The Impact of Corporate Governance on the Insurance Firm’s Performance in Bahrain

Abstract

The importance of responsibility, accountability, transparency and fairness are raising the issues of their effect on the performance of the firm and the managers as well. This is closely related to the agency problem because corporate governance mechanisms intend to induce managers to act according to the best interest of the shareholders, which is by maximizing the firm’s value and ultimately reducing agency costs.

This study is a contribution to other studies conducted to examine the impact of corporate governance mechanisms on firm’s performance of the insurance industry in Bahrain, understand how to minimize the agency costs effectively and design the appropriate organizational structure. Also, to distinguish between good and bad corporate governance which is a crucial step in building the market’s confidence and attracting positive investment flows to the institution and the economy.

E-views program has been used to regress and the method the Pooled data. Five insurance companies listed in BSE have been selected as a sample for this study for the period of 2005-2010. Therefore, the total panel of observations is 30.

The research concludes that there is no statistically significant impact of corporate governance expressed by CEO status, ownership concentration, the number of employees, industry performance, and number of shares traded on firm’s performance in the insurance industry expressed by the dependent variable - return on equity (ROE). On the other hand board size, firm size, number of block-holders found to have statistically significant impact on firm’s performance in the insurance industry expressed by the dependent variable - return on equity (ROE). This result, confirms the importance of good governance structure on the firm and the whole economy in the long run.

The researcher suggests that every insurance firm should properly define corporate governance and its mechanisms and implement them effectively in order to reach the firm’s long-term goals, build stakeholders’ confidence and generate positive investment flows.

The recent financial crisis has had enormous impacts on the economy, leading to major problems in insurance companies. Therefore, an insurance company should focus on good corporate governance that will build a stable foundation for recovering from this crisis.

Regarding future line of research, efforts should be put at increasing the sample size, the corporate governance variables, and the time frame in order to have more accurate and reliable results.

More importantly, the empirical literature indicates a sample selection bias in favor of very big firms. It is hereby suggested that attention should be devoted to the study of small- and medium-scale firms. This is because these firms account for at least 90% of the total number of firms in the world.