Do the Board Characteristics influence the Firm Performance? An Experience with the Capital-Intensive Industries Listed in the Saudi Stock Exchange (TADAWUL)

The objective of the researchers in this article is to explore the relationship of board characteristics (board size, board meeting, number of board committees, board independence) on the firm performance (ROA & Tobin’s Q) in Saudi Capital-Intensive Industries for the data period of 2017-2020. Many researchers have tried to measure this relationship in earlier research papers, but the Capital-Intensive Industries have not been exclusively tested so far. This paper aims at filling this gap and measure the relationship of exclusive board characteristics and firm performance Capital Intensive Industries listed in Saudi Stock Exchange (TADAWUL). We find board size influences the firm performance in an opposite direction. On the other hand, board meeting influences the firm performance in a positive direction and both the results are statistically significant. The other board characteristics are not influencing the firm performance in this study. Additionally, the firm size is influencing the firm performance (positively with ROA and negatively with Tobin’s Q).


Introduction
The principle of separation of ownership and management in the corporates, give rise to the agency conflict which in turn might lead to the misuse of managerial power and discretion (Tirole, 2006). In the recent past we have experienced such kind of agency conflict and poor corporate governance (Enron, Worldcom, Xerox, Lehman Brothers, Tyco, AIG, GM, the list goes on) all over the World. Corporate governance has been defined by Solomon & Solomon, (2010) as: "The system of checks and balances, both internal and external to companies, which ensures that companies discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activity". As per the OECD "Corporate governance involves a set of relationships between a company's management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined". The researchers at academic and corporate world are continuously exploring the relationship of corporate governance with the corporate performance since last three decades (Jensen, 1993;Klein, 1998;Bhagat & Black 2001;Guest, 2009;Dalton & Dalton, 2011;Ujunwa, 2012;Pathan & Faff, 2013;Yeh & Trejos, 2015;Mustafa et al., 2017;Bajeher, 2019;Almoneef & Samontaray, 2019;Ganguli & Guha Deb, 2021;Fariha, Hossain & Ghosh, 2021 Vol. 15, No. 9;2022 The researchers in this current study tries to answer the question of whether the board characteristics influence the firm performance of Saudi listed companies, with a special reference to the capital-intensive industries. We have analyzed the descriptive statistics, conducted the correlation and multiple regression for testing whether the board characteristics influence the performance of Saudi capital-intensive industries. For measuring the firm performance (dependent variables) we have used ROA and Tobin's Q. Board characteristics (independent variables) are measured through board size, board independence, board meetings and number of board committees.
H1A: Board size has a significant positive association with capital-intensive industries performance represented by ROA.
H1B: Board size has a significant positive association with capital-intensive industries performance represented by Tobin's Q. H3A: Board meeting has a significant positive association with capital-intensive industries performance represented by ROA.

Board Independence and Firm
H3B: Board meeting has a significant positive association with capital-intensive industries performance represented by Tobin's Q.

Number of Board Committees and Firm Performance:
Here we studied the relationship of number of committees inside the board with the financial performance. Klein, (1998) found a positive relationship between the composition of board committees and firm performance. In another research study the authors revealed a negative significant relationship between the number of board committees and firm performance (Almoneef & Samontaray, 2019) represented by Tobin's Q.
H4A: Number of board committees has a significant positive association with capital-intensive industries performance represented by ROA.
H4B: Number of board committees has a significant positive association with capital-intensive industries performance represented by Tobin's Q.

Data Sample
As our study focuses on the capital-intensive industries, we have selected the four most capital-intensive industries viz. capital goods industry, transportation industries, energy industries and consumer durables & apparels industries. There are total thirty companies listed under these four industries. Out of total thirty companies we have considered those companies whose data is available for the whole sample period of 2017 -2020. In this process it is further scaled down to 16 companies which became our final sample (Refer appendix A). The sample taken in our study is more than 50% of the population consisting capital-intensive industries of Saudi Arabia (listed in TADAWUL).

Data Source
The data used in this study are secondary in nature, collected from the sample companies' websites and the official website of Saudi Stock Exchange (TADAWUL).

Descriptive Statistics
As shown in table 2 the minimum number of board members are 5 where as the maximum goes to 12 with a standard deviation of 1.4. The number of independent directors is as low as 1 with a maximum of 7, give rise to a mean of 4 independent directors. There are 2 minimum numbers of meetings held whereas 9 meetings are held as maximum, with a mean of 5 meetings a year. The number of board committees are 2 minimum, 5 maximums with an average of 3 number of board committees. The age of the companies in the sample are 9 years minimum age and 67 years as the maximum age. The minimum size of the company is 13 million Saudi Riyals and maximum of 22 million with an average of 20 million. A large dispersion is seen in the Tobin's Q ratio of minimum 2.4 percent and maximum of 119318 percent, which shows a huge disparity of companies' market value to book value of the assets.  Table 3 shows the potential correlation among the variables taken for the study. This study will help us to understand that there is no major correlation between variables and the results of the regression analysis will be robust (Field, 2013). From the table 3, it is clear that there remains no high significant correlation between variables. To ensure there remains no auto correlation problem between the variables, we conducted the Durbin-Watson Test and made sure that the value remains between 1.5 -2.5 (Kenton, 2021;Investopedia.com).

Durbin Watson Test & Pearson Correlation Analysis
We found there remains no serious auto-correlation problem between the variables (Value is within the range) when the dependent variable is Tobin's Q (Table 6). When it comes to dependent variable ROA, there remains slight positive auto-correlation as the Durbin-Watson value is slightly less than 1.5, at the same time it is more than 1, which is in the acceptable range.

Regression Analysis
We run the multiple regression analysis (Ordinary Least Square) technique (Fariha, Hossain & Ghosh, 2021) to test the relationship between the board characteristics and firm performance (ROA & Tobin's Q).
Referring to table 6 we find the adjusted R square is above the acceptable range of 0.4, which shows that the independent variables of board characteristics taken are well defining the dependent variable Tobin's Q. further the same table 6 shows the Durbin-Watson test score of 1.574, which shows the variables are neither positively nor negatively auto-correlated.  Table 7 shows board meeting is positively associated with firm performance represented by Tobin's Q. The result is similar with previous studies conducted by Neralla, (2022). Whereas the results are in contrast with studies conducted by Bajeher, (2019); and Naseem et al, (2017). Therefore, hypothesis H3B is accepted. No other board characteristics are significantly associated with firm performance (Tobin's Q), neither positive nor negative as well. The results are supported by previous studies (Bajeher, 2019; Ganguli & Guha Deb, 2021;Bajeher, 2019;Dalton & Dalton, 2011;Bhagat & Black, 2001).

Conclusion
The current study examines the relationship between the board characteristics and firm performance (ROA & Tobin's Q) in Saudi Capital-Intensive Industries. 16 sample company's data have been analyzed for the sample period of 2017-20. We find board size influences the firm performance in an opposite direction. On the other hand, board meeting influences the firm performance in a positive direction and both the results are statistically significant.
As there is no specific study for these industries, we want to add value undertaking such study. We found Board of Directors play an important part in the corporate sectors (intermediate between the shareholders and the managers), therefore we wanted to test the relationship in the Saudi capital-intensive industries.
The outputs of this study will be helpful for the regulators and policy makers (CMA, TADAWUL etc.) to frame more specific guidelines as necessary. Based on the current findings more importance may be provided on true independence and freedom of opinion of the independent non-executive director.
As the sample of the study is the capital-intensive industries in Saudi Arabia, this study might be extended to other industries in future. Similarly, the period of the study might be extended to pre and post pandemic event study.