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- DISSERTATION PROPOSAL – Corporate Governance and Firm Performance & Value: An Insight into the Canadian Oil & Gas Industry

Craig Powell – 102254 Academic Year 2010-2012 craig.powell@grenoble-em.com Grenoble Ecole de Management MBA Dissertation Proposal October 2011


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□ Non Confidential

□ Confidential

In library for:

□ Rare Topic □ Grade □ Technology Management Title - Corporate Governance and Firm Performance and Value: An Insight into the Canadian Oil and Gas Industry Program: MBA - FT 3 - London (2010 - 2012) Academic Year: 2010-2011 Dissertation / Project / Internship Report: Project Proposal 2010-2011 Student Name: Powell Craig School Tutor / Evaluator Name: To be confirmed Summary: What is the effect of corporate governance mechanisms on firm performance and firm value in Canadian Oil & Gas companies? Keywords: (cf. Thesaurus du Management): MANAGEMENT - CORPORATE GOVERNANCE AMERICA - CANADA ENERGY - OIL ENERGY - GAS

Craig Powell (102254) - GEM MBA - Dissertation Proposal


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Title -------------------------------------------------------------------------------------------------------------------------------------------------------------The title of the paper is “Corporate Governance and Firm Performance and Value: An Insight into the Canadian Oil and Gas Industry.”

Preface ---------------------------------------------------------------------------------------------------------------------------------------------------------Corporate Governance is a broad concept and the definition is often confused; it is therefore necessary to identify a definition, which will underpin my research. A good definition is provided by the OECD (1999): “Corporate Governance is the system by which business corporations are controlled and directed. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as the board, managers, shareholders and other stakeholders and spells out the rules and procedures for making decisions on corporate affair. By doing this it also provides a structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.”1 Corporate governance has been the subject of scrutiny in most jurisdictions throughout the world following some of the most notorious cases of improper governance; namely Enron, WorldCom, Parmalat and Anderson. Following the collapse of the global economy in 2008 there has been increased pressure on top management teams and boards of directors to reassess their responsibilities as they guide their firm‟s strategic decisions. I believe that proper corporate governance is fundamental to a firm‟s financial performance and value, which is why I am inspired to explore factors of governance that affect performance and value and test the correlation.

Aims and Objectives ---------------------------------------------------------------------------------------------------------------------------------------The goal of my research is to expand on previous studies testing the relationship between corporate governance mechanisms and a firm‟s performance and value. Specifically, the study will examine the Canadian Oil & Gas Industry. Using panel regression analysis I will quantify the relationship between the variables. My rationale for pursuing the research is both for the progression of my professional goals and a desire to contribute to governance literature. I am enthused to acquire expertise in corporate governance as I believe it is fundamental element of business practice. I want to build upon the management knowledge I have developed throughout my MBA. This will allow me to contribute to discussion and analysis of corporate governance topics with my colleagues. I have been involved in governance projects in my previous role and in my new job as a consultant, governance issues arise daily. In the long-term I want to hold a governance position. Furthermore, I intend on growing my knowledge of the Oil & Gas industry in Canada. The industry is dynamic and is regarded as a fundamental component of the Canadian economy. The capital markets environment provides a rich source of information for the industry. There is a large peer group of companies as nearly 50% of the world‟s public Oil & Gas companies are listed on the TSX and TSX Venture Exchange2. As of December 31, 2010 the Toronto Stock Exchange and TSX Venture Exchange accounted for a total of 394 Oil & Gas Issuers, $11.3B Oil & Gas equity raised (in 2010), and $258B in value traded (in 2010) (TSX 2010)3. The Canadian context provides vast amounts of data to draw conclusions for this study.

Craig Powell (102254) - GEM MBA - Dissertation Proposal


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Academically, there has been a great deal of research addressing the impact of board mechanisms on performance and value and through the research I am looking to build on elements of previous studies. I believe that the rapidly changing nature of the Oil & Gas industry calls for a modern study specifically relating to the Canadian environment. I hope that my study will provide insight for small, medium, and large caped Oil & Gas companiesâ€&#x; top management teams and boards of directors to best align their board mechanisms to strengthen firm performance and value. Industry observers may be able to use this study to analyze the stability and strength of a corporate position and their predict impact on future performance.

Research Question -----------------------------------------------------------------------------------------------------------------------------------------The study will attempt to examine the relationship between corporate governance and firm performance. Specifically: “What is the effect of corporate governance mechanisms on firm performance and firm value in Canadian Oil & Gas companies?� For corporate governance the following variables are proposed: board size (total number of board members), board composition (percentage of non-executive directors), CEO/Chairman role duality, disclosure of share interest (percentage of all board members), and nomination committee (as a percentage of all board members). For the firm performance and firm value variables the following are proposed: return on assets, return on equity, payout ratio, operating profit margin, stock return, and price to book value.

Hypotheses ---------------------------------------------------------------------------------------------------------------------------------------------------The study will focus on five corporate governance mechanisms and six firm performance and value metrics to test the correlation between governance mechanisms and performance and value:

- Size - CEO/Chairman Duality - Board Composition

Return on Sales

Stock Return

Return on Assets

Corporate Governance Mechanisms

Price to Book Value

Return on Equity

Payout Ratio

- Shareholder Disclosure - Nomination Committee

Craig Powell (102254) - GEM MBA - Dissertation Proposal


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H1. There is a relationship between board composition and firm performance

H10. There is a relationship between directors’ interest and firm value

H9. There is a relationship between nomination committee and firm value

H2. There is a relationship between board size and firm performance

H3. There is a relationship between role duality and firm performance

H4. There is a relationship between nomination committee and firm performance

Hypotheses: Canadian Oil & Gas Industry

H8. There is a relationship between role duality and firm value

H5. There is a relationship between directors’ interest and firm performance

H7. H6. There is a There is a relationship between relationship between board board composition and size and firm value firm value

Academic Literature ---------------------------------------------------------------------------------------------------------------------------------------There is a wealth of literature discussing the effect of governance mechanisms on a firm performance and value. In an attempt to define the scope of the dissertation I realised that governance research is so deep and complex that for the purposes of this paper I must focus on a limited set of board mechanisms and performance and value indicators in order to draw empirical evidence to support my research objectives for the Canadian Oil & Gas industry. One thing is clear; there remains a lot of debate and mixed evidence around the impact of the governance mechanisms on firm performance and value. In 2003 Gompers et. al analyzed 24 governance provisions on stock returns for around 1500 American firms throughout the 1990s and showed that stronger corporate governance mechanisms are associated with positive abnormal returns, higher firm values, higher profits, higher sales growth, lower capital expenditures and fewer corporate acquisitions 4. Gompers‟ et. al “Gscore” (an analysis of publications by the Investor Responsibility Research Center) is used as a proxy for a lot of recent literature. In line with Gompers et al., Drobetz et al. (2004) studied the impact of corporate governance on stock returns throughout German companies from 1988-2002 and found an annual excess return of 16.4 per cent to a corporate governance long-short strategy5.

Craig Powell (102254) - GEM MBA - Dissertation Proposal


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There is mixed research surrounding the correlation between firm performance and value and board size. Some studies supporting the notion that smaller board are related to better performance include Yermack (1996)6; Gertner and Kaplan (1996)7; Eisenberg, Sundgren and Wells (1998)8; and Denis and Sarin (1999)9. Other studies such as Gales & Kesner (1994)10; Dalton, Daily, Johnson, and Ellstrand (1999)11 argue that larger boards are linked to superior performance. Though these groups of studies are conflicting, both arguments support the view that board size has a significant economic impact on firm performance and value. Millstein and MacAvoy‟s (1999) study found that board independence has positive effect on firm performance; the more independent firms‟ boards are the better their operating performance are12. Contrastingly, Fogel and Geier (2007) found inconclusive evidence that board composition is positively associated with superior firm performance13. CEO and Chairman role duality has also been the focus of a lot of empirical research. Rechner & Dalton (1991) compared firms with CEO duality to those with separated roles and found consistently better accounting performance for those with role separation14. Davidson et. al (2004) found that income increasing earnings strategies were more correlated with firms following duality creating successions than in non-duality creating ones15. Contrastingly, in a U.K focused study Dahya (2004) suggested that performance improvement was not associated with the separation of the two roles16.

Research Methods -----------------------------------------------------------------------------------------------------------------------------------------The research methods will provide evidence towards the overall question of whether or not corporate governance affects a firm‟s performance and value. In consideration of this the main element of the research will consist of the dependent variable being a measure of firm performance and value and the independent variable being corporate governance mechanisms. Additionally, I will incorporate the control variable of firm size (by market capitalization) as a dependent variable. I will collect the individual characteristics from different companies‟ board mechanisms and performance and firm value over a five year period (potentially 2006-2010). I will tabulate the data using panel regression to calculate the correlation. Additionally, I will use qualitative research regarding TMTs and board characteristics of Canadian Oil & Gas companies to understand the specific challenges that the industry is presented with and how these affect board mechanisms. I believe that a quantitative approach is the most relevant data collection and analysis method to explore the research topic. As I am testing the correlation between the independent and dependent variables I must be able to quantify the relationship using valid statistical measures. Without a wide sample size the study would lack validity. By separating the governance mechanisms into different hypotheses relating to firm performance and value I believe that calculating the correlation will provide concrete evidence towards the research questions. I will use grounded governance theories to relate my findings to the Canadian Oil & Gas industry. Furthermore, I will use some qualitative analysis provide insight of the industry not available through quantitative analysis, which will strengthen the quantitative findings.

Craig Powell (102254) - GEM MBA - Dissertation Proposal


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Risks & Mitigation -----------------------------------------------------------------------------------------------------------------------------------------Some risks that I have identified of the study include: i.

The estimated time for each stage of the project plan may not viable and project plan overruns may occur or there are delays in accessing research information. 

Ensuring that project plan is continually updated is important to reduce this risk. If I am able to plan ahead and adjust my plan I will be able to shift my efforts appropriately. I have also incorporated a full calendar month contingency to offset any delays.

ii.

My proposal assumes that I will be able to access information for each company. There is a possibility that some companies may not disclose the information or else the data available may not be as historic as I had intended it to be (5 years). 

I chose the variables (outlined above) not only because they provide insight to the research objectives but also because the governance mechanisms and firm performance/value figures are readily available in most publicly traded corporations. With nearly 400 publicly traded Oil & Gas firms to sample from I will be able to omit some samples from the research without compromising the validity of the study significantly.

iii.

As I learn more about the Oil & Gas industry in Canada there is a possibility that I find the firm performance and value figures I have proposed are not the most relevant indicators for the Canadian Oil & Gas industry. 

There are many financial indicators available to test and at the time of this proposal I believe that they are the most relevant indicators to test; however if I find more relevant indicators that could add value to the study I can add/replace the indicators. This will not harm the research.

ii.

My professional responsibilities may at times be hindrance on my research efforts 

My role demands a lot of late nights and extra hours. This will divert time away from research. In order to help me balance the two I have informed my managers of my commitments. I am open about the commitment I have to make outside of my work and I am seeking to incorporate the firm into the research wherever possible. I have set-up a work schedule for nights and weekends to keep the project on schedule. I am thoroughly committed to both my job and the research.

Craig Powell (102254) - GEM MBA - Dissertation Proposal


Project Plan -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


Works Cited 1

OECD (1999) - Organization for Economic Cooperation and Development, Paris, April 1999. TMX (2011). Oil & Gas Sector Sheet, retrieved from TMX.com/energy 3 TMX (2011). Oil & Gas Sector Profile, retrieved from TMX.com/energy 4 Gompers P, Ishii J, Metrick A (2003). Corporate governance and equity prices. Quarterly Journal of Economics 118(1):107– 155. 5 Drobetz, W., Schillhofer, A. and Zimmermann, H. (2004). „Corporate Governance and Expected Stock Returns: Evidence from Germany‟, European Financial Management, 10, 267–293. 6 Yermack, D., (1996), “Higher Market Valuation of Companies with a Small Board of Directors,” Journal of Financial Economics 40 (No. 2), 185-211. 7 Gertner, R. and S. Kaplan (1996). “The Value-Maximizing Board,” University of Chicago, Working paper. 8 Eisenberg, T., S. Sundren, and M. Wells (1998). “Larger Board Size and Decreasing Firm Value in Small Firms,” Journal of Financial Economic 48 (No. 1), 35-54. 9 Denis, D. and A. Sarin, (1999). “Ownership and Board Structures in Publicly Traded Corporations,” Journal of Financial Economics 52 (No. 2), 187-224. 10 Gales, L. and I. Kesner (1994). “An Analysis of the Board of Director Size and Composition in Bankrupt Organizations,” Journal of Business Research 30 (No. 3), 271-282. 11 Dalton, D., C. Daily, J. Johnson, and A. Ellstrand (1999). “Number of Directors and Financial Performance: A Meta Analysis,” Academy of Management Journal 42 (No. 6), 674-686. 12 MacAvoy, P.,W., & Millstein, I.,M. (1999). The active board of directors and its effect on the performance of the large publicly traded corporation. The Bank of America Journal of Applied Corporate Finance, 11(4), 8-8-20. 13 Fogel, E. and Geier, A. M. (2007). “Strangers in the house: Rethinking Sarbanes-Oxley and the independent board of directors” Delaware Journal of Corporate Law, 32(1), 33-72. 14 Rechner, P. L. & D. R. Dalton (1991). CEO duality and organizational performance: A longitudinal analysis. Strategic Management Journal, 12(2): 155-160. 15 Davidson, III W. N., P. Jiraporn, Y. S. Kim & C. Nemec (2004). Earnings management following duality-creating succession: Ethnostatistics, impression management, and agency theory. Academy of Management Journal, 47(2), 267-275. 16 Dahya, J. (2004). One man two hats – What‟s all the commotion! Working paper, Baruch College. 2


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