Impact of CEO Duality and Audit Committee on Firm Performance: A Study of Oil & Gas Listed Firms of Pakistan

This paper examines the relationship between corporate governance mechanisms and performance of the firm. In this empirical paper, audit committee and CEO duality are taken as corporate governance mechanisms and profit margin and return on equity are taken as a measure of performance of the firm for a sample of 11 listed firms of Pakistan for year 2010-2011. Results reveal positive significant relationship of return on equity and profit margin with audit committee. However, this study could not provide a significant relationship of CEO duality with return on equity and profit of the firm. The findings of study help policy makers in setting of proper policies. The finding also determines the importance of audit committee and CEO duality in terms of profitability.

W, 2003; Gompers, Ishii, & Metrick, 2003;Klappe & Inessa). The researchers also argued that interest rate has significant positive impact on performance of firm. . In previous literature some researcher concluded that there is systematic relationship between the characteristics of board but its evidence is little (Adenikinju & Ayorinde, 2001). But some researchers determined the positive & some found negative relationship between firm performance and corporate governance (Bhagat & Black, 2002).
Incorporation the audit committee's work as link between external, internal auditor and also between the board of directors ("Finance Committee on Corporate Governance," 1999). Audit committee assist the auditors rather than management and resolves the disputes between the management and auditors (Abbott & Parker, 2000). Audit committee is only most important board of directors subcommittee due to its role of protecting the interest of shareholders and financial control (Mallin, 2007). It was found in literature that if the financial reports are disclosed in better quality then performance of firm improves (Wild, 1996). In US, the audit committee is required to review and discuss the firm's risk assessment and strategies for hedging of risk ("NYSE,"). The revised Code of Corporate Governance (2012) issued by Securities and Exchange Commission of Pakistan describes the following benchmarks for international best practices SECP (2012).

Audit Committee
The Chairman of the audit committee shall be an independent director, who shall not be the chairman of the board. Audit Committee shall comprise of non-executive directors. The secretary of Audit Committee shall either be the Company Secretary or Head of Internal Audit. However, the CFO shall not be appointed as the secretary to the Audit Committee. Human Resources and Remuneration Committee introduced by SECP (2012). The internal audit function may be outsourced by a listed company to a professional services firm or be performed by the internal audit staff of the holding company. In the event of outsourcing the internal audit function, the company shall appoint or designate a fulltime employee other than the CFO, as Head of Internal Audit, to act as coordinator between the firm providing internal audit services and the board by SECP (2012). Audit committee determines the appropriate measures to safeguards company's assets; review the preliminary announcements of results prior to publication; review the quarterly and annual financial statements of the Company, prior to their approval by the board of directors and facilitating external auditors and coordinating internal and external auditors by SECP (2012).

Corporate Governance Mechanisms
There are many dynamics or variables that may constitute benchmarks by which corporate governance can be measured in an organization. Some of these mechanisms are briefly discussed following.

CEO/Chairman Duality
In literature there is enormous critique on CEO duality. By keep in mind the agency theory there are different arguments some researchers says that CEO duality diminish the monitoring role of board of directors. On the other hand, the stewardship theory stresses that a unity of command of a CEO leads to an unambiguous leadership over subordinates to this. Due to this induces the effective decision making (Donaldson & Davis, 1991). In this paper CEO/Chairman duality is taken as independent variable. There are enormous studies in which corporate governance practices dimensions like board size, board composition, CEO duality and audit committee were taken as independent variables (Anderson, et al., 2004;Mallin, 2007). In those studies researchers examined the impact of these variables on firm performance but they take EPS, debt to equity ratio and Tobin's Q as indicator of firm performance Arshad, et al. (2011). Researchers also studied that unemployment increased due to poor firm performance .
Some researcher suggest that there is no optimal leadership structure because duality and separation both have related benefits and costs (James, a, & Gregg, 1997). CEO duality causes information problems as he determines the agenda and information to the board (Jensen, 1993). CEO duality has also been linked to other signs of ineffective governance, such as in the cases of antagonistic takeovers (Morck, Shleifer, & Vishny, 1988). In some researches the researchers have focused on the audit committee and they take profit margin as a measure of performance of firm (Yasser, Entebang, & Mansor, 2011).

Audit Committee
In literature, some authors reported negative correlation between independence of audit committee and earning management . Some researcher found that audit committee has positive and significant impact on performance of the firm Roe M, 2002). According to some researchers it was found that cost of debt financing can be lowered if there is entirely independent audit committee Anderson,et.al (2004). In literature there were enormous studies in corporate governance practices Arshad, et al. (2011). In some researches it was found that audit committee has positive and significant impact on profit margin and return on equity of the firm (Yasser, et al., 2011).

Return on Equity
In previous literature there were positive relationship between the corporate governance practices and return on equity (Shaheen & Nishat, 2004). In previous literature it was found that independent audit committee has positive impact on return on equity (Shaheen & Nishat, 2004). In previous studies the relationship of CEO and return on equity is weak (Yasser, et al., 2011).

Profit Margin
In literature it is found that independent audit committee has no impact on net profit of the firm (Shaheen & Nishat, 2004). But in some researches it was found that independent audit committee has strong positive significant impact on profit margin of the firm Muhammad Aves Arshad, et al., 2011;Roe M, 2002;Yasser, et al., 2011). It is also found that good corporate governance has positively related with net profit margin of the firm (Shaheen & Nishat, 2004). In some researches there were found no relationship of net profit margin with corporate governance best practices (Bhagat & Black, 2002).

Theoretical Framework Independent Variables Dependent Variables
Adapt from (Muhammad Aves Arshad, et al., 2011)

Variables Description
In this paper the CEO/Chairman duality and audit committee are taken as independent variables. The value zero if the CEO and chairman are same and value 1 if CEO and chairman are different head.
If the firm has audit committee consisting of non executive members who are independent then value 1 and if firm has no audit committee or if it doesn't consist of non executive members then value zero.
In this paper the firm performance is taken as dependent variable and it is determined by return on equity and profit margin of firm. Return on Equity = Profit margin = Hypothesis H1: CEO Duality has significant impact on return on equity of firm.
In previous studies many researchers argued that CEO duality and return on equity has significant weak relationship (Yasser, et al., 2011). The purpose of this study was to investigate this relationship. H2: CEO Duality has significant impact on Profit Margin of firm.
The purpose of study was to determine relationship between profit margin and CEO. In previous researches it was argued that there is no relationship between CEO duality and profit margin of the firm (Yasser, et al., 2011). H3: Audit Committee has significant impact on return on equity of firm.
Researchers argued that audit committee has strong significant effect on return on equity of the firm. Previous studies showed significant positive relationship between audit committee and return on equity of the firm (Muhammad Aves Arshad, et al., 2011;Yasser, et al., 2011). H4: Audit Committee has significant impact on profit margin of firm.
In literature audit committee and profit margin of the firm had strong relationship with each other. This relationship were positive in nature (Muhammad Aves Arshad, et al., 2011;Yasser, et al., 2011).

Methodology Secondary Data
Secondary data refer to information that is collected by individuals, agencies and institutions other than by the researcher Welman et.al.(2005). Secondary data is data which is collected for previous projects other than current project. In this paper the data were taken from the annual reports of the firms and the Karachi Stock Exchange was the authenticated source for annual reports of firms. In this paper there were used two years (i.e. 2010, 2011) data of these firms for getting authenticated results.

Population
Population presents the entire group of people, things or events that researcher wishes to investigate. In this

Corporate Governance Practices
• CEO Duality • Audit Committee

Firm Performance • Return on Equity • Profit Margin
Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.5, No.17, 2014 paper the population was consisted of oil and gas companies in Pakistan which were listed on Karachi Stock Exchange. There were 12 companies listed on Karachi Stock Exchange. This industry was selected because it plays crucial rule in economy of Pakistan and these were adopted code of corporate governance effectively.

Sample
Sample is a subset of population and it should present the main objective of the study (Collis & Hussey, 2003). In this paper the sample were consisted of 11 companies which was 91 % of total population. These companies were Attock Petroleum, Attock Refinery Ltd, Byco Petroleum, Mari Gas Company, National Refinery, Oil & Gas Development Company, Pak Oilfields, Pak Petroleum, Pak Refinery, P.S.O. and Shell Pakistan Ltd.

Model Specification
The economic model was used in the study is given below: = º + ᵢᵼ + ℧ᵢᵼ In above equation Y is the presenting the performance of firm and it is dependent variable. It is constant. β is the coefficient of independent variables. ℧ᵢᵼ , is the error term and it is assumed to have zero mean and independent across time period.
This paper employs two important ratios (return on equity and profit margin) to measure the performance of the firm in defined period of time. By adopting the above economic model, the equation for this paper evolves: !"#$%&'()" = º + ₁+,-+ ₂/0123+$& + ℧ᵢᵼ  Table 1 shows the descriptive statistics of firms. Results show that mean of ROE of sampled firms is 4 % and PM is 11 %. It means that on average, for every Rs.100 turnover of sampled firms, Rs. 11 was the profit earned. Results indicate that 73 % of sampled firms have separate persons occupying the position of CEO and board chairman. While 27 % sample firms have same person having position of chairman and CEO. Only 9% of firms have audit committee consisting of executive members while .91 % of firms have audit committee composed by non executive members of the board and there are minimum three executive members in an audit committee of the firm.  Table 2 results showed that there is positive and significant relationship between CEO duality and return on equity. These results have support from previous literature (Mansor,et.al.2011). CEO duality has significant but negative relationship with profit margin. It means it there is CEO duality then it has negative impact on profit margin of the firm. Results also show that audit committee has positive impact with return on equity and profit margin of the firm. This relationship is significant. These results are consistent with previous literature (Muhammad Aves Arshad, et al., 2011;Mansor,et.al.2011) Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697(Paper) ISSN 2222-2847(Online) Vol.5, No.17, 2014 Table 3a indicates that there is positive and significant relationship between audit committee and return on equity. T-stats show that null hypothesis should reject. From above table H3 should accepted. Findings of this paper is consistent with previous literature (Yasser, et al., 2011). In majority of firms audit committee is being occupied by nonexecutive members and it has positive influence on performance of firm. These results have support with previous literature Roe M, 2002). Results also show that there is weak significant relationship between CEO duality and return on equity. So H1 should accept. Durbin Watson stats show that there is some positive auto correlation between the variables and probability of f-stats show that model is significant.  Table 3b show that there is no relationship between PM and CEO duality and it is significant at 5 % level of significance. These results have support with previous literature (Yasser, et al., 2011). So H2 should be rejected. Audit committee and profit margin has strong significant relationship with each other. Because of non executive members of audit committee, the performance of firm increases and in literature many studies support this argument that audit committee has strong significant relationship with profit margin Muhammad Aves Arshad, et al., 2011;Yasser, et al., 2011).

Results and Discussion
Results of R-square in table 3a, b show that about 7-9 % change in performance of the firm is due to these variables and remaining change is due to unexplained variables.

Conclusion
This study is done on oil and listed firms of Pakistan and economic model is used. From 12 listed firms only 11 listed firms have been selected for analysis. The findings of this paper show that there is weak significant relationship between ROE and CEO duality. There is positive and significant relationship between ROE and audit committee. There is no relationship between the profit margin and CEO duality. Results also conclude that audit committee and profit margin has strong significant positive relationship with each other.