Anglo-American Corporate Governance Model Research Articles

The Effect of the Global Financial Crisis on Earnings Management and Executive Compensations: UK Evidence

The research questions of the present paper have been motivated by the Global Financial Crisis (GFC) that hit almost the whole globe in 2007-2008. The purpose of the current study is to examine the effect of the global financial crisis on the level and direction of earnings management during crisis period as well as the effect of this crisis on the level and structure of executive compensation during the same period using a sample of the UK FTSE 350 nonfinancial companies. Regarding the effect of global financial crisis on earnings management practices; the results showed that firms engaged in higher levels of earnings management. More specifically, the findings revealed that firms managed earnings downward during the crisis period. These results are consistent with the argument that firms may have recourse to income decreasing earnings management during crisis periods to gain governmental aid, relax debt covenant and lower interest rates. With regard to the impact of the GFC on executive compensation, the results indicated that the sample firms provided less total compensations during the crisis period; however firms offer higher salaries, bonus, and direct compensations. Surprisingly, the results show that CEO’s ownership increased during the crisis period, implying that they could not anticipate the financial crisis. Moreover, the study reported that the quality of corporate governance system of the sample companies does not have a significant effect on earnings management practices or on the level and structure of executive compensations during the crisis period. To the best of the author’s knowledge, this paper is one of the first papers that examine the impact of the GFC on earnings management and executive compensations using UK data, as most of the extant literature have been undertaken in the US. Although both countries represent the Anglo-American model of corporate governance, the UK has a different institutional environment regarding many aspects of executive compensation. Therefore, the results of US studies cannot be generalised to the UK. The current paper also provides up-to-date evidence regarding the implications of the GFC on earnings management and executive compensations. The results presented in the current study provide more understanding of the consequences of financial crises on earnings management and executive compensations, especially with the absence of any consensus in this regard.

Board Independence as Panacea to Tunneling? An Empirical Study of Related Party Transactions in Hong Kong and Singapore

This article examines the effect by imposing higher board independence requirement on private benefit extraction by corporate management or controlling shareholders in Hong Kong and Singapore, which are both international financial centers transplanting the Anglo-American corporate governance model in the 21st century. We show that higher board independence does negatively correlate with fewer related party transactions (RPT), indicate that better corporate governance might have an effect of reducing tunneling through RPTs. However, we find no causal effect of Hong Kong’s imposition of minimum board independence threshold in 2012 on reducing tunneling. Our data also shows that a controlling having more ownership stakes does not necessarily mean more tunneling. Overall, this research lends support to existing literature on the role of better corporate governance in addressing agency costs, though the exact effect of a particular change of corporate governance rule on tunneling might be unclear if the rule is imposed and revised incrementally over time.

The association between CEO incentive rewards and earnings management

Purpose – The purpose of this paper is to investigate whether or not there is a link between CEO incentive-based compensation and earnings management and to examine how institutional environment's features influence such link. Design/methodology/approach – To test the predictions, the authors use a panel of 1,500 American, Canadian, British, and French firm-year observation over the period 2004-2008. Findings – The authors find a significant association between earnings management and CEO incentive-based compensation. Moreover, the analysis provides evidence that institutional factors are strong determinants of this association. Specifically, the results show that firms from countries within the Anglo-American corporate governance model, which provides greater protection of shareholder rights, ensures strict enforcement of law, and scores high on board oversight, tend to have lower level of earnings management. The analysis shows however, that beside the formal corporate governance quality, it is relevant to consider weaker shareholder protection and lower law enforcement indexes to explain earnings management in firms from countries within the Euro-Continental corporate governance model. Originality/value – This paper is the first to provide insights regarding the extent to which CEO incentive rewards imply management discretion and to indicate how much institutional features matter. The analysis contributes to two distinct strands of research. It extends prior research on the association between executive compensation and earnings management and adds to the literature demonstrating a relationship between institutional factors and financial decisions.

A Critique of the Anglo-American Model of Corporate Governance

There is a developing literature comparing different models of capitalism from alternative analytical frameworks highlighting the strengths and weaknesses of diverse forms of capitalism, and the prospects for institutional diversity when confronted with growing pressures for international economic integration.This paper examines how different varieties of capitalism produce different levels of inequality. Specifically how the Anglo-American variant of corporate governance in its US manifestation afforded CEOs of large corporations inordinate power and wealth, and the consequences of this for inequality in wider society. Arrogation of an increasing share of the wealth of corporations by CEOs impacts upon relationships with other stakeholders and displaces CEOs objectives. The significance is that this is precisely the model of capitalism that is being propagated vigorously throughout the world. This dynamic induced the present international financial crisis, in which investment bank executives were massively incentivised to pursue vast securitization and leverage which hugely enriched themselves, but caused the collapse of financial institutions worldwide, the violent instability of financial markets, substantial damage to the real economy, and impacted severely on the employment security and living standards of working people.

Exploring audit committee practices: oversight of financial reporting and external auditors in Poland

This paper investigates audit committee (AC) practices in relation to the oversight of financial reporting and external auditors. We conducted semi-structured interviews of Polish public interest entities to explore AC processes in a different environment from the widely researched Anglo-American model of corporate governance. The results of the study highlight the complexity and contradictory nature of solving governance issues in an environment characterized by a high concentration of ownership. Monitoring is stronger for companies whose dominant shareholder is a foreign investor. Local firms are generally slower to embrace an AC as an effective tool of oversight for financial reporting and external auditors. In general, the processes utilized by ACs are similar to those reported in the literature. The collected evidence does not provide support for a single dominant theory that explains the actual practices of ACs. In fact, multivocality proves to be a more useful approach for explaining various aspects of AC practices.

Changing perspectives of corporate governance in India

The nature of corporate governance in India is constantly changing due to the interactions of Indian firms with global markets. The existing corporate governance regime in India has borrowed largely from the UK and US systems. The compatibility of these models to the Indian situation is being questioned in recent days. The Indian corporate governance reform process and the recommendations of various committees have been examined in detail to substantiate the basic argument. This paper argues that convergence towards the Anglo-American model of corporate governance may not suit the Indian circumstances. The study indicates that the corporate governance model followed in a country should be specific to its micro and macro environment. A unique model that considers the social, political, economic and legal systems of India would be the most appropriate one. But the practicability of such a concept would require ample time and motivation.

Corporate governance in South Africa: from 'Old Boys Club' to 'Ubuntu'?

Padayachee examines developments in the culture and practice of corporate governance largely within the private sector in South Africa. His analysis reveals the dominance of powerful individuals, family trusts and groups sharing common social, cultural, and linguistic norms, bound together outside the boardrooms thorough old school, club, societal, political, church, sports and other such networks. A sound corporate governance culture based on transparency and disclosure hardly existed before and during the apartheid era. Since 1994 and as South Africa opened up to global economic circuits and institutional rules and practices, there has been a much stronger commitment, at least nominally, to compliance with developments in global corporate governance. The King codes of corporate governance (now into version 3) are the strongest indication of this. South African companies have over the last 18 years shifted from an initial state (a management controlled, 'social club' approach to corporate governance) towards an Anglo-American corporate governance model, practising what is widely referred to as 'shareholder wealth maximization'. But Padayachee argues that the practice of this approach remains uneven, as large family networks (both old and new) still exercise significant influences in boardrooms.

The Anglo-American Corporate Governance Model: A Research Gap

The Anglo-American Corporate Governance Model: A Research Gap

Is there an Anglo-American corporate governance model?

This paper questions the existence of an Anglo-American model of corporate governance and capitalism. Significant differences between the UK and US models of corporate governance are identified. The UK is a principles orientated system based more on voluntary codes operated on a ‘comply or explain’ basis, whilst the US system is more rules based and litigious. The UK focuses more on ex ante protection of ‘outside’ shareholders, whilst the US focuses on ex post protection of share traders. Institutional investors are expected to play a more prominent and wide ranging role in corporate governance in the UK than the US, though the evidence on their voting behaviour and wider ‘engagement’ activity is not readily available. The explosion of private equity led leveraged buy-out activity in the mid 2000s challenges the efficiency of both models and could be a harbinger of a ‘new capitalism’; relying more on incentive compatible remuneration packages and less on public disclosure and market discipline. Alternatively, it could simply be driven by the tax advantages currently enjoyed by debt over equity, the special deferred capital gains (‘carried interest’) tax treatment enjoyed by private equity, low (long as well as short term) real interest rates (‘cheap money’), and rising equity prices.

Shareholdership, Stakeholdership and the Modern Global Business Environment: A Survey of the Literature

This paper surveys literature relating to the Anglo-American model (shareholder theory) and stakeholder theory of corporate governance in the modern global business environment. Stakeholder theory emerged during the 1970–80s and suggested that corporations should look beyond the shareholder perspective of profit maximisation. Through a survey of the literature we examine why the traditional Anglo-American model of corporate governance had difficulties when dealing with certain unethical business practices of corporate boards. Overall, this study investigates whether an application of deontological and teleological ethical theories may illustrate how boards of directors could manage stakeholder issues and deal with problematic moral dilemmas and ethical decisions.

An Emerging Third Way?: The Erosion of the Anglo-American Shareholder Value Construct

There is an active debate among corporate law professors about the extent to which European companies are converging on the Anglo-American shareholder-wealth-maximizing model of the corporation. In this model, the paramount obligation of corporate officers and directors is to maximize the near-term financial return to the company's shareholders. The American literature has paid far less attention to the opposite phenomenon: factors that are causing British and even American companies to converge on a European stakeholder model of the corporation. The European view authorizes - or even requires - management to take account of the interests of stakeholders, including such constituencies as employees, residents of communities in which the company operates, and advocates for more diffuse social and environmental interests. The enclosed Article analyzes recent developments in the United Kingdom and the United States that are promoting that convergence to varying degrees. In this Article, we describe and evaluate recent legal developments, particularly in the United Kingdom, that are not only causing greater attention to be paid to stakeholders' interests, but that cast doubt on the intellectual construct, Anglo-American corporate governance. We argue that on a number of corporate governance measures, Britain has embarked upon a unique course to encourage enlightened share value as the proper approach to corporate governance. This approach explicitly adopts a long-term shareholder orientation, and assumes that the long-term health of the company will depend in large part on its ability to manage social, ethical and environmental risks. Accordingly, the U.K. has recently moved to require the disclosure of such risks an annual basis. In addition, institutional investors in London are acting to bring social and environmental issues, such as climate change and global labor standards, into the ambit of mainstream concern in a way that is quite different from institutional investor behavior in the United States. These developments, construed together, suggest to us that a divergence is occurring between the United States and the United Kingdom, such that our understanding of the Anglo-American corporate governance model needs to be re-evaluated.

Balancing Social and Corporate Culture in the Global Economy: The Evolution of Japanese Corporate Structure and Norms

Japanese corporate law is undergoing a transition with new Commercial Code amendments in 2003 that allow corporations to opt for an Anglo‐American model of governance. Combined with shifts in securities regulation, shareholder activism, and the notion of Japanese lifetime employment, there is an important issue of whether these shifts represent a move towards an optimal corporate governance paradigm. The evolution is tempered by particular cultural norms that drive Japanese corporate law. While there is a perception in North America that Japanese corporations have shifted to an Anglo‐American model of corporate governance, the reality is more layered. It may be that ultimately, the governance model that evolves will adopt the best elements of increased transparency, corporate accountability, enhanced shareholder protection, employee long‐term employment protections, and production synergies, that would allow Japanese corporations to compete internationally, but retain those elements of corporate community that have long been considered a primary objective of the social and economic life of Japan.

Corporate Governance Reforms in India

In recent years India has been moving further in the direction of adopting an Anglo-American model of corporate governance. This decision, the result more of international economic and political pressures than public debate, in effect represents a new development strategy for the world's most populous democracy. In light of this situation, it is important to ask two basic questions: 1) why has the Anglo-American model of corporate governance been adopted? and; 2) can it be justified? This paper addresses the first of these questions by distinguish and examining three historical models of governance in India: 1) the managing agency model in the colonial period; 2) the business house model that emerged after independence, and; 3) the Anglo-American model which has recently been adopted (and is still emerging). The second question is approached through an examination of the "development impact" of the new model, as indicated by such measures as growth, employment and respect for shareholder rights.

Board Composition, Leadership Structure and Performance in Chinese Shareholding Companies

The corporatization reform in Chinese SOEs has been largely influenced by the Anglo-American corporate governance model, but at issues is whether or not this model suits China's current institutional and cultural contexts. Agency theory and stewardship theory are two corporate governance theories that provide conflicting assumptions about human behavior and different prescriptions about governance mechanisms. In this study we drew upon both theories and developed competing hypotheses about the relationships between board composition, leadership structure, and organizational performance in Chinese shareholding companies. We gave special attention to China's unique institutional context and its influence on board attributes. The hypotheses were tested with a sample of Chinese listed companies. Overall, the stewardship hypotheses received stronger empirical support.