Abstract:
Proponents of Agency theory define the term “organization” as a "legal fiction
which serves as a nexus for a set of contracting relationships among individuals".
Thus, the managers being the agents of the corporate sector have a duty to
coordinate the contracts, initiating and implementing exchanges between the nexus
of shareholders and all the other stakeholders. The purpose of this study is to
identify and measure the “Level of compliance of Relations with Shareholders with
the code of best practices on corporate governance and its impact on Corporate
Financial Performance in Sri Lanka”. Most of the countries in the world explicitly
rely on the shareholders’ meetings as the most important forum where shareholders
can exercise their rights and therefore it may lead to have improved efficiency on
decision making which ultimately improve the performance of the companies. After
deducting companies in the default board, a sample of 130 companies which are
registered in the Colombo Stock Exchange as at 31st of August 2010 was selected
from all the industry sectors randomly based on the probability proportionate
sampling technique to represent 60% of the qualified population. The Secondary
data on independent variables were collected from Annual Reports issued by each
company for the period of two years from 2008/09 to 2009/10 through a Composite
Index which was constructed being based on the Code of Best Practices on
Corporate Governance (2008). The data on financial performance, the dependant
variables measured through Return on Assets (ROA), Return on Equity (ROE) and
Return on Investment (ROI) were collected from the Audited Financial Statements
of each company. Mean, minimum and maximum values were used to analyze the
level of compliance with the Code whereas Pearson correlation and regression
analysis were used to analyse the association and the level of the strength of the
association between dependant and independent variables. The level of compliance
with the Code was 42.6% and 71.2% in 2008/09 and 2009/10 respectively. The
association recorded in 2009/10 was around 0.516, 0.518 and 0.507 with ROA,
ROE and ROI respectively at 95% significant level where no significant association
found in 2008/09. In conclusion, it is emphasised that the companies are in a
position to improve their financial performance as long as they improve their level
of compliance with Code of Best Practices on Corporate Governance confirming the
results obtained by Weir and Laing (2000).