The Worldwide Governance Indicators, corporate governance mechanisms, and financial performance of FTSE 100 in the UK

This study explores the influence of World Governance Indicators (WGI) and corporate governance mechanisms on the financial performance of the firms listed on the Financial Times Stock Exchange 100 Index (FTSE 100) from 2000 to 2021, using panel data analysis with a generalized method of moments (GMM) estimation. Unlike previous studies that focus on either external governance or internal mechanisms, this research integrates both. Our findings reveal that WGI variables, particularly the rule of law, significantly enhance financial performance, highlighting the critical role of legal frameworks. Additionally, effective corporate governance mechanisms, such as executive compensation and board independence, positively impact profitability. Notably, we find that larger boards hinder performance, challenging prior studies that emphasize their benefits. This study offers a nuanced understanding of governance’s dual dimensions, providing unique insights for policymakers and managers in enhancing governance frameworks in the United Kingdom (UK) retail sector.