Abstract:
Along with the widespread attention on corporate governance due to a series of corporate failures directly attributable to agency issues, many countries have formulated best practices and have incorporated these into listing rules of capital markets. These best practices essentially aim to instil democracy in the governing structure of corporations. Nevertheless, neither the level of compliance nor the effectiveness of the best practices in enhancing performance is known without doubt. Therefore, this study first measures the compliance with the best practices using a corporate governance index which is used in this study as a proxy for board democracy and then investigates its effect on firm performance measured using ROA and Tobin's Q. Data was collected on a random sample of 100 firms listed in the Colombo Stock Exchange in Sri Lanka for 2014 and 2018. Findings showed an increase in board democracy as indicated in higher compliance with corporate governance best practices in 2018 compared to 2014. However, even though higher compliance with corporate governance best practices is associated with higher financial performance, its influence on market performance was not evidenced. Therefore, though the effect of board democracy on firm performance cannot be entirely denied, further studies are required to investigate whether the prevailing best practices enhance board democracy so that it can influence firm performance.
