Corporate Governance Recommendations Research Articles

Does risk management committee gender diversity matter? A financial distress perspective

PurposeUsing 2010 corporate governance principles and recommendations (CGPR) as a natural setting, the purpose of this paper is to investigate the relationship between risk management committee (RMC) gender diversity and a firm’s likelihood of financial distress. Empirical evidence regarding whether CGPR (2010) enhances RMC gender diversity (RMCGD) is also provided.Design/methodology/approachData were collected from the annual reports of the top 300 Australian Stock Exchange (ASX) listed companies from 2007 to 2014. To control for potential endogeneity, the association between (RMCGD) and a firm’s likelihood of financial distress was investigated using an instrumental variable approach (panel 2SLS regression). The relationship between CGPR (2010) and RMCGD was explored using panel regression analysis with firm fixed effects.FindingsRMCGD was found to be associated with a lower probability of financial distress, suggesting that women are better at monitoring and reducing firms’ excessive risk-taking behaviours, which, in turn, decreases firms’ risk of financial distress. The results also indicate that CGPR (2010) is quite effective in enhancing committee gender diversity. In the additional analysis, the results show that RMCGD moderates the negative relationship between risk and likelihood of financial distress. Importantly, the proportion of women with financial experience on RMCs is more effective in reducing the likelihood of financial distress compared to the proportion of men with financial experience on RMCs. These results highlight the benefits of having a gender diverse RMC.Research limitations/implicationsThe results were based on the top 300 ASX-listed companies; thus, restricting generalisability. In addition, this study only focussed on listed firms, non-listed firms may add additional insights to the literature.Practical implicationsThe results provide new and useful empirical evidence about RMCGD for Australian policymakers. This paper suggests that, in the short-term at least, RMCGD should be encouraged by regulators. Regulators could also recommend that the firms with a non-diverse RMC include women with financial experience on their RMC.Originality/valueGiven that prior studies have indicated that gender diversity is closely related to risk, this study contributes to the previous literature by investigating RMCGD and its effect on the likelihood of financial distress. It is expected that the role of RMC member would be to protect the firm from ultimate failure (likelihood of financial distress), especially during a financial crisis.

Corporate Governance Code Compliance and financial performance: the case of Austrian stock listed companies

This article analyzes the correlation between compliance to the Austrian Code of Corporate Governance and financial success of Austrian stock listed companies. It uses a sample of 52 Austrian companies that are listed on the Vienna Stock Exchange and corporate data collected from company publications such as annual reports, financial reports, corporate governance reports and company websites. Three accounting measures – return on assets, return on equity and net profit margin – were chosen in order to proxy the financial performance of a company. The period under review ranges from 2008 to 2016, whereas particular attention is given to the years 2010 to 2016. A corporate governance compliance score has been established on the comply or explain basis and recommendation rules of the Austrian Code of Corporate Governance in order to measure a company’s ability of implementing ‘good’ corporate governance practices. In line with research for other countries, this study finds no statistical evidence that a correlation exists between high compliance to the Austrian Code of Corporate Governance and financial success of companies listed on the Austrian Stock Exchange. The paper highlights the uniqueness of the Austrian Corporate Governance system when compared to other systems and gives arguments why companies comply with corporate governance recommendations.

Voluntary disclosures practices of family firms in Australia

Purpose This paper aims to examine the voluntary disclosure practices of family and non-family listed firms and whether family firms have improved their disclosure practices following the introduction of the Principles of Good Corporate Governance and Best Practice Recommendations in 2003 in Australia. Design/methodology/approach Voluntary disclosures are measured by constructing an index specifically for this study. Such indexes consist of corporate governance disclosure, strategic disclosure and future disclosures. They are then regressed on firm-specific variables while controlling for family and non-family firms. A total of 60 family firms and 60 non-family firms in Australia are randomly chosen from 2001 to 2006 for examining their disclosure practices. Findings The research findings show that family firms disclose information voluntarily to signal to the market regarding their growth potentials and abide by government regulations to improve their reputation. Despite the fact that compliance with the Principles of Good Corporate Governance and Best Practice Recommendations was not compulsory, this paper finds that the recommendation encouraged family and non-family firms to disclose more corporate governance information. Practical implications The findings from this research will help investors and regulators make more strategic decisions on investments and regulations respectively in family firms. Originality/value There has been limited empirical evidence on the disclosure practices and their determinants of family firms in Australia. The study will thus significantly contribute to the current knowledge in this regard.

Corporate governance practices in brazilian family construction companies

InBrazil, family construction companies provide a significant share of goods and services in the construction industry. To protect themselves against fraud, crises and problems inherent to family organizations, these corporations need to implement at least basic corporate governance recommendations. This study evaluates the practices suggested by the Brazilian Institute of Corporate Governance (IBGC) based on a survey of 33 organizations. Our results indicate that construction companies in the country start their governance models by standardizing and professionalizing their business; however, they only start considering the family influence in later stages. The average scores obtained for the recommendations investigated suggest poor implementation of corporate governance practices in Brazilian family construction companies.

The role of the external auditor in corporate governance: The case of companies listed in the NYSE Euronext Lisbon

This study investigates the effects of the presence of the external auditor on corporate governance in Portugal, in the way listed companies are managed, based on the verification of compliance with the corporate governance regulations of the Securities Market Commission, as well as the transparency of information and the reduction of agency problems, fraud and economic crimes. By comparing government reports of companies listed on NYSE Euronext Lisbon, during several periods and with surveys conducted in the 1st half of 2013 in Portugal to the external auditors responsible for the majority of the legal certification of accounts of companies during 2007 to 2011, a significant direct relationship in the fulfillment of the recommendations of corporate governance and its verification by the external auditor is concluded. Based on multiple regression and multinomial logistic models, it is concluded that a greater involvement of the ROC in complying with corporate governance recommendations, allows for greater transparency of information and a reduction of agency problems, fraud and economic crimes

Sustainability Risk Disclosure Practices of Listed Companies in Australia

AbstractThis paper investigates the extent to which the top 100 ASX listed companies disclosed economic, environmental and social sustainability risk factors during the 2014/15 financial year in light of the changes introducing Recommendation 7.4 to the third edition of the Corporate Governance Principles and Recommendations in 2014. While all companies complied with the Recommendation, questions of substance over form were raised because some companies had risks that were not disclosed according to Recommendation 7.4. Our conclusion outlines how this research contributes to the growing literature on sustainability and corporate governance. We add to the continuing debate on mandatory versus voluntary disclosures, advocating that Australia may need to introduce mandatory guidelines, beyond the ASX, to regulate the disclosure of material economic, environmental and social risks. Additionally, we conclude that Recommendation 7.4 is unlikely to substantially change Australian corporate reporting and disclosure practices – that, for most companies, it is ‘business as usual’. However, under business as usual, we can naturally expect to see further increases in sustainability and alternative reporting frameworks, such as integrated reporting, as well as increasing use of the Internet to report and disclose sustainability risks.

Corporate governance compliance of family and non-family listed firms in emerging markets: Evidence from Latin America

Based on agency theory, this study analyzes whether family firms are more compliant with corporate governance recommendations than non-family firms in the context of emerging markets. Using a unique sample of 826 observations of the highest ranked companies on the stock exchange indices of Argentina, Brazil, Chile and Mexico during the period 2004–2010, we hypothesize that family firms may adopt better corporate governance practices to substitute for the absence or inefficiency of a regulatory system and to mitigate the agency problem between majority and minority shareholders. Additionally, we propose a corporate governance compliance index considering the legal and institutional framework of the region. The empirical results indicate that family firms report a higher corporate governance index. We find that board composition (independence, size and COB-CEO duality) does not moderate corporate governance compliance of family firms but rather such variables have a direct effect on the corporate governance index.

Board and audit committee effectiveness in the post-ASX Corporate Governance Principles and Recommendations era

PurposeThe purpose of this paper is to contribute to the corporate governance literature by examining the aggregate effect of board and audit committee characteristics on earnings management practices, particularly in the period following the introduction of the second edition of the Australian Securities Exchange (ASX) Corporate Governance Principles and Recommendations.Design/methodology/approachThis paper begins by embarking on an extensive review of extant empirical research on boards of directors and audit committees. Then, the paper reports on the use of a quantitative analysis approach to specify the relationship between board and audit committee characteristics (introduced by the ASX Corporate Governance Council) and the level of absolute discretionary accruals as a proxy for earnings management.FindingsThe findings suggest that greater compliance with board and audit committee principles is linked to lower earnings management, indicating that deliberate structuring of boards and audit committees is an effective approach for enhancing a firm’s financial reporting quality and providing support for the efficacy of the second edition of principles and recommendations related to boards and audit committees suggested by the ASX Corporate Governance Council.Practical implicationsThis study significantly extends the literature and has notable implications for financial reporting regulators, as the findings regarding the monitoring role of boards and audit committees should be beneficial for future revisions of corporate governance principles and recommendations.Originality/valueThis study focuses on the aggregate effect of board characteristics recommended by the Australian Corporate Governance Council on earnings management practices, and the results support the effectiveness of the board and audit committee characteristics recommended by the ASX Corporate Governance Council. New directions for future improvements to the principles and recommendations are identified.

Do corporate boards affect firm performance? New evidence from an emerging economy

PurposeThe purpose of this paper is to examine an association between board demographics and corporate performance using a sample of Pakistani firms listed on the Pakistan Stock Exchange in the 2014 year.Design/methodology/approachThis study is unique in that corporate performance is examined using a mixture of performance measures: accounting-based measures (return on assets), market-based measures (Tobin’s Q, earnings per share, and total return) and economic profit measures (economic value added).FindingsThe results of this research show a significant positive relationship between board size, minority representation on the board and the appointment of a family director and enhanced firm performance. However, contrary to expectations, the authors also find that instead of adding value, the appointment of independent directors to Pakistani firm boards negatively impacts firm value.Originality/valueThis study adds to a growing body of empirical evidence that suggests that agency theory-based corporate governance recommendations adopted in developed economies may not be relevant to emerging economy firms.

Diversity ASX corporate governance recommendations: a step towards change?

PurposeThe business case argument was used to underpin the inclusion of diversity disclosures within the Australian Securities Exchange (ASX) Corporate Governance Principles and Recommendations (2010). By adding a requirement for diversity disclosure, an increase in focus on diversity would be expected because of a heightened level of accountability. Whether this change in the Recommendations affected any change in the boardroom is questionable though. The purpose of this paper is to explore the effectiveness of these disclosure requirements.Design/methodology/approachThe authors draw on data obtained from a random sample of 120 ASX-listed company annual reports across two time periods: 2009 and 2012 (before and after the change in the Recommendations).FindingsAlthough findings indicate that there has been some change, especially in the more visible companies (ASX200), many of the changes appear to be largely superficial with a continued focus on the business case perspective.Social implicationsWhile the disclosure recommendations have the potential to be a driver in addressing gender inequity, the findings of this paper indicate that without deep change at the organisational level, requiring listed companies to disclose on gender diversity may have little impact, with the focus remaining on the business case and business as normal.Originality/valueThis paper contributes to the literature on gender diversity in the boardroom and the effect of disclosure. The empirical findings contribute to an understanding of the diversity Recommendations within the ASX Corporate Governance Principles and Recommendations, but in doing so, it calls for deeper organisational cultural change if real change is to take effect.

A finer-grained approach to assessing the “quality” (“quantity” and “richness”) of risk management disclosures

PurposeThis paper aims to examine the “quality” of narrative risk management disclosures (RMD) from a “quantity” and “richness” (width and depth) perspective, utilising a finer-grained approach. Evidence is then provided on the relationships between RMD quality and the corporate determinants driving that quality.Design/methodology/approachWithin a multidimensional quality disclosure framework, annual report narrative RMD from the top 100 Australian Securities Exchange (ASX) listed companies precisely “matched” for the 2010 and 2012 years were examined using semantic content analysis. The relationship between the dimensions and sub-dimensions of RMD “quantity” and “richness”, and various corporate characteristics were explored using ordinary least squares (OLS) regression analysis.FindingsThe results indicate that RMD are considerably lacking in quality, from the “quantity”, “width” and particularly the “depth” dimension and sub-dimensions for both years. Many companies provide “boiler plate” RMD over consecutive years and many do not comply with the intent of the ASX Corporate Governance Principles and Recommendations under the “if not, why not” regime (ASX CGC, 2010). Company size and cross-listing were found to be the primary determinants of higher quality RMD and, to a lesser extent, firm risk. Some evidence was found that “quality” RMD were less likely where companies are more highly leveraged and when their shareholders are more concentrated.Research limitations/implicationsAlthough two coders independently coded the RMD and specific decision rules were followed, the subjectivity inherent in conducting semantic content analysis into the dimensions and sub-dimensions of the framework cannot be completely eliminated. However, by adopting a finer-grained approach, this study contributes to the global literature on the quality of RMD. Previous studies are extended by analysing and testing the individual dimensions and sub-dimensions of “quantity” and “richness” which provides new empirical evidence and a more comprehensive portrayal of RMD quality and a greater understanding why some companies are more likely to disclose higher quality RMD than others.Practical implicationsThese results provide useful and predominantly new empirical evidence on the quality of RMD for practitioners, regulators and researchers. As many companies are not complying with the “intent” of the “if not, why not” approach, these results support the argument for mandated narrative RMD regulations at an international level.Originality/valueThe multidimensional framework of RMD “quantity” and “richness” provides a basis for examining not only how much is disclosed, but what is disclosed and how. In adopting a finer-grained approach, this study analyses and tests the individual dimensions and sub-dimensions of the framework. This provides a deeper understanding of the overall quality of RMD and the determinants driving RMD quality for the sample companies.

Ranking Corporate Governance of Australia's Top Companies: A Decade On

type=main> The Horwath/University of Newcastle (UoN) Corporate Governance Reports commenced in 2002 and were among the first to assess Australia's largest companies on their corporate governance structures and policies. Initiated prior to the release of the 2003 Australian Securities Exchange Corporate Governance Council's Principles of Good Corporate Governance and Best Practice Recommendations, and at a time of increased focus on corporate governance failures, the reports attracted much attention from both the media and stakeholder groups. This paper reports the findings of applying the Horwath/UoN methodology to the relevant corporate governance disclosures of the 2012 annual reports of Australia's top 200 companies. Comparison to the original analysis of 2002 annual report disclosures shows a significant improvement across all areas of corporate governance by Australia's top companies. However, there remain some areas of concern, particularly in respect to board diversity, risk management and insider share trading policies.

An analysis of risk management disclosures: Australian evidence

Purpose– Communication of risk management (RM) practices are a critical component of good corporate governance. Research, to date, has been of little benefit in informing regulators internationally. This paper seeks to contribute to the literature by investigating how listed Australian companies disclose RM information in annual report governance statements in accordance with the Australian Securities Exchange (ASX) corporate governance framework.Design/methodology/approach– To address this study’s research questions and related hypotheses, the authors examine the top 300 ASX-listed companies by market capitalisation at 30 June 2010. For these firms, the authors identify, code and categorise RM disclosures made in the annual according to the disclosure categories specified in ASX Corporate Governance Principles and Recommendations (CGPR). The derived data are then examined using a comprehensive approach comprising thematic content analysis and regression analysis.Findings– The results indicate widespread divergence in disclosure practices and low conformance with the Principle 7 of the ASX CGPR. This result suggests that companies are not disclosing all “material business risks” possibly due to ignorance at the board level, or due to the intentional withholding of sensitive information from financial statement users. The findings also show mixed results across the factors expected to influence disclosure behaviour. While the presence of a risk committee (RC) (in particular, a standalone RC) and technology committee (TC) are found to be associated with some improvement in disclosure levels, the authors do not find evidence that company risk measures (as proxied by equity beta and the market-to-book ratio) are significantly associated with greater levels of RM disclosure. Also, contrary to common findings in the disclosure literature, factors such as board independence and expertise, audit committee independence and the usage of a Big-4 auditor do not seem to impact the level of RM disclosure in the Australian context.Research limitations/implications– The study is limited by the sample and study period selection as the RM disclosures of only the largest (top 300) ASX firms are examined for the fiscal year 2010. Thus, the findings may not be generalisable to smaller firms or earlier/later years. Also, the findings may have limited applicability in other jurisdictions with different regulatory environments.Practical implications– The study’s findings suggest that insufficient attention has been applied to RM disclosures by listed companies in Australia. These results suggest RM disclosures practices observed in the Australian setting may not be meeting the objectives of regulators and the needs of stakeholders.Originality/value– The Australian setting provides an ideal environment to examine RM communication as the ASX has explicitly recommended RM disclosures areas in its principle-based governance rules since 2007 (Principle 7). This differs from other jurisdictions where such disclosure recommendations are typically not provided and provides us with a benchmark to examine the nature and quality of RM disclosures. Despite the recommendation, the authors reveal that low levels and poor RM communication are prevalent in the Australian setting and warrant further investigation.

Social responsibility and financial performance: The role of good corporate governance

The objective of this theoretical–empirical study is to investigate the bidirectional relationship between Corporate Social Responsibility and Financial Performance in Spanish listed companies. A complete theoretical framework – based on agency, stewardship, dependency resources, and stakeholder theories – provides the basis for the conceptual model. An important contribution is the use of a social behavioral index formed by four components: Global Reporting Initiative participation, Dow Jones Sustainability Index firm inclusion, Good Corporate Governance Recommendations compliance, and Global Compact signee.The conclusions drawn from the empirical study performed on the companies registered on the Madrid Stock Exchange demonstrate positive relationships in both directions, namely that the social is profitable and that the profitable is social, thereby originating a positive feedback virtuous circle.The results of this analysis have practical applications in the boardroom; they are proof that all social policies increment financial resources, and vice versa, that increased financial performances lead to greater social benefits. As a consequence, this paper encourages all board members to seriously weigh investing financial resources in developing policies that boost the levels of social behavior components in order to contribute globally to the improvement of society.

Factors influencing corporate governance disclosure of companies listed on the Alternative Exchange (AltX) in South Africa

This article examines the various factors that influence the level of conformance with corporate governance recommendations for companies listed on the Alternative Exchange (AltX) in South Africa. To achieve this objective, a corporate governance disclosure index was developed by examining the extent to which AltX companies apply the corporate governance recommendations as set out in King II and King III. The corporate governance disclosure index was then regressed on a number of corporate governance and firm characteristics to determine the influence of various factors on the level of conformance with corporate governance recommendations. It was found that larger companies, where the CEO and chairman of the board are separate, companies with an independent audit committee and companies with higher debt levels are more likely to conform to corporate governance recommendations. There is no evidence that levels of corporate governance conformance are influenced by the growth and profitability of companies, or by corporate governance characteristics, such as the independence of the board.

Integrating Corporate Social Responsibility in Corporate Governance Codes in the EU

While having different starting points, corporate social responsibility (CSR) and corporate governance have developed along similar paths and today they are linked in many different ways. As a consequence of this development, CSR is becoming an integral part of corporate governance codes in the EU, and the aim of this article is to analyse the extent of this integration. It is concluded that stakeholder-related issues in particular are now part of most codes in the EU, whereas corporate governance recommendations refer less frequently to specific CSR issues. However, specific CSR recommendations are still common, so it seems that in most codes it is recognised that there is a strong link between CSR and corporate governance. Even though this link may be widely recognised, it is also clear that the existing codes show a great variety of solutions to the integration of CSR and corporate governance codes. It is shown that for CSR the codes mostly contain specific recommendations related to transparency and that other recommendations are less specific. The vagueness of the recommendations on CSR issues seems to be common to all the codes examined. This general vagueness makes CSR recommendations 'soft' and frequently open to interpretation. It is also shown that the countries whose codes are most dominant in the field of corporate governance do not seem to be at the forefront of integration of CSR in their corporate governance codes. Furthermore, an analysis of two examples of the reporting on CSR recommendations under the comply-or-explain principle shows that the adoption of this principle for CSR disclosure may not work without measures to overcome some of the shortcomings seen hitherto in the application of the comply-or-explain principle.

Do corporate governance recommendations improve the performance and accountability of small listed companies?

This study examines whether the implementation of the 2003 Australian Securities Exchange Limited governance recommendations influenced the governance choices of small companies and whether compliance improves their accounting and market performance and earnings quality. Our analysis examines small and large companies because we are interested in the different effects of the governance recommendations on the two groups. The analysis shows a significant shift by small and large companies to comply with the recommendations around the time of their introduction. We find that formation of an audit committee surrounding the reform period is significantly associated with improved earnings quality for small and large companies. However, compliance with other governance recommendations is not systematically associated with improved performance or earnings quality.

Board Attributes and the Impact of Organizational Characteristics: Findings from the Greek Listed Manufacturing Companies

Corporate governance has emerged in the last decade mainly due to a number of corporate failures and scandals that have drawn the global attention. Furthermore, the current financial crisis has highlighted issues of CG in a widest sense and the corporate governance codes and recommendations are being revisited, in order to facilitate transparency and accountability of the management processes within organisations. A range of studies has investigated the essential features of CG; most of the discussion on CG has been driven by concerns with the effectiveness of board of directors that is expected to represent the interests of the shareholders by controlling the opportunistic behaviour of managers and by providing resources to the firm. In Greece, CG is a topic of increasing interest, as a result of dysfunctional boards, executive misconduct and international pressures for a more shareholder-oriented model of governance. However, due to the fact that Greece is a small economy with the majority of companies being small to medium, the interest of corporate governance is highly concentrated to the listed companies of the Athens Stock Exchange (ATHEX). In this study, the focus is on the manufacturing companies of the ATHEX, with about half of the total listed companies being characterized as such.

Canadian Evidence of Adherence to “Comply or Explain” Corporate Governance Codes: An International Comparison

AbstractThis study documents the rate of compliance by Canadian public firms with corporate governance recommendations imposed by the Canadian Securities Administrators. Canada uses a “comply or explain” governance structure in which harmonized provincial regulation establishes mandatory disclosure of governance practices. Firms can be compliant with these requirements either by voluntarily adopting the recommended best practices (i.e., adopt) or by explaining the alternative practices implemented to achieve the same governance principle (i.e., explain). Firms that fail to comply (i.e., neither adopt nor explain) are in violation of Canadian securities regulation with respect to governance. Using a hand‐collected sample of 742 Canadian public companies and 16 governance recommendations, our results show that an average of 82 percent of firms complied by adopting the best practice and an additional 4 percent complied by explanation. Our study also shows that 39 percent of Canadian publicly traded firms were completely compliant with all 16 recommendations examined in this study, either by adoption or explanation. To provide a broader context for these results, we compare rates of compliance in Canada to rates in Australia, a country broadly similar to Canada with comparable governance recommendations. The Australian Securities Exchange supplied data sample of 1334 Australian companies reports a complete compliance rate of 74 percent compared to Canada's 39 percent complete compliance rate. Our analysis shows that compliance by adoption of best practice is more common in Canada, whereas compliance by explanation is more common in Australia. In our analysis of compliance with individual recommendations, we find that half of the recommendations are more likely to be complied with in Australia, and the other half are more likely to be complied with in Canada.

The Real Coso, and Nothing but the Real Coso

Within the international corporate governance debate, one recommendation which appears to be gaining ground internationally is that management should report, publicly or otherwise, on the effectiveness of management control systems or aspects of it. With respect to evaluation and standards for effectiveness, all reports in the field of corporate governance make reference to the conceptual framework included in the final report of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control – Integrated Framework [1992]. In our opinion, the international reference to the current COSO report is therefore unjustified: the COSO framework does not include the assumed and widely acclaimed unequivocal standards.This paper is divided into two sections. In the first section we will analyse the current COSO framework in more depth and argue for what reasons the COSO framework does not comprise the internationally widely acclaimed standard. First, we discuss the backgrounds leading to, and the methodology applied by the Committee of Sponsoring Organisations of the Treadway Commission (COSO). Secondly, we evaluate the definition and accompanying content of the COSO framework. Thirdly, we argue why – in our opinion – the COSO framework does not comprise the widely acclaimed standards. Fourthly, we evaluate the guidance for evaluation of the effectiveness of management control systems and the general applicability of this guidance. In section two we present a new management control framework to overcome the deficiencies of the current COSO framework, in order to fulfil the international widespread corporate governance recommendations for organisations to report on the effectiveness of their management control system. The revised management control evaluation framework comprises four perspectives on control, which are derived from the main existing paradigms in organisation theory, which represent the general developments of organisation theory. First, we position the COSO framework between business practice and the different levels of analysis applied science (management control theory), basic science (organisation theory) and relevant paradigms. Secondly, we discuss the origin of the four control perspectives. Thirdly, we will evaluate the arguments mentioned in the COSO framework to include management control features, using our control evaluation framework, to analyse whether the partial and restricted view on control of COSO (see section one) is confirmed.