The Nexus Between Corporate Governance and Firm Performance During COVID-19 Pandemic in Sri Lanka

The COVID-19 has redefined the world operation. Specially COVID-19 pandemic shows a higher impact on the business field. Accordingly, this study aims to find the impact of corporate governance on firm performance during the Covid-19 pandemic in Sri Lanka. The quantitative methodology deployed and secondary data was collected from 27 companies listed in Colombo Stock Exchange (CSE) for 209 and 2020. The results depicted that pandemic has affected the Corporate Governance (CG) measures unfavorably. Further, board size and qualification of director’s show a positive association between firm performance meantime, NED proportion, Gender diversity, Board meeting, Audit committee size and Audit committee meeting show a negative association between firm performance. It clearly reveals that COVID-19 severely impact the corporate governance attributes and firm performance. The corporate management, regulators, and investors must consider the board’s board size and qualification to recover the corporate sector in any crisis. This study provides a unique contribution to the literature of COVID-19 and firm performance in emerging economies. 

bank loans. Furthermore, numerous steps have been taken to monitor COVID-19, including extended deadlines for filing financial statements and compliance actions, requiring all publicly traded firms to disclose the effect of COVID-19, their responses, and the expected impact on the financial position of the company. To respond to the epidemic situation, CSE, in collaboration with the Institute of Chartered Accountants Sri Lanka (ICASL), jointly issued a corporate disclosure guidance note was created to assist organizations in planning their disclosure. Guidance notes on hosting annual general Meetings, including interactive and hybrid options. Listed entities may send corporate disclosures and financial statements to the CSE via email or the CSE announcement portal. (CSE Annual Report, 2020) In this research, we analyzed the financial results of corporates before and after the Pandemic using the Colombo Stock Exchange (CSE) as a sample for this study and we took the year 2019 (Pre) and the year 2020 (post) financial reports to assess this relationship and the effects of COVID-19. In addition, the COVID-19 pandemic effect on all firm features, including firm success and corporate governance structure, was tested using a non-parametric t-test. There are a range of efficiency metrics as well as different firm characteristics.
Several authors conduct few studies on the COVID-19 and its impact (Farwis, Siyam & Nazar, 2020). However, very limited work was found examining the influence of COVID-19 on corporate governance and firm performance. Despite the fact that Shen (2020) discovered that COVID-19 has a negative impact on the performance of Chinese listed companies. That is the first empirical evidence of the association between Covid-19 and firm performance emerging market perspective. A large number of studies emphasise stock performance in evaluating the impact of the pandemic (Liu, 2020). However, this study is unique in many ways. The literature regarding Covid-19 and its impact on corporate governance performance seems to be dearth in the academic fraternity. Secondly, this study is the first initiative concerning emerging economy concern, especially Sri Lankan perspective.

Literature Review
One of the most important topics of the twenty-first century is the pandemic. Because of the uncertainty created by Coronavirus and government interventions, the impact on the atmosphere, industry, and economy is important. The economic impact of the crisis is now being assessed, and it is apparent that it is more than a health problem. COVID-19's strong contagiousness prompted the government to enact lockout events. These initiatives have a significant negative impact on companies' consumer demands. Restricted travel policies, social isolation, stay-at-home policies, and the closure of needless businesses have significantly impacted overall firm results.
Although scholars reported that it is too early to predict the exact impact of Coronavirus, there has been a surge in the number of studies conducted on the impact of the pandemic on management (Sharma, 2020; Mirza, 2020; Slater, 2020), banking (Qin, 2020), and economics (Sharma, 2020). The effect of the Coronavirus epidemic on corporate governance and financial and operating results of organizations, on the other hand, has gained little coverage. The literature has extensively studied the relationship between corporate governance and corporate performance (Guney et al., 2020;Khatib et al., 2020;Sami et al., 2011;Azeez, 2015). The supervision and advising functions governance attribute in terms of managing and guiding management operations, according to agency theory, improves firm efficiency in many areas, including agency cost reduction (Jensen & Mackling, 1976; Guney, 2020; Khatib S. F., 2020). Apart from these responsibilities, the COVID-19 crisis emphasized the importance of board supervision in reducing the possibility of instability. This pandemic increases potential risk, prompting executives to restructure their capital, strategies, and corporate design in the event of long-and short-term crises (Foss, 2020) (Shen, 2020). As the ongoing epidemic threatens to affect all facets of business activities, the board of directors must make a concerted attempt to concentrate not only on the traditional monitoring position of directors to protect their discretion but also on the policy-making role that comes with active oversight (Croci, 2020; Khatib S. F., 2020). If management staff were infected or unable to function as a result of the outbreak, the board of directors should be prepared to participate, and they should be heavily involved in the process with a strong monitoring position.
The board should assist in the development of programs to prepare for a disaster, such as establishing a program for a dispersed employee continuity plan. Boards would consider new developments, executive pay constraints, and any future changes to new market reality. Some boardroom structures (diversity and size) can be more useful to firm resilience during periods of crisis than others (independent directors). As a result, we expect that the governance system will change, as shareholders will not predict or properly respond to the crisis.
Further, the COVID-19 epidemic has presented companies and their boards with unparalleled problems, including frozen liquidity, inability to execute transactions, processes, and infrastructure failures due to disruptions. Despite the negative effects of the pandemic, the board of directors continues to play an important role in improving company results. The extent and effectiveness of the board's interventions are determined by the board's structure, composition, and characteristics, as well as the directors' backgrounds and expertise (Croci, 2020). As a result, certain boards can review existing processes and be flexible in determining which elements of the traditional board agenda can be condensed or postponed to allow management to concentrate on the firm's short-term challenges. Despite the current COVID-19 crises' impact on corporate governance qualities and firm efficiency, we continue to expect that well-governed companies outperform their peers. Corporate boards should assist contemporary organizations in properly connecting with the outside world, facilitating access to services to counteract the pandemic's negative effects (Shahwan, 2015;Song, 2021). As a result, an effective and productive board of directors needs a strong corporate governance system, which expresses itself in the form of eligible board members. Based on current corporate governance and firm success literature (Detthamrong, 2017; Hermuningsih, 2020; Khatib S. F., 2020; (Sumani, 2020; Waheed A. &., 2019). The following hypothesis is established based on the limited literature on the effect of COVID-19 on corporate governance and firm performance:

H1:
The COVID-19 has a significant effect on Corporate governance structure and firm performance.

Methodology
This analysis gathered a sample of 27 listed firms on the Colombo Stock Exchange in April 2021 to assess the relationship between corporate governance and firm results and the effect of COVID-19 on these variables for the years 2019 and 2020. Just 27 firms had disclosed their annual report by the time this study was conducted. Firms were omitted from this review because, at the time of the study, they did not provide annual reports for the year 2020.
Corporate governance data like board size, NED, gender diversity, board meetings, audit committee size, and audit committee meetings were manually collected from the annual reports. Other financial data were also collected to test the firm performance, such as return on assets (ROA), return on equity (ROE), Tobin's Q (TQ), leverage and liquidity. We used a traditional t-test in this study to assess the effect of COVID-19 on governance qualities before (2019) and after the pandemic (2020). The Ordinary Least Square (OLS) method was also used to investigate the relationship between company performance and governance. In line with many studies (Al Farooque O. B., 2020; Khan, 2020; Khatib & Nour, 2020), we performed the Hausman test to select the appropriate panel data analysis technique (Khatib & Nour, 2020). According to that random effect model deployed for this study.

Econometric Model:
The following is the regression model used to examine the impact of corporate governance on firm performance ROA/ROE/TQ = β1 BS +β2 NED + β3 GD + β4 BM + β5 FQ + β6 ACS + β7 ACM + β8 LEV + β9 LIQ + β10 SEC Dummy + β11 YDummy + Where;  The ratio of total debt to total assets SEC Dummy If the particular sector as same in the data is given 1 otherwise 0 Y Dummy If the particular year as same in the data is given 1 otherwise 0

Correlation Analysis
In order to assess multicollinearity, we ran a correlation study on all variables in the model. Table 2 shows that all independent variables have a correlation of less than 0.5, with the exception of board size and board meeting with an audit committee meeting. Non-executive directors have a financial qualification and a board size that includes a majority of female directors. In the case of the multicollinearity crisis, researchers have generally stated that values less than 0.7 mean that the problem is unlikely to occur (Shahwan, 2015), (Khatib & Nour, 2020).

T-Test
To compare the mean value of all variables in the sample before and after the Covid-19 pandemic, the t-Test was used. The COVID-19 pandemic has clearly impacted all firm characteristics, including firm efficiency, corporate governance structure, liquidity ratio, and leverage, as seen in table 3. Except for the audit committee scale, the discrepancy between prior and post COVID-19 is important, according to the t-test study, which confirms the first hypothesis H1. The pandemic has had the most impact on corporate governance, board financial qualification, and board meetings. This effect involves government interventions to combat the pandemic that stopped directors from attending board meetings, or certain directors may have become sick with the disease and unable to continue working and attending board meetings. During the pandemic, some firm features were either altered or reduced. The debt and liquidity levels have also been significantly reduced. The corporation's and managers' weak success in mitigating instability and contractual commitments may explain this drop.

Regression Analysis
Regression was used to examine the association between corporate governance characteristics and the performance of companies in Sri Lanka. The regression analysis results are shown in Table 4 below. To measure firm results, we used return on assets (ROA), return on equity (ROE), and Tobin's Q (TQ). The study discovered that board size is the only governance mechanism that has a significant positive impact on firm performance (Hassan & Marimuthu, 2016) (Khatib & Nour, 2020) ; (Waheed A. &., 2019). A larger board is suitable for its various knowledge, experience, increased governance structure, strategic connection, ability to bring urgent capital, and fewer chances to influence board members (Goodstein, Gautam, & Boeker, 1994). Regardless of the pandemic's effects, board size appears to be a key factor in improving firm performance during this crisis. Furthermore, the extent of this board size analysis indicates financial qualification has a significant impact on firm performance (ROA and ROE).
On the other hand, liquidity positively correlates with firm performance (Dawar, 2014); (Khatib & Nour, 2020). Furthermore, board meetings and audit committee meetings tend to substantially negatively impact results, which firms in this Pandemic manage the costs (Brick, Palmon, & Wald, 2006); (Khatib & Nour, 2020). Meantime, NED participation, gender diversity, board meeting frequency, audit committee size and audit committee show a negative association between firm performance. It demonstrates that the past studies and theories clearly depicted that the above said corporate governance variables empirically reported a positive association between firm performance.   However, this study shows controversial results due to pandemic. Hence, these CG variables deal with physical interaction and in-person among board members. However, the physical interaction was not possible due to COVID-19 pandemic. As results, CG characteristic has not been efficiently contributed to the firm performance. On the other hand, qualification of board members reported being a significant positive association with firm performance such ROA and ROE. However, TQ positively reported but not significant relationship with firm performance. It shows that qualified directors could contribute to the firm performance through their professionalism even though they physically not interact with management. In this study, three dependent variables simultaneously used to the robustness of the study.

Conclusion
COVID-19 is not limited to some industry, but it immensely impacted the publicly traded firms in Sri Lanka and affected the relationship between corporate governance and firm performance. By the way, as there is a paucity of research in this field, especially in an emerging market like Sri Lanka. In this paper, we examine the impact of COVID-19 on firm governance characteristics as well as the efficiency relationship using a sample of 27 companies listed on the CSE for the years 2019 and 2020. The COVID-19 crisis influenced all firm characteristics, but not large, as the disparity between prior and post COVID-19 is not significant. Furthermore, the regression analysis showed that the board of directors' size and qualification is the only governance framework that has a substantial positive effect on company results. This is due to a more varied board's diverse insight, aspirations, experience, and context as opposed to its equivalent. On the other hand, Meetings of the board of directors and the audit committee continue to have a substantial negative impact on company performance. This research adds to the limited literature by expanding on pandemic effect on various firm-level characteristics before and after a crisis. This research has a vital contribution to the literature by studying the limited evidence on the effect of COVID -19 on firm performance. According to the knowledge, the attempt of this study is the pioneer study in relation to COVID-19 impact on firm performance in the Sri Lankan context. However, this study has some drawbacks too. The sample of this study was 27 listed companies only. Other companies were not taken due to data unavailability. If the larger sample has been selected, it would have been depth analysis with valid results. Hence, the time of the study is too early and this study to be repeated with a higher number of sample and including several CG measures.
Funding: This research received no external funding