Governing Board Attributes as Profitability Influencers under Endogeneity: An Econometric Analysis in South Africa

Presently, the oversight role performed by the governing board has been interrogated due to the demise of several corporate giants. The governing board is responsible for advancing the strategic direction of the company by ensuring superior performance whilst managing risks. Accordingly, this study investigated whether the governing board has any influence on a firm’s profitability by using OLS and GMM estimation on an unbalanced panel of 130 firms over a six-year period. ROA served as a proxy for firm performance and several board-level governance variables were selected namely board size, board independence, CEO duality, director qualifications, and board interlocks. From an econometric contribution, this study found that the addition of instrument variables in the GMM estimation model has proven to be robust in examining corporate governance variables. GMM is also robust in controlling endogeneity and a possible bi-directional causality between board and profitability. From a theoretical contribution, agency, resource dependence and management hegemony theories are highly prevalent in the governing boards of the JSE. The results of this study are as envisaged in the SCP paradigm. All hypotheses were supported, showing overall that profitability is significantly influenced by the board attributes. This study provides a useful analysis of the theoretical framework used by academic writers as a foundation for model specification as well as contributes to the econometric methodology of corporate governance. These findings will also advise future researchers, stakeholders and regulators in better understanding the role of board composition from a profit maximisation and sustainability outlook.