission of Sri Lanka (SEC) and ICASL. Thereafter, the ICASL was
released an updated publication of the CBP on corporate governance 2013, which was
formulated through the joint initiatives of the ICASL and the SEC of Sri Lanka.

CBP on corporate governance (2013) was mentioned in the section of the directors’
remuneration that, companies should establish a formal and transparent procedure for
developing policy on executive remuneration and for fixing the remuneration
packages of individual directors. No director should be involved in deciding his/her
own remuneration (Principle B.1). According to the section of the level and make up
of remuneration, levels of remuneration of both executive and non-executive directors
should be sufficient to attract and retain the directors needed to run the company
successfully. A proportion of executive directors’ remuneration should be structured
to link rewards to corporate and individual performance (Principle B.2). The section
of disclosure of remuneration was mentioned that, the company’s annual report
should contain a statement of remuneration policy and details of remuneration of the
board as a whole (Principle B.3). Directors’ remuneration package was decided by the
remuneration committee of the company. Remuneration committees should consist
exclusively of non-executive directors, and should have a chairman, who should be
appointed by the board.

2.4 Reviewing of the Literature

In this section discusses about the reviewing of the literature. This intends to discuss,
what were said by the previous researchers about the relationship between directors’
remuneration and firm performance and also board size, firm age, firm size and firm
performance which were they have founded through their researches. In here mostly
discuss about the relationship between directors’ remuneration and firm performance.
Various researchers have mentioned different conclusions of this relationship
according to their findings.

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2.4.1 Relationship between Directors’ Remuneration and Firm Performance
Miyienda et al., (2013) examined the relationship of directors’ remuneration and
company performance for 57 firm listed on the Nairobi Securities Exchange for a
period from 2006 through 2010. According to their study, the relationship between
firm performance and directors’ remuneration can be seen from two perspectives. The
first perspective involves the decision to base directors’ remuneration on firm
performance. In this case, it would be expected that there is a very high correlation
between the two. The second perspective is the residual effect of remuneration
packages on firm performance. If the remuneration is attractive enough, the company
can bring in talent that can lead to better management of the firm. Further, rewarding
directors based on performance of them can also motivate them to perform better.
Directors’ remuneration packages should be attractive enough to attract and retain the
directors who have the capacity required to manage the company successfully and that
the structure of the packages for the executive directors should be tied to the corporate
and individual performance. Further, they were said that the remuneration of non-
executive directors, on the other hand, should reflect individual directors’ experience
and the level of responsibilities in the company. According to their study, the
correlation analysis yielded positive statistically significant correlations between
directors’ remuneration and each of the measures of firm performance (ROE, EAT
and Tobin’s Q). The correlation between directors’ remuneration and EAT being the
strongest and that with Tobin’s Q being the weakest. The regression analysis results
revealed that directors’ remuneration and firm performance as measured by ROE has
a weak but positive relationship. The study has demonstrated the existence of a
positive link between directors’ remuneration and ROE, EAT and Tobin’s Q as
measures of firm performance. The study concludes that among Kenyan listed
companies, directors’ remuneration has a weak relationship with ROE and Tobin’s Q,
but a moderately strong positive relationship with EAT (Miyienda et al., 2013).

The study which was executive compensation, board characteristics and firm
performance in China: the impact of compensation committee by Yuqing Zhu et al.,
(2009) mentioned that they focused primarily on the effect of a compensation
committee on CEO pay-performance relation as a consequence of its help for the
board and found that board independence produces a stronger relationship between
executive compensation and firm performance in Chinese listed firm. Contrary to a

13
popular belief that Chinese corporate governance, specifically the executive
compensation scheme, does not work effectively. They have found that executive
cash compensation is more related to accounting and stock market performance when
the proportion of independent directors on board is larger. And our results show that
the independent directors on board work more effectively on setting executive
compensation to the maximum of shareholder wealth if they have a compensation
committee to offer them help and provide information (Yuqing Zhu et al., 2009).

According to Abdullah (2006), the study of directors' remuneration, firm's

performance and corporate governance in Malaysia among distressed companies and
the study was used publicly available data from a sample of 86 distressed firm and
matched 86 non-distressed firm for the period of 2001. The purpose of his study was
to investigate the extent to which firm's performance, the structure of the board of
directors and ownership determine directors' remuneration in Malaysia among
distressed firm. This study was revealed that the full sample show directors'
remuneration is not associated with firm's profitability, as measured by ROA. A
negative and significant association is observed between directors' remuneration and
ROA (Abdullah 2006).

The study of executive remuneration and firm performance: evidence from a panel of
mutual organizations by Amess and Drake (2003) and they have explained that the
relationship between the remuneration of the highest paid director (HPD), mean board
remuneration (Director), and the chairperson of the board (Chair) and firm-level
performance is examined on a panel of mutual building societies over the 1991 to
1996 period. They have used two measures to measure performance that are
profitability and the change in Total Factor Productivity (TFP). They suggested
through their research that, the relationship between the remuneration of the board of
directors as a whole and the performance of firm is important in order to establish
whether the board of directors has a financial incentive to behave in owners’ best
interests. The excessive profits, however, may be retained and utilized to fund
unprofitable growth. Indeed, this is consistent with results showing a negative
relationship between mean highest paid director’s pay and TFP change because TFP
is an index measure of resource utilization, unlike profitability. According to their
evidence the pay-performance relationship is mixed; however, there is a strong

14
relationship between the remuneration of the HPD and profitability (Amess and
Drake, 2003).

Based on the above discussion the present study was developed the following
hypothesis.

H1: There is a significant relationship between directors’ remuneration and firm

performance.

2.4.2 Relationship between Control Variables and Firm Performance

Miyienda et al., (2013) were revealed through their study that the firm size influences
on the relationship between directors’ remuneration and firm performance as
measured by ROE and Tobin’s Q. However, firm size has little influence on the
relationship between directors’ remuneration and EAT. This could be due to the high
correlation between firm size and EAT. This suggests that larger firm tend to pay
higher values of director remuneration compared to smaller firm.

Yuqing Zhu et al., (2009) were said that through further investigation in their study,
that the positive effect of board independence on executive pay-performance link is
more evident in well performing firm and in firm with very large or very small board.
That is, firm performance and the size of board may affect the effectiveness of
independent directors on setting optimal executive compensation.

Uadiale (2010) was said the relationship between board size and firm performance
through the study of the impact of board structure on corporate financial performance
in Nigeria. It was investigated that the composition of boards of directors in Nigerian
firm and analyses whether board structure has an impact on financial performance, by
using ROE and ROCE. The result from the study was indicated that there is a strong
positive association between board size and corporate financial performance. Further
the study explained that the results are shown ROE is positively correlated with board
size and it is significant. And it was indicated that ROCE is positively correlated with
board size but not significant. According to ANOVA returns, the board size was
significant at p-value < 0.05 and that was indicated a positive relationship between it
and ROE. The result was implied that the large board size performs effectively.
Therefore, this study was recommended that the large board size should be
encouraged.

15
According to Siriwardhane the relationship between board size and company
performance is positively related with respect to ROE. Size of the firm and firm’s
performance measured by ROA, ROE and Tobin’s Q is remained insignificant. It
means that firm with having good corporate governance measures perform well as
compared to the firm having no or less corporate governance practices (Khatab et al.,
2011). Shan and Lei Xu were suggested through their findings that the board size
negatively related to the profitability of Chinese financial institutions which were the
sample of that study.

According to the study of corporate governance practices and their impacts on

corporate performance in an emerging market: The case of Sri Lanka by Manawaduge
(2012), firm size was expected to have a positive influence on firm performance since
larger firm perform better than smaller firm through economies of scale and are
resilient during economic downturns, leading to consistent performance both in terms
of accounting profit and market return. In here firm size was measured using log total
sales of sample companies. Further this study was said that the operational experience
of the firm is represented by the age of the firm. It was measured using log age of the
sample companies and was expected to be positively related to the performance,
because experience reduced operational costs via economies of scale and the
operational processes efficiencies.

According to Shakir, the study of board size, board composition and property firm
performance and it was said that the results from regression showed that, board size
has a consistent negative relationship with Tobin’s Q in all regressions and in most
instances is statistically significant too. These findings were consistent with
hypothesis one which predicts a negative association between board size and firm
performance. This research was involved panel data which comprise 81 firms studied
in the period of 1999 to 2005. The sample was consisted of firm listed under the
property sector on the main board of the Kuala Lumpur Stock Exchange.

Based on the above discussion the present study was developed the following
hypotheses.

H2: There is a significant relationship between board size and firm performance.

H3: There is a significant relationship between firm age and firm performance.

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H4: There is a significant relationship between firm size and firm performance.

2.5 Summary
The present study was intended to discuss about the relationship between directors’
remuneration and firm performance of top 40 companies listed in the CSE. When
considering above discussion of the reviewing literature, there are different kind of
arguments about the relationship of the variables, were mentioned by the researchers
based on their findings. Therefore, researchers can do further research about the
relationship between directors’ remuneration and firm performance. The findings are
different from each study. Because of, the researchers have done their study in
different kind of type of socio, economic, market, political and legal conditions. And
also, each study has taken different data sets, samples, methodologies, research
context and analytical tools. Therefore, all those finding can not adapt in directly for
Sri Lankan context. Therefore, need to do further researches in Sri Lankan context to
take an accurate idea about the relationship between directors’ remuneration and firm
performance. The methodology of this study was intended to discuss in next chapter.

17
 CHAPTER THREE
Methodology

3.1 Introduction
The present study was intended to examine the relationship between directors’
remuneration and firm performance of top 40 companies listed in CSE for the period
of 2012 and 2013. In this study, three measures of performance were employed. They
are, ROA, ROE and Tobin’s Q. The purpose of this chapter was to describe the
research methodology of this study. The design of the methodology was based on
prior researches. This chapter was intended to describe the method of data collection,
the variables used to test the hypothesis and analytical techniques employed to present
the results.

In this study quantitative research methods were used by the researcher. The
quantitative approach involves gathering and analyzing numerical data. The selection
of the sample, the data collection methodology, types of data, design of the variables,
measurements of those variables and the analytical techniques used to analyze data
are described below.

3.2 Sample Selection

The objective of this study was to investigate of the relationship between directors’
remuneration and firm performance of top 40 companies listed in CSE. In this study,
the sample was consisted of 80 observations over the period of 2012-2013 for 40
companies listed in CSE. The sample was selected from the listed companies in the
CSE for the period 2012 and 2013 excluding banking and finance sector because there
is a separate corporate governance practices for banking and finance sector. This
study was selected the sample based on market capitalization of listed companies in
CSE. The main purpose of this study was investigated the relationship between
directors’ remuneration and firm performance of selected sample and also, provided
an idea for the population using the sample. The population of this study was all
companies listed in CSE without banking and finance sector.

The top 40 companies were selected because these companies were shown higher
market capitalization among all listed companies in CSE when the sample was

18
selected. If a company performs well, the board of directors of that company was
controlled in good manner. Therefore, this study was selected forty highest market
capitalization companies listed in CSE as the sample.

The study was examined the data for the years 2012 and 2013. The reason for
selection of the years was that established the current position about directors’
remuneration and firm performance.

3.3 Data Collection

This section was intended to discuss about the method of data collection and types of
data that were collected to do the study. The data and information required for the
study were collected from the CSE websites and annual reports of selected
companies.

3.3.1 Data Collection Methodology

The all data and information were used for the purpose of this study and those were
collected from secondary sources such as companies’ annual report and CSE website.
Financial data and also, corporate information were collected from companies’ annual
reports. The name list of the sample was collected from the CSE website.

3.3.2 Types of Data collection

For the purpose of this study, data were collected for the period of 2012 and 2013.
The data required for the study included directors’ remuneration, board size, firm size
and firm age. Performance data used in the study were ROA, ROE and Tobin’s Q and
also, those data were collected which are required for the calculated above measures.
All above types of data were collected from the companies’ annual reports.

3.4 Design of the Variables

To achieve the purpose of this study, it was used control variables in addition to
independent variable and dependent variables. This study was used directors’
remuneration as independent variable. Then, firm performance as dependent variable.
Further, this study was used board size, firm age and firm size as control variables.

The firm performance of this study was measured by using accounting based
measures and market based measures. Both ROA and ROE considered as accounting

19
measures. Those two measures were indicated the effective use of companies’ total
assets and the efficiency of generating return for shareholders’ equity respectively.
Tobin’s Q which is a market based measure and it was used to indicate the market
perception of the firm performance.

A brief description about dependent variables, independent variable and control

variables which were used in this study are as follows.

Table 3.1 Measurement of Variables

Variable Abbreviation Measurement
Independent Variable The log value of total cash
Directors’ remuneration
DR
Remuneration
Dependent Variable Measured by using ROA, ROE and
Firm Performance FP Tobin’s Q
Control Variables The total number of executive and
non-executive directors of the board
Board Size BS
which, disclosed in the annual reports.
Years since incorporated the company
Firm Age FA
in Sri Lanka
Measured by using log value of total
Firm Size FS
sales

3.4.1 Directors’ Remuneration

This study was identified directors’ remuneration as independent variable and took
the log value of total cash remuneration for the measurement of directors’
remuneration. The total cash remuneration of directors was taken from the annual
reports, which were disclosed in the financial statements. Prior researchers were also
taken total cash remuneration as the measurement of directors’ remuneration. Yuqing
Zhu et al., (2009), Scholtz and Smit (2012) and Abdullah (2006) used total cash
remuneration as the measurement of directors’ remuneration for their study. The
reason for use only cash remuneration in this study was, non cash remuneration such
as share options are used as rewards for risk and for the retention of the company by
the directors. Therefore, total cash remuneration used to accomplish the purpose of

20
this study. Manawaduge (2012) was said that the area of executive remuneration is
always controversial due to an agency conflict between managers and shareholders.

3.4.2 Firm Performance

In this study, firm performance was the dependent variable and it was measured by
accounting based measures and market based measures. The accounting based
measures are Return on Assets (ROA) and Return on Equity (ROE). And, the market
based measure is Tobin’s Q. Prior studies have used above measurements to measure
firm performance. For example, Khatab et al., (2011), Heenatigala (2011) were used
all above three measurements in their study. In addition to, Miyienda et al., (2013),
Duc Vo and Phan (2013), Abdullah (2006), Uadiale (2010) and Bhagat and Bolton
(2006) were used one or two of above three measurements in their study.

3.4.2.1 ROA
ROA is an indicator of how profitable a company is relative to its total assets. It gives
an idea as to how efficient management is at using its total assets to generate earnings.
A higher ratio of ROA indicates that, the company uses its assets efficiently. Some
investors add interest expense back into net income when performing this calculation
because they would like to use operating returns before cost of borrowing. In present
study ROA was calculated by add interest expenses to profit after taxation and
divided by total assets.

Profit after Taxation + Interest Expenses

ROA =
Total Assets

3.4.2.2 ROE
ROE is the amount of net income returned as a percentage of shareholders equity. It
shows how well the company uses the shareholders’ investments to generate earnings.
ROE is expressed as a percentage and calculated as profit after interest and taxation
divided by shareholders’ equity (Khatab et al., 2011). A higher ratio indicates a
higher return that is, the company generates enough return to pay shareholders. It was
calculated as follows.

Profit after Interest and Taxation

ROE =
Shareholders’ Equity

21
3.4.2.3 Tobin’s Q
Tobin’s Q compares the ratio of a company’s market value and the value of company
total assets. In this study Tobin’s Q was calculated by, the market value of the firm
divided by the book value of the firm. If the value of the Tobin’s Q is equivalent to
1.0, it indicates that the market value is reflected in the total assets of the company.
The ratio greater than 1.0, it indicates market value is higher than the company’s
recorded total assets. If it is less than 1.0, indicates that the market value is lower than
the total assets of the company and it shows that the company may be undervaluing in
the market. Therefore a higher rate of Tobin’s Q encourages companies to invest more
capital, because the value of the company is more than the price they paid. There are
different equations to calculate Tobin’s Q. In this study, it was calculate as follows.

Market Value of the Firm

Tobin’s Q =
Book Value of the Firm

In this study the market value of the firm calculated as the number of shares
outstanding of the company multiplied by market value per share. And then, total
assets were taken as the book value of the company.

3.4.3 Board Size

The study was considered the board size as a control variable that can be influenced to
firm performance. This study was measured board size by taking the total number of
executive directors and non executive directors of the board of the company, which
was disclosed in the annual report. This measurement also used Abdullah (2006) and
Heenatigala (2011).

3.4.4 Firm Age

In this study was considered the firm age as a control variable that can be influenced
to firm performance. Firm age measured as, since years of the company incorporated
in Sri Lanka. Duc Vo and Phan (2013) were used firm age as a control variable and it
was measured by natural logarithm of years since establishment in their study.

3.4.5 Firm Size

The present study was intended to use firm size as a control variable in addition to
board size and firm age. And also, the study was considered firm size can be

22
influenced to firm performance. The previous studies were used different
measurements to measure firm size. In this study, firm size was measured by using
log value of total sales. Duc Vo and Phan (2013) were used firm size as a control
variable in their study and it was measured by natural logarithm of book value of total
assets. Heenatigala (2011) was mentioned that, the firm size can be represented by
market capitalization and book values of total assets of the firm. Miyienda et al.,
(2013) were mentioned that, the firm size as measured by revenue, total assets and
total equity.

3.5 Conceptual Framework and Hypotheses

This study was intended to examine the relationship between directors’ remuneration
and firm performance. The conceptual framework comprises of link between
variables which were employed in this study. The conceptual framework can be
developed as follows for the study.

Figure 3.1Conceptual Framework

Independent Variable Dependent Variable

 Firms Performance
 Directors’  ROA
Remuneration  ROE
 Tobin’s Q

Control Variable

 Board Size
 Firm Age
 Firm Size

The hypotheses can be developed according to above conceptual framework as

follows for the purpose of this study. And also, this study was developed the main
hypotheses and sub hypotheses under the main hypotheses.

23
 H1: There is a significant relationship between directors’ remuneration and
firm performance.
 H1a: There is a significant relationship between directors’
remuneration and ROA.
 H1b: There is a significant relationship between directors’
remuneration and ROE.
 H1c: There is a significant relationship between directors’
remuneration and Tobin’s Q.
 H2: There is a significant relationship between board size and firm
performance.
 H2a: There is a significant relationship between board size and ROA.
 H2b: There is a significant relationship between board size and ROE.
 H2c: There is a significant relationship between board size and
Tobin’s Q.
 H3: There is a significant relationship between firm age and firm
performance.
 H3a: There is a significant relationship between firm age and ROA.
 H3b: There is a significant relationship between firm age and ROE.
 H3c: There is a significant relationship between firm age and Tobin’s
Q.
 H4: There is a significant relationship between firm size and firm
performance.
 H4a: There is a significant relationship between firm size and ROA.
 H4b: There is a significant relationship between firm size and ROE.
 H4c: There is a significant relationship between firm size and
Tobin’s Q.

3.6 Analysis Techniques

The data was carried out for the years of 2012 and 2013 of top 40 companies listed in
CSE for the purpose of the study. To test the relationships, this study was developed
hypotheses and stated in the above section of conceptual framework. In this study MS
Office Excel and SPSS Package were employed to analyze data. Descriptive

24
Statistics, Correlation Analysis and Regression Analysis were used as analysis
techniques in the present study.

3.6.1 Descriptive Statistics

Descriptive statistics is a technique tool for that summarizes and describes
characteristics about variables which are used in a study or make comparison of
characteristics between those variables. The most commonly used measures of central
tendencies are mean, mode, median and standard deviation.

Descriptive statistics is useful to make general observations about the data collected.
The mean is the most important measurement of central tendency. The mean
calculates to measure the central tendency of the variables. Heenatigala (2011) was
said that the higher mean values for the measurements of firm performance indicate
that, the higher performance of the firm. Most researchers were used descriptive
statistics for analysis data. For examples, Amar and Zeghal (2011), Miyienda et al.,
(2013), Scholtz and Smit (2012), Amess and Drake (2003), Brick et al., (2005), Duc
Vo and Phan (2013) and Velnampy (2013) were used descriptive statistics for analysis
data of their studies. In this study was intended to discuss about minimum, maximum,
mean and standard deviation through descriptive statistics.

3.6.2 Correlation Analysis

Correlation can be used to measure the strength of association of variables. This study
was intended to use correlation analysis to measure the strength of association of all
variables employed of this study. The correlation value is between -1 and +1. If it is
+1, the correlation of the variables is very strong positive relationship and it is -1, the
correlation of the variables is very strong negative relationship. If it is ‘0’ there is no
relationship between variables. Previous studies were used correlation analysis for
analyze data. For examples, Miyienda et al., (2013), Brick et al., (2005), Duc Vo and
Phan (2013) and Velnampy (2013).

3.6.3 Regression Analysis

The regression analysis is also a common analysis technique to use as the
measurement the relationship of variables. Simple regression analysis can be used to
measure two variables and also multiple regression analysis can be used to measure
more than two variables of the study. The study was intended to discuss about the
relationship between variables using regression analysis and the Sig. value of this

25
analysis should be smaller than the confidence level of 0.05, to say the model is
statistically valid. Miyienda et al., (2013) were mentioned through their study that, the
regression analysis was preferred since it is able to provide not only the relationship
between two or more variables (whether positive or negative), but also information on
the strength of the relationship (Quoted by Johnson and Kuby, 2007). Most of
previous studies were used regression analysis to measure the relationship between
variables. For examples, Amar and Zeghal (2011), Miyienda et al., (2013), Scholtz
and Smit (2012), Amess and Drake (2003), Brick et al., (2005), Velnampy (2013) and
Duc Vo and Phan (2013). Regression analysis is carried out to test the hypothesis of
this study and it was expected to develop the regression model as follows.

FP = a + β1DR + β2BS + β3FA + β4FS

Where,
 FP - The firm performance and it was represented by ROA, ROE
and Tobin’s Q.
 a - The intercept of coefficient.
 β - The standardized coefficient for each of the independent
variable and control variables.
 DR - The directors’ remuneration.
 BS - The board size.
 FA - The firm age.
 FS - The firm size.

3.7 Summary
This chapter was discussed the methodology to be used to test the hypotheses
developed in this study. It was included selection of the sample, data collection
including data collection methodologies and types of data then, the design of the
variables, the conceptual framework and developed hypotheses for the purpose of this
study. Furthermore, this chapter was discussed about the analysis techniques use to
analyze data to test the relationship between directors’ remuneration and firm
performance of top 40 companies listed in the CSE. The results from the analysis
techniques will be discussed in the next chapter.

26
 CHAPTER FOUR
Results and Discussion

4.1 Introduction
The analysis of the relationship of directors’ remuneration and firm performance was
discussed in this chapter using the collected data from the sample. As discussed in the
previous chapter descriptive statistics, correlation analysis and regression analysis
were used to analyze those data. Descriptive statistics was used to find out general
observations about the data and also, it was presented the distribution of variables
which were employed in this study. Correlation analysis was assessed the association
between independent variable and dependent variables and also control variables.
Regression analysis was provided that, the relationship between variables and also, it
was provided information on the strength of the relationship between variables.
Further, the regression analysis also provides that the adequacy of model.

The structure of this chapter was presented the results on the descriptive statistics,
correlation and regression analysis and also, discussed about the analysis of the results
and finally, a summary about this chapter.

4.2 Data Analysis, Results and Discussion

4.2.1 Descriptive Statistics

As discussed in chapter three, descriptive statistics for 2012 and 2013 were calculated
for directors’ remuneration and firm performance in the study. Descriptive statistics
was used to compare general observations about the data and presented the
distribution of variables for the period of 2012 and 2013. Further, it was described the
distribution of board size, firm age and firm size of top 40 companies listed in CSE. In
this study it was intended to discuss about variables using minimum, maximum, mean
and the standard deviation through the descriptive statistics. A summary of the
descriptive statistics are presented in the Table 4.1 as follows.

27
Table 4.1Results of Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

Directors'
80 7,000 157,469,000 33,603,630.24 36,924,478.15
Remuneration
Board Size 80 5 12 8.14 1.84
Firm Age 80 7 120 47.30 32.76
Firm Size 80 92,839,000 75,110,530,155 9,554,964,200 15,182,225,064.03
ROA 80 .022 .379 .121 .071
ROE 80 .026 .677 .161 .116
Tobin Q 80 .439 7.995 1.93 1.59
Valid N
80
(listwise)
Source: Data Analysis

4.2.1.1 Directors' Remuneration

According to the table 4.1 the minimum directors’ remuneration per annum is Rs.
7,000, maximum directors’ remuneration per annum is Rs. 157,469,000 and the mean
is Rs. 33,603,630.24 of top 40 companies listed in CSE in the period of 2012 and
2013. And also, the mean value was closed to the maximum value. The standard
deviation is 36,924,478.15 and it showed that there was a high level of variation of
directors’ remuneration from the mean. The reason for this variation is that some
companies paid very high levels of remuneration and others paid very small levels of
remuneration as shown by the minimum and maximum paid. Miyienda et al., (2013)
were mentioned that, there was a high level of variation of directors’ remuneration
from the mean indicating that while some companies paid very high levels, others
paid very small values.

4.2.1.2 Board Size

The table 4.1 also shows that the minimum and maximum board size of top 40
companies listed in CSE are respectively 5 and 12 in the period of 2012 and 2013.
The mean is 8.14. Velnampy (2013) was said through his findings that the average
number of directors on the board is about 8 persons. It was consistent with the mean
of the board size in this present study. The standard deviation is 1.84 and it was
indicated that the low level of variation of the board size from the mean.

28
4.2.1.3 Firm Age
The table 4.1 shows the minimum and maximum firm age of top 40 companies listed
in CSE are 7 and 120 years respectively from incorporated in Sri Lanka. However, the
minimum and maximum as above, the mean of 47.30. The standard deviation is 32.76
and it was indicated that there was a high level of variation of firm age from the mean.
Because, some companies have been incorporated few years ago and other companies
have been incorporated long time ago as shown by the minimum and maximum firm
age.

4.2.1.4 Firm Size

The table 4.1 shows that the minimum and maximum firm size of top 40 companies
listed in CSE are Rs. 92,839,000 and Rs. 75,110,530,155 respectively in the period of
2012 and 2013. The mean is Rs. 9,554,964,200. The standard deviation is
15,182,225,064.03 and it was indicated that there was a high level of variation of firm
size from the mean. The reason for this variation was that, while some companies
earned very high amounts of revenue from their turnover and others earned small
amounts of revenue as shown by the minimum and maximum firm size.

4.2.1.5 ROA
The above table (Table 4.1) shows that the minimum and maximum ROA of top 40
companies listed in CSE are 2.2% and 37.9% respectively in the period of 2012 and
2013. The mean is 12.1% and the standard deviation is 7.1%.

4.2.1.6 ROE
The table 4.1 shows that the minimum and maximum ROE of top 40 companies listed
in CSE are 2.6% and 67.7% respectively in the period of 2012 and 2013. The mean is
16.1% and the standard deviation is 11.6%.

4.2.1.7 Tobin Q
The table 4.1 shows that the minimum and maximum Tobin Q of top 40 companies
listed in CSE are 0.439 and 7.99 respectively in the period of 2012 and 2013. The
mean is 1.93 and it is close to the minimum value. The standard deviation is 1.59 and
it shows that a low level variation of Tobin Q.

29
 4.2.2 Correlation Analysis
As discussed in the previous chapter, the correlation analysis can be used to measure
the strength of association of variables. The present study was used correlation
analysis, to analyze the strength of association of variables which are directors’
remuneration, board size, firm age, firm size and firm performance. Table 4.2 presents
the correlation for all the variables used in this study as follows.

Table 4.2 Results of Correlation Analysis

Directors' Board Firm Firm

ROA ROE Tobin Q
Remuneration Size Age Size

Directors' Pearson Correlation 1 .373** -.158 .453** .070 .097 -.281*

Remuneration Sig. (2-tailed) .001 .162 .000 .534 .393 .011
Board Size Pearson Correlation 1 .010 .150 -.226* -.215 -.009
Sig. (2-tailed) .931 .183 .043 .056 .938
Firm Age Pearson Correlation 1 -.372** -.164 -.139 .360**
Sig. (2-tailed) .001 .145 .220 .001
Firm Size Pearson Correlation 1 .151 .240* -.456**
Sig. (2-tailed) .180 .032 .000
ROA Pearson Correlation 1 .918** .255*
Sig. (2-tailed) .000 .022
ROE Pearson Correlation 1 .164
Sig. (2-tailed) .147
Tobin Q Pearson Correlation 1
Sig. (2-tailed)

N = 80
**. Correlation is significant at the 0.01 level (2tailed)
*. Correlation is significant at the 0.05 level (2-tailed)
Source: Data Analysis

The table 4.2 shows the significance of variables as “ ** Correlation is significant at

0.01 level (2- tailed)” and “ * Correlation is significant at 0.05 level (2-tailed)”.
According to above table directors’ remuneration positively correlated with board size
(0.373) and firm size (0.453). It is significant at the 0.01 level. According to table 4.2,
there is a negative correlation between directors’ remuneration and Tobin Q (-0.281)

30
and it is significant at level of 0.05. Miyienda et al., (2013) said that, the correlation
analysis yielded positive and significant correlations between directors’ remuneration
and Tobin’s Q. But in the present study there is a negative correlation between
directors’ remuneration and Tobin Q. There is a negative correlation between
directors’ remuneration and firm age (-0.158) and there are positive correlations
between directors’ remuneration and ROA (0.070) and also ROE (0.097) but those are
not significant at 0.01 level or 0.05 level. Further, Miyienda et al., (2013) said that
there was a positive correlation between directors’ remuneration and ROE and it was
significant. In this present study there is positive correlation between directors’
remuneration and ROE but it is not significant.

The above table 4.2 shows the negative correlation between board size and ROA (-
0.226). And also it is significant at the 0.05 level. Velnampy (2013) said that the
board size was not significantly correlated with ROA. The board size positively
correlated with firm age (0.010) and firm size (0.150) and also board size negatively
correlated with ROE (-0.215) and Tobin Q (-0.009) but those are not significant at
levels of 0.01 or 0.05. Further, Velnampy (2013) said that the board size was not
significantly correlated with ROE. According to Uadiale (2010), positively correlated
with board size and ROE, and it was significant. But in this present study there is a
negative correlation between board size and ROE and it is not significant.

There is a negative correlation between firm age and firm size (-0.372) and it is
significant at the 0.01 level. Firm age was positively correlated with Tobin Q (0.360)
and significant at the 0.01 level. According to table 4.2 firm age negatively correlated
with ROA and ROE and it is not significant at 0.01 level or 0.05 level.

Firm size is positively correlated with ROE (0.240) and it is significant at level of
0.05. There is a negative correlation between firm size and Tobin Q (-0.456). It is
significant at the 0.01 level. Firm size positively correlated with ROA (0.151) and it is
not significant at level of 0.01 or 0.05.

The table 4.2 shows that ROA positively correlated with ROE (0.918) and it is
significant at the 0.01 level. There is a positive correlation between ROA and Tobin Q
(0.255) and it is significant at the level of 0.05. There is a positive correlation between
ROE and Tobin Q (0.164) and it is not significant at 0.01 levels or 0.05 level.

31
4.2.3 Regression Analysis
As discussed in chapter three, the purpose of using regression analysis, to measure the
relationship between variables used in the study and provides information on the
strength of the relationship between those variables. Further, regression analysis
provides that the adequacy of the model was used in this study.

4.2.3.1 Regression Analysis for ROA

The following table 4.3 shows the results of the regression analysis such as
coefficients, R Square and P Value of director’s remuneration, board size, firm age,
firm size and ROA.

Table 4.3 Result of Regression Analysis for ROA

Coefficientsa
Unstandardized Standardized
Model Coefficients Coefficients Sig.
B Beta
(Constant) 0.0741 0.4935
Directors' Remuneration 0.0084 0.1122 0.3930
Board Size -0.0109 -0.2828 0.0191
Firm Age -0.0002 -0.1051 0.3761
Firm Size 0.0094 0.1040 0.4276
R Square
0.1050
P Value 0.08
Predictors: (Constant), Firm Size, Board Size, Firm Age, Directors' Remuneration
a. Dependent Variable: Return on Assets
Source: Data Analysis

According to the table 4.3 the regression model can be developed for ROA as follows.

ROA = 0.0741 + 0.1122 (DR) – 0.2828 (BS) – 0.1051 (FA) + 0.1040 (FS)

Where, ROA: Return on Assets

DR : Directors’ Remuneration
BS : Board Size

32
 FA : Firm Age
FS : Firm Size
The above model described how change ROA when change the directors’
remuneration, board size, firm age and firm size.

The results of the regression analysis in the table 4.3 for ROA show that, the
coefficient for variables such as directors’ remuneration, boar size, firm age and firm
size. According to the table 4.3 there is a positive relationship between directors’
remuneration and ROA (0.1122) but it is not significant because the significant value
(0.3930) is greater than the confidence level of 0.05. Abdullah (2006) said that
through his findings, there was a negative and significant association is observed
between directors' remuneration and ROA. But in this present study there is a positive
relationship between directors’ remuneration and ROA and also, it is not significant.
There is a negative relationship between board size and ROA (-0.2828) and it is
significant because significant value (0.0191) is less than the confidence level of 0.05.
Firm age and ROA negatively related (-0.1051) but it is not significant because the
significant value (0.3761) is greater than the confidence level of 0.05. There is a
positive relationship between firm size and ROA (0.1040) and it is not significant
because the significant value (0.4276) is greater than the confidence level of 0.05.
According to Khatab et al., (2011) they were founded that the relationship between
firm size and ROA was not significant. The present study can be agreed with their
statement because, the present study is found that the relationship of firm size and
ROA is not significant.

The table 4.3 shows that the R Square is 0.1050 and it is indicated that 10.50% of the
variation of the ROA is explained by the independent variable namely directors’
remuneration and control variables namely board size, firm age and firm size in this
study. Remaining 89.5% of the variance in ROA is related to other variable which is
not explained in this study. Hence, it is better to do future research by applying other
variables not used in this study. Further, table 4.3 shows the P value is 0.08 and it is
greater than the confidence level of 0.05. Therefore, it is indicated that the regression
model is not adequate to measure the relationship between independent variable and
control variables with ROA.

4.2.3.2 Regression Analysis for ROE

33
The following table 4.4 shows the regression analysis of director’s remuneration,
board size, firm age, firm size and ROE.

Table 4.4 Result of Regression Analysis for ROE

Coefficientsa
Unstandardized Standardized
Model Coefficients Coefficients Sig.
B Beta
(Constant) -0.0812 0.6395
Directors' Remuneration 0.0114 0.0941 0.4674
Board Size -0.0179 -0.2836 0.0172
Firm Age -0.0001 -0.0366 0.7540
Firm Size 0.0334 0.2266 0.0821
R Square 0.129
P Value
0.0320
Predictors: (Constant), Firm Size, Board Size, Firm Age, Directors' Remuneration
a. Dependent Variable: Return on Equity
Source: Data Analysis

According to the table 4.4 the regression model can be developed for ROE as follows.

ROE = -0.0812 + 0.0941 (DR) -0.2836 (BS) -0.0366 (FA) + 0.2266 (FS)

Where, ROE: Return on Equity

DR : Directors’ Remuneration
BS : Board Size
FA : Firm Age
FS : Firm Size

The above model described how change ROE, when change directors’ remuneration,
board size, firm age and firm size.

The results of the regression analysis in the table 4.4 for ROE shows that the
coefficient for variables such as directors’ remuneration, boar size, firm age and firm
size. According to the table 4.4 there is a positive relationship between directors’
remuneration and ROE (0.0941) but it is not significant because the significant value
(0.4674) is greater than the confidence level of 0.05. There is a negative relationship

34
between board size and ROE (-0.2836) and it is significant because significant value
(0.0172) is less than the confidence level of 0.05. Siriwardhane said that the
relationship between board size and company performance is positively related with
respect to ROE. But in this present study is found that there is a negative relationship
between board size and ROE. Firm age and ROE negatively related (-0.0366) but it is
not significant because the significant value (0.7540) is greater than the confidence
level of 0.05. There is a positive relationship between firm size and ROE (0.2266) and
it is not significant because the significant value (0.0821) is greater than the
confidence level of 0.05. According to Khatab et al., (2011) they were found that the
relationship between firm size and ROE was not significant. The results of the present
study compatible with their evidence because the present study is found that the
relationship of firm size and ROE is not significant.

The table 4.4 shows the R Square is as 0.129 and it is indicated that 12.9% of the
variation of the ROE is explained by the independent variable namely directors’
remuneration and control variables namely board size, firm age and firm size in this
study. Remaining 87.1% of the variance in ROE is related to other variable which is
not explained in the present study. Hence, this area is indicated as a scope for future
research. Further, table 4.4 shows the P value is 0.032 and it is less than the
confidence level of 0.05. Therefore, it is indicated that the regression model is
adequate to measure the relationship between independent variable namely directors’
remuneration and control variables such as board size, firm age and firm size with
ROE.

4.2.3.3 Regression Analysis for Tobin Q

The following table 4.5 shows that the regression analysis of director’s remuneration,
board size, firm age, firm size and Tobin Q.

Table 4.5 Results of Regression Analysis for Tobin’s Q

Coefficientsa
Unstandardized Standardized
Model Coefficients Coefficients Sig.
B Beta
(Constant) 8.6406 0.0001
Directors' Remuneration -0.2179 -0.1305 0.2739
Board Size 0.0755 0.0872 0.4175

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Firm Age 0.0105 0.2159 0.0472
Firm Size -0.6674 -0.3295 0.0067
R Square 0.264
P Value
0.0001
Predictors: (Constant), Firm Size, Board Size, Firm Age, Directors' Remuneration
a. Dependent Variable: Tobin Q
Source: Data Analysis

According to table 4.5 the regression model can be developed for Tobin Q as follows.

Tobin Q = 8.6406 - 0.1305 (DR) 0.0872 (BS) 0.2159 (FA) - 0.3295 (FS)

Where, DR : Directors’ Remuneration

BS : Board Size
FA : Firm Age
FS : Firm Size

The above model described how change Tobin Q, when change directors’
remuneration, board size, firm age and firm size.

The results of the regression analysis in the table 4.5 for ROA show that the
coefficient for variables such as directors’ remuneration, board size, firm age and firm
size. According to the table 4.9 there is a negative relationship between directors’
remuneration and Tobin Q (-0.1305) but it is not significant because the significant
value (0.2739) is greater than the confidence level of 0.05. There is a positive
relationship between board size and Tobin Q (0.0872) but it is not significant because
significant value (0.4175) is greater than the confidence level of 0.05. Shakir was said
that, board size has a negative relationship with Tobin Q. But in this present study
there is a positive relationship of board size and Tobin Q. Firm age and Tobin Q
positively related (0.2159) and it is significant because the significant value (0.0472)
is less than the confidence level of 0.05. There is a negative relationship between firm
size and Tobin Q (-0.3295) and it is significant because the significant value (0.0067)
is less than the confidence level of 0.05. According to Khatab et al., (2011) they found
that the relationship between firm size and Tobin Q was not significant. The finding
of the present study is not compatible with their statement because, the present study
found that the relationship of firm size and Tobin Q was significant.

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The table 4.5 shows the R Square is 0.264 and it is indicated that 26.4% of the
variation of the Tobin Q is explained by the independent variable namely directors’
remuneration and control variables namely board size, firm age and firm size in this
study. Remaining 73.6% of the variance in Tobin Q is explained by the other variable
which is not used in this study. Hence, it is better to do future research by applying
other variables related to this topic. According to table 4.5 the P value is 0.0001 and it
is less than the confidence level of 0.05. Therefore, it is indicated that the regression
model is adequate to measure the relationship between directors’ remuneration, board
size, firm age and firm size with Tobin Q.

4.3 Discussion of Hypotheses

According to above discussion the study was found out about hypotheses developed
in the chapter three whether, they are accepted or rejected. The hypotheses were
developed as main hypotheses and also, sub hypotheses in this study. Considering
above data analysis and discussion, the H1a is rejected because there is an
insignificant positive relationship between directors’ remuneration and ROA. The
H1b is rejected because there is an insignificant positive relationship between
directors’ remuneration and ROE. And, the H1c also rejected because there is an
insignificant negative relationship between directors’ remuneration and Tobin’s Q.
Therefore, the hypothesis one is rejected. Then, the H2a and H2b are accepted
because the board size has significant negative relationship with ROA and ROE. But
H2c is rejected because there is an insignificant positive relationship between board
size and Tobin’s Q. Therefore, the hypothesis two is partially accepted. The firm age
has insignificant negative relationship with ROA and ROE. Therefore, the H3a and
H3b are rejected. There is a significant positive relationship between firm age and
Tobin’s Q. Therefore, the H3c is accepted. So, the hypothesis three is partially
accepted. The firm size has insignificant positive relationship with ROA and ROE.
Therefore, the H4a and H4b are rejected. The H4c is accepted because there is a
significant negative relationship between firm size and Tobin’s Q. So, the hypothesis
four is partially accepted.

4.4 Summary

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The above results provided evidence to support the hypotheses developed in chapter
three and it was also discuss in next chapter. The results of descriptive statistics,
correlations and regression analysis have been used to analyze and compare the
results for the selected sample of top 40 companies listed in CSE. Directors’
remuneration and firm performance and also control variables which are, board size,
firm age and firm size of the sample were explained in this chapter through
descriptive statistics, correlation and regression analysis and also the relationship
between directors’ remuneration and firm performance, then relationship between
control variables and firm performance were explained in this chapter through the
results of above analysis techniques. The conclusion of this study was intended to
discuss in next chapter by using the results of analysis data presented in this chapter.

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 CHAPTER FIVE
Conclusion and Recommendation

5.1 Introduction
This chapter was intended to give an overall conclusion based on the discussion of
chapter four. Furthermore, it was expected to discuss the relationship of directors’
remuneration and firm performance and also, discuss about the impact of board size,
firm age and firm size on firm performance. Finally, recommendations for the code of
best practice and the proposed conceptual framework for future research are
summarized.

5.2 Overall Conclusion

Mainly this study was intended to examine about the relationship between directors’
remuneration and firm performance. And also, it was expected to discuss about the
impact of board size, firm age and firm size on firm performance. In this section it
was intended to test the hypotheses developed in chapter three by using the results of
the previous chapter.

Directors’ remuneration significantly negatively correlated with only Tobin’s Q as the

performance measures. Then, board size has significant negative correlation with
ROA. There is a significant positive correlation between firm age and Tobin’s Q.
Firm size significantly positively correlated with ROE and negatively correlated with
Tobin’s Q as the performance measures. According to correlation analysis, it shows
that, mostly independent variable and control variables significantly correlated with
Tobin’s Q as the performance measures.

The regression analysis of this study was provided evidence and support to test
hypotheses, developed in chapter three. According to regression analysis, the study
was found that there is an insignificant positive relationship between directors’
remuneration and firm performance as measured by ROA, ROE and Tobin’s Q.

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Therefore, the sub hypotheses namely H1a, H1b and H1c are rejected. Then, the main
hypothesis is, hypothesis one is rejected. It means the impact of directors’
remuneration on firm performance is not considerable. The board size has significant
negative relationship with ROA and ROE. Therefore, H2a and H2b are accepted. And
also, there is an insignificant positive relationship between board size and Tobin’s Q.
Therefore, the H2c is rejected. It means the board size strongly affects to ROA, ROE
and weakly affects to Tobin’s Q. So, the main hypothesis two is partially accepted.
The firm age has insignificant negative relationship with ROA and ROE. Therefore,
H3a and H3b are rejected. And, there is a significant positive relationship between
firm age and Tobin’s Q. Therefore, H3c is accepted. It means that the firm age has a
weak relationship with ROA, ROE and it has a strong relationship with Tobin’s Q.
So, the main hypothesis three is partially accepted. The regression analysis shows, the
firm size has insignificant positive relationship with ROA and ROE. Therefore, the
H4a and H4b are rejected. And, there is a significant negative relationship between
firm size and Tobin’s Q. Therefore, 43c is accepted. It means that the firm size has a
weak relationship with ROA, ROE and it has a strong relationship with Tobin’s Q.
So, the main hypothesis four is partially accepted.

Based on above discussion the researcher can be said that there is no significant
relationship between independent variable namely directors’ remuneration and
dependent variable namely firm performance. But, the control variables have
significant relationship with firm performance such as board size has a significant
relationship with firm performance as measured by accounting based measurements
and also, firm age and firm size have significant relationship with firm performance as
measured by market based measurement.

The R Square values show up that, the variation of firm performance measured by
ROA, ROE and Tobin’s Q are explained by the independent variable namely
directors’ remuneration and control variables namely board size, firm age and firm
size. According to R Square values of this study, it was indicated that the other
variables which are not employed in this study contribute to explain the dependent
variables. Because the R Square values of this study was presented at low levels.

The P values of this study were indicated that the adequacy of the model used to
measure the relationship of variables. The value of 0.08 indicated that the regression

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model is not adequate to measure the relationship between independent variable and
control variables with ROA as performance measures. Then, the value of 0.032 and
0.0001 indicated that the regression model is adequate to measure the relationship
between independent variable and control variables with ROE and Tobin’s Q as
performance measures.

5.3 Recommendation and Future Research Direction

This study was discuss about mainly the impact of directors’ remuneration on firm
performance and also it was discuss about the impact of board size, firm age and firm
size on firm performance. The study was concerned only forty highest market
capitalized companies listed in CSE as the sample and it was concerned only the
period of 2012 and 2013. So, further can do research in future by increasing the
sample and collecting data more than two years. According to R Square values of this
study, it was shown that low percentage and it was indicated that the variation of the
dependent variable explained by other variables not employed in this study more than
the variables employed this study. Therefore, researchers can do further research in
future by adding other variables in addition to explained in this study.

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