based on the information below, how is Board Composition and Firm Performance affected?

Abstract Corporate governance comprises of the policies and procedures that align a firm's activities with the interests of its investors and society. It has become increasingly important in global markets due to the rise in demand for information on a firm's reputation and governance; investment decisions are no longer based purely on a firm's financial performance but rather paired with assurance that investments will generate reasonable returns with low risk. These assertions are indirectly communicated through the firm transparency, primarily from disclosures. Corporate governance disclosures include mechanisms such as the size of a firm's board of directors, their independence, diversity, stock ownership, and other pertaining data. Adherence to strong corporate governance practices has been shown to increase investors' confidence, as it encourages firm flexibility, innovation, and risk management, in turn providing firms with easier access to the capital market. Thus, it would be reasonable to believe that better corporate governance positively correlates to a firm's value, consequently improving performance. On the basis of this assumption, we have conducted extensive research on various firm's corporate governance disclosures through their most recent proxy reports alongside Bloomberg's ESG (environmental, social, governance) scores. This report examines the impact of such internal mechanisms and their accompanying disclosures on a firm's overall performance. Scope The report will be restricted to corporate governance and firm performance with respect to five industries within the manufacturing and retail sectors: luxury, food, electronics, pharmaceuticals, and footwear. Appendix A illustrates the sample of firms researched for purposes of this report Objective To establish any correlation between a company's performance measures and corporate governance disclosures. Research Questions How does a firm's board composition influence their corporate governance disclosures? 2 . How do these disclosures impact a firm's overall performance? Review of Relevant Literature The relation of corporate governance, the board of directors, and firm performance is a widely controversial topic. Specifically, the structure and effectiveness of a board cause scrutiny in their role of corporate governance disclosures and firm performance. In general, the responsibility of the board is to monitor the firm; as well as provide knowledge, advice, and business networks to aid management in improving firm performance (Harris & Raviv, 2018). 2In the United States, there are two primary sources of law and regulations relating to corporate governance. The first source states corporate laws which govern the formation of corporations and the fiduciary duties of directors. The second source is federal security laws, which includes the Securities Act and the Exchange Act. The Security Act regulates all offerings and sales of securities, whereas the Exchange Act sets requirements for the periodic disclosure of information by publicly held corporations (Curbow, Kurnit, & Zeidman, 2019). In addition to these primary sources mentioned above, there are corporate governance guidelines and codes of best practice that recommend how public company boards should organise their structures and processes (Curbow, Kurnit, & Zeidman, 2019). However, these guidelines are broad as there are no specific requirements regarding the disclosure of corporate governance for firms. This provides ample flexibility for firms to adapt their corporate governance practices to their specific circumstances or preferences in relation to the size and complexity of their firm (Conheady, et al, 2014). Implementing effective corporate governance practices within a firm can reduce information asymmetry and agency risk. Jensen and Meckling (1976) agency theory suggests that "there ought to be a positive impact on the firm value for firms employing such governance devices and thus better governance and an effective board can raise the firm value." The assumption is that a capital market will assess and monitor a firm's compliance with the corporate governance guidelines and react by either rewarding or punishing the firm (Conheady, B., et al, 2014) Prior research has shown that in general, the higher the level of transparency, the better quality the corporate governance practices. Further, the main features considered for assessing board quality were: independence, size, education, experience, gender, as well as the frequency of board meetings (Alexandrina, 2013). In addition, prior studies have suggested a link between well- governed firms and firm value or performance (Bebchuk, Cohen, & Ferrell, 2009; Gompers, Ishii, & Metrick, 2003). However, there has been other research that has been unable to indicate that good governance actually impacts positively on the firm value/performance (Core, Guay, & Rusticus, 2006). Given the importance of the board of directors in ensuring that the firm is efficiently managed, it can be argued that an efficient and effective board can lead to the improved financial performance of the firm and ensure minimization of information asymmetry. Theoretically, we can also assume that board composition would influence the information disclosed regarding corporate governance. Therefore, ignoring all other factors, the quality of the corporate governance disclosures would impact the firm's performance, either positively or negatively based on the capital markets reaction. 3Research Method lThe research method used to answer the questionlr .. .. . In order to evaluate each Board composition, we created a scorecard similar to the Board Shareholder Condence Index (BSCI). BSCI provides an assessment of board effectiveness and looks at factors used by investors Boards of Directors for corporate governance. The main factors we focused on were Board diversity, Board independence, Board meetings, and Board evaluation. Board diversity focuses on the composition of the board through its members. This includes evaluating their gender and background. Board independence evaluates whether or not each board member had ties to the company Board they were a part of. Board meetings included the number of meetings held as well as Board member attendance. The last factor, Board evaluation, looks at how each Board is evaluated. This factor included researching if there was an existing committee that evaluated the Board and the CEO or if a third party conducted evaluations as well as the frequency of the evaluations. During our evaluation of each Board composition, we had one company stand out and receive an overall score ofA. Best Buy received high scores in all four factors. The Board for Best Buy was 50% gender diverse and had a 33% racial diversity. In addition, all members were independent including the CEO and chairman positions which were separated. Furthermore, All of their board meetings were mandatory and all of their members were expected to attend. While their board evaluation was conducted by an internal committee, they would periodically bring in a third party to further evaluate the Board. - Transparency of corporate govemance disclosures ESG scores Explain ESG scores (this is available on the information that Kudrat provided), I am sure that there is more information on if you just google it as well Corporate governance disclosure impact on nancial performance - Financial analysis for firm performance (similar to the chart used in the presentation - look at nding II and appendix E) Explain that share price would be preferable in our analysis but it was not used for the purpose of our research as share price can become obsolete and it very volatile based 011 economic events/individual firm events. Therefore, it would be difficult to compare firms. Sample Our research was carried out using a total sample size of ten firms; five rms each from the manufacturing industry and the retail industry. As summarized in the table at Appendix A, our sample was further disaggregated under the manufacturing industry and retail industry to compare one rm each from the categories of luxury, food, electronics, pharmaceuticals, and footwear. 77 7- ' Commented [1]: Make sure we update our method for the our board composition scorecard with Chris' changes For the purpose of this study, rms were chosen based on the availability of relevant information of the chosen criteria (or dependent variables), which included board diversity, board independence, board meetings, and board evaluation. These criteria were made up of individual components which are discussed in detail under \"research method\" of this report. Due to the potential bias and numerical nature of the data, the financial information, as well as individual components of each criterion were compiled and compared between the chosen firms. The reliability of the data was veried by comparing the information from multiple resources such as the annual report, corporate web site, and Bloomberg. Data collection Data collection was done through a variety of means, most notable being the use of Bloombcrg terminals and investor information made public by the organizations analyzed, with supporting information being provided from websites and other sources. Using these sources, data was gathered that could both directly and indirectly, have been pertinent to the questions. Bloombcrg tcrminals allow access to the Bloombcrg database, providing real-time information which can assist in the evaluation of specific quantitative measures (Kenton, 2018). Quantitative measures identified through the use of Bloomberg were those identied in the Appendices, Within the tables comparing financial information and dependent variables, along with other variables related to an organization's environmental, social and governance (ESG) scores. The public information provided by the organizations included reports filed with the Securities and Exchange Commission (SEC), Committee Charters, and Governance Documents. The main SEC Filings used were the lO-K Annual Reports and DEF 14A Proxy Statements, which helped identify the organization's financial health and share structure. Committee Charters provided insight on the board's mandate, compensation practices and selection committee. Governance documents involved finding information in relation to Directors Conict of Interest Guidelines, and Corporate Governance Guidelines, which assist in understanding the board's independence and ethical practices. Various websites were also involved to provide supporting evidence, most prominent of such being Censible. the Board Shareholder Confidence Index (BSCI), and the Spencer Stuart Board Index (SSPI). Ccnsiblc is a platform that breaks down and ranks, corporations based on 12 different corporate values, while the indexes provide guidance on how a Board of Directors can be evaluated. Data analysis 1. Conceptual analysis A gencv Theory and Information Asymmetry From a conceptual perspective, the goal of analyzing these manufacturing and retail companies is to determine whether companies with highquality corporate governance practices produce higher eamings as well as whether there is a positive correlation with decreasing agency risk and information asymmetry. Net income is one of the agency theory implications as it is linked to both the performance of managers and the overall company. Managers' intensity of effort (working hard or shirking) plays a key role in determining how much they are willing to disclose useful information to primary users, investors, and the board. Information asymmetry occurs when managers decide to pick and choose what information to be disclosed and that is often inuenced by the higher management practices and the board's corporate governance standards. Aligning with the agency theory, managers have no compensation incentive if they do not take on any risk and if they are not required to contribute that extra effort disutility of working hard. Essentially, the board must act in the best interests of the overall company to abide by good corporate govcmancc practices to prevent information asymmetry from occurring. In the manufacturing industry, Nike has the highest ESG score with the highest ROI of all manufacturing companies that were conducted while Tyson Foods has the lowest ROI but with the secondlowest ESG score. On the retail side, CVS Health has the highest ESG score with the lowest ROI of all retail companies that were conducted while Best Buy has the highest ROI with the second-highest ESG score. Therefore, it is evident that companies that rank below average on good corporate governance practices and characteristics are prone to mismanagement and risk the ability to capitalize on business opportunities over time. As a result, they do not have the best profit earnings due to one possible reason for information asymmetry. 11. Theoretical analysis The Scorecard From a theoretical perspective, a scorecard was involved in the analysis which was used to rank the individual companies based on four criteria that best reected the board's overall composition across both the manufacturing and retail industries. This would showcase how the board composition would reect the quality and transparency of their disclosures. The criteria chosen were board diversity, board independence. board meetings and board evaluation. A classic ranking system was used, as can be found in appendix D. An individual breakdown of how the analysis was provided for each measure is as follows. Board Diversity Board diversity was graded based on the average percentages of women and minorities on the board. An assumption was made that the perfect level of diversity would equal 50%, therefore, before providing it with a letter grade, a value over 50% was calculated to correspond with the grading scheme chosen. The letter grades can be found in appendix. where corporations are sorted from the highest-ranking to the lowest. While there does not seem to be a correlation between whether a company is a manufacturer or retailer and how diverse their Board of directors is, it is worth noting that both corporations involved in the pharmaceutical industry are found to have failing grades, While all other industries vary significantly. Board Independence Independence was measured based on the number of board members that were independent, in comparison to the total. Most organizations scored highly in this regard, which goes to show that corporations take board independence quite seriously. It must be noted, however, that this is also a measure of how the corporation has identied themselves as being independent to the public, Whether these directors act independently in practice, is something that would take a much greater level of insight into the corporations and is not within the scope of this report. Board A! eetings Board meetings were graded based on the number of board meetings that must be held in a year While factoring in the number of board meetings each member was responsible to attend annually. To do this, an assumption was made that an appropriate number of meetings was one per quarter, four annually, along with the expectation that each member was to attend all four meetings. With this in mind, the number of board meetings annually was divided by the four annual meetings, With the percentage of meetings deemed mandatory multiplied against the percentage of annual meetings, the results can be found in the appendices below. Many corporations scored highly in this regard, however, the data still does not seem to be skewed towards either manufacturers or retailers, With corporations from both sectors seemingly having a mix of positive and negative results. Once again, the pharmaceutical industry is identified as being the most poorly governed in this area. Board Evalualion The board evaluation was graded based on 5 criteria, the criteria chosen were if the board had a committee established, if this committee provides annual evaluations of the board of directors, if the committee provides annual evaluations of the CEO, if there is a third party that also provides independent evaluations, and if there is a mandatory retirement age policy. As can be seen in the appendix, each rating got a score of either 1 they met the criteria and O - they did not meet the criteria. All the corporations met the rst three criteria, meaning they all had one or more committees that oversaw the annual evaluations of the board ofdirectors and the CEO, it was the last two criteria Where the idea of govemance policies diverge. MeDonalds, for instance. clearly stated that they do not have an age limit at which directors must retire, since they believe directors can still bring value to the organization. Most corporations have an age limit of around 72-74 at which, by the end of their terms, they must retire. Board Composition With the metrics together, an average was created, in which the grading of the board composition was completed, which can also be seen in the appendix. III. Empirical analysis Comparison between board composition and ES G score After understanding the board composition, it is important to see how it correlates to the ESG scores provided by Bloomberg, which can be found in the appendices below. The goal of this activity was to gain insight on how a BoD composition would affect the level of transparency in the corporation's disclosures, eventually comparing the level of transparency to the rm's overall performance, based on ROI. Comparison between ESG score and rm performance As noted in the Stanford Graduate School of Business, \"ESG activities attract socially conscious customers and investors, we nd that, after successful engagements, particularly for those on ES issues, engaged companies experience improvements in their operating performance, protability, efciency, shareholding, and governance\" (Larcker, D., Tayan, B. 2018). Companies who are committed to good governance as depicted by ESG scores are known to have better rm performance and their ESG scores are driven by the similar factors. ESG reporting is associated to the level of the corporate structure and the size of the company as ESG scores are positively correlated with companies= size and age. As shovm in Table XXX, companies with higher scores Who are more established in the industry have more resources available and probably more free cash ow to implement social responsibility initiatives, thcrcforc, increasing their ESG score. Additionally, ESG can impact nancial performance by lowering the volatility of a company's cash ows as the impact of negative effects can be avoided or mitigated. In our analysis, we have considered Return on Investment as the main accounting variable to measure financial performance. The correlation shown in Appendix E show _ (no / positive) correlation of ROI with ESG score. Main findings I. Finding - Board Composition and Corporate Governance Disclosure The first finding has to do with what was observed in the empirical analysis, with the comparison of board composition and corporate governance disclosure. The board composition was the analysis The results from analysing the composition of the board and their ESG scores, which provide insight into their corporate governance disclosures, are not as initially expected. Reviewing the table and associated chart in appendix F, there is a negative correlation between the two values, which would identify a board that has an increased level of diversity, independence, meetings and evaluations, is not as transparent as a corporation who is lacking these metrics. II. Finding - Corporate Governance Disclosure and Firm Performance For the purpose of this paper, we used ROA and ROE to measure firm performance. It would be preferable to use share price to measure firm performance in our analysis. However, as share price can be obsolete and volatile based on economic and individual firm events, it would be difficult to compare between firms. We used the ESG score from Bloomberg as a measure for corporate governance disclosures. As mentioned above, the ESG score measures the transparency of a firm's environmental, sustainability, and governance disclosures. With reference to the graph and Table 1 in Appendix E, there is generally a weak positive correlation between the variables for all firms. However, when comparing firms individually, the comparison of these variables is quite random. For example, when comparing the company with the highest ESG score (59.9), Merck & Co., the ROA is slightly below average and the ROE is slightly above average. In addition, when comparing the company with the lowest ESG score (19.62), Footlocker Inc., the ROA is slightly below average and the ROE is below average. With reference to Table 2 in Appendix E, when comparing the means of the variables for the retail industry and manufacturing industry, note that the manufacturing industry performed better for all variables; ESG score, ROA, and ROE. These findings are inconclusive as to whether more transparent Corporate Governance Disclosures actually contribute positively on a firms performance. Our research suggests some correlation between the two variables, however most of the data was random or contradictory which made it difficult to find a trend. Therefore, our research was consistent with prior studies 9in that there was some link between the two factors; however; it is difficult to conclude that corporate governance practices actually contributes positively to a firm's performance. III. Finding - Board Composition and Firm Performance Summary The increasing awareness and demand of corporate governance disclosures makes it a more pressing issue for firms to address and implement globally. It is evident that a public firm's stance in environmental, social, and governance issues have a distinct effect on its paid-in capital through investor confidence. However, the point to be addressed is not whether corporate governance disclosures increase investor confidence, but rather if it impacts a firm's overall performance. This information would be useful to primary users of financial statements, such as present or potential investors, lenders, and other creditors evaluating the level of sustainability and risk of a particular firm. This analysis would be able to give further depth to queries such as whether a firm with greater corporate governance disclosures is able to produce reasonably higher returns or has relatively lower risk than its competitors. The objective of this report was to establish any correlation between a firm's corporate governance disclosures and overall performance. In order to come to a conclusion, two points needed to be addressed; how a firm's board composition influences their corporate governance disclosures and how these disclosures impact their performance. Through the extensive research of ten firms in five different industries respective to the manufacturing and retail sectors, we were able to extract data pertaining a firm's assigned ESG score, board composition, and overall performance. Through methodical examination of this data, we were able to form some linkages and trends between governance and performance, as well as differentiate between sectors in some cases. Some factors that affected the reliability of our research included our sample size of the chosen firms, financial metrics, scoring criteria, and publicly available scores. Our sample size of ten firms is evidently not reflective of all firms in the five chosen industries. However, we selected these firms based off their popularity and dominance within their respective markets, likely yielding more accurate results than less-known public firms. As for financial performance, we considered a firm's return on investment to be the most preferable metric in terms of financial evaluation. Though share price was a good benchmark, we concluded the volatility and obsolescence based off economic/individual events as well as market differences would raise challenges when comparing sectors and their respective industries. 10Conclusion & Takeaways Appendices Appendix A- Sample Manufacturing Industry Retail Industry Electronics Apple Inc. Best Buy Pharmaceuticals Merck & Co. CVS Health ll. lAppendix B - Financial information! - ' ' Commented [2]: Is this all in USD? and is it in the 7 7 N ' \" ' ' ' ,,, " ' ' ' millions? Did he say we have to change everything to Manufacturing Industry (2018) E32332\" make sure we have everythlng m one In 000's I Company Total Assets Total Net Income Sales ROA ROE Liabilities Revenue Apple Inc. $365,725.00 $25,8578.00 $59,531.00 $265,595.00 16.07 49.36 Standard $150,530.28 8107, 654. 58 $25,418.84 $105,876. 05 . 14. 35 Deviation 11 Retail Industry (2018) Total Net Income Sales Liabilities Revenue $9,437.00 $1,000.00 $42,151.00 $13 7,913.00 -$5 94.00 $194,579.00 $1,442.00 $284.00 $7,782.00 S3 9,069.60 $5,924.30 $21,025.20 $2,219.90 70.10 $4, 169. 80 $38,016.30 $1,396.88 $53.941.40 $57,914.37 $2,593.81 $80,014.57 III. Appendix C - Comparison of the dependent variables Board Board Board Board Board ESG Diversity " Independence Meetings Evaluation Composition Disclosure Score Score Apple Inc. . 87.50 4.00 A . Merck & Co. . 91.67 6.00 A Nike Inc. Company Total Assets Best Buy Co. 13,049.00 CVS Health Corp. $196,456.00 Foot Locker $3,961.00 lVIcDon alds Corp. $32,811.20 Tiffany & Co. $5,468.10 Mean $50,349.06 Standard Deviation $82,480.70 H .0 Tapestry Inc. 38.67 Tyson Foods 22.64 Standard 8.24 6.63 Deviation *Board diversity is an average measure based on the percentage of women and percentage of minorities on the board of directors of each individual corporation. 12 Retail Industry (2018) Company Board Board Board Board Board ESG Diversity " Independence Meetings Evaluation Com position Disclosure Score Score Best Buy Co. 36.67 . . 52.15 CVS Health 15.50 87.50 8.00 Corp. Foot Locker 48.18 90.91 7.00 Inc. McDon alds 26.14 90.91 6.00 Corp. 30.63 86.86 8.00 Standard 13.72 6.78 4.18 Deviation *Board diversity is an average measure based on the percentage of women and percentage of minorities on the board of directors of each individual corporation. IV. Appendix D - Ranking System Numeric value D 13 V. Appendix E - Board Diversity Board Diversity Company Percentage Letter Foot Locker Inc. 96% A+ Tapestry Inc. 77% B+ Best Buy Co. 73% B Mcdonalds Corp. 52% D Apple Inc. 50% D Tyson Foods 45% E Nike Inc. 45% E Tiffany & Co. 44% E Merck & Co 33% F CVS Health Corp. F VI. Appendix F - Board Meetings Board Meetings Company Percentage Letter Foot Locker Inc. ?? ?? Tapestry Inc. 100% A+ Best Buy Co. 100% A+ Mcdonalds Corp. 100% A+ Tyson Foods 100% A+ Nike Inc. 94% A+ Apple Inc. 75% B+ Tiffany & Co. 25% F Merck & Co. 25% F CVS Health Corp 25% F VII. Appendix F - Board Independence Board Independence 14Name Percentage Letter Foot Locker Inc. ?? ?? Nike Inc. ? ? CVS Health Corp. ?? Best Buy Co. 100% A+ Mcdonalds Corp. 92% At Merck & Co. 92% A+ Tapestry Inc. 89% A Apple Inc. 88% A Tyson Foods 82% A- Tiffany & Co. 80% A- VIII. Appendix F - Board Evaluation Board Evaluation Committee Annual CEO Overall Board 3rd Party Retirement Established Evaluations Evaluation Evaluations Age Policy Letter Foot Locker Inc. 30% A- Tapestry Inc. 50% C Best Buy Co. 1 1 1 100% At Mcdonalds Corp. 1 60% C Apple Inc. 1 30% A- Tyson Foods 1 30% 4- Nike Inc. 1 0 30% A- 15Tiffany & Co. 60% Merck & Co. 1 100% At CVS Health Corp O 80% 4- IX. Appendix F - Board Composition Diversity Independence Meetings Evaluation Board Composition Name o Letter Letter % Letter % Letter o/ Letter Foot Locker Inc. 96% A+ 91% A+ 100% A+ 80% A- 92% A- Tapestry Inc. 77% B+ 89% A 100% 60% C 82% A- Best Buy Co. 73% B 100% A+ 100% A+ 100% At 93% A+ Mcdonalds Corp. 52% D 91% A+ 100% A+ 60% 76% B+ Apple Inc. 50% D 88% 4 75% B+ 80% A- 73% B Tyson Foods 45% E 82% A- 100% A+ 80% A- 77% B+ Nike Inc. 45% E 75% B+ 94% 80% A- 73% B Tiffany and Co. 44% 75% B+ 25% 60% 51% D Merck & Co. 33% F 92% At 25% F 100% At 62% CVS Health Corp. 31% F 88% 25% F 80% A- 56% D+ X. Appendix F - Board Composition Vs. ESG Board Composition Vs. ESG Composition Grade % ESG Apple Inc. 73% 53% Best Buy Co. 93% 52% 16CVS 56% 48% Foot Locker Inc. 92% 20% Mcdonalds Corp 76% 42% Merck & Co. 2% 60% Nike Inc. 73% 57% Tapestry Inc. 32% 36% Tiffany & Co. 51% 50% Tyson Foods 77% 49% Board Composition Vs. ESG 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% CVS Foods Apple Best Buy Co. Foot Locker Inc. Mcdonalds Corp Merck & Co. Nike Inc. Tapestry Inc. Tiffany & Co. Composition Grade % ES G 17XI. Appendix G - Corporate Governance Disclosures and Firm Performance Corporate Governance Disclosures vs. Firm Performance ESG Score -ROA ROE 70 60 50 8 20 10 Best Buy Co. CVS Health Foot Locker Mcdonalds Tiffany & Apple Inc. Merck & Co. Nike Inc. Tapestry Tyson Foods Corp. Inc. Corp. Co. Inc. Retail Manufacturing Table 1: Comparison of Corporate Governance Disclosures and Firm Performance Industry Company ESG Score ROA ROF Best Buy Co. 52.1 7.43 24.04 CVS Health Corp. 48.30 -0.41 1.24 Retail Foot Locker Inc. 19.6 2 7.28 0.86 Mcdonalds Corp. 42.10 17.79 #N/A Tiffany & Co 50 .24 7.01 1 1.85 Apple Inc. 53.11 16.07 49.36 Manufacturing Merck & Co. 59.90 7.30 20.38 Nike Inc. 56.94 8.44 17.40 apestry Inc. 35.8 6.35 12.73 Tyson Foods -8.76 10.5 25.91 18MEAN 46.70 8.7 19.03 STANDARD DEV 1 1.74 5.14 13.99 Table 2: Comparison of Industries Retail Industry Manufacturing Industry ESG Score MEAN 42.48 50.92 ESG Score SD 13.33 9.38 ROA MEAN 7.82 9.75 ROA SD 6.48 3.87 ROE MEAN 11.38 25.16 ROE SD 10.33 14.45 Bibliography Bebchuk, L., Cohen, A., & Ferrell, A. (2009). What matters in corporate governance? 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