Shipping companies listed on New Yorks Stock Exchange

This study was based on 21 shipping companies listed in New York Stock Exchange, over the period of 2005 to 2009. On the table below the selected shipping companies are shown.

Shipping Companies listed in the New York Stock Exchange

DIANA SHIPPING INC

NAVIOS MARITIME HOLDINGS INC

SAFE BULKERS INC

GENCO SHIPPING &TRADING LIMITED

TEEKAY CORPORATION

TSAKOS ENERGY NAVIGATION LIMITED

EXCEL MARITIME CARRIERS LTD

DANAOS CORPORATION

AEGEAN MARINE PETROLEUM NETWORK INCORPORATION

FRONTLINE LIMITED

SEACOR HOLDINGS INCORPORATED

NORDIC TANKERS

GLOBAL SHIP LEASE INCORPORATION

GENERAL MARITIME CORPORATION

SEASPAN CORPORATION

SHIP FINANCE INTERNATIONAL LIMITED

KIRBY CORPORATION

OVERSEAS SHIPHOLDING GROUP, INC

DHT MARITIME INCORPORATION

INTERNATIONAL SHIPHOLDING CORPORATION

TIDEWATER INC

This paper seeks to examine the relationship among three corporate governance mechanisms (board composition, chief executive status and audit committee) and some firm performance measures (return on investment capital, return on equity, Return on Assets and Current Ratio). Also, the essay examines the relationship among these three corporate governance mechanisms and the operating performance (Net Sales to Operating Cost) of the corporations.

Part 1 Corporate Governance

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled with the objective to enhance shareholder’s wealth. Corporate governance also includes the relationships among the stakeholders involved and the goals by which the corporation is governed.

It is supposed that better corporate governance leads to better corporate performance by preventing the expropriation of controlling shareholders and ensuring better decision-making. Corporate governance is a priority along with financial indicators when evaluating investment decisions according to investors. The majority of them are prepared to pay a premium for companies having high governance standards. On the opposite, there are also bad forms of corporate governance that lead corporations to problems. Good corporate governance is considered to be a fundamental necessity to run a firm successfully. Moreover corporate governance is a process which can ensure growth for a firm and the economy in general.

Most of the selected shipping companies are foreign private issuers established in Marshal or Bermuda islands. The minority of the selected companies are U.S corporations. Consequently most of them are not required to comply with the corporate governance practices followed by U.S. companies following the New York Stock Exchange (NYSE) listing standards. However, they are required to state any significant differences between their corporate governance practices and the practices required by the NYSE according to Section 303.A.11 of the NYSE Listed Company Manual. Furthermore almost every chosen shipping company adopts NYSE required practices, such as having a majority of independent directors, establishing audit and compensation and nominating committees as well as adopting a Code of Ethics.

NYSE requires companies to adopt and disclose corporate governance guidelines. The guidelines should address to the director qualification standards, the director responsibilities, the director access to management and independent advisers, the director compensation, the director orientation and continuing education, management succession as well as an annual performance evaluation. However, most of the shipping companies trade in NYSE are not obliged to comply with these rules due to that they are foreign private issuers as well as most of them are offshore. For these companies there is no obligation of complying with any corporate governance guidelines or code of ethics. Shareholders can be informed via the annual reports and Code of Ethics, both of which have been publicly filed by the United States Securities and Exchange Commission available on the companies web-sites. Corporate governance guidelines and shipping companies intend to publish an overview of the Company’s guiding principles which focuses on social issues. This Code cannot cover every applicable law or provide answers to all questions that may arise but it can set out general principles about an organization belief on matters such as mission, quality, conflicts of interest, internal reporting, privacy or the environment. Furthermore, it may define proper procedures to determine whether a violation of the code of ethics has occurred.

Code of ethics and corporate social responsibility is a neglected issue in the shipping industry. Traditionally there is no reason for the shipping companies to invest in advertising or in any other activity that could improve their image. Consequently the main goal of the management of a shipping company is to attract as many as possible new clients. Any characteristic that can improve the reputation of the company is not a priority for the managers of a shipping company. Many years have passed and shipping companies were not obliged to follow some rules of social responsibilities. Fortunately, the last decade various regulations have been imposed to the operation of a shipping company, although the control mechanisms were not always efficient.

Board of Directors

An important aspect that influences the corporate governance is the board of directors. The board of directors plays an important role to the company operation. It oversees top management and is entrusted with the responsibility of monitoring and supervising the company resources and operation. Moreover, it undertakes the obligation of appointing a qualified person as the Chief Executive Officer and other management staff. Therefore, the board is seen as a team of individuals with fiduciary responsibilities of leading and directing a firm, with the primary objective of protecting the shareholders interests with high sense of integrity and commitment to the firm.

The role of the Board is significant in designing efficient corporate monitoring and ratification mechanisms. With respect to reducing agency costs at the Board level, Boards of directors have three key decision rights: (1) Monitoring (2) Ratification (3) Reward and punishment rights. They may even remove top managers from their positions and sanction them for their decisions. NYSE rules require the size of the board of directors not to be smaller than three members. As it can be observed by the survey the size of the board of directors of the sample is between five and seven members. Although there are some shipping companies that have more than seven members in the board and some others that have less than five members.

It can be concluded that the majority of the board members in the board of directors are outside directors (member of a company board of directors who is not an employee or stakeholder in the company). The role of independent directors on the board of directors is to effectively monitor and control firm activities in reducing opportunistic managerial behaviors and expropriation of firm resources. The majority of the board members are outsiders for most of the companies; some of them use relatives as well as acquaintances as board members. This indicates a tendency for the shipping companies to be governed by a closed team of people. In accordance to NYSE rules the board should have audit, compensation, and nominating committees made up entirely by outside directors. Almost all of them are consisted by the three obligatory committees opposed to the majority of the selected shipping companies that do not have the obligation to comply with the NYSE rules. The role of these committees is significant; they are assigned to evaluate the board

The role of the Audit Committee

The purpose of the Audit Committee is to:

Monitor the integrity of the firm financial statements.

Monitor the qualifications, independence and performance of the company independent auditors.

Monitor the performance of the company internal audit function.

The audit committee ensures that the books of the company are not fake and that shareholders are properly informed of the financial status of the firm.

In this essay it is made an effort to examine the importance of the audit committee in shipping companies listed in the New York Stock Exchange. NYSE requires from a listed U.S. company to have an audit committee with a minimum of three members. But it is permitted by Rule 10A-3 under the Securities Exchange Act of 1934 that audit committees of foreign companies can have less than three independent members in the audit committee.

The Chief Executive Officer (CEO) Status

The Chief Executive Officer position and the whole management team is an important position to hold in a corporation. They are responsible for

Operating the firm in an effective way.

Preparing the annual operating plans and budgets.

Establishing an effective system of internal control.

In this essay it is examined the role of the Chief executive officer (CEO) in the shipping companies. There are two types of leadership structure i.e. combined leadership structure and separated structure. Combined leadership structure happens when the CEO is also the chairman of the board. On the other hand separated leadership structure takes place when the Chairman of the board is a different person from the CEO. Many studies identifying the implications of CEO duality exist. It is thought that the operating performance may be improved as a result of less debate among the CEO and chairman and/or other directors. From the sample of the shipping companies that it was taken a significant tendency cannot be provided. In some of the shipping companies the CEO is also the chairman of the board while in others is not.

Part 2 Methodology

The aim of this research is to figure out if the corporate governance mechanisms have an effect on firm performance. Therefore, the measurement of firm performance is primarily comprised of two factors: operating and financial performance.

The data used for this research were extracted from the audited financial statements of 21 shipping companies listed in the New York Stock Exchange. The survey covers the time period through 2005 – 2009. The sample consists of the annual observations for the board size of every company, for the CEO status and for the size of the audit committee of every shipping company. The aim of the research is to find if these corporate governance mechanisms influence the operating and financial performance ratios. Consequently regression models have been constructed in order to prove the association between the corporation governance in operating and financial performance.

Microsoft Excel and the statistical package Eviews were used so as to collect the data run the appropriate regressions and identify the results. Moreover except from the companies’ annual reports a lot of information was extracted through the Thomson Database. In the end panel data methodology was adopted because it combined time series and cross sectional data. The method of analysis is that of multiple regressions and the method of estimation is Ordinary Least Squares (OLS).

By running the appropriate regressions via Eviews and by using Return on equity and the profit margin as the dependent variables, the results were considered inadequate. Consequently it was considered integral to proceed to further research. That is why the below financial ratios were used as dependent variables.

For the financial performance:

Return on equity ratio: Profitability ratio, it can indicate the management effectiveness

Return on assets ratio: Profitability ratio, it can also indicate the management effectiveness

Return on investment capital ratio: Profitability ratio, it can also indicate the management effectiveness

Current ratio: liquidity ratio

Finally in order to measure the operating performance:

The above formulas contributed on calculating the ratios of the shipping companies for the time period of 2005 – 2009. Moreover, many independent variables were used to define the most accurate and specifically those that would give some results.

Consequently as independent variables are defined the above:

Out_Board = the proportion of the independent directors over the total directors.

CEO = if the same person occupies the post of the chairman of the board and the Chief executive is defined by valuing with zero, otherwise value with one.

Audcom1 = the proportion of the audit committee.

In the end in order to run the regression, the economic models should be defined.

For the return on equity:

For the return on assets

For the return on investment capital

For the current ratio

So as to measure the operating performance of the shipping companies the above economic model was used.

Furthermore the above parameters should be defined.

Î²o:Constant term

Î²1:Coefficient of the regression

Î²2: Coefficient of the regression

Î²3: Coefficient of the regression

eit: Disturbance term

Empirical Results and Discussion

It is important to mention some important data before continuing to comment on the outputs of the regression. First of all the regression outputs will be tested for all the three confidence intervals 90%,95% and 99%. In order to have a statistical significant output the t – statistic has to be greater than 1.64, 1.96 and 2.576 respectively. Moreover so as to have a statistically significant variable the p – value has to be less than 0,1 , 0.05 and 0.01 respectively.

As it can be observed from the table below, the three independent variables are statistically insignificant because the t – statistics are lower than the critical values. Moreover it can be confirmed because all the p – values are greater than the level of significance.

Dependent Variable: ROE

Method: Panel Least Squares

Total panel (unbalanced) observations: 99

Variable

Coefficient

Std. Error

t-Statistic

Prob.

OUT_BOARD

-0.00683

0.552604

-0.01236

0.9902

CEO

0.017437

0.17098

0.101982

0.919

AUDCOM1

-0.002796

0.101423

-0.027571

0.9781

0.18661

0.529641

0.352334

0.7254

R-squared

0.000114

Adjusted R-squared

-0.031461

F-statistic

0.003613

Prob(F-statistic)

0.999698

S.E. of regression

0.791347

Dependent Variable: ROA

Method: Panel Least Squares

Total panel (unbalanced) observations: 99

Variable

Coefficient

Std. Error

t-Statistic

Prob.

OUT_BOARD

-0.095721

0.061678

-1.551956

0.124

CEO

-0.032232

0.019084

-1.688972

0.0945

AUDCOM1

0.009389

0.01132

0.829387

0.409

0.140099

0.059115

2.369954

0.0198

R-squared

0.078318

Adjusted R-squared

0.049212

F-statistic

2.690791

Prob(F-statistic)

0.050602

S.E. of regression

0.088325

Dependent Variable: ROA

Method: Panel Least Squares

Total panel (unbalanced) observations: 99

Variable

Coefficient

Std. Error

t-Statistic

Prob.

OUT_BOARD

-0.104552

0.060653

-1.723773

0.088

CEO

-0.028425

0.018493

-1.537033

0.1276

0.171387

0.045439

3.771807

0.0003

R-squared

0.071644

Adjusted R-squared

0.052303

F-statistic

3.704289

Prob(F-statistic)

0.028204

S.E. of regression

0.088181

It is evident from the tables above that there is a correlation between return on assets and the independent variables. On the first table it can be observed that the CEO independent variable is statistically significant on 10% confidence interval. Also R- Squared is 7.16% of the variability of the return on assets and is explained by the regression. On the second table one independent variable is excluded from the regression in order to prove that the proportion of the outside directors over the total number of the board is also statistically significant at the 90% confidence interval.

It is evident that these two variables influence the financial performance of the shipping companies that are selected in the sample.

On the table below it is shown the regression output between the return on investment capital and the independent variables. It can be observed that the proportion of the outside directors and the CEO are statistically significant on the 90% confidence interval. It implies that the majority of the sampled firms, in the period under study, have separate persons occupying the posts of chief executive and the board chair.

Dependent Variable: ROIC

Total panel (unbalanced) observations: 97

Method: Panel Least Squares

Variable

Coefficient

Std. Error

t-Statistic

Prob.

OUT_BOARD

-0.108758

0.062348

-1.744367

0.0844

CEO

-0.031869

0.019189

-1.660741

0.1001

AUDCOM1

0.00542

0.011377

0.476405

0.6349

0.199476

0.059341

3.361532

0.0011

R-squared

0.081182

Adjusted R-squared

0.051542

F-statistic

2.738981

Prob(F-statistic)

0.047783

S.E. of regression

0.088251

Dependent Variable: CURRENT_RATIO

Method: Panel Least Squares

Total panel (unbalanced) observations: 99

Variable

Coefficient

Std. Error

t-Statistic

OUT_BOARD

0.554821

1.498786

0.37018

CEO

-0.636588

0.463736

-1.372737

AUDCOM1

0.538569

0.275082

1.95785

0.954122

1.436504

0.664197

R-squared

0.047648

Adjusted R-squared

0.017574

F-statistic

1.584356

Prob(F-statistic)

0.198271

S.E. of regression

2.146311

Another ratio so as to observe the financial performance of a company is the current ratio. By running a regression it can be concluded that the audit committee size is statistically significant at a 90% and 95% confidence interval. Because of the different financial performance ratio it can be observed a different correlation between the dependent and the independent variable. On the particular output the positive relationship between the liquidity ratio and the audit committee seems to be a very reasonable result. Shipping companies follow the corporate governance guidelines which are given by the NYSE for the audit committees.

In the end a regression was run for the operating performance of the shipping companies. On the table below it is shown that the proportion of the outside directors is statistically significant at 90% confidence interval with t – statistic greater than the critical values. Also it is shown that the audit committee variable is also statistically significant for all the confidence intervals. But the R – squared of the output is very low which means that only the 8.76% of the variability of the dependent variable is explained.

Dependent Variable: OPER_PERF

Method: Panel Least Squares

Total panel (unbalanced) observations: 99

Variable

Coefficient

Std. Error

t-Statistic

Prob.

OUT_BOARD

-0.951585

0.50254

-1.893552

0.0613

CEO

0.083654

0.15549

0.538005

0.5918

AUDCOM1

-0.23875

0.092234

-2.588514

0.0112

3.109729

0.481657

6.456321

R-squared

0.087671

Adjusted R-squared

0.05886

F-statistic

3.043024

Prob(F-statistic)

0.032629

S.E. of regression

0.719653

Descriptive statistics

The table below presents the result of the descriptive statistics analysis between the dependent variables and the independent variables by measuring the mean, the standard deviation and the percentage of distribution range of the pooled years of the sample under study.

Descriptive Statistics

Oper_Perf

Roa

Roe

Roic

Cur_ratio

Out_Board

CEO

AUDCOM1

Mean

1.741854

0.078202

0.18183

0.11603

3.243112

0.762211

0.474747

2.808081

Median

1.527139

0.072055

0.156449

0.110134

1.86132

0.777778

Maximum

5.409894

0.513177

3.84573

0.368966

70.57955

Minimum

0.889839

-0.42841

-4.60062

-0.41285

0.1406

0.428571

Std. Dev.

0.737746

0.090581

0.779185

0.09045

7.100746

0.153031

0.501903

0.816623

Skewness

1.867152

-0.45139

-1.94635

-1.54254

8.614659

-0.20659

0.101139

0.250996

Kurtosis

8.233289

16.32647

24.76835

14.17857

81.7566

2.085215

1.010229

3.44567

Jarque-Bera

177.3846

735.9403

2017.183

549.1192

27351.86

4.156112

16.50043

1.858795

Probabil.

0.125173

0.000261

0.394791

Sum

179.411

7.741993

18.00119

11.3709

327.5543

75.45889

278

Sum Sq. D.

55.51539

0.804091

59.49867

0.793579

5042.06

2.295021

24.68687

65.35354

Observ.

103

101

As it can be referred from the table above the number of the observations is all close to the hundred. This is because some of the data were not available and could not be extracted from the financial reports. Moreover another reason of the lack of some data is that some of the shipping companies were listed in the New York Stock Exchange after 2005.

Conclusion

The aim of this essay was to prove that there is a relationship between corporate governance mechanisms and firm performance using a sample of 21 shipping companies which are listed in the New York Stock Exchange from 2005 until 2009. The study used firm performance ratios and three mechanisms to prove the above relationship. Panel data methodology is employed; the method of analysis is multiple regressions and the method of estimation is Ordinary Least Squares. The study concludes to the followings:

There is no significant relationship between ROE and none of the independent variables.

There is a significant relationship among ROA and CEO status and the proportion of the outside directors.

There is significant relationship among ROIC, board composition and CEO status.

There is a significant relationship between Current ratio and audit committee.

And there is a significant relationship among operating performance, board composition and audit committee.

Concerning future research, efforts should be made to increase the sample size and the corporate governance variables to achieve a clearer view about the affection of the corporate governance mechanisms on the shipping companies. It can be said that shipping industry has been expanded all over the world from family to family. It is a closed industry which excludes many people. Consequently the nature of the industry makes it very difficult to perform an in depth research and establish an outcome.

References

Web – Sites

http://www.investopedia.com/

http://en.wikipedia.org

http://www.dianashippinginc.com

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