Corporate Governance Practices and Its Impact of Firm Performance in Sri Lanka


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Corporate governance is a highly focusing area in today’s context. Good corporate governance practices are considered as important to achieve well-being of the companies and the society as whole. Corporate Governance in a firm refers to the rules and policies where companies are directed and controlled. The good corporate governance can protect and investors by mitigating the risk associated with the firm, attract more investors and also to enhance the image & reputation of the company which leads to increase the profitability and shareholder wealth while contributing to the economic development. This study focus on the corporate governance areas which associate with the board structure and the governance structure. Hence the board of directors play a vital role in an organization in the process of achieving good corporate governance. This involves appointment of directors, termination or re-election of directors, composition of directors & non-executive directors in the board, Separation of CEO’s and chairman’s duties, directors’ appraisal. Companies should have the audit committee appointed to ensure the internal and external controls implemented by the company is achieving the expected outcomes and to carry out the audit and to increase the accountability. Further, he code of best practice on corporate governance issued by Institute of Chartered Accountants of Sri Lanka emphasize the availability of Remuneration committee which authorized the Director’s remuneration procedure, the level and makeup of remuneration & and disclosure of Remuneration. And to meet the regulatory requirement all companies are carrying out the annual internal & external audit where independent auditor’s opinion matters for the financial & non-financial compliances.

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Firm performance can be interpreted as Return on Asset (ROA), Return on equity (ROE) or return on Capital Employed (ROCE). In this study the firm performance is interpreted as the return on capital employed which measured the amount of return earned from the unit of capital invested in the company’s operations.

The corporate governance practices are different from country to country as there are different code of practices introduced by the government or institution of different countries/region. Sri Lanka is a developing country focusing to achieve the economic growth where firms trying to face the global competition by gaining international competitiveness. Therefore, the practice of good corporate governance is important and essential. Due to this in 2008, Securities and Exchange commission (SEC) mandated to follow the code of best practice introduce by ICASL when listing the companies in Colombo Stock Exchange (CSE).

This study is to identify the relationship between the cooperate governance practices and firm performance in Sri Lanka. As the cooperate governance variables CEO duality, Availability of Audit Committee, Auditor’s opinion & availability of Remuneration committee are considered and ROCE is used as the measure of Firm performance. Regression results shows that separation of CEO duality, availability of remuneration committee & non-qualified Audit opinion have positive impact on firm performance and availability of audit committee have negative impact. Though these corporate governance variables have positive or negative impact on firm performance, the impact is not much significant.

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