Corporate governance: An analysis of the relationship between quality and cost

Sylvie Berthelot,Yves Levant,Michel Coulmont

doi:10.22495/cocv17i1art7

Abstract

The purpose of this study is to analyse linkages between the quality and cost of Canadian firms’ governance practices. With this in mind, the study relates the compensation of chief executive officers (CEOs) and non-executive directors to best governance practice index developed by The Globe and Mail. We collected data for the years 2013, 2014 and 2015, constituting 602 observations from all the Canadian companies included in The Globe and Mail corporate governance ratings for which financial information was available on the Research Insight database. We examined the relationship between the quality and cost of Canadian firms’ governance practices with a regression model. The analyses results tend to indicate some relationship between CEO and non-executive director compensation and the quality of governance practices. However, firm size appears to the determining explanatory factor. The study results also indicate that some activity sectors seem to have better governance practices than others

Highlights

Since the first years of the 21st century, corporate governance practices have been the focus of numerous debates among key financial market stakeholders and academics
The study results indicate that some activity sectors seem to have better governance practices than others
In Canada, the Canadian Securities Administration (CSA) has issued documents focusing on the audit committee’s composition and responsibilities (National instrument NI 52-110) auditor oversight (NI 52-108), as well as the roles played by the chief executive officer (CEO) and the chief financial officer (CFO) to ensure that the reported information is accurate and of the highest quality (NI 52-108)

Summary

Introduction

Since the first years of the 21st century, corporate governance practices have been the focus of numerous debates among key financial market stakeholders and academics. The financial scandals in the early 2000s led to more stringent requirements respecting corporate governance practices in most Western countries (Martynova & Renneboog, 2014). In United States, the federal government has introduced substantial regulations to establish requirements to achieve extensive oversight of corporate management by the board and audit committee (Sarbanes-Oxley Act 2002), to limit executive pay and the firm’s control of the proxy process (Dodd-Frank Act 2010), and to ban specific corporate governance provisions such as CEO duality (Shareholder Bill of Rights Act and Shareholder Empowerment Act 2009) (Aguilera et al, 2014). In Canada, the Canadian Securities Administration (CSA) has issued documents focusing on the audit committee’s composition and responsibilities (National instrument NI 52-110) auditor oversight (NI 52-108), as well as the roles played by the chief executive officer (CEO) and the chief financial officer (CFO) to ensure that the reported information is accurate and of the highest quality (NI 52-108). The CSA introduced new guidelines respecting corporate governance (NI 58201) and corporate governance mechanisms disclosure (NI 58-101) in 2005 (Salterio, Conrod, & Schmidth, 2013)

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