Evaluating the Impact of Corporate Governance

Aims and Objectives

The financial and economic success of firms like Toyota not only relies on efficiency, and innovation rather compliance to corporate governance principles also plays a major role in the financial success of the firm (Goel, 2018). Correspondingly, aim of the proposed research is to evaluate how the various corporate governance principles impact the financial performance of Toyota in UK.

In order to support and complement this aim of the proposed study, the study will further attempt to achieve the following objectives. These objectives are:

To determine the corporate governance principles in the UK

To examine the potential relationship between the various corporate governance principles in the UK and the financial performance of Toyota in the UK

To evaluate the impact of corporate governance performance on financial performance of Toyota in the UK

Literature Review and Hypotheses Development

Corporate Governance Indicators

According to Mishra & Mohanty (2013), it has been argued that the investors usually prefer to invest in companies which is characterised by good corporate governance practices. The companies with good corporate governance practices are thus argued to raise funds at low cost than the companies with nominal corporate governance practices, which helps the company to strengthen its financial performance.

The companies operating in the UK are required to comply with corporate governance code, which was produced by Cadbury Committee in 1992. However, this code does not enforce rigid rules but it includes certain important principles. The main principle of the code includes leadership, effectiveness, accountability, remuneration, and relations with shareholders. When studying the corporate governance issue in the context of UK, it is important to include these main principles of code.

Financial Performance Indicators

According to Mishra & Mohanty (2014), it has been argued that accounting ratios are often considered as the indicators of firm’s financial performance. There are numbers of accounting ratios such as return on equity, return on sales and return on assets. However, in the proposed research study, return of asset (ROA) has been considered as a measure of financial performance of the firm. It is because ROA is found to between capture the financial performance of the firm than other measures or ratios and also it is not influenced by other leveraging factors in the firm.

Leadership

The corporate governance principle of leadership notes that every firm should be headed by board members that are jointly responsible for the long-term success of the firm (FRC, 2012). According to Koene, Vogelaar & Soeters (2002) it has been argued that leaders in a firm play an important role in driving the performance of the firm. In this empirical study, they found that financial performance of a firm is influenced by variety of factors. In this regard, competent leadership is identified as one of the main factors that positively influence the financial performance of the firms. Therefore, the first hypothesis that can be drawn is:

H1: There is no significant relationship between leadership and financial performance of the firm

Board Effectiveness

The key tenet of this corporate governance principle of effectiveness is stated that the board members and committees of the firm should have adequate skills, experience and knowledge so that they are able to perform their duties effectively and efficiently (FRC, 2012). According to Ali (2018), it has been argued that board members and committees that are characterised by proper balance of skills and expertise are able to deal with the challenges face by the fir more efficiently which helps in improving the financial performance of the firm. The second hypothesis is:

H2: There is no significant relationship between effectiveness and financial performance of the firm

Accountability

This corporate governance principle of accountability notes that the board members have the obligation to present fair and understandable assessment of the firm’s position as well as prospects (FRC, 2012). According to Goel (2018), it has been stressed that efficient monitoring and control of the firm’s operation is critical for improving the financial performance of the firm. In addition, it has been argued that to ensure efficient monitoring and control, it is essential for the board to maintain fairness and transparency in the firm’s operations as well as practice enhanced disclosure for protecting the interest of various stakeholders. Thus, the third hypothesis is:

H3: There is no significant relationship between accountability and financial performances of the firm

Remuneration

The corporate governance principle of remuneration states that level of compensation should be adequate to attract as well as retain competent directors with the ability to run the firm successfully. However, this principle argues that firm should avoid paying excess amount the standard (FRC, 2012). Accordingly, Ali (2016) claimed that that providing fair and sufficient remuneration plays an important role in solving many of the agency problems in the firm. It reduces the agency cost while enhances the confidence shareholders. All these factors associated with corporate governance is thus claimed to positively influence the financial performance of the firm. The fourth hypothesis is:

H4: There is no significant relationship between remuneration and financial performance of the firm’s

Relationship with shareholders is another important corporate governance principle that the firms operating in the UK are required to comply. This principle states that board in the firm has the obligation to engage with the shareholders and investors based on the mutual understanding of the common objectives (FRC, 2012). According to Byron (2014), it has been argued that firms in which the board members h regularly engage in dialogue with the shareholders and protect their interest witness positive financial performance.

H5: There is no significant relationship between relations with shareholders and financial performance of the firm

Research Model

The research model for the proposed study has been from the knowledge developed from the review of literature. It is anticipated that the proposed research model would researcher select an ideal research methodology and achieve the research aim and objectives more efficiently. The review of literature provided evidences that the firm’s financial performance is influenced by different principles of corporate governance including leadership, accountability, remuneration, effectiveness and relations with shareholders.

It has been assumed that corporate governance principles support the firm’s financial performance directly but if they are not checked can lead to negative impact on the firm’s performance

The figure1.0 below illustrates the diagrammatic representation of the research model that will be adopted the proposed study.

Research MethodThe proposed research study will be quantitative research. This research method is recognised to be an ideal choice for the proposed study because it involves formulation as well as resting of hypotheses. Since, this study attempt to determine the relationships between the corporate governance and Toyota’s financial performance in UK, five hypotheses are designed which requires testing for their acceptance or rejection using suitable statistical tools. Hence, quantitative method is considered suitable (Johnson & Christensen, 2012). Another major reason is that the findings obtained from the quantitative research are objective and have high degree of generalizability, which makes this method appropriate for the study (Creswell, 2013).

The proposed research study will be quantitative research. This research method is recognised to be an ideal choice for the proposed study because it involves formulation as well as resting of hypotheses. Since, this study attempt to determine the relationships between the corporate governance and Toyota’s financial performance in UK, five hypotheses are designed which requires testing for their acceptance or rejection using suitable statistical tools. Hence, quantitative method is considered suitable (Johnson & Christensen, 2012). Another major reason is that the findings obtained from the quantitative research are objective and have high degree of generalizability, which makes this method appropriate for the study (Creswell, 2013).

Data Collection

This proposed study will involve the use of secondary data for completing the eventual research. The secondary data will be collected from annual financial reports of Toyota UK and other library sources. Notably, the information collected from secondary data for the proposed study will be predominately associated with the financial performance of Toyota UK and how corporate governance influence the same in larger picture. Therefore, financial, annual and environmental statements of Toyota UK will be considered to be the key data sources associated with this particular research study.

Data Processing and Analysis

The data collected in the proposed study will be analysed using descriptive and inferential statistics. Descriptive statistics concerns with presenting and evaluating data through tables diagrams, graphs and percentage. In this study, the descriptive statistics involved the use of frequency, mean, maximum, minimum and standard deviation in order to quantitatively describe the variables examined in the study.

With respect to inferential statistics, the proposed study will use of hierarchical multiple regression analysis. The inferential statistics will be mainly used for testing hypotheses for its acceptance or rejection to determine the relationship between corporate governance variables and performance variables. This study further measures the goodness to fit the regression model for dependent variables including return on asset. All these analysis will be run using SPSS data analysis package.

Expected Outcome

The proposed research study represents a major step towards understanding the dynamics of corporate governance and financial performance relationship of Toyota in the UK. It is expected that the findings of this proposed study will produce new insight about the various principles of corporate governance such as leadership, board effectiveness, accountability, remuneration, relations with shareholders and its impact on the financial performance of the firm. Moreover, it is expected that the findings from the proposed research study will postulates that the good corporate governance can lead to improved financial performance in Toyota in the UK while if it is not properly managed can negatively influence the financial performance of the firm.

The findings from the study are also anticipated to contribute in my personal development. It is strongly believed that as a business and management student who aspires to become an effective leader in in leading MNC in future, the insight gain from the proposed study will help me understand the significance of complying with the corporate governance principles for the success of the firm.

References

Ali, M., 2016. Impact of Corporate Governance on Firm's Financial Performance (A Comparative Study of Developed and Non Developed Markets). Arabian Journal of Business and ar A Management Review, vol. 6, no. 6, pp. 1-6.

Ali, M., 2018. Determinants and consequences of board size: conditional indirect effects. Corporate Governance: The International Journal of Business in Society, vol. 18, no. 1, pp. 165-184.

Creswell, J. W., 2013. Research design: Qualitative, quantitative, and mixed methods approaches. London: Sage publications.

Goel, P., 2018. Implications of corporate governance on financial performance: an analytical review of governance and social reporting reforms in India. Asian Journal of Sustainability and Social Responsibility, vo. 3, no. 4, pp. 1-21.

Johnson, B. & Christensen, L., 2012. Educational Research, Qualitative, Quantitative and Mixed Approach, 4th ed. London: SAGE Publication.

Koene, B. A. S., Vogelaar, A. L. W. & Soeters, J. L., 2002. Leadership effects on organizational climate and financial performance: Local leadership effect in chain organizations. The Leadership Quarterly, vol. 13, pp. 193 – 215.

Mishra, S. & Mohanty, P., 2014. Corporate governance as a value driver for firm performance: evidence from India. Corporate Governance, vol. 14, no. 2, pp. 265-279.

Post, C. & Byron, K., 2015. Women On Boards And Firm Financial Performance: A Meta-Analysis. Academy of Management Journal, vol. 58, no. 5, pp. 1546-1571.

Take a deeper dive into Equity Valuation Using with our additional resources.