The Correlation Between Corporate Governance and Corporate Performance: Board Independence

Abstract

Board independence is an essential mechanism of corporate governance for stock market listed corporations in most of the world’s countries including the United States and Saudi Arabia. Reforming the requirements of board independence under the corporate governance regulations is a primary demand by many commentators and various stakeholder groups of corporations. While large US listed corporations collapses are still continuing after adopting some reforms, some empirical research shows positive correlation between board independence and corporate performance. Likewise, a current Saudi empirical study shows a positive association between board independence and corporate performance while many Saudi key stakeholders in Saudi listed corporations are requiring more restrictions. This dissertation examines the board independence mechanisms of corporate governance in two different stock exchange countries, the United States and Saudi Arabia. The examination was conducted by analyzing two different empirical studies for each country. For the US empirical studies, the paper uses Bhagat & Black (2001) and Bhagat & Bolton (2013). For the Saudi empirical studies, the paper uses Ghabayen (2012) and Albassam (2014). The paper suggests that US board independence regulations need more reform in the following areas: board independence standards, stock ownership incentives, a corporate reward system to encourage hard work independent director, and the monitoring of independent directors. The Saudi board independence regulations need more reform in the following areas: election process of the independent directors, developing the awareness of the independence concept, becoming a listed corporation, and how to have effective corporate governance practices in Saudi Arabia.