Board Structure and Firm Performance of Hotel and Travel Sector Companies in Sri Lanka

Sajith JayawardhanaDepartment of Finance

Faculty of Commerce and Management StudiesUniversity of Kelaniya

Background of the study

•This study investigates the effect of corporate governance practices to the financial performance of Hotels and Travels sector companies in Sri Lanka.

What is Corporate Governance ?What is Corporate Governance ?

•Corporate Governance is the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company's relationship with its all stakeholders.

Corporate Governance in Sri Lankan contestCorporate Governance in Sri Lankan contest

•A voluntary code on corporate governance was published jointly by the Securities and Exchange Commission of Sri Lanka and the Institute of Chartered Accountants of Sri Lanka in 2002.

Tourism sector overview - 2011Tourism sector overview - 2011

•There are 36 Hotels and Travels sector companies listed in Colombo stock exchange in Sri Lanka which represent 13% out of 287 listed companies in Colombo Stock Exchange.

•Sri Lanka’s tourist industry recorded an impressive performance in the year 2011 and is poised to continue its growth momentum in the coming years too.

Board StructureBoard Structure

•Components which affect to structure of the board are board size, percentage of insider ownership, non-executive directors’ percentage and female director percentage which were gathered from the companies’ audited annual reports.

Firm PerformanceFirm Performance

•As a financial performance indicator, the return on equity (ROE) is used in this study.

Review of LiteratureReview of Literature

•Literature review focuses on the relationship between firm performance and component of board structure such as board size, Non-executive directors in the board, inside ownership, Female directors on the board.

1. Board size 1. Board size

Inverse relation between board size and Firm performanceInverse relation between board size and Firm performance

- Dr. Roselina Shakir- Board size, board composition and property firm performance 2006

- Lipton and Borsch 1992, Jensen 1993 - Limiting board size is believed to improve firm performance

- Yermack (1996) documents an inverse relation between board size and profitability

2. Non-executive directors2. Non-executive directors

Inverse relation between Non-executive directors and Firm performanceInverse relation between Non-executive directors and Firm performance

- Klein (1998), Bhagat and Black (1997, 1998) and Hermalin and Weisbach (1991) have found that a high proportion of independent directors does not predict better

future accounting performance.- The proportion of non-executive directors in Sri Lankan firms has no significant impact on the firm performance (Fernando, 2007). - Fosberg (1989) finds no relation between the proportion of outsider directors and return on equity.

Positive relation between Non-executive directors and Firm performancePositive relation between Non-executive directors and Firm performance

- Baysinger and Butler (1985) indicated that the proportion of independent non-executive directors in 1970 was positively correlated with return on equity.

3. Insider ownership3. Insider ownership

Inverse relation between insider ownership and Firm performanceInverse relation between insider ownership and Firm performance

- Demsetz and Lehn (1985) and Hubbard and Palia (1999) that managerial ownership does not affect firm.- Loderer and Martin (1997) points in the same direction that insider ownership does not have a predictive effect on firm performance.

Positive relation between insider ownership and Firm performancePositive relation between insider ownership and Firm performance

- Kaserer & Moldenhauer (2008) find a positive relationship between insider ownership and stock performance.- D. Txomin Iturralde argued that if insider ownership is between 0 and 35%, increases in ownership will result in higher firm performance.

3. Female directors on the board3. Female directors on the board

Inverse relation between Female directors and Firm performanceInverse relation between Female directors and Firm performance

- Shrader, Blackburn, and Iles (1997) investigate the relationship between the percentage of female board members and two accounting measures of financial value (ROA and ROE) find a significant negative relationship between those two.

Positive relation between Female directors and Firm performancePositive relation between Female directors and Firm performance

- Erhardt (2003) find that the percentage of female directors is positively related to larger US firms’ two accounting measures; return on assets and return on investments.

Research objectivesResearch objectives

• Identify the board structure of Hotels and Travels sector companies in Sri Lanka.

• To determine the relationship between Board size and the Firm performance measured by using Return on Equity.

• To determine the relationship between the Proportion of Non Executive directors and the Firm performance measured by using Return on Equity.

• To determine the relationship between Insider ownership Percentage and the Firm performance measured by using Return on Equity.

• To determine the relationship between the Proportion of female directors and the Firm performance measured by using Return on Equity.

MethodologyMethodology

• Data CollectionData Collection- Data were gathered from the companies’ audited annual reports.- Firms with missing information and the firms which were not started their commercial operation were excluded from the study and the final sample was reduced to 33 listed companies out of 36 hotel and travel sector companies.

• Dependent VariablesDependent VariablesReturn On Equity (ROE)To measure corporate performance return on equity (ROE) is used in this study

ROE = Net Income / Shareholder’s equityROE = Net Income / Shareholder’s equity

• Explanatory variablesExplanatory variablesBoard Size (BS)Non-Executive Director percentage (NED)Insider ownership percentage (IO)Female Director percentage (FD)

MethodologyMethodology

•The data were analyzed with SPSS and interpret findings using descriptive statistics and Pearson correlation.

Descriptive statisticsDescriptive statistics

•Descriptive statistics measure the central tendency and dispersion.

•The descriptive statistics used in this study consist of mean which helps to identify the Board Structure of Hospitality Companies in Sri Lanka.

Pearson correlationPearson correlation

•Pearson correlation coefficient is a measure of the correlation between two variables. It is widely used in the sciences as a measure of the strength of linear dependence between two variables which helps to determine the relationship between corporate governance and financial performance of hotel and travel sector companies in Sri Lanka.

Data analysis and findingsDescriptive statisticsDescriptive statistics

•Table 3 represents the data collected from annual reports of hotels and travel sector companies.

•The first objective of the study is to identify the nature of the BOD within the Hotel and Travel Sector organizations, in order to deliver this, descriptive statistics were employed

Descriptive Statistics

Mean Std. Deviation N

ROE (%) 06.92 14.75 33

BS 8.67 2.203 33

NED (%) 73.82 27.78 33

IO (%) 06.56 14.26 33

FD (%) 07.61 10.20 33

Data analysis and findings

• Second objective of this study is to measure the association between the board characteristics and financial performance, for this we measured correlation between the above said variables.

• There is a significant correlation between Return on Equity and insider ownership.

ConclusionConclusion• The results of this study proves that good corporate governance is an important factor in

determining firm performance.

• This study reported significant positive relationships between insider ownership percentage and firm performance.

• And also this study proves that there is a inverse relationship between Board size and firm performance as well as Non Executive directors and firm performance and there is a positive association between The Proportion of female directors on the board and firm performance.

• Descriptive statistics from the study showed that - The BOD consists of around nine directors with a variation of around two within the

hotel sector organizations in Sri Lanka. This is fairly a large number for a board in hotel sector organization, when compared to average of 7.56 per board for all the listed companies in Sri Lanka.

- Female directors are about 7.6% out of the total board members. - Non-executive director proportion in the board is 73.8% which is very high which is

given by the governance requirement.- Insider Ownership is around 7% which is relatively small compared with findings from other countries.

• Table 1No Company Name AR – Year BS NED% IO % FD% ROE

1 AITKEN SPENCE HOTEL HOLDINGS PLC 2010/11 9 0.25 0.0009 0 0.1458

2 AMAYA LEISURE PLC 2010/11 9 0.667 0.683 0 0.6

3 ASIAN HOTELS & PROPERTIES PLC 2010/11 8 0.25 4.562 0.125 0.13

4 BERUWALA RESORTS LIMITED 2010/11 9 1 0.103 0 0.03

5 BROWNS BEACH HOTELS PLC 2010/11 6 0.5 0.0001 0 -0.01

6 CEYLON HOTELS CORPORATION PLC 2010/11 8 0.75 0.0197 0 -0.0403

7 CITRUS LEISURE PLC 2010/11 9 0.666 0.0315 0.111 0.011

8 DOLPHIN HOTELS PLC 2010/11 6 1 0.0224 0.166 0.0439

9 EDEN HOTEL LANKA PLC 2010/11 9 0.777 0.0019 0.125 0.073

10 GALADARI HOTELS (LANKA) PLC 2010/11 8 1 9.866 0 -0.22

11 HOTEL DEVELOPERS (LANKA) PLC 2010/11 10 1 0 0 -0.255

12 HOTEL SERVICES (CEYLON) PLC 2010/11 12 0.833 0 0.083 0.033

13 HOTEL SIGIRIYA PLC 2010/11 8 1 0.0177 0.125 0.1085

14 HUNAS FALLS HOTELS PLC 2010/11 10 0.8 0.1706 0.1 0.199

15 JOHN KEELLS HOTELS PLC 2010/11 9 1 9.8119 0 0.036

16 KANDY HOTELS COMPANY (1938) PLC 2010/11 7 0.428 0.0004 0 0.0086

17 MAHAWELI REACH HOTELS PLC 2010/11 14 0.857 0.1481 0 0.0736

18 MARAWILA RESORTS PLC 2010/11 8 1 0.0004 0 0.0223

19 PALM GARDEN HOTELS PLC 2010/11 7 1 0 0 0.012

20 PEGASUS HOTELS OF CEYLON PLC 2010/11 5 0.2 0 0 0.046

21 RAMBODA FALLS LIMITED 2010/11 6 0.17 0 0 -0.01

22 RENUKA CITY HOTEL PLC 2010/11 9 0.444 0.0035 0.444 0.109

23 RIVERINA HOTELS PLC 2010/11 6 1 0 0.166 0.43

24 ROYAL PALMS BEACH HOTELS PLC 2010/11 14 0.642 0.2158 0.071 0.0791

25 SERENDIB HOTELS PLC 2010/11 9 0.888 0.0074 0 0.1272

26 SIGIRIYA VILLAGE HOTELS PLC 2010/11 7 1 0.0001 0 0.0556

27 TAJ LANKA HOTELS PLC 2010/11 11 1 0 0.090 0.0328

28 TANGERINE BEACH HOTELS PLC 2010/11 10 0.5 0.1575 0.3 0.0394

29 THE FORTRESS RESORTS PLC 2010/11 10 0.9 0.1200 0 0.1341

30 THE LIGHTHOUSE HOTEL PLC 2010/11 12 0.75 0.0341 0.166 0.0133

31 THE NUWARA ELIYA HOTELS COMPANY PLC 2010/11 6 0.333 0.4179 0.166 0.076

32 TRANS ASIA HOTELS PLC 2010/11 7 1 0.0033 0.142 0.1485

33 WASKADUWA BEACH RESORT PLC 2010/11 8 0.75 0.0021 0.125 0.0004