Impact of expertise of audit committee chair and nomination committee chair on financial performance of firm

Pages621-638
DOIhttps://doi.org/10.1108/CG-01-2020-0017
Published date22 April 2020
Date22 April 2020
AuthorNaveed Iqbal Chaudhry,Muhammad Azam Roomi,Iqra Aftab
Subject MatterCorporate governance,Strategy
Impact of expertise of audit committee
chair and nomination committee chair
on f‌inancial performance of f‌irm
Naveed Iqbal Chaudhry, Muhammad Azam Roomi and Iqra Aftab
Abstract
Purpose The purpose of this paper is to analyzethe influence of financial, monitoring and experiential
expertise of audit committee chair (ACC) and HR, monitoring and experiential expertise of nomination
committeechair (NCC) on the financial performance (FP)of the firm.
Design/methodology/approach Quantitative approachwas used in this study to collect data from 50
non-financialfirms of Pakistan and to analyze thedata through e-views for testing hypotheses.
Findings The findings revealed that financial and monitoring expertise of ACC and experiential
expertise of NCC positively influencereturn on assets, return on equity and the net profit margin of the
firm. However, no significantinfluence of experiential expertise of ACC and monitoringand HR expertise
of NCC on FP was found.
Research limitations/implications The findings of thisstudy will help firms of Pakistan to understand
what expertiseof their ACC and NCC can contribute to the enhancementof their FP. However, the current
study examinedthe non-financial firms of Pakistan only.
Originality/value Past studies have nevershown the particular focus on different types of expertise of
‘‘Chairs’’ of nomination and audit committees in a combined research to analyze their impact on FP of
firms. Thepresent study has abridged this gap in the field of expertiseof chairs of board committees so, it
will open new areas of discussionfor future researchers in domains of ‘‘agency theory’’, ‘‘humancapital
theory’’and corporate governance.
Keywords Financial performance, Corporate governance, Agency theory, Audit committee chair,
Nomination committee chair
Paper type Research paper
1. Introduction
The board committees in a firm are vital instruments for the proper maintenance of
stakeholders’ interest and shareholders’ wealth maximization. Among other board
committees, the audit committee (AC) and nomination committee (NC) are also embraced
by various past scholars as vital instruments for getting quality governance in the
organization and enhanced organizational performance. The great role of AC and NC in
corporate governance (CG) and organizational performance is associated with their
contribution in reducing the agency problems and agency cost in the firm and thus
enhancing the CG mechanisms that in turn enhance FP (Berezinets et al.,2017;Kandukuri
et al.,2015
;Azim, 2012;Aggarwal, 2013). AC and its functions are considered as the key
mechanism for the firms who are struggling to ensure the quality governance and
transparency in financial reporting of firms and to enhance their performancelevel (Kallamu
and Saat, 2015;Safari, 2017). The importance of AC expertise for the firms and countries
reflects in their governance recommendations clearly for example, according to “UK
Corporate Governance Code” (2016), there must be at least one member present in AC
Naveed Iqbal Chaudhry is
based at the Department of
Business Administration,
University of the Punjab,
Gujranwala Campus,
Gujranwala, Pakistan.
Muhammad Azam Roomi is
based at the Prince
Mohammad Bin Salman
College of Business and
Entrepreneurship, King
Abdullah Economic City,
Saudi Arabia. Iqra Aftab is
based at the Department of
Business Administration,
University of the Punjab,
Gujranwala Campus,
Gujranwala, Pakistan.
Received 13 March 2019
Revised 20 February 2020
Accepted 29 March 2020
DOI 10.1108/CG-01-2020-0017 VOL. 20 NO. 4 2020, pp. 621-638, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 621
who has “recent and relevant financial expertise”. The “Sarbanes-Oxley Act” (2002) also
considers the vitality of financial expertise of AC and suggests that at least one member of
the committee should have financial expertise. Among other members of AC, the chair of
the committee has the most part of the responsibility because ACC is responsible for the
overall functioning of the committee. Past scholars suggest that various positive outcomes
are associated with the effectiveness of ACC expert ACC in terms of improved quality and
timeliness of audit and financial reporting, firm effectiveness, the governance quality of
firms, etc. (Abernathy et al., 2014;Ghafran and Yasmin, 2018;Tanyi and Smith, 2014;
McNulty et al.,2011;Akhtaruddin and Haron, 2010). However, it is found in the literature
that particular studies on “Audit committee chair” are scarce, and there is a clear lack of
literature on the expertise of ACC in terms of their impact on “financial performance” (FP)
of the firm. Therefore, the first objective of this study is to analyze the effect of expertise of
ACC on FP of the firm for which this study has considered three kinds of audit committee
chair (ACC) expertise named as “financial expertise, monitoring expertise and experiential
expertise”.
To achieve the organizational goal, firms need to have an appropriate board in the firm
that can contribute to the achievement of organizational goals in an effective manner. In
this regard, the NC is a crucial determining element of board construct as it plays the
leading role in nomination and appointment of the board of the firm (Nachemson-Ekwall
and Mayer, 2018;Ingley and Van der Walt, 2003). NC is a very fundamental tool of
enhancing the CG quality of firms but unfortunately, it has been neglected in past studies
to some extent. The NC should be significantly considered and focused by firms
because it can play a vital part in the nomination of appropriate board members and
elimination of ineffective board members (Kaczmarek et al., 2012;Abeysekera, 2012;
Eminet and Guedri, 2010). In this regard, the expertise of the nomination committee chair
(NCC) is of great concern in CG so that he/she can monitor and operate the committee’s
work in an effective way. It is expected that when NCC has related educational or
experiential expertise then the acceptability of this committee and its output by
shareholders increases that is critical for the empowerment of the board. When NC is
chaired by a person having required expertise and monitoring capability, then there is an
increased likelihood of having appropriate and effective directors in the board of the firm
that will ultimately enhance firm’s FP (McNulty et al.,2011). NC and its proper functioning
assist the corporation to diminish the agency cost by reducing agency conflict to magnify
the trust of shareholders. Thus, NC plays an important role in the success and failure of a
company, but the literature seems to be silent about the role of its chair in organizational
performance. Therefore, the second objective of the current study is to analyze the
influential role of expertise of NCC in FP of the firm.
Given the importance of AC and NC in organizational performance and the gap found in
literature about chairs of these committees and their expertise in terms of theirimpact on FP
of the firm, the current study aims to explain the association of expertise of ACC and NCC
with FP of the firm by performing the study on listed financial firms of Pakistan. The very
scarce literature about chairs of AC and NC creates an intense need to investigate what
types of expertise are needed for ACC and NCC to enhance their contribution in FP of the
firm. Furthermore, Ghafran and Yasmin (2018) have also suggested to examine the role of
expertise of chairs at the organizational level. Thus, the current study responds to this need
by stuffing this gap through its key objectives. The current study is anticipated to make
several contributions to the field of literature and practice. First, it is expected to enhance
knowledge significantly aboutCG, board committees, “agency theory” and role of ACC and
NCC in organizational performance because it is first one of its types to assess the impact
of expertise of ACC and NCC on FP of the firm, and there isno similar type of study found in
existing literature. The firms willfind this research very helpful in their strategy and decision-
making regarding the board,financial reporting and corporate governance.
PAGE 622 jCORPORATE GOVERNANCE jVOL. 20 NO. 4 2020

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