Board Attributes and Financial Performance of Listed Firms in Uganda

This study examines the relationship between Board of director attributes and financial performance of listed firms in Uganda. Board attributes of board size, Non-executive directors (board independence) and directors’ shareholding are examined while controlling for firm size and leverage. The study uses a cross sectional research design, employing panel data of listed firms in Uganda for a period of four years. Financial and board attributes information is collected from annual reports of each firm. The study finds that non executive director’s independence on board and large boards increase firm performance. We do not provide evidence to suggest that director’s shareholding affects firm performance differently. Thus this study is consistent with evidence that shows the importance of board of directors’ attributes on firm ́s financial performance.

, several studies examine the relationship between directors' shareholding and performance (Adams & Santos, 2006;Bhagat and Black, 1999;Demsetz, 1983;Demsetz and Lehn, 1985;Demsetz and Villalonga, 2001;Finkelstein, 1992;Ho and Williams, 2003;MangenaandChamisa, 2008;McConnell,Servaes, andLins, 2008;Morck, Shleifer and Vishny, 1988). Fama (1980) suggests that directors' ownership helps to reduce the conflict of interest that exists between directors and shareholders. Directors who hold large stake in the firm are more likely to monitor management in order to protect their investments (Jensen, 1993). For example, large block holders, who have a strong incentive to closely monitor a firm, may acquire seats on the board, which enhances their ability to monitor effectively (Ahmed and Hadi, 2017).
Prior studies have shown different results on how directors' shareholding influences firm performance. Empirical studies generally support this notion. For example, Morcket al. (1988) attributes the increase of Tobin's Q with ownership to the convergence of interests between directors and shareholders. Bhagat and Black (1999) found a significant relationship between the number of shares owned by directors and firm performance. They argue that the reason behind this phenomenon is that the increase in directors' equity motivates directors to improve their monitoring of management and that improves firm performance. In contrast, they stress that this might be due to the inside information the directors have about the firm and its operations, thus they will increase their ownership to benefit from the firm's success. Seifert, Gonenc and Wright (2005), Morck et al. (1988) andYammeesri (2003) finds a positive relationship between insider ownership and firm performance. On the other hand, Demsetz (1983) argues that insider ownership is internally derived so it has no credible impact on firm value. Yammeesri (2003) found that government, financial institution, and bank shareholders ownership had no impact on profitability. Shah, Butt and Saeed (2011) found a negative relation between directors' shareholding and firm performance because family owned firms in Pakistan dominate the board and there is lack of expertise, diversity and new knowledge for achieving operational efficiency.
There is evidence that directors' ownership and performance to be endogenous. Demsetz results were supported by (Cho, 1998;Holderness et al., 1999;and Demsetz and Villalonga, 2001.) Cho (1998) tested a reverse relationship between ownership and performance, using a cross-sectional 2-SLS regression to model. He found investment affects corporate value positively which in turn affects directors' ownership. Another aspect of corporate governance was investigated by Ho and Williams (2003);and Abidin et al. (2009), who examined directors' ownership and the value added by a firms' intellectual capital. Ho and Williams (2003) tested the ownership and value added in three countries (South Africa, Sweden, and the UK) and found that the coefficient for directors' shareholding is significantly positive for Swedish firms, but not significant for the South Africa and UK samples. Abidin et al. (2009) support Ho and Williams' (2003) findings for South African firms. Mangena and Chamisa (2008) investigated the impact of directors' ownership on the incidence of listing suspensions by the JSE Securities Exchange of South Africa. They find an insignificant relationship between directors' ownership and the suspension of firms by the JSE Securities Exchange.

Methodology
The study is comprised of firms listed on the Uganda Securities Exchange. Information on the board attributes of board composition, directors' shareholding, leadership structure and board size and financial information was primarily collected from annual reports of each company listed on the Uganda Securities Exchange for the 2013 to 2016. According to the USE website, the companies listed were 16. However, two of the firms had missing annual reports by the time of data collection, leaving a total of 14 firms for this study with 56firm year observations. Relevant information was extracted following a data collection guide on board attributes such as board size, number of non-executive director's, and directors' shareholding, total assets, debt and equity among others which were collected from the annual reports and later transformed into measures that describe the variables with respect to the study objectives. Financial information required for the study was primarily compiled from the following, income statements, statements of financial position, as well as from the notes on the financial statements. Information on the board attributes of board composition, directors' shareholding, leadership structure and board size were taken primarily from the annual reports of each company specifically the corporate governance section of the report.
This study examined three categories of board attributes and these were; board independence, directors' shareholding and board size. These were measured as below: Directors' shareholding refers to the proportion of shares held by directors' in the company.
Directors % shareholding = Total number of shares held by directors Total company shares Board size refers to the total number of directors on a board. Board size was measured using the total number of directors on the board.
The firm's financial performance, measured in terms of return on assets (ROA) and return on equity, are the dependent variables. The ROA measures the capacity of a firm's assets to generate profits and it is considered to be a key factor in determining the firm's future investment. ROA is the indicator as what profit the company is earning against its available resources and was measured as:

ROA =
Profit after tax Total Assets Return on Equity (ROE) indicates how much the company is earning to the ratio of investment of shareholders. It was measured as:

ROE = Profit after Tax Equity
The Control variables used in this study include; Firm size was measured using the natural logarithm of total assets (Anderson &Reeb, 2003;Barontini and Caprio, 2006;Wang, 2006). Leverage (Borrowing level) was measured as the quotient between long term debt and long-term debt and Equity (Coles, Daniel and Naveen, 2005;Wang, 2006).

Results
The following descriptive statistics were obtained from the analysis.  Board composition -ratio of non-executive directors to total number of directors in the company.  Directors' shareholding-proportion of shares held by directors' in the company.  Board size-total number of directors on the board.  lnFS-the natural logarithm of total assets  Leverage-the quotient between long term debt and long-term debt and Equity  ROA-ratio of profit after tax to total assets  ROE-ratio of profit after tax to equity On average, the board of directors are composed of 82% non-executive directors. This is consistent with the requirements of the corporate governance code of the United Kingdom that suggests that the board of directors should be composed of more than 50% of non-executive directors of which more than a half should be independent. The average board size is of 10 board members. This is slightly higher than average board size of between seven to eight as advocated by Lipton and Lorsch (1992) and Jensen (1993). Directors' shareholding is on average is on average of 6% with a maximum executive ownership of 52.5% of the firm.On average the Return on assets is at 5.58% with the average Return of equity is 12.18%. The findings in table 2 above using a Pearson correlation coefficient tests provide preliminary evidence on the relationship between board attributes and firm performance. We show that there is a positive relationship between Board size, non executive director independence and firm performance. The relationship between director's shareholding and firm performance is insignificant. The study also finds a significant negative relationship between leverage and firm performance. This implies that as leverage increases, the financial performance of a firm reduces or deteriorates. These findings are consistent with Williams (2001) who argues that a high proportion of debt may lead a firm to focus primarily on the needs of debt holders and that firms with a high leverage ratio may lack attractiveness to investors, and will have a higher interest payments, which reflect on the risks and returns of the firm.  -0.412and p=0.001). These findings are consistent with the argument that a greater proportion of outside independent directors on the board have positive impact on firm financial performance firms because large proportions of outside directors on the board normally have less agency problems, and therefore, exhibit a better alignment between the interests of shareholders and those of management (Fama and Jensen, 1983;Fernandes, 2005;Jackling and Johl, 2009;Jensen and Meckling, 1976;Shleifer and Vishny, 1997). The results also show that there no relationship between board size and ROE (β=0.179,p=0.054). The results in table 3 also suggest that there is no a relationship between directors' shareholding and ROE (β=-0.179, p=0.054). Looking at the coefficient data in table 4, we can see that there is a significant a positive relationship between non executive directors independence and ROA (β=-0.318 and p=0.022). This is similar to the findings using ROE. The results also show that there is a significant positive relationship between board size and ROA (β=0.471, p=0.00). Some studies report similar results and argue that larger boards have directors with heterogeneous educational and industrial background and skill that will help to enhance actions of the firm, hence, improving performance (Pfeffer, 1987;Herman, 1981;Bacon, 1973). The results in table 3 indicate that there is no relationship between directors' shareholding and ROA (β=0.053, p=0.688). The study finds a significant negative relationship between leverage and ROA (β=-0.504 and p=0.001 which is less than 0.05). These finds are consistent with Williams (2001) who finds that as companies increase long-term debt financing, their financial performance deteriorates.

Contribution and Implications
The purpose of the study was to examine the relationship between Board attributes and financial performance. ROA and ROE were used to measure the firm´s financial performance. Three selected board attributes of board size, Non-executive directors (board independence) and directors' shareholding were considered for this study. In order to minimize the impact of other variables that could explain the relationship between board attributes and firm financial performance, two control variables of firm size and leverage were also included in this study.
The results show that there is a significant positive relationship between the presences of high number of nonexecutive directors on the board of directors (board independence) firm financial performance. The results therefore suggest that increase in number of non-executive directors increases firm financial performance. The results also show that there is a significant positive relationship between board size and ROA. This implies that as members on the board increase, firm financial performance also improves. We find no evidence to suggest that Director Shareholding influences firm financial performance differently. Overall, the results show the importance of directors' attributes on firm´s financial performance and give several insights on how firms can improve their board effectiveness and performance.
This study contributes to the literature on corporate governance specifically board attributes of board size, board independence and directors' shareholding and financial performance in Uganda,by providing an empirical analysis of the relationship between board attributes and firm financial performance. The study has also established significant findings that will be very useful to operations of capital markets in Uganda and other firms listed and non-listed.
The study also recommends that companies should continuously develop and maintain corporate governance principles and mechanisms in place especially well constituted boards in terms of size and independence as these board attributes significantly influence how well a firm performs.