An-Najah National University Faculty of Graduate Studies Influence of Board Interlocking, Board Structure and Ownership Structure on the Financial Performance of Palestinian Corporations By Luai Saleh Mohammad Antari Supervisor Dr. Islam Abdeljawad Co-Supervisor Dr. Ra’fat Al-Jallad Submitted in Partial Fulfilment of the Requirements for the Degree of Master of Finance, Faculty of Graduate Studies, at An- Najah National University, Nablus, Palestine. 2021 ii Influence of Board Interlocking, Board Structure and Ownership Structure on the Financial Performance of Palestinian Corporations By Luai Saleh Mohammad Antari This thesis was defended successfully on 29/05/2021 and approved by: Defense Committee Members Signature 1- Dr. Islam Abdeljawad / Supervisor ………..……… 2- Dr. Ra’fat Al-Jallad / Co-Supervisor ………..……… 3- Dr. Mohmad Abusharbeh / External Examiner ………..……… 4- Dr. Shatha Qamhieh / Internal Examiner ………..……… iii Detection iv Acknowledgements Firstly, I would like to express my sincere gratitude to my advisors Dr. Islam Abedaljawad and Dr. Ra’fat Al-Jallad for the continuous support of my master study and related research, for his patience, motivation, and immense knowledge. They help me with their guidance all the time in research and writing this thesis. Besides my advisors, I would like to thank everyone taught me at the master degree. v اإلقرار عنوان: تحملالرسالة التي مد مقأدناه الموقعأنا هيكل الملكية، وخصائص مجلس اإلدارة و أثر تداخل مجالس اإلدارة، على األداء المالي للشركات المساهمة العامة المدرجة في بورصة فلسطين Influence of Board Interlocking, Board Structure and Ownership Structure on the Financial Performance of Palestinian Corporations أقر بأن ما اشتملت عليه الرسالة إن ما هو نتاج جهدي الخاص باستثناء ما تم ت اإلشارة إليه حيثما ورد وأن هذه الرسالة ككل أو أي جزء منها لم يقد م من قبل لنيل أي درجة علمية أو بحث علمي بحثيَّة أخرى.عليمية أو ت ي مؤسسةلدى أ Declaration The work provided in this thesis, unless otherwise referenced, is the researcher’s own work, and has not been submitted elsewhere for any other degree or qualification. :Luai Saleh M. Antari Student’s Name اسم الطالب: :Signature …………………………………… التوقيع: :Date 29/05/2021 التاريخ: vi Table of Contents No. Subject Page Defense Committee Members ii Detection iii Acknowledgements iv Declaration v Table of Contents vi List of Tables ix List of Figures x List of Abbreviations xi Abstract xii Chapter One: Introduction 1.1 Introduction 2 1.2 Problem of the Study 4 1.3 Objectives of the Study 5 1.4 Research Questions of the Study 6 1.5 Importance of the Study 6 1.6 Thesis Structure 8 Chapter Two: Theoretical Framework and Empirical Studies 2.1 The Concept of Corporate Governance 11 2.2 Theories of Corporate Governance 12 2.2.1 Agency Theory 13 2.2.2 Stakeholder Theory 14 2.2.3 Stewardship Theory 16 2.2.4 Resource Dependency Theory 17 2.3 The Principles Underlying an Effective Governance System 18 2.3.1 The First Principle: Shareholder’s Equity 18 2.3.2 The Second Principle: Equal Treatment of Shareholders 19 2.3.3 The Third Principle: The Role of Stakeholders in Governance 20 2.3.4 Fourth Principle: Disclosure and Transparency 21 2.3.5 Fifth Principle: Responsibilities of the Board of Directors 22 2.4 Objectives of the Corporate Governance 24 2.5 The Main Characteristics of an Effective Governance System 26 2.6 Research Hypotheses Development 28 2.6.1 Financial Performance (FP) 28 2.6.2 Explanatory Variables 29 vii No. Subject Page 2.6.2.1 Board Interlocking 29 2.6.2.2 Board Size 35 2.6.2.3 Duality (CEO / Chair Duality) 38 2.6.2.4 Women on Board 39 2.6.2.5 Number of Board Meetings 41 2.6.2.6 Large Ownership 44 2.6.2.7 Institutional Ownership 47 2.6.2.8 Foreign Ownership 50 2.6.3 Control Variables 51 2.6.3.1 Firm Size 51 2.6.3.2 Leverage 53 2.7 The Conceptual Model of the Study 58 Chapter Three: Research Methodology and Design 3.1 Data of the Study 61 3.2 Measurement of Study Variables 62 3.2.1 Dependent Variables 62 3.2.2 Measurement of Independent Variables 63 3.2.3 Control Variables 65 3.3 Empirical Research Models 67 3.4 Statistical Analysis Methods 68 Chapter Four: Findings and Discussion 4.1 Introduction 70 4.2 Exploratory Data Analysis 70 4.2.1 Data and Descriptive Statistics 71 4.2.2 Correlation Coefficient Matrix 75 4.3 Empirical Models Estimation 77 4.3.1 Panel data estimation 78 4.3.1.1 Financial Performance (ROA) 79 4.3.1.2 Value of the company (Tobin’s Q) 81 4.3.2 Diagnostic Checks 84 4.4 Discussion of Results 84 4.4.1 Board Interlocking (BI) 85 4.4.2 Board Size 88 4.4.3 CEO Duality 91 4.4.4 Women in the Board 94 4.4.5 Number of Meetings 95 4.4.6 Large Ownership 97 4.4.7 Institutional Ownership 98 4.4.8 Foreign Ownership 100 4.4.9 Firm Size 101 viii No. Subject Page 4.4.10 Corporate Financial Leverage 103 4.5 Robustness Test 105 4.5.1 Financial Performance (ROE) 106 4.5.2 Financial Performance (EPS) 108 Chapter Five: Conclusion and Recommendations 5.1 Introduction 112 5.2 Summary of the Main Findings 112 5.2.1 Board Structure Characteristics and Financial Performance (FP ( 112 5.2.1.1 Board Interlocking (BI) and Financial Performance (FP) 112 5.2.1.2 Board Size and Financial Performance (FP) 113 5.2.1.3 CEO Duality and Financial Performance (FP) 115 5.2.1.4 Women in the Board and Financial Performance (FP) 116 5.2.1.5 Board Meetings Frequency and Financial Performance (FP) 116 5.2.2 Ownership Structure Variables and Corporate Financial Performance 118 5.2.2.1 Large Ownership and Financial Performance (FP) 118 5.2.2.2 Institutional Ownership and Performance 118 5.2.2.3 Foreign Ownership and Financial Performance (FP) 119 5.2.3 Control Variables on Corporate Financial Performance (FP) 120 5.2.3.1 Firm’s Size and Financial Performance 120 5.2.3.2 Corporate Financial Leverage and FP 121 5.3 Recommendations of the Study 121 5.3.1 Recommendations for Companies 122 5.3.2 Recommendations for Regulators 123 5.4 Limitations of the Thesis 123 5.5 Suggestions for Further Researches 124 Reference 126 English References 126 Arabic References 150 ملخص ال ب ix List of Tables No. Title Page Table (2.1) Summary of the hypotheses of the thesis 58 Table (3.1) Distribution of the studied population based on economic sector at the end of 2018 62 Table (3.2) Variables measurement 65 Table (4.1) Descriptive statistics of the Variables 71 Table (4.2) Pearson Correlation Coefficients for all firm variables 76 Table (4.3) Regression results for FP (ROA) 79 Table (4.4) Regression results for Value of the company (Tobin`s Q) 82 Table (4.5) Summary of the results for ROA and TQ models 85 Table (4.6) Summary of the Hypothesis and Results 105 Table (4.7) Regression results for Financial Performance (ROE) 106 Table (7.8) Regression Results For Financial Performance (EPS) 108 Table (4.9) Summary of Robustness Test for ROR and EPS models 110 x List of Figures No. Title Page Figure (2.1) Conceptual model on corporate performance 59 xi List of Abbreviations CG : Corporate Governance OS : Ownership Structure FP : Financial Performance PEX : Palestine Exchange BI : Board Interlocking STT : Stewardship Theory BD : Board of Directors ST : The stakeholder theory OECD : Economic Co-operation and Development RD : Resource Dependence EPS Earnings per share BI Board Interlocking CI Corporate Interlocking AT Agency Theory xii The Influence of Board Interlocking, Board Structure and Ownership Structure on the Financial Performance of Palestinian Corporations By Luai Saleh Mohammad Antari Supervisor Dr. Islam Abdeljawad Co-Supervisor Dr. Ra’fat Al-Jallad Abstract This thesis purpose is to examine the impact of ownership structure, board characteristics, and board interlocking on corporate financial performance of listed firms at Palestine exchange. The data was obtained through the manual examination of the annual reports of listed companies at the Palestinian Exchange (PEX) for the period from 2011 to 2018. Besides, the market value of the stocks listed in the market. The researcher investigated the entire listed corporations. The thesis findings CEO duality, existence of women on the board, foreign ownership and corporate size has positive effect on ROA. However, frequency of board meetings, board size, number of interlocking, interlocking per board, institutional ownership, large ownership and corporate financial leverage have negative relationship with ROA. According to the Tobin`s Q there is positive effect for frequency of board meetings, number of interlocking, interlocking per board member, foreign ownership, institutional ownership and large ownership on corporate financial performance. However, there is negative effect for board size, xiii CEO duality, women in the board, corporate financial leverage and corporate size on financial performance. In terms of practical implications, this research demonstrated that companies should decrease the board interlocking by ensuring to supplement new board members who are not interconnected. There is a necessity to keep the size of the board to a minimum size as that will give the companies the potential and power to carry out their supervision activities efficiently. Furthermore, the board of directors should include professional and experts who have good experience, awareness and knowledge with the controlling and oversight duties and activities. Eventually, there is necessity to rationalize the number of board meetings. Besides, Capital Market Authority and the other supervisory organizations should set rules and regulations that decrease the large ownership and institutional ownership in Palestinian listed. Eventually, there is a necessity to adopt policies and laws that promote and encourage foreign ownership in listed companies at the Palestinian exchanges. Key words: Board interlocking, ownership structure, board of director characteristics, corporate governance, financial performance. 1 Chapter One Introduction 2 Chapter One Introduction 1.1 Introduction The International economy is witnessing the important role of Corporate Governance (CG) as a factor in the marketplace. The financial problems of many of the world leading companies have led to the need for a set of ethical and professional controls, laws and principles to achieve confidence and credibility in the information disclosed in the financial statements needed by many users, especially investors. This need clearly demonstrates the importance of establishing good CG practices that can have an active role in the field of financial and administrative reforms, increase investor confidence in the financial statements, stimulating national investment, and attracting foreign investments (Zayed, 2017). Owing to the critical importance of the Ownership Structure (OS) in public shareholding companies, many studies have discussed the influence of OS on the Financial Performance (FP) of these companies. In addition, in the belief of many researchers, it may reflect the strength and continuity of companies' work and success. The OS is important in determining corporate objectives, shareholders’ wealth, and managers’ discipline (Jensen & Meckling, 1976). Both managers and shareholders should have one goal of maximizing the value of the company (Abu Zir, 2010). 3 The agency problem between investors seeking for maximizing wealth and the innovative agents that have new ways to increase their own FP call for a third party to monitor the performance of management. Many studies have highlighted the complex interaction between the OS and the performance of companies investigated the agency problem between managers and shareholders in order to support the continuity and vitality of the company. Shareholders usually try to raise the proportion of indebtedness in the composition of capital in an attempt to put pressure on the company management. Besides, to reduce their ability to achieve personal interests. In addition, shareholders try to find an external party that can monitor the management performance at the company (Ramadan, 2009). Abdeljawad and Masri (2020) explored the influence of the board of directors’ characteristics on the financial performance of companies listed at the Palestine Exchange (PEX). The researchers found that when there is a high level of empowerment for senior management and executives, they will execute faster, there will be a low potential for ambiguity between the firm`s objectives and processes, and thus there will be an increase in the FP of the business. This result is an agreement with the Stewardship Theory (STT). Bezemer et al. (2007) argued that Board Interlocking (BI) is important and offers advantages to corporations in a network by sharing their directors. Palestinian corporations are characterized by high connectivity, and it is interesting to highlight the impact of this connectivity on performance. 4 Few studies investigated the influence of ownership structure and board of directors’ characteristics on corporate financial performance in Palestine. Whereas, the relationship between corporate interlocking and performance has not been addressed yet. Therefore, this study will overcome this divergence by studying the effect of ownership structure, board of directors’ characteristics, and corporate interlocking on the performance of companies in Palestine. 1.2 Research Problem The influence of board characteristics, ownership structure and interlocking on corporate financial performance of companies listed on Palestine Exchange is perceived as a unique and quite complicated area taking into consideration that the corporations` capital ownership structure change constantly from one type of ownership to another such as the change from foreign ownership, concentrated or large ownership and institutional ownership. This is evident in several financial markets. Besides, in light of these developments and arises of financial crises in the globe there is a constant development and change in corporate environment, corporate structure and even government policies relating to corporations. These changes in ownership structure, board of directors` characteristics and interlocking affect significantly financial performance. (Shahrier et al. 2018(, (Pombo & Gutierrez, 2011). 5 In Palestinian case, according to the researcher knowledge there is a little research investigated the influence of ownership structure and board of directors` characteristics on corporate financial performance. Moreover, the relationship between corporate interlocking and performance has not been addressed yet. Board of director’s characteristics and board interlocking may be an important corporate governance tools to protect small investors and other stakeholders’ interests and improve the financial performance of Palestinian corporations. Thus, this study will contribute to bridge the research gap in this important field through exploring the influence of the corporate interlocking, ownership structure and board of directors` characteristics on the financial performance of Palestinian corporations. 1.3 Research Objectives The main objective of this study is to explore the influence of board interlocking, board characteristics and ownership structure on the financial performance of Palestinian listed corporations. Based on this main objective, three sub objectives are the following: 1 To explore the effect of board interlocking on the financial performance of Palestinian corporations. 2 To estimate the influence of board characteristics on the financial performance of Palestinian corporations. 3 To investigate the influence of ownership structure on the financial performance of Palestinian corporations. 6 1.4 Research Questions The research questions of the thesis are the following: 1- What is the influence of board interlocking on the financial performance of Palestinian corporations? 2- What is the influence of the board characteristics (board size, women in the board, frequency of board meetings, CEO duality) on the financial performance of Palestinian corporations? 3- What is the influence of ownership structure on the financial performance of Palestinian companies? 1.5 Importance of the Study The findings of this study are most likely to be important for investors, policymakers and the Palestinian Capital Market Authority (PCMA) to set the rules and regulations in order to improve the corporate governance in Palestinian listed companies in order to protect the interest of shareholders and support the financial performance of these corporations. Besides, this study will provide clear insight for investors about the efficiency of the board interlocking, board characteristics and ownership structure of listed companies in Palestine. This study is important for listed companies in order to have good insight and awareness of the best and optimal board structure, ownership structure and board interlocking in order to improve their financial performance. 7 The significance of this study stems from adding to the previous researches new evidence on the influence of the ownership structure, board characteristics and interlocking on corporate financial performance from the companies listed in Palestine exchange. Most of the previous studies in this field were conducted in developed context and there is a gap in studies and research that explored this topic in underdeveloped countries such as the case of Palestinian companies. Therefore, this study provides a new understanding relevant to the relationship between these important variables. Improving the governance level and the performance of corporations is likely to enhance the confidence and trust of the investors and shareholders and motivating them to invest more in Palestine Exchange, hence affect the development of the country, increase its competitiveness and economic and financial prosperity. Besides, this study is important for PCMA and policy makers as they seek to establish an encouraging atmosphere and establish policies to enhance and develop confidence across all types of investors in order to create and build a strong economy that is inclusive. This research adds more insight to previous works in Palestine Abdeljawad and Masri (2020), Hassan (2016), and Abu Zer (2011) as it explores the impact of ownership structure, corporate interlocking, and board characteristics on the financial performance of companies listed in PEX. Therefore, this study will explore several factors influencing corporate financial performance. Besides, this study is one of the pioneering studies 8 in Palestine that explore the impact of the existence of women on board (Women) in increasing the financial performance of the corporations. There are several studies such as Abdelzaher (2019) and Rose (2007) that have documented the positive correlation between the existence of female in the board of directors and financial performance of the corporations and an increasing emphasize on the importance of diversity in the board in order to increase the profitability of the business but only few from underdeveloped countries. 1.6 Thesis Structure This thesis is structured as follows: Chapter One presents introduction and background of the study, defines the problem, specifies the objectives and importance of the study, and the questions that the research will answer. Chapter Two presents the theoretical framework and empirical previous studies through articulating the related theories with special emphasizes on Agency Theory (AT), resource dependence theory and STT. The researcher in the second section in chapter two presents several empirical studies that explore the relationship between the board characteristics, corporate interlocking and ownership structure on financial performance of corporations in different contexts either in developed countries or in developing countries. The third chapter is the design of the study and its methodology. This chapter explores the research approach and design, the philosophy of the study, population and sample of the study, data collection tools, articulating 9 the model of the study and defining the dependent and independent variables of the study. Chapter Four presents the results and discussions. Descriptive data analysis and interpretation of the estimation output is carried out. Eventually, Chapter Five concludes this thesis and suggest recommendations. 10 Chapter Two Theoretical Framework & Empirical Studies 11 Chapter Two Theoretical Framework and Empirical Studies 2.1 The Concept of Corporate Governance The most common definition of CG is the definition that was suggested by Cadbury committee in 1992 as “The system by which companies are directed and controlled” (Cadbury Report, 1992). The Organization for Economic Co-operation and Development (OECD) define corporate governance as “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the aims of the company are set, and the means of achieving those aims and monitoring performance are determined". While, the Corporate Governance Guide was issued by Central Bank of Jordan (2017) defined governance as: "The system by which the bank is directed and managed, which aims to define the bank's institutional goals and achieve them, manage the bank's operations safely, protect the interests of depositors, and adhere to due responsibility towards shareholders and other stakeholders, the bank adheres to the bank's internal legislation and policies". The Guide to the Rules and Best Practices for Banking Governance in Palestine issued by the Palestine Monetary Authority in 2017, defined governance from the perspective of the Palestinian Monetary Authority as "A set of relationships, rules, procedures and principles that guarantee the 12 bank's management in a judicious manner that achieves the interests of the relevant parties in a manner consistent with laws, instructions and best practices in the field of banking business, and in a manner that achieves the bank’s maintenance and development”. )Palestine Monetary Authority, 2017, p. 8). Finally, the Code of Corporate governance in Palestine offers the following definition: "The Corporate governance is the set of rules and procedures by which the company's management and supervision are carried out through the co-ordination of relations between the board of directors and the Executive Management and the shareholders and all other stakeholders including the social and the environmental responsibilities for the company” (Code of Corporate governance in Palestine, 2009). As we can see, all definitions are affected by the Cadbury committee definition and the OECD definition. 2.2 Theories of Corporate Governance There are many theories that directed the empirical research in the field of corporate governance. The most important theories AT, Resource Dependence (RD), stakeholder’s theory (ST) and STT. Following are a discussion of each. 13 2.2.1 Agency Theory The role of businesses is to maximize shareholders’ wealth (Blair, 1996) but Jensen and Meckling (1976) explain a basic problem of lacking or detached shareholders who hire professional executives to act on their behalf. However, a conflict may occur between the principal and the agent as each is aiming to maximize his interest. Agency problem is closely connected to information asymmetry problem. According to Eisenhardt (1989), most firms exist under circumstances of inadequate data, information, and uncertainty that expose these businesses to two information asymmetry problems: adverse selection and moral hazard. Adverse selection takes place when shareholders cannot determine whether an agent correctly characterizes his aptitude to do the work for which he is paid to do, whereas moral hazard is a situation under which a principal cannot be certain if an agent has present highest effort. The conflicting interest between principal and agents explain practices that may be appraised as dishonest or immoral. The executive senior managers who are expected to be professionals may be more involved to achieve their personal interests at the expense of the business and shareholder’s interests (Berle & Means, 1932). The executive senior managers, by the reality that they can access large amount of information and data than other stakeholders, may benefit over the shareholders. 14 According to Donaldson and Davis (1991), senior executive management will not respond to maximize returns to shareholders unless efficient governance structures are adopted to protect the stakeholders and shareholder’s interests. Wheelen and Hunger (2002) claimed that the problems take place due to agents (professional) are not eager to tolerate accountability for their decisions as they do not own a large amount of stock in the corporation and so that they don’t stand to take advantage by perusing wealth maximizing objective. Moreover, Mallin (2002) argued that a senior executive management of the business ought to have an important stake of ownership to ensure a positive relationship between CG and the amount of stock owned by the top management. The researcher in this study used the AT since this thesis focuses on the association between corporate shareholders and their professional agents existing in various OSs. Moreover, how these relationships influence the corporate FP of corporations listed in PEX market. 2.2.2 Stakeholder Theory This theory assumes that a corporation ought to be managed and controlled in the best interests of its entire stakeholder (Freeman, 1994). The stakeholder theory (ST) is based on the argument that values are essentially and obviously a portion of doing business and that senior executive management have to clear the common sense of value they produce to bring its main stakeholders together. When stakeholders achieve what they 15 desire and pursue from a corporation, they return to the business for more (Freeman & McVea, 2001). According to Ehrlich et al., (1994) stakeholders can be an important technique and tool to achieve corporate success and so that, corporate leaders must take into account the opinions of stakeholders when they make the corporate decisions and bear business responsibly towards all stakeholder’s interests. The ST assumes that senior executive managers ought to make decisions in order to consider all stakeholders` interests in the corporation comprising not merely financial claimants, but further human resources in the business, customers, communities and governmental officials (Manville & Ober, 2003). According to Freeman (1994) ST denies to identify how to achieve the required trade-offs in these conflicts of interests, they leave the managers with a theory that makes it difficult for them to make decisive decisions. Watkins (2003) claimed that the real reason for the financial scandals in businesses nowadays is the failure of the managers to take into consideration stakeholder claims in decision-making. Moreover, Adams (2002) noticed that several governments establish new rules and regulations to create a balance between the interests of all stakeholders with corporate conduct giving example of the Sarbanes-Oxley Act (SOX) that was taken because of the failure of Enron and WorldCom. Wheelen and Hunger (2002) claimed that the selection of wealth maximization as the corporate scorecard, should be completed by a 16 corporate vision, strategy and tactics that tie stakeholders with the business in its fight for supremacy in a competitive field. Freeman (1994) also demonstrated that a business could not achieve wealth maximization if it disregards the stakeholder’s interest in the long-term. The researcher in this study used the ST, as it is important to analyze and recognize how the concerns of all stakeholders into their decision-making processes and to specify the important board of directors’ structures to achieve wealth maximization in the long-term. 2.2.3 Stewardship Theory Donaldson and Davis (1991) presented the STT as an alternative to the AT. They assumed that from the view of managerial incentive by assuming that management far from being an opportunistic shirker desires to do a good job, to be a good steward of the corporate assets. The main idea of this theory is that it claims humans to be in larger necessity than the neo- classical view in the sense of them to be opportunistic, dishonest and concentrated on personal interests. Thus, it is perceived that the attitude of the management is organization focused (Arthurs & Busenitz 2003), whose basic goal is to develop and enhance the performance of the business by satisfying its rules. The STT assumes that both the principal and the steward interests are associated. Its usefulness is increased when the stewards’ objectives are coordinated with the objectives of the principals (Arthurs & Busenitz, 2003). The STT holds that agents are opportunistic but that human incentives are more than just self-actualization. Thus, 17 agents that are motivated by organizational and collectivistic motivations have a greater usefulness by directing for objectives that are the best interest of the business that usually in consistent with the principal`s interest (Bender, 2011). This setting is achieved more willingly where the CEO is also chair of the board. This theory assumes that control and monitoring that are presented by the AT interfere with the steward`s motivation. This could decrease the firm`s productivity and stimulate opportunistic behavior. Because there is no conflict of interests between the principal and the steward in this theory, the agents receive authorization and independence from their principals. This will lead to increasing firm`s productivity and efficiency. 2.2.4 Resource Dependency Theory This theory stands on the argument that the firm`s ability to save itself against the external environment and reduce uncertainty can be supported by the hiring of non-executive directors on the BD of the corporation (Casciaro and Piskorski, 2005). The resource role is played by BD basically by supporting their social and professional networks, advise, legitimacy, reputation, and enriching the channels of communications in order to decrease the uncertainty of outside influences in order to confirm the existence of resources important to their existence and development that are considered strategic resources. So that, the board is considered an important tool that may ease access to various resources and competencies needed for success of the business. In order to acquire these basic and essential 18 strategic resources, the business depends on individuals and businesses within its environment that are called “Stakeholders”. This theory assumes that an organization surpasses to maximize shareholders’ value and to accomplish the interests of shareholders’ wealth maximization (Tricker and Tricker, 2009).So that, the businesses select efficient directors and members “Supporters” who have the competencies and capabilities of investing their counsel, knowledge, and channel of communication with external businesses in order to acquire preferential access to commitments or support from significant actors outside the business (Tricker and Tricker, 2009). The researcher in this study used the resource dependence theory, as it is important to analyze and recognize how the board interlocking affects financial performance. 2.3 The Principles Underlying an Effective Governance System The OECD has issued general pillars of corporate governance since 2004 that underlie the effective corporate governance system to suit all countries (Palestine Capital Market Authority, 2012). These principles are discussed here below. 2.3.1 The First Principle: Shareholder’s Equity Governance rules focus on protecting the rights of shareholders via a set of mechanisms and means that protect the rights of shareholders. Among the most important of these mechanisms was also indicated by "the existence 19 of methods and mechanisms to ensure ownership registration, and transfer of shares ownership, obtain information about the company on time and regular manner, and participate and vote in public meetings." For shareholders, electing members of the BD, and obtaining shares of the company's profits (Al-Abd, 2006, p.14). The governance rules also stressed the need for shareholders to exercise their right to vote and stand for election of the board, and to have access to sufficient information regarding the decision-making process related to fundamental changes in the corporation which could affect the market value of the stock in the financial market. Board of director must inform shareholders of any amendments or changes in the internal system and founding contract of the corporation. Moreover, board is responsible in providing information to all shareholders in the event that the corporation offers new shares for circulation, whether in public subscription or private subscription. In addition, encourages shareholders to attend and participate in the meetings of the corporation’s general body, and determine the meeting agenda before specific period of meeting according to the instructions of regulatory authorities. In Palestine, the instructions are of the Palestine Capital Market Authority governing the meetings of the General Authority for corporations (Code of CG in Palestine, 2009). 2.3.2 The Second Principle: Equal Treatment of Shareholders The pillar of equal treatment for all shareholders is considered one of the most important rights confirmed by the OECD. This principle is of most important rights to preserve the rights of small shareholders from the 20 presence of controlling shareholders where the governance policy and governance guide, and the list of tasks of the BD should emphasize the need to provide equal treatment to all shareholders. The CG Manual should also ensure that all shareholders have the opportunity to obtain effective compensation in the event that the corporation’s BD or executive management violates any rights affecting shareholder’s rights and there must be equal treatment for all shareholders belonging to the same category. There is an equal treatment for all shareholders who have an equal number of shares, and investors have the right to grant a power of attorney or authorization to others to represent them in the meetings of the general assembly, and the right to vote on any decisions that are made or elect members of the BD. Moreover, it must include the processes and procedures related to the general meetings of shareholders’ equal treatment for all shareholders. In addition, the company's actions must not result in difficulty or an increase in the cost of the voting process. Trading in shares in a manner that is not disclosed or transparent should be prohibited, and board members or executives should be required to disclose the existence of any interests of their own that may relate to operations or issues affecting the company (Sullivan, 2006). 2.3.3 The Third Principle: The Role of Stakeholders in Governance The recommendations of the OECD stipulate the need to provide protection and safeguard the rights of all stakeholders in the corporation in the light of the decisions and instructions issued by the board and supervisory authorities. In addition, that the guide and policy of the institutional 21 governance of the corporation include enhancing cooperation with stakeholders in the field of wealth creation and enhancing employment opportunities. Moreover, caring for social responsibility, enhancing the moral values of all employees of the corporation, and working to enhance the sustainability of existing projects in society by providing adequate and necessary financial resources for these projects are also recommended. More recommendations include ensuring that the rights and interests of stakeholders in the corporation, and compensation must be provided to stakeholders in the event of harm to their interests because of default or exploitation by members of the BD or executive management in the corporation. Moreover, care must be taken to provide specific and clear mechanisms for the participation of stakeholders in making decisions related to their interests and provide tools and mechanisms for oversight and accountability actors on the work of the board of directors, its committees, and the executive management. In addition, the need to have the opportunity to obtain and access all the information that stakeholder need in a timely manner with objectivity, integrity, and transparency, and without any injustice in this information and data (Rahma, 2007). 2.3.4 Fourth Principle: Disclosure and Transparency The principle of disclosure and transparency is an important principle that must be included in the institutional governance policy of the corporation and the governance guide, and in the BD and its committees. So that the disclosure includes the annual financial statements, future plans of the 22 corporation, any changes in ownership rights, any important decisions, salaries of the general manager and the senior executive management of the corporation, the compensation due to the members of the board of directors, the number of board meetings, the number of board members, any amendments or changes to the internal system or the founding contract of the corporation. In addition, it includes the names of the members of the board of directors, the names of the executive management of the corporation, the statement of the financial endowment of the corporation, the method of taking decisions, determining the goals and strategies of the corporation, the statement of the right of the majority in terms of contribution, voting rights, the appetite for risks accepted by the BD and a statement of the organizational structure to the corporation. The information should be prepared and reviewed as well as disclosed in a manner consistent with the accounting and financial quality standards, and that method should meet the non-financial disclosure requirements. Moreover, the corporation should allocate a website that is concerned with the disclosure of the corporation information, such as targets, values, the principles, disclosure of financial statements and reports, and a summary of the work of board meetings (Yousef, 2007). 2.3.5 Fifth Principle: Responsibilities of the Board of Directors The Guide of CG must clarify the qualifications and experiences that should be available in the members of the BD. Such as list of tasks, duties and responsibilities assigned to the members of the BD. It must clarify how 23 the board is convened, and determine its relationship with the external auditor, and oversight departments, especially the internal audit department, and government agencies. In addition, it must clarify the repeated tasks of the BDs, and the follow-up mechanisms of the corporation’s executive management, and ensuring that there are accountability mechanisms for members of the board and its committees through the annual evaluation of the effectiveness of members and committees. Moreover, the evaluation of some board member’s actions, proposing any amendments or new developments in the corporation’s environment, and specifying mechanisms and how to take decisions, and the necessity of achieving equal treatment for all shareholders should be emphasized. Moreover, the BD must ensure compatibility with the laws in force. “and taking into account the interests of all stakeholders. The BD has a set of basic functions, including reviewing and directing the company’s strategy, business plans and risk policy, annual budgets, and activity plans, setting performance goals and following up on the implementation and performance of the company, as well as overseeing capital spending and anywork acquisition, sale of assets, selection of key executives, determination of salaries and benefits granted to them and follow-up when necessary their replacement and follow-up of succession plans. Reviewing the levels of salaries and benefits of executives and members of the BD and ensuring the formal nature and transparency of the nomination process for members of the board of directors” (AL-Taqez, 2007). 24 2.4 Objectives of the Corporate Governance The existence of effective CG policies and controls also contributes in increasing the ability of these companies to borrow and reach lending centers and institutions to obtain adequate financing in an accessible and without complications. As well as, the ability to enter foreign markets and attract foreign investors, which positively affects the investment movement and the overall performance of the country reflected in GDP. Abu-Baker and Naser (2000) indicated the existence of a set of goals that institutional governance seeks to achieve in the corporations, “to enhance and increase the level of confidence of shareholders and savers in the national economy and public joint-stock companies listed in the financial market, which contributes to advancing investment, and providing an appropriate investment climate for investors, preserving the rights of shareholders and investors". The Guide to the Rules and Best Practices for Banking Governance in Palestine No (10) for the year 2017 identified a set of goals for institutional governance represented as “Achieving transparency and disclosure, protecting the rights of shareholders and depositors, enhancing the role of risk management and facilitating the process of monitoring and supervising the performance of banks by setting frameworks, internal control, formation of specialized committees, increasing the bank's market value, maximizing profitability, enhancing trust with related parties with the bank, reducing risks of financial crises to banks, controlling risks of corruption in 25 banks, and maintaining financial and economic stability" (Palestine Monetary Authority, 2017). CG aims to achieve a set of goals that are represented in maintaining transparency and justice and protecting the rights of shareholders in the company.This is done by creating rules, regulations and controls aimed at achieving transparency and fairness, and creating controls, rules and administrative structures that grant the right to hold the company's management accountable before the general assembly and guarantee the rights of shareholders and the development of investments and their flow by deepening the confidence of investors in the capital markets, working to develop savings, raising investment rates and guaranteeing funding for projects, thus creating new job opportunities. In addition, it aims at working to achieve good FP by holding management accountable to shareholders, and imposing good and effective control over the performance of economic units. Lastly, the aim is to achieve developing and improving the competitiveness of economic units, and work to fight unacceptable behavior, whether in the physical, administrative or moral aspect, and to attract investments, whether foreign or domestic, and to limit the flight of national capital abroad through the provisions of supervision, legislation and procedures regulating the market, and fighting internal corruption about the way of researching its causes, limiting them and not allowing it to continue. 26 2.5 The Main Characteristics of an Effective Governance System There must be a set of characteristics in the system of institutional governance in order to be an effective system, where the system of CG must be characterized by discipline, transparency, independence, accountability, justice, and adopt appropriate implementation of social responsibility (Rimawy, 2008). Details are following. 1- Discipline: AL-Abed (2006) defines discipline as “the moral obligation to which a member of the BD adheres to his behavior and practice towards investors and stakeholder’s incorporation, which effectively contributes to achieve the goals of the stakeholders, and the inclination to exploit the stakeholders in the company ". 2- Accountability: Governance is based on its principles and foundations on work to enhance accountability by holding the company’s BD accountable for the company’s performance in a comprehensive manner, and the top executive management accountability for the board of directors. Moreover, it is necessary to define many mechanisms through which accountability is achieved in the company whether through reports the various executive management and / or oversight departments report to the board of directors, internal audit reports, and work procedures. In addition, obtain the necessary approvals from the BD in cases that require the approval of the BD or board committees. (Sullivan, 2006). 27 3- Transparency: Transparency means that "the ability to provide a clear picture of what the company does to stakeholders and shareholders, and that this information is characterized by the quality of the data that is disclosed”. Transparency is one of the foundations to be considered in order to achieve the competitive advantage and improve the competitive position of the corporation in order to enhance and consolidate the confidence of stakeholders and shareholders in the BD and the executive management. Transparency needs the work on providing information that ensures the achievement of economic efficiency, and that gives members of the BD the ability to take appropriate calls in achieving the interest of shareholders in an effective and efficient manner. Transparency gives the shareholders the opportunity to examine companies carefully (Hammad, 2005). 4- Independence: Independence means that a member of the BD has a good level of independence, and that he is not subjected to pressure from certain parties, and thus works to achieve the interest of one party at the expense of another. That the member of the BD is able to take decisions and vote without being pressure exerted on him (Sullivan, 2006). 5- Justice: Shabrashawi (2007) defined justice as "the commitment of the members of the BD and the executive management to respect all the rights of stakeholders in the company, and a permanent commitment to 28 achieve parity and reconciliation between the various stakeholders in the company". 6- Social Responsibility: Social responsibility is achieved through the adoption of the BD to implement the provision of funding for many youth and women's projects, attention to the marginalized and poor class of society, people with special needs, financing sports, cultural, and, recreational activities, and the active contribution to the development of society where companies by allocating part of its annual budget in order to support such projects. 2.6 Research Hypotheses Development 2.6.1 Financial Performance (FP) Profitability ratios are commonly utilized to specify how well business use their assets and how they manage their activities and operations (Ross et. al., 2009) These profitability ratios express the income or operating success of the business. Thus, creditors and investors are involved in assessing profitability as income demonstrates the capability of the business to access debt and equity financing. Furthermore, it indicates the firm`s liquidity position and its capability to expand (Weygandt et al., 2010). There are several variables that can be utilized to measure corporate FP that can be derived from the financial statements such as ROE, ROA, EPS (Earning per share) and Net Profit Margin, whereas stock valuation, stock market return and volatility in returns are utilized measurement of market 29 FP. Several researchers used a mix of both market performance and accounting measurement. 2.6.2 Explanatory Variables The independent variables include a set of BI, board characteristics and OS mechanisms basically the independent variables will include BI, board size, number of board meetings, Duality (CEO / Chair Duality), women on boards, large ownership, Institutional ownership and foreign ownership. 2.6.2.1 Board Interlocking A simple board interlock takes place when an individual works on the BD for more than one corporation. The other type is mutually interlocking relationships that occurs when at least two managers together serve on the boards of two various corporations. The third type of interlocking is reciprocal interlocking when the CEO of one corporation is serving on the board of a second company, whereas, the CEO of that second corporation is also serving on the board of the first one (Fich & White, 2005). The corporate director interlocking is perceived as an important cooperative strategy between corporations for decreasing sources of uncertainty in their environments. Corporate interlocking is a tool or instrument of anticipating or controlling sources of uncertainty from potentially disruptive one-sided actions of other corporations (Allen, 1974). Bezemer et al., (2007) argued that BI is important as it can provide advantages to corporations connected in a network and increasing FP of 30 corporations by sharing their directors. On the other hand, the relationships of the BD can compromise the independence of non-executive directors and creating conflicts of interest. An extremely centralized and compressed network of directors can generate a social system in which the directors are faithful to each other and just act on shareholders’ interest. Mendes-da-Silva (2008), and Mendes-da-Silva (2011) revealed that there is a positive correlation between BI and the firm FP. Similarly, Mendes-da- Silva (2011) argues that there is a significant positive correlation between the BI and corporate FP. Likewise, Kaczmarek et al., (2014) investigated the impact of board of director’s interlocking and FP of the financial and utility corporations listed in UK over a period of ten years. The study results demonstrated that there is a positive correlation between the two variables. Pombo and Gutiérrez (2011) revealed that there is a positive correlation between external directors, the extent of BI and ROA in Colombian corporations. Moreover, they revealed that there is a positive association between external directors that are interconnected with other corporations and firm`s performance. Thus, there is a positive correlation between interlocking and firm`s financial performance. Likewise, Kim (2005) explored the impacts of the interlocking of the board of directors on the financial performance of corporations of Korean corporations and revealed that there is a positive relationship between interlocking and corporate financial performance measured by ROA. 31 Interlocking is a vital mechanism for corporate control; interoperate interconnection and resource dependence (Mizruchi, 1982). Furthermore, Schoorman et al., (1981) assumed that interlocking directors are vital tool for providing horizontal coordination between the different competitions, vertical coordination between suppliers and customers, expertise and improvement of brand name and recognition of the business. There are several opinions that support the positive effect of interlocking on firms` FP. One of the most important theories that explained the effect of BI on firm`s performance is the resource dependency theory as this theory argued that the basic basis for the viewpoint that interlocking directors affect positively firm`s FP. The basic argument that BI is important to provide businesses to access required resources and information to develop and ease the FP of firms (Westphal et al., 2006). Furthermore, a board interlock indicates the business aptitude to provide important resources and competencies. For example, Lang and Lockhart (1990) revealed that board interlocked with financial firms increased with financial dependence. According to Hillman, et al., (2000) the businesses are more expected to hire resourceful outside directors throughout times of environmental instable and turbulent condition. Furthermore, Carpenter and Westphal (2001) revealed that external directors can play an important role to the decision process if they are attributed to strategic attributed businesses. Furthermore, Inter-locking directors is important in organizations in order to ease a business`s 32 borrowing, coalition construction and have been attributed with efficient capital acquisition (Stearns & Mizruchi 1993). Resource dependency theory assumes that interlocking directorates is important to work as carrier of information (Useem, 1984). Furthermore, directors who work in the other firm`s boards are more expected to have better access to different policies and strategies and insider information that is else not accessible to external investors and stakeholders. They are expected to offer better direction and advice. Furthermore, Westphal (1999) demonstrates that there is a positive association between advice offered by external directors and the FP of the business. This argument is in an agreement with the survey findings of the 2012 Spencer Stuart Board Index that demonstrated that "board directors consider their role in discussing corporate strategy one of their top priorities in governance issues " (Westphal, 1999, P.7). Thus, based on the resource dependence theory, interlocking directors support coordination among firms and decrease environmental instability and uncertainty in the organization (Pfeffer & Salancik, 1978). So that, interlocking is an important mean of transmitting serious information and best practices (Hillman & Dalziel, 2003). Furthermore, interlocking is also an important tool to decrease opportunism by increasing the potential of the flow of information among businesses. Another important theory that explored the influence of interlocking on the FP of businesses is social network theory that has been practical in research 33 on interlocking directors. It assumes that businesses that are entrenched in the director network can enhance better social relations and thus ease economic exchanges, leading to better FP for the business (Granovetter, 1985). So that, board interlocks are an important tool for businesses to connect businesses together. Businesses that are entrenched in the director network can gain the advantages of social capital that are not accessible to businesses outside of the network. Research has revealed that board-interlocking directors are attributed with the future performance of businesses (Horton et al., 2012). Another important argument is that a director that serves on several boards can express his or her quality especially in monitoring and advising responsibilities and roles (Kaplan & Reishus, 1990). So that, increasing the number of directors interlocking in the business, will enhance the quality of the BD and so that will lead to better FP. Drago et al )2015) explored the influence of CG reforms on interlocking directorship for the Italian companies listed on the Italian stock exchange over 1998-2007 through using a set of unique datasets that includes CG variables relevant to the, interlocking directorships and attributes relevant to corporation`s performances. The study results demonstrated that there is a negative relationship between interlocking and FP. Santos and Da Silveira (2007) revealed that there is a negative relationship between board interlocking and the firm`s value measured by Tobin's Q in Brazilian companies. 34 On the other hand, several scholars and researchers claimed that there is a negative relationship between BI and FP. According to Fligstein and Brantley (1992), interlocks decrease FP as it imposes higher costs on firms as the interlocking directors do not have adequate time to attend all board of directors’ meetings and discussions. Besides, other researchers argued that external directors with several directorships are attributed with weak CG (Fich & Shivdasani, 2005). Thus, busy directors may affect negatively the firm`s performance. Arguing that interlocking directors convey information and practices, it is not merely the best and good practices that are spread, but likewise the bad practices. For example, interlocking directors have been demonstrated to spread preferences backdating (Armstrong & Larcker, 2009); (Bizjak, et. al., 2009). Thus, when negative practices are spread, FP of the business will suffer. Eventually, businesses that are interlocked with businesses that are blamed of uncertain practices may suffer from reputational consequences as well. Thus, most of the studied demonstrates that there is positive and significant effect of board interlocking on financial performance of listed companies, therefore, hypothesized then at: H1: There is a significant positive relation between BI and firm`s performance 35 2.6.2.2 Board Size The BD is the body that is responsible of controlling and monitoring a senior executive management practices and activities. Besides, it makes strategic decisions relevant to the optimal corporate capital structure as corporations use leverage as a governance instrument to mitigate the conflict of interests between the agents and principals by reducing the agency costs of free cash flow that is available to executive management (Wen et al., 2002). Board size refers to the number of directors on the board. In general, there is no optimum size of the board documented in any universal standards. Palestinian Code of CG stated that the members of the BD of the listed corporations must not be less than five and not exceed eleven directors. According to Abdelzaher and Abdelzaher (2019) who investigated the impact of board size on corporate FP in (114) Egyptian non-financial corporations listed in Cairo Stock Exchange market in 2013 that there is a positive correlation between the board size and FP of corporations. Some researchers argue that a larger board size is better since allows more diversity of competencies and skills. On the other hand, increasing board size may lead to intensifying the challenges of coordination and communication, decreasing board of directors` efficiency in controlling and monitoring agents (Eisenberg, Sundgren, & Wells, 1998). Moreover, increasing board of director’s size decreases the potential and aptitude of 36 directors to disapprove and criticize senior executive management and to analyze corporate FP efficiently (Lipton & Lorsch, 1992). M. C. Jensen (1993) argued that large board of directors` size is more expected to confront high costs to control and oversight the corporation and they are less expected to have efficient function when the board size is larger than (7-8) directors. Zayed (2017) explored the association between board size and FP revealed that there is a positive correlation between board size and FP of listed corporations through using ROE (Return on Equity) and Tobin's Q. Similarly, (Delima & Ragel, 2017) revealed that there is a positive correlation between size of the board and FP of the business in Financial Institutions in Batticaloa district. On the contrary, Le, Kim and Yi (2014) studied the impact of CG on the large private enterprises` performance in Vietnam. The researchers found that increasing the board of directors’ size is badly related with performance irrespective of performance measures. Arosa et. al., (2013) and Yawson (2006) revealed that large BD is important to create and offer wider variation of backgrounds, diversity in communications skills, and experience and business contacts outside the corporation. Dalton et al., (1998) argued that larger BD gives the opportunity for directors to exchange more highly qualified counsels and brings greater scope for the opportunity of association with diverse external linkages. 37 Moreover, large BD acts an essential role in increasing the consequences of the decisions as a result of sharing of ideas and influences that provide the senior executive management with recent and innovative ideas and opinions that might lead to decrease in the agency problem which in turn increases corporate FP (Patro et al., 2003). Anderson et al., (2003) show that there is a negative correlation found between the corporate board size and the FP and corporate firm value. They stated that financial markets respond positively to the declaration of a board downsizing. on the other hand, the declaration of increasing the size of the BD will lead to decreasing the equity value. They argued that this is not the common outline that can be used to all corporations, as it is not a linear reaction. They revealed that the businesses who were influenced negatively with SMEs, whereas large-scale corporations did not face the same problem. Yermack (1996) found that there is a negative relationship between the board size and firm FP, measured by Tobin ‘s Q for (452) large scale US corporations throughout the period 1984 to 1991. The researcher excluded the utility and financial corporations from the studied sample due to the government regulations adopted by boards of directors in such corporations. The research documented that a small board has more favorable values for financial ratio. Likewise, (Yermack, 1996) argued that the incremental cost will rise as long the number of board member’s increases, and the corporation will achieve greater market value if the 38 number of the board is smaller. He stated that businesses are more valued in the capital markets by examining various independent variables, for example board composition, the existence of development and growth feasibilities, diversification and corporate age. According to Blue Ribbon Committee (1995), the BD has to be small enough to have detailed debate. Some researchers claimed that large BD has more aptitude to use more monitoring and advice (Coles et al., 2008). Likewise, Vu and Nguyen (2017) explored the impact of board size on FP in listed Singaporean companies. The study results demonstrated that there is a negative association between board of director’s size and corporate performance. Bhagat and Black (2001) revealed that there is a positive relationship between increasing the number of directors and increasing corporate FP. It is, therefore, hypothesized that: H2: There is a significant positive relation between board size and firm`s Financial Performance. 2.6.2.3 Duality (CEO / Chair Duality) CEO duality refers to the situation when same person occupies the CEO and board chair positions in the company. CEO duality is an important board of directors’ variable that affects agency problem. According to the AT, the separation of the CEO and the chairman plays an essential role in increasing the efficiency of the BD and confirming existence of board independence from the executive management in the corporation that is 39 expected to increase firm`s FP due to enhancing monitoring and controlling (M. C. JENSEN, 1993). Conversely, STT assumes that separation decreases the FP of the corporation. As this theory argued that, the efficient management is based on the principle of the unity of command. Since as when responsibilities and decisions are in hand of one person so this might ease better recognition of the business activities and rationale better decisions that will decrease the agency costs and it will so increase the FP of the corporation (Mallette and Fowler, 1992). Dal Vesco and Beuren (2016) explored the formation of the BD on FP of Brazilian corporations. The study results demonstrated that there is a positive correlation between CEO duality and corporate FP. This study will follow the main stream literature and hypothesized that: H3: There is a significant negative relation between duality of CEO and firm`s Financial Performance. 2.6.2.4 Women on Board Abdelzaher and Abdelzaher (2019) explored the impact of the existence of women in the composition of the BD on FP on a sample of (114) Egyptian corporations that form active Egyptian non-financial corporations with data available for the year 2013. The researcher analyzed the impact of corporate size, women in BD and industry. The study results demonstrated that there is a positive significant relationship between percentage of women on board members and corporate value measured by return on equity. The study results demonstrated that there is positive impact of 40 female board membership on firm`s FP as measured by Tobin Q, even though the women face several challenges in their effort to access the director’s position in corporations. Abdeljawad and Masri (2020) explored the effect of board of directors’ characteristics on the FP of companies listed in Palestine Exchange (PEX) throughout the period 2012-2014. The research revealed that there is positive association for board duality, board gender diversity, and number of board meetings with financial performance. On the other hand, they found a negative relationship of board size, board independence and board academic background with financial performance. The main implication of this study is that the Board of Directors plays an essential role in enhancing the financial performance of businesses through empowering executives that leads to higher levels of financial performance, an agreement with the stewardship theory Rose (2007) claimed that board diversity becomes an important issue within CG where several researchers interested to ascertain the influence of board of directors` on corporate FP. The researcher selected a sample of listed Danish corporation throughout the period of 1998–2001 in a cross- sectional analysis. In spite of the reality that Denmark has gone very far in the liberalization of women, boards of directors in Danish corporation are still to a great extent controlled by men. It is hypothesized that: H4: There is a significant positive relation between women in the board and firm`s Financial Performance. 41 2.6.2.5 Number of Board Meetings Number of board meetings held every year measures the effectiveness of the board of directors. According to Ntim (2009) there is a positive correlation between the efficiency of the BD and corporate FP. Still the efficiency of the BD is specified by the directors` competencies, skills, knowledge qualifications and whether the board is being paid for the meetings (Hassan, 2016). Finkelstein and D'aveni (1994) argued in light of the AT perspective. that the BD has an essential role in monitoring, running board meetings, confirming that all the matters that relevant to the business are listed in the agenda to be discussed in the board meeting, hiring and firing, and replacing the CEO if the latter is deemed to be ignored in serving the interests of the shareholders. Eluyela et al. (2018) studied the impact of board meeting frequency on FP of the corporation of deposit money banks in Nigeria through using a panel data. The research results indicated that there is a positive significant relationship between board meeting frequency and corporate performance. The main implication of this seminar that banking sector institutions` management have to increase the board meetings frequency to at least four (4) meetings annually. Likewise, Qadorah and Fadzil (2018) investigated the role of internal CG tools relevant to the board of directors’ features definitely (board independence and board meetings frequency) and corporate performance in Jordanian listed firms. The researchers used the https://www.sciencedirect.com/topics/earth-and-planetary-sciences/congressional-report 42 cross-sectional data for the year 2013. The researchers selected a sample of (64) manufacturing corporations. The researchers used ROA as a proxy for corporate FP. Aryani et. al., (2017) explored the correlation between board meeting frequency and FP of the corporation measured by ROA in Indonesian corporations with the impact on company performance. The studied sample consists of corporations listed in the Jakarta Islamic Index throughout 2006-2016. The researcher selected (175) observations. The researchers used the purposive sampling selection method. The study results show that there is insignificant relationship between board meetings frequency and the FP of the corporation. Al-Daoud et al., (2016) examined the relationship between board meeting frequency and FP of industry and service sectors corporations listed on the Amman Stock Exchange throughout 2009-2013. The study results demonstrated that there is a positive significant relationship between the board meetings frequency and their FP. Likewise, Hoque et. al., (2013) investigated the effect of board committee meetings frequency and FP of Australian corporations. The research results demonstrated that there is a positive correlation between audit committee meetings frequency and remuneration committee meetings with ROA and ROE. However, there is insignificant relationship between the risk committee meetings frequency and Australian corporations’ FP. 43 Zabri et al., (2016) argued that the board of directors is the most vital instrument of CG as it plays an important role in all businesses. The construction of the BD is influenced by the frequency of the board meetings. Every person in the board of director is expected to attend and participate efficiently in these meetings. Al-Manaseer et al., (2012) stated that the frequency of the board of directors’ meetings is an essential indicator for the efficiency of the board of directors. As the increase in frequency of meetings affects positively the corporation`s FP as the increasing number of board of directors’ meetings acts an essential role in enhancing the efficiency of the BDin monitoring and controlling the senior executive management. Rodriguez-Fernandez et al., (2014) examine the effect of internal governance structure and FP of listed Spanish corporations. The researchers analyzed the efficiency of the BD through using a number of variables that included corporate size, composition of the board of directors, duality of the chief executive officers, frequency of annual meetings and busyness of the directors. They used ROA, ROE and Tobin’s Q as proxies of FP of the corporations. The result revealed that there is a negative correlation between the frequency of the board of directors’ meetings and FP. It is hypothesized that: H5: There is a significant positive relation between Number of Board Meetings and firm`s financial performance. https://www.sciencedirect.com/topics/economics-econometrics-and-finance/board-of-directors 44 2.6.2.6 Large Ownership Large ownership is the percentage of owned shares by five largest shareholders to total outstanding shares. Another important definition of large investors is the investors or shareholders who have a 5% or more in a specific corporation (Puspitaningrum & Atmini, 2012). This attribute indicates up to what extent the ownership is dispersed among the investor and owners of the corporation. The corporate ownership might be dispersed or diluted among large number of shareholders and investors or the ownership of the corporation in hand of small number of owners and shareholders that leads to concentration of firm`s ownership. According to Jensen et al. (1976) increasing ownership size may stimulate the prioritization of self-interest by large investors and so that expropriation of the resources and competencies of the organization that leads to increasing conflict and reduced corporate FP. Conversely, Brown (2011) claimed that from the effective controlling viewpoint, large investors who have large percentage of shares have the aptitude and the motivation to exercise control and to induce the corporate management to adopt practices and decisions to decrease the conflict to increase the wealth of investors in the corporation. So that, enhancing firm`s performance. Shahrier et al., (2018) explored the relationship between ownership concentration, board characteristics and companies’ performance among Shariah-compliant companies through investigating (200) large scale companies listed on the Kuala Lumpur Stock Exchange during the period 45 of 2014- 2017. The researcher studied the impact of ownership structure, board independence, board competence, firms’ characteristics, and debt structure on FP of these corporations studied using ROA and ROE. The study results demonstrated that there is positive association between ownership concentration and corporate financial performance. Besides, existing of external chair and independent board members with an educational level greater than a BA degree affects positively the FP of the corporation whereas, there is a negative relationship between CEO duality (BCEO) and financial performance. According to García-Ramos and García-Olalla (2011), there is a positive correlation between the corporations that are characterized by having large shareholders and firm`s profitability as increasing the concentration of the ownership will lead to better FP. Shleifer and Vishny (1986) revealed that when the nature of the OS is highly focused, large and controlling investors play an important role in decreasing the agency risks as they have the motivations and competencies to control and supervise the senior management for the mutual benefit of control that is achieving and protecting all the shareholders` interests either for large or small investors. Demsetz and Lehn (1985) noticed that as corporate ownership becomes more concentrated, the extent to which benefits and costs are tolerated by the same holder rises. Therefore, large shareholders` companies are more expected to be efficient in CG to inhibit information asymmetry between 46 principals and agents because of their larger ownership in business, and the more risk hold by their larger ownership. So that, if agency costs declined, it is highly expected that investors will achieve higher levels of profitability and FP. It is noticed that corporations in developing countries have higher levels of blockage or large shareholders or investors in listed corporations and there is low level of protection for small investors. This indicates that there is high potential for principals to monitor and control agent’s practices and decreasing managerial opportunism (Shleifer et al., 1999; Shleifer & Vishny, 1997) According to Alchian and Demsetz (1972), large ownership is an important tool to control management and prevent managerial opportunism. Besides, it is an important tool to alleviate agency risks within the corporation. They argued that large investors are important to specify the wealth of shareholders, achieving corporate objectives and enhancing the compliance and discipline of senior executive management. So that, large shareholders are an important tool to monitor and control senior management and thus increasing the firm`s profitability and wealth maximization. According to Morck et al., (1988) the dispersion of corporate ownership among large number of investors and shareholders may lead to decreasing the level of monitoring and controlling over the senior executive management and thus that manipulate the interest of investors and shareholders to achieve their personal interests and objectives. Conversely, 47 the existing of dispersed ownership is important to prevent the likely for forming a structure that is big adequately to over control management. According to Rowe and Davidson (2002) there is an insignificant correlation between large ownership and firm`s profitability and FP. However, Sanda et al., (2005) demonstrated that there is a positive correlation between concentrated ownership and firm`s FP and profitability. It is hypothesized, following most literature that: H6: There is a significant negative relation between the large OS and firm`s FP. 2.6.2.7 Institutional Ownership Institutional ownership is an important attribute to indicate the nature of ownership composition in corporations. It indicates the total portion of equity that is owned by institutional investors. According to Hassan (2016) a large portion of institutional investors and ownership concentration characterize ownership structure in Palestinian listed firms. He confirmed that institutional investors hold 52% of Palestinian corporation. Furthermore, Fama (1980) stated that institutional ownership affects firm`s FP and maximization of the owners and shareholders` wealth. Shleifer and Vishny (1986) the external block owners have the aptitude to get rid of controlling managers` problem. Furthermore, the large block investors may increase the efficiency of takeover tool by overwhelming the problem of free rider that takes place from the inadequate of shareholders` 48 control. Berger and Udell (2003) revealed that there is a positive significant relationship between institutional ownership and FP of the corporation. Whereas, Wan (1999) revealed that there is a positive direct significant correlation between institutional investors and firm`s FP. Koh (2007) stated that institutional investors are specialized money managers who have rationale control and monitoring over corporation’s resources and assets that are mutual funds, insurance institutions, bank trusts and pension funds. He argued that there is a positive correlation between institutional investors and FP of the business as the existing of institutional investors allow the company to manipulate more investment opportunities and to increase the efficiency of corporation`s controlling and monitoring. Furthermore, institutional ownership gives the corporation more potential to accomplish such advantages in the interest of the firm`s value. It is argued that firm’s ownership acts an essential role in enhancing the control and monitoring over the firm`s executive management based on the percentage that they hold in the corporation. Thus, it is interesting to focus on their obligation as a fiduciary responsibility to oversight and monitor the business concerning their holding (Mallin, 2001). Holding large stake in the corporation inspire them to be more effective in inducing the management strategies and policies to develop the performance of the corporation (Cremers & Nair, 2005). Likewise, Davis and Steil (2001) stated that corporation’s ownership that has characteristics for instance: risk diversifications; favoritism of liquidity and the capability 49 to control large size of businesses because of their large ownership of shares. Shleifer and Vishny (1986) claimed that institutional investors act an essential role in influencing the management decisions. They argued that small investors, who are often individual investors, prefer their profits in the form of capital gain. On the other hand, institutional investors prefer to receive dividends due to tax purposes. Thus, firms` ownership have the inspiration to collect evidence associated to the corporation to oversight the management, thus, decreasing agency costs and so uprising corporation value (Grossman and Hart, 1980). On the other hand, Hart (1995) indicated that there are two essential problems from holding large stake of ownership in one corporation as ownership of large stake will decrease the potential to invest outside the corporation this indicates that corporation’s ownership will decrease the potential to diversify the investment opportunities among various investment opportunities. Besides, corporations may improve the agency problem but they cannot eliminate it. Likewise, according to Berger and Udell (2003) there is a positive significant correlation between institutional investors and FP of banking sector institutions in USA. They claimed that institutional ownership is important to enhance controlling and monitoring that decrease agency costs and so that enhancing firm`s FP. It is, therefore, hypothesized that: H7: There is a significant positive relation between institutional ownership and firm’s financial performance. 50 2.6.2.8 Foreign Ownership Foreign ownership is an image of OS that was used considerably in the literature to explain the corporate FP as those investors are expected to have more experience, competencies and aptitude than local investors do. Foreign ownership is the percentage of the company shares owned by foreign investors. Often, those investors conduct a detailed analysis before taking the investment decision in the country and they search for efficient investment opportunities. They are anticipated to bring in the recent technologies that give the opportunity for corporations to achieve better levels of performance (Kumar, 2004). Sarkar and Sarkar (2000) note the contradictory outcomes as some of the scholars revealed that there is a positive correlation between foreign ownership and firm FP and corporate value. Mangena and Tauringana (2007) revealed that there is a positive association between foreign investment in Zimbabwe and firm`s FP. Conversely, other researchers revealed that there is a negative relationship between the two variables (Sarac, 2002). Hamdan (2018) investigated the influence of BI on corporate FP through mediating the impact of foreign ownership in Saudi Arabia. The study results confirmed that there is a negative relationship between the number of interlocks per director and the firm`s performance. This thesis hypothesized that: H8: There is a significant negative relation between foreign ownership and firm`s financial performance. 51 2.6.3 Control Variables Besides, the independent variables the model will also use some control variables that can influence FP: firm size, and leverage as discussed below. 2.6.3.1 Firm Size Isik et al., (2017) studied the association between corporate size and FP in (112) manufacturing companies in Turkey throughout the period of 2005- 2013. The study results demonstrated that there is a positive correlation between firm size and FP. The researchers measured firm size through several indicators that are firm’s assets, sales volume and number of employees in the business. Zeitun and Tian (2007) revealed that there is a positive correlation between firm size and corporate FP in the corporations listed in Jordan Stock Exchange Market through the period of 1989- 2003. In the study results researcher assumed that large-scale business has more ability to generate profits more than SMEs due to diversification and economies of scale. Shen (2012) revealed that there is a positive correlation between firm size and FP in European countries. On the other hand, the study results demonstrated that there is a negative correlation in case of UK. He revealed that small firms tend to achieve better FP. Likewise, Chen (2011) used corporation size as a moderator. He claimed that the path from tax to capital structure is moderated by the firm size indicating that firm size considerably influences the capital structure and so that the corporate 52 financial position. Besides, he claimed that large-scale companies enjoy the advantage to increase financing from banking and financing sector institutions that leads the tax deductibility of debt advantage. Iavorskyi (2013) revealed contradictory result using logarithm of assets as a measurement of firm size as different performance proxies offer diverse results. Size and performance are positively and negatively attributed though using earnings before interest and tax margin to total factor productivity (TFP) as a performance proxy. On the other hand, they are negatively attributed, when ROA is used as a proxy. Likewise, Abor (2005) in his study in Ghana revealed that there is a positive significant relationship between firm size and firm performance. Likewise, Pouraghajan, Malekian, Emamgholipour, Lotfollahpour and Bagheri (2012) demonstrated that there is a direct relationship between firm size and FP in listed companies in Iran, through using the logarithm of assets as an indicator for firm size. Also, Abeywardhana and Krishanthi (2016) revealed that there is a positive effect of firm’s size on FP in the manufacturing sector SMEs in UK throughout the period 1999-2008. It is, therefore, hypothesized that: H9: There is a significant positive relation between firm size and firm`s financial performance. 53 2.6.3.2 Leverage In general, researchers use two proxies of corporate financial leverage that are either market leverage or book leverage. The book leverage refers to the book value of total debts of the corporation divided by the total book value of the corporation total assets. Conversely, the market leverage refers to the book value of total debt of the business divided by the book value of liabilities and shareholders` equity (Chakraborty, 2018). Total leverage (TLEV) is the total liabilities as a percentage of total assets. Whereas, short terms leverage (SLEV) is the ratio of the current liabilities that will mature with one year such as trade credit from the total assets and long term leverage (LLEV) is the percentage of the noncurrent liabilities from the total assets. Fama and French (2002) using the theoretical results of pecking order theory and trade-off theory, found that there is a negative significant relationship between leverage and FP of the corporation. Moreover, they claimed that increasing firm`s size will affect negatively on the corporate financial leverage and on average a negative correlation between dividend payout and firm`s size. Likewise, Kochhar (1997) explored the relationship between strategic assets, capital structure and FP of the corporation, they revealed that there is a negative relationship between financial leverage and firm`s FP. Likewise, Khan (2012) explored the relationship between financial leverage and firm`s performance in (36) engineering corporations listed in Pakistan throughout the period 2003-2009, they revealed that there 54 is a negative relationship between leverage and FP through using ROA, Gross Profit Margin (GM) and Tobin’s Q as proxies of corporate FP. He claimed that coordination in engineering sector in general depend on short- term leverage with strong covenants that influence corporate FP. Bambang et al., (2012) demonstrated that there is a negative correlation between corporate financial leverage and corporate FP at the Indonesian listed corporations through using a sample of manufacturing corporations during 2008-2010. Likewise, Ebaid (2009) revealed that there is a negative relationship between Financial Leverage (FL) through using short-term debt and firm`s profitability throughout the period 1997-2005 in non- financial listed corporations in Egypt, the study results revealed that there is a negative relationship between short-term debt and ROE. Other measurements of corporate FP such as, long-term debt to assets has insignificant impacts on gross profit margin as a proxy for firm performance. Nassar (2016) explored the correlation between financial leverage and firm`s FP on (136) industrial corporations listed on Istanbul stock exchange, over a panel of data for eight years. The study results demonstrated that there is a negative correlation between ROA, ROE and EPS as proxies for corporate FP and debt ratio for capital structure. Rajendran and Nimalthasan (2013) examined the relationship between the corporate FP and financial leverage in listed corporations of Sri Lanka through using four proxies for performance that are return on equity, return 55 on assets, gross profit ratio and net profit ratio. The study results demonstrated that there is a negative relationship between excessive financial leverage and corporate FP. Bauer (2004) investigated the case of (72) corporations listed on the Prague stock exchange during (2000-2001) in order to specify the relationship between leverage and FP. The study results demonstrated that there is a negative correlation between corporate FP and financial leverage. The researcher used the ROE as a proxy for FP, whereas he used total debt to total equity as a proxy for corporate FL. In consistent with this study, Zeitun and Tian (2007) investigated the correlation between financial leverage and corporate FP in Jordanian listed companies in Amman Sock Exchange Market during 1989-2003, the study results demonstrated that there is a negative correlation between leverage and corporate FP. Chen (2011) examined the correlation between financial leverage and corporate FP in a population of (305) corporations listed on the Taiwan stock exchange in the 2009. The study results indicated that there is a negative relationship between leverage and FP of the corporation and this result is in consistent with Pecking order theory. Shen (2012) investigated the effect of financial leverage on corporate FP in a number of European corporations that included Germany, France, Italy and UK. The study results demonstrated that there is a negative relationship between financial leverage and firm`s FP in companies in Italy, France, Germany and UK. 56 Rajan and Zingales (1995) explored the relationship between financial leverage and firm`s performance in the seven industrial countries that argued that relationship of capital structure and corporate FP did not change throughout the last ten years. Likewise, Pouraghajan et al. (2012) revealed there is a negative correlation between debt ratio and corporate FP in various industries that are listed on Tehran stock exchange during 2006- 2010. The researchers used ROA and ROE as proxies for corporate FP. Other variables in the study included tangibility, sales growth and age of the business. The researchers found that there is a positive correlation between these three variables and FP of the corporation. Domenichelli (2012) explored the relationship between corporate leverage FPs in small Italian businesses in the region of Marche during 1999-2008. The study results demonstrated that there is a negative and significant correlation between debt to assets as a measurement of financial leverage and corporate FP measured by ROE. This result is in consistent with pecking order theory. Similarly, Iavorskyi (2013) who revealed the correlation between financial leverage and corporate FP in non-financial firms listed on Ukraine during 2001-2010. The research results confirmed that there is a negative relationship between financial leverage and corporate FP. The researcher used ROA, operating profit margin and total factor productivity as proxies for FP. However, a study of Majumdar and Sen (2010) revealed that there is a positive correlation between corporate FP and financial leverage in India 57 during 1988-1993. Moreover, the study results confirmed that capital structure variables are insignificant except for fixed deposits that seem to have a direct significant correlation with corporate performance. Whereas, they revealed that excessive financial leverage decreases firm`s profitability and FP. Likewise, Ebrati et al., (2013) revealed that there is a positive correlation between FL and firms` performance in corporations listed on the Tehran stock exchange during 2006-2011. The researchers used Short- Term Debt to Total Assets (STD-TA), Long-Term Debt to Total Assets (LTD-TA) and Debt Ratio (DR) as proxies for FL. Whereas, they used ROA, ROE, EPS and market value of equity to the book value of equity as proxies for FP of corporations. It is, therefore, hypothesized that: H10: There is a significant negative relation between corporate financial leverage and firm`s FP. 58 Table (2.1): Summary of the hypotheses Hypotheses Expected Relationship Board Interlocking There is a significant positive relation between BI and firm’s FP positive Board Characteristics There is a significant positive relation between board size and firm`s FP positive There is a significant negative relation between duality of CEO and firm`s FP. Negative There is a significant positive relation between women in the board and firm`s FP. positive There is a significant positive relation between Number of Board Meetings and firm`s FP. positive Ownership structure There is a significant negative relation between the large OS and firm`s FP Negative There is a significant positive relation between institutional ownership and firm`s FP. Positive There is a significant negative relation between foreign ownership and firm`s FP Negative There is a significant positive relation between firm size and firm`s FP. positive There is a significant negative relation between corporate financial leverage and firm`s FP. Negative 2.7 The Conceptual Model of the Study Based on the above presented hypotheses, the researcher developed the conceptual model used to validate the relationships of the variables of interest. The conceptual framework shows the hypotheses supported by the discussed theories and empirical studies pertinent to developing countries to identify the relationships between BI, board characteristics and OS on the FP of corporations listed in PEX. 59 The conceptual framework (Figure 2.1) shows the effect of BI, board characteristics and OS on the FP that were explored. These variable elements are operationalized as independent and dependent variables. In line with the thesis hypotheses, relationships among the independent and dependent variables are categorized to affect either positively or negatively the FP. The conceptual framework specifies BI, board size, women in the board, number of board meetings, institutional ownership and firm size have a positive effect on FP. On the other hand, each of duality of CEO, large ownership structure, foreign ownership, and corporate financial leverage has negative effects on FP. Eventually, the researcher used financial leverage and firm`s size as control variables. Figure (2.1): Conceptual model on corporate performance. 60 Chapter Three Research Methodology and Design 61 Chapter Three Research Methodology and Design 3.1 Data of the Study The researcher obtained the data from annual reports of companies that are listed on the Palestinian Exchange (PEX) for the period from 2011-2018. The number of listed companies at PEX is (48) as of 31/12/2018. The researcher excluded the data of the listed companies in 2019 since when the researcher started to collect these data, the annual reports of these companies had not been published yet. The companies are categorized into five sectors: banking, insurance, service, investment and manufacturing. There are fourteen financial corporations listed in PEX of which seven are banking institutions whereas the others are insurance institutions. Whereas, there are 34 non-financial corporations listed on the PEX. The researcher uses the annual reports of these corporations in order to get the required information and data. Besides, the researcher obtained the stock market price information from PEX Reports. The researcher in this thesis included all economic sectors since the board interlocking exists among all the economic sectors whether they are financial or non-financial economic sectors. The researcher investigates the entire corporations listed on the PEX including financial and non-financial institutions over the study period. The 62 main criteria for the inclusion of the company are to be listed in the market during the period of 2011-2018 and have published annual reports. The remaining sample after excluding unqualified companies is (45) listed companies. Table (3.1): Distribution of the studied population based on the economic sectors at the end of 2018 Sector Number of listed companies Sample Banking sector 7 7 Insurance sector 7 7 Industrial sector 13 13 Investment sector 10 9 Service sector 11 9 Total 48 45 Source: www.pse.com. Investor Newsletter Issue # 401 December 2018 3.2 Measurement of Study Variables This section presents the various variables of the study and the measures used to operationalize them. 3.2.1 Dependent Variables The dependent variable is the FP. The theoretical framework assumes that there are several factors and determinants that influence the firm`s FP of Palestinian listed corporations through increasing the efficiency of the BD in performing its control, resource and strategic roles and activities that will in turn improve the FP of the corporation. This improvement in FP can be express