“The impact of the board process on board and corporate performance: the case of Slovakia”

Nowadays a great deal of attention is paid to corporate governance (CG). Frequent takeovers of ownership rights by management bodies led to a need for business owners to establish clear rules for business management and compliance monitoring. The aim of this paper is to examine the relationship between selected characteristics of the governance process and the ability of governing bodies to perform their core tasks, as well as to model and predict the impact of the selected characteristics of the governance process on the company’s financial performance, measured by the year-on-year change in return on equity. The respondent sample consists of members of randomly selected top management entities with their headquarters in Slovakia. A total of 132 subjects participated and answered questions in the survey, 54% of which were joint stock companies, 36% were limited liability companies and 10% were respondents from coopera- tives. Data were personally collected by a questionnaire survey conducted during 2019. To verify the assumptions and success of the formulated model, correlation analysis, binary logistic regression and other relevant tests were used. The results show that each of the examined board process attributes significantly affects at least one board performance attribute. All significant correlations have a positive value. Independent variables in the ROE regression model increased the estimation rate of ROE change from 54.5% to 93.9%. The model is applicable in the CG practice and allows the prediction of changes in ROE with respect to ongoing governance processes.


Abstract
Nowadays a great deal of attention is paid to corporate governance (CG). Frequent takeovers of ownership rights by management bodies led to a need for business owners to establish clear rules for business management and compliance monitoring. The aim of this paper is to examine the relationship between selected characteristics of the governance process and the ability of governing bodies to perform their core tasks, as well as to model and predict the impact of the selected characteristics of the governance process on the company's financial performance, measured by the year-on-year change in return on equity. The respondent sample consists of members of randomly selected top management entities with their headquarters in Slovakia. A total of 132 subjects participated and answered questions in the survey, 54% of which were joint stock companies, 36% were limited liability companies and 10% were respondents from cooperatives. Data were personally collected by a questionnaire survey conducted during 2019. To verify the assumptions and success of the formulated model, correlation analysis, binary logistic regression and other relevant tests were used. The results show that each of the examined board process attributes significantly affects at least one board performance attribute. All significant correlations have a positive value. Independent variables in the ROE regression model increased the estimation rate of ROE change from 54.5% to 93.9%. The model is applicable in the CG practice and allows the prediction of changes in ROE with respect to ongoing governance processes.

Janka Grofcikova (Slovak Republic), Hussam Musa (Slovak Republic)
The impact of the board process on board and corporate performance: the case of Slovakia INTRODUCTION A few decades ago, the public was almost unaware of the concept of corporate governance. However, scandals and financial crises of recent years have made this term quite commonly used not only in the business environment, but also amongst the public. This concept, which used to be mostly the subject of closed-door discussions, has continuously turned into a public concern. Since the concept concerns the interests of several groups involved and is still considered to be a relatively new phenomenon, it is difficult to define it explicitly (Ararat & Ugur, 2003). Beside this, as the OECD Corporate Governance Report (OECD, 2015) indicates, there is no unique model of good corporate governance. Apparently, the basic principles of good corporate governance include support and provision of transparent and efficient markets, protection and facilitation of exercising the shareholder rights, guarantee of fair treatment of all shareholders, as well as a guarantee of timely and accurate disclosure of all materials that are related to the company.
Several institutions worldwide also pay attention to corporate governance issues. Among the most important is the Organisation for Economic Co-operation and Development (OECD). In 1999, this organization developed the first set of corporate governance principles, which was revised and amended in 2004 and 2015. The current valid version was developed in cooperation with the OECD Governance Committee and the states of G20. This document has six separate chapters: Ensuring the basis for an effective CG framework; (II) The rights and equitable treatment of shareholders and key ownership functions; (III) Institutional investors, stock markets, and other intermediaries; (IV) The role of stakeholders in CG; (V) Disclosure and transparency; and (VI) The responsibilities of the board.
Each of the chapters contains a list of supporting sub-principles, supplemented by explanatory notes (Grofcikova & Izakova, 2018;OECD, 2015). Corporate governance has become an international issue due to globalization of businesses (Musa, Rech, & Musova, 2019).
The study explores the relationship between selected characteristics of the management process and the ability of management authorities to fulfill their core tasks. The effect of these characteristics on the company's financial performance is modelled and predicted.

LITERATURE REVIEW
Several authors have tried to define the concept of corporate governance. Cadbury (1992) defined it as a system or process by which companies are managed and controlled. In this regard, corporate governance, in accordance with the theory of Gillan and Starks (1998), consists of the law, rules and factors that make it possible to control the activities of a company, as well as relationships between various persons involved in the system, such as management, board, shareholders, and other stakeholders. Jensen (1993) divides corporate governance into two parts -the internal and the external one. The internal corporate governance system consists of the management and the board. On the other hand, the external corporate governance system involves external funding providers, shareholders and corporate debt holders. With regard to this concept, Shleifer and Vishny (1997), Jensen and Meckling (1976), and Gillan (2006) assume that the key corporate governance mechanism is to get a return on investments provided by funders; however, some fundamental problems need to be solved to achieve this goal.  , 1992). The direct approach is criticized for two reasons. The first reason concerns the fact that governance processes are implicitly regarded as a black box, while this approach ignores their potential impact on the ability of administrations to perform their duties (Pearce & Zahra, 1992;Pettigrew, 1992). The second reason indicates that these studies are often inadequate, ambiguous and unconvincing (Kiel and Nicholson, 2003). Some studies confirm a positive (Pearce & Zahra, 1992;Daily & Dalton, 1993), and other confirm a negative relationship between the Board and the company's performance (Conyon & Peck, 1998;Yermack, 1996).
The process approach enables better understanding of the role of the Board of Directors in the company. This approach is based on the assumption that the performance of the Board of Directors is a function of its inputs and processes. Therefore, the right processes must be in place to transform these inputs into desired performance results. According to the procedural approach, research focuses on collecting and analyzing data on Board processes and Board activities, instead of direct interconnection between the selected Board characteristics and the company performance (Dalton, Daily, Ellstrand, & Johnson, 1998;Maassen, 1999 2) the resource dependency theory, which is based on a premise that businesses need external funding to generate added value and output; and 3) the stakeholder theory, according to which the Board of Directors should be composed of members representing various stakeholders so that they can legitimize and protect their interests, identify key stakeholders and manage their potential conflicting interests, and thereby enhance an increase the social performance of a company (e.g., Boeker & Goodstein, 1991;Boyd, 1990;Daily & Dalton, 2003).
There are two views of the strategic role of the Board of Directors in a company. The first group of authors states the low involvement of the Board of Directors in strategic functions, as this role is fulfilled by management in the company. The other view highlights the independence of the Board of Directors and its contribution to formulating corporate strategies and directing its management towards achieving the company's mission and goals (Levrau & Van Den Berghe, 2007).
The process aspects of the Board of Directors' activities relate to decision-making activities and the behavior of its members, which may affect the Board's ability to perform its tasks.

Legislative regulation of the board competence of companies and cooperatives in Slovakia
The basic legal norm that regulates the establishment, extinction and operation of companies and cooperatives in the Slovak Republic is The Commercial Code No. 513/1991 Coll. as amended. Section 56 par. 1 of the Code defines a company as a legal entity established for the purpose of doing business. The term company is related to a public company, limited partnership, limited liability company, joint stock company, and simple stock company. Sections 221 and 222 define a cooperative as a legal entity established for the purpose of doing business or meeting the needs of its members. Bodies entrusted with a certain range of competences and duties establish a limited liability company, a joint stock company, a simple company for shares and a cooperative in accordance with the Code and bylaws. The following part of the paper will review the current legislation in the area of corporate governance in Slovakia. is the information on the principal intentions of the company's management for the future, the information on the anticipated development of the company's assets, finances and revenues, and these are confronted with the results of the previous period. This information is submitted for negotiation by the company executives. Managers are also obliged to inform the Supervisory Board of all facts that may significantly affect the business activity of the company, the state of its assets and especially its liquidity. Minutes shall be made of the progress and outcome of the General Meeting.
Executives are the statutory body of a limited liability company. The executive of the company can only be a natural person/an individual. The executives are appointed by the General Meeting from among the members or other individuals. Executives are obliged, in accordance with Section 135, to ensure proper keeping of the requisite records and accounting, to keep the list of partners and to inform the partners about company matters. They submit the separate financial statements and the proposal for distribution of profit or compensation of loss, if required by the Accounting Act, also the annual report of the company to the General Meeting for approval. The annual report is compulsorily prepared by an accounting unit, which, in accordance with Section 19 of Act No. 431/2002 Coll. on Accounting, verifies its financial statements by auditors. The content of the annual report is determined by Section 20 of the Act on Accounting. According to Section 135a of the Commercial Code, executives are obliged to exercise their powers with professional care and in accordance with the interests of the company and all its stakeholders. In particular, they are obliged to obtain and take into account all available information regarding the subject matter of the decision, to maintain secrecy, and in the exercise of their sovereignty they must not give priority to their interests or the interests of only some partners or third parties over the company's interests. The activities of the executives are supervised by the Supervisory Board, if it is established in the company by a Memorandum of Association. In addition, this body controls business and accounting books and other documents, examines the financial statements and the proposal for distribution of profit, or compensation of loss, and it shall report its findings to the General Meeting at least once a year. The members of the Supervisory Board shall attend the General Meeting and shall be given the floor whenever they request.
The specifics of the establishment and management of a joint stock company are regulated by the Commercial Code in Sections 154 to 220. The minimum share capital of a joint stock company is 25,000 Euros. General Meeting is the supreme body of a joint-stock company. The General Meeting convenes the Board of Directors at least once a year. According to Section 180 of the Commercial Code, a shareholder is entitled to attend and vote in the general meeting, to request information and explanations concerning the matters of the company or persons controlled by the company related to the subject of the meeting, and to make proposals thereon.

AIM
The paper aims to examine the relationship between selected characteristics of the governance process and the ability of governing bodies to perform their core tasks (i.e., Board performance), as well as to model and predict the impact of the selected characteristics of the governance process on the company's financial performance measured by the year-on-year change in return on equity.

METHODOLOGY
Examination and analyses have been done in accordance with the aforementioned theoretical background of the process approach to the Board of Directors' activities. Research was inspired by Namoga (2011).
The following characteristics of the corporate governance process are examined in the paper: 1) the efforts of the board members; 2) the board cohesiveness; 3) cognitive conflict that regards differences in the judgment of the Board of Directors' members and the way of their solution; and 4) use of knowledge and skills in corporate governance.
The selected characteristics are examined based on a sample of enterprises through survey questions.
Performance of Board members, i.e. their ability to perform basic tasks, is examined through 19 questions in the questionnaire (see Table A1 of the Appendix). In accordance with the theoretical background, these questions are divided into three groups of tasks that are performed by the Board: 1) the monitoring and control task is examined through 6 questions; 2) the supporting task is also examined through 6 questions; and 3) the strategic task, which is examined through answers to 7 questions.
All questions are formulated as statements, and the respondents answer whether they completely disagree with the statements (this answer is coded with number 1), disagree, do not know, agree, or fully agree (the answer is coded with 5). Coding is done based on the 5-degree Likert scale. The statements are presented in Table A1 (see Appendix).
Only one choice is made to answer each question. The responses are ordinary variables.
The respondent sample consists of randomly selected business entities with the headquarters in the Slovak Republic, which, in accordance with the valid legislation of the Slovak Republic, create governing bodies. Specifically, the members of the Board of Directors, the Supervisory Board and the executive managers of these companies were personally addressed. In the first stage of the research, which was carried out during the year 2019 and the results of which are published in this paper, a total of 132 subjects have participated and answered the questions in the survey. 54% of these respondents represent joint stock companies, 36% are from limited liability companies, and 10% are represented by the respondents from cooperatives. Entities have also indicated their identification number in the questionnaire. This data made it possible to obtain additional information from their financial statements and annual reports, from which the year-on-year change in return on equity (ROE) was determined. ROE, as one of the indicators of company performance, is calculated by the ratio of EBIT to equity. The change in the ROE value is calculated between years 2017 and 2018, which are the latest available at the time of processing the research, and is a binary variable for the purposes of this research. The number 1 denotes a year-on-year increase in ROE, the number 0 denotes a ROE decrease.
Several statistical methods are used in this research. The relationship between the board process characteristics as an independent variable and the performance of the Board members as a dependent variable are quantified through the Somers' D (H0: d = 0; H1: d ≠ 0). The impact of the board process attributes on the company performance is quantified through binary logistic regression. The backward stepwise (Wald) method was used to develop the regression model. Independent variables are represented by 17 characteristics of the board process (q14, q18, q19, q23). The dependent variable is the change in ROE. The Nagelkerke R Square test is used to describe the degree of explanation of a dependent variable through the independent variables. The Omnibus tests of model coefficients are used to assess the suitability of model description through logistic regression. The multi-collinearity of the independent, explanatory variables entering the regression model is tested using the Variance Inflation Factor (VIF) with a reference value of 10. No variable exceeds the VIF reference value. The significance of the interaction between individual predictors and their log transformation is tested through the test of linearity of the logit. A higher significance level was found for all interactions than the level of the selected significance. The independence of random errors is verified by the 1st level autocorrelation test. The influence of independent model variables on the dependent variable is evaluated using the odds ratio. Odds ratio is the ratio of the probability that a phenomenon has occurred and the probability that a phenomenon has not occurred. For variables with an odds ratio higher than 1, the phenomenon is more likely to occur, i.e., a higher degree of agreement of a respondent with the statement indicates higher probability for the company to record an increase in ROE. Conversely, odds ratio values lower than 1 indicate that with a higher degree of agreement with the statement, the probability of an increase in the ROE will be lower. The logistic regression equation has this formal notation: where P is the estimation of the mean level of probability of occurrence of the observed depen-dent variable, b 0 is a constant, b 1 , b 2 to b n are regression coefficients expressed in logits, x 1 , x 2 to x n are the values of independent variables, and ε is a random error.
The hypotheses are tested at the significance level of α = 0.1. The SPSS statistical program is used for calculations.

EMPIRICAL RESULTS
The results of the correlation analysis are presented in Table A2 (see Appendix A). The objective of the analysis is to determine how the individual attributes of the board process (q14, q18, q19, q23) affect the performance of the board members through their ability to perform their core tasks (q20, q21, q22). The results that are statistically significant at the selected level of α are indicated in italics in Table A2 of the Appendix.
The impact of board process attributes on the company performance, measured by the year-on-year change in return on equity (ROE), is investigated using binary logistic regression. Covariance of the model will be represented by statements in questions q14, q18, q19, q23. Independent variables are described in Table A1. The dependent variable is a binary formula of the change in ROE. The results of logistic regression are presented in Table 1.
The results of the correlation analysis show that each of the board process attributes that were examined affects at least one board performance attribute at a statistically significant level. All significant correlations have a positive value. The highest number of significant results (15) is detected in the case of statement q14c; 13 significant results are identified in the case of statement q19a; 12 results in statement q23d; and 10 results in statement q14d. Statement q23d significantly correlates with statement q21a. The highest value of Somers' D is recorded amongst statements q22d and q14c (d = 0.625), the lowest value is indicated amongst statements q20b and q19b (d = 0.194).
Using the backward stepwise Wald method, 15 models with various independent variables were suggested. The results of 15 th model, presented in Table 1, show that all selected independent variables q14a, q14d, q18c, q19a, q23a, which are related to the board process in a company, are statistically significant (Sig. < 0.1) at the selected level α.  Table 2) indicate a relatively high degree of explanation of the dependent variable through the model.

Observed Predicted
ROE_increase Percentage correct 0 1 Step 0 a,b ROE_increase 0 72 0 100.0 1 60 0 0.0 Overall percentage -54.5 Step 15  Note: a. Constant is included in the model; b. the cut value is .500.  . (B)). The other independent variables included in the model (q14d, q23a) have positive regression coefficients, which means that with the growing agreement with the statement that is related to the board process, there is a higher possibility that the enterprise may record a year-on-year increase in ROE. In companies where information flows quickly and without loss of quality (q14d), the chance to achieve a growth in ROE is 80.8 times higher compared to companies that have problems with the flow and quality of information needed for governance. Mutual respect and confidence (q23a) may increase the chances to achieve an ROE increase by up to 57.3 times.
By substituting the value of regression coefficients into equation (1), the following binary logistic model was obtained:

Method
Chi-square df Sig.

Enter
Step 0 Step This binary logistic model can be used to predict the change in ROE of business entities.
The decrease in ROE can be predicted for entities whose governing bodies fully agree with statements q14a, q18c and q19a and completely disagree with statements q14d and q23a. The model predictions can be seen in Table 7. To predict a decline in ROE, the statements whose Exp (B) values (in Table 1) are higher than 1 were lowered with a low rating (strongly disagree). On the other hand, the statements whose Exp (B) values are lower than 1 were strengthened with a high rating (I fully agree). Respondents who fully agree with statements q14d and q23a and at the same time strongly disagree with statements q14a, q18c and q19a, can expect growth of ROE.
From the answers to questions q14a, q14d, q18c, q19a and q23a, mean, mode, median, minimum and maximum were found, and the prediction of ROE change for each was created. The results are given in Table 7.

DISCUSSION
This research is one of the first of its kind to be conducted in Slovakia. Therefore, comparison of its results with other statistically comparable data is limited.
Many different corporate governance characteristics have been researched and examined. Khanchel (2007) analyzed board size, board composition  Note: a. Multiple modes exist. b. 0 means an ROE decrease, 1 means an ROE increase. c. Completely disagree with the statements (this answer is coded with number 1), disagree (code 2), do not know (code 3), agree (code 4), and fully agree (the answer is coded with 5). and board meetings, CEO duality, independence of committees, competence of audit committee members, reputation of auditors, audit committee meetings, and compensation and nominating committee meetings. Using a simple linear ranking method, the researcher has constructed four indices of a governance rating.
The influence of the Board of Directors on firm performance has been the primary focus of organizational behavioral research ( L. He, R. He, and Evans (2020) confirm that boards play an important role in company investment decision making. Board effectiveness is a function of board potential and board dynamics (Macus, 2008). The internal processes of how boards enable the resources to be used effectively are critical for the boards to produce positive organizational outcomes (L. He, R. He, & Evans, 2020).
Corporate governance examination is significant from a theoretical point of view, but the practical benefit is more important. Results in the research reflect that corporate governance has a significant impact on performance, measured in terms of return on equity. The relationship between the selected CG process attributes and board performance attributes was confirmed at a statistically significant level. The achieved results are important for ownership rights by management bodies.
There is a need for business owners to establish clear rules for business management and compliance monitoring.

CONCLUSION
Most of the studies conducted apply a direct approach to the performance of Board of Directors, through which a direct relationship between the board of directors and corporate performance is examined. This study is based on process approach, which relates to decision-making activities and the behavior of its members that may affect the Board's ability to perform its tasks. The results of the correlation analysis between the selected CG process attributes and board performance attributes show that each of the board process attributes examined affects at least one board performance attribute at a statistically significant level. All significant correlations have a positive value. Formulated binary logistic model can be used to predict the change in business entities' ROE. Quantifying independent variables increased the estimate rate of ROE change from 54.5% to 93.9%. The success rate related to classification of an ROE decrease is 94.4% and the success rate of the ROE growth classification is 93.3%.
Although the research was inspired by Namoga, the form of a survey on a sample of companies in the Slovak Republic, through which it was conducted, is a novelty, as well as the modelling of the impact of selected attributes of corporate governance on ROE change. The space for further research can be seen in expanding the research sample by other companies, as well as in repeating the study to compare changes in the results achieved.
Without doubt, the authors are aware of the fact that modelling of corporate governance and board processes, as well as the performance of corporate governance bodies as a whole, has its limits and limitations. This may have resulted from the amount, quality and structure of the available data. At the same time, this might also be influenced by the capability of the interviewees to assess the situation objectively and without prejudices. Moreover, the relevant legislation may have an influence as well. In the Slovak Republic, this legislation primarily concerns the Commercial Code and the Act on Accounting, through which the obligations, competences of the management, and the governing bodies are defined. The documents also determine the basic conditions and laws for the disclosure of information that is related to confidential materials, facts and events in companies, as well as their business results. Efforts to unify the conditions are made in large companies in the form of codification of corporate governance principles. However, these are mostly recommendations in character, and thus, they are not required to be implemented by smaller joint stock companies. Despite the OECD's efforts to formulate recommendations for corporate governance, these principles are not sufficient to assess board processes and the performance of governance bodies. It is assumed that it should be a comprehensive and detailed material, which should develop some convenient mechanism to measure the efficiency of board processes and the performance of the Board of Directors' members. Due to the uniqueness of many processes, their unification is problematic. The Commercial Code authorizes the General Meeting to approve the remuneration rules for the members of the company bodies. However, these rules should be based on appropriately chosen qualitative and quantitative characteristics that can adequately reflect the qualitative level of corporate governance and the board process. It should be noted, however, that the development of such a mechanism is a rather intricate task.

Statements in questionnaire
Corporate governance (board) process attributes Effort q19a Before meetings, the BoD shall carefully review the information provided by the company q19b The board often examines (is interested in) the situation in areas of importance to society The BoD receives feedback from directors for decision-making q23d The BoD will receive assistance from the directors in making decisions q23e The directors shall cooperate with each other Use of skills and knowledge q14a The board members are aware of the areas of their experience q14b When discussing a problem, the most informative members have the greatest impact q14c The delegation of tasks shall be in accordance with the knowledge and responsibility of the members responsible for the task q14d Information flows between members quickly and without loss of quality

Boards performance attributes
Monitoring and control roles q20a The BoD ratifies and monitors the strategic decisions of top management q20b The Management Board develops performance targets for management q20c The Board formally evaluates the performance of the company's top managers q20d The Board analyzes financial information on important issues and trends q20e The Board analyzes the budget allocation in line with performance q20f The BoD assesses the company's performance against the strategic plan

Service roles q21a
The CEO, Managing Directors and Managers ask the BoD for help in formulating their corporate strategy q21b The BoD is an effective controller for strategic issues management q21c The BoD also provides management advice and recommendations in discussions outside Board and Committee meetings q21d The BoD takes into account the legitimate interests of other stakeholders in the company q21e The Board ensures communication with stakeholders and the general public q21f The Board promotes goodwill and support from relevant stakeholders Strategic roles q22a The BoD formulates the company's mission q22b The BoD carries out an internal analysis of the company's strengths and weaknesses q22c The BoD carries out an external analysis of opportunities and threats to society q22d The BoD is involved in the strategic planning process of the company q22e The Board communicates the strategic direction of the company throughout the company