The relationship between ASX recommendations on audit committees and corporate performance

Abstract

The objective of this study is to determine whether compliance with ASX Recommendation 4.3 as part of Australia’s corporate governance reforms is related to the performance of corporations. In order to investigate this matter, companies operating in the materials sector that are ranked in the top 500 companies listed on the ASX were analysed. The research question is: Among corporations that operate within the materials sector and are ranked in the top 500 companies (by market capitalisation) listed on the ASX, do those corporations that comply with ASX Recommendation 4.3, achieve higher corporate performance? This study used secondary numerical and historical data to answer the research question. The study period was derived from reports of the corporations for years ended 30 June 2006, 30 June 2007 and 30 June 2008. The data includes board characteristics, audit committee characteristics and financial data. The study included 54 corporations; 30 of them complied with Recommendation 4.3 and 24 did not. Panel data estimation regression analysis was selected as a suitable statistical technique for this study. A random effects model regression analysis was conducted (with six variables in total) for the dependent variables: Reported Net Profit (RNP), Return on Assets (ROA), Return on Equity (ROE), +/- Market (M), Price Earnings Ratio (PER) and Price Cash Flow Ratio (PCFR). Conclusions and implications were only drawn for ROA and ROE as the results for the remaining variables presented a low percentage of overall fit and statistically insignificant probability values, and so statistical inferences could not be drawn. This study answered the research question by concluding that corporations that operate within the materials sector ranked in the top 500 companies (by market capitalisation) listed on the ASX that comply with ASX Recommendation 4.3, achieve higher corporate performance as measured by return on assets and return on equity. Key Words: Corporate governance, corporate boards, company directors, audit committees and corporate performance. The terms \u27corporation\u27, \u27organisation\u27, \u27company\u27, \u27entity\u27 and \u27firm\u27 have the same meaning and are used interchangeably