Corporate Governance Reform Research Articles

Reforms of corporate governance in East Asia: December 2022

ABSTRACT At the heart of corporate governance reforms in East Asia is board re-composition legislation aiming to alleviate the prevalent agency conflicts. The principal–principal agency conflicts associated with controlling shareholders are prevalent in China, Korea and Taiwan while the managerial entrenchment along the declining role of (main) bank is a concern in Japan. Countries such as Korea have actively initiated reform in contrast to Japan, which has adopted a conservative approach. Taiwan and China take a more moderate approach that lies between active reform and conservatism. While the reforms have shifted the governance system from the traditional relationship-based insider model towards the outsider model, empirical research evaluating the effectiveness of the reforms has been indecisive. The remaining challenges the region faces, regardless of the approach to board re-composition reforms, are ensuring effective implementation of these reforms to enable the independence of the board so that it may execute its monitoring function.

The Fallacy Of The Rational Apathy Theory: Minority Shareholder Electronic Participation In Nigerian Corporate Governance

Purpose: The appeal of the Rational Apathy Theory lies in the fact that it is not only a descriptive theory of shareholder behaviour in the modern public firm but also a powerful normative tool which recommends itself to corporate legislators and policymakers. True to their normative logic, proponents of apathy contend that since shareholders of modern public firms will never find it cost-efficient or incentivized to perform their monitoring responsibilities over corporate management, insisting on a shareholder-oriented corporate governance model is undesirable. This article rejects the determinism and immutability of the above thesis and argues that firm investors will embrace activism where the cost of corporate monitoring is reduced, and the benefits of doing so are increased. Given the ability of the internet to reduce monitoring costs for shareholders (predominantly minority shareholders) in public companies, the article campaigns for minority shareholder electronic participation in corporate governance and proposes a careful reform of corporate law and governance in post-covid Nigeria, drawing inspiration from similar reforms on electronic governance in Canada, UK, and the State of Delaware in the US. In a society where digitalization has been identified as a major catalyst for the economic revival of commercial and corporate life, this article recommends itself to policy and lawmakers, corporate boards, corporate law experts, legislators, regulators, and other relevant stakeholders. Methodology: The article adopts doctrinal and comparative methods of legal analysis. Results/Findings: The article finds that while the Rational Apathy Theory may have served the analogue world, it is unsuitable for a digital generation, where issues of cost, communication and participation could be liberalized, through the use of the internet, to serve the interest of shareholder democracy in public companies.

Do markets react to corporate governance reforms? Evidence from a developing economy

PurposeThe purpose of this study is to investigate market reaction to corporate governance reform pronouncements on board diversity in Kenyan listed firms.Design/methodology/approachAn event study was performed using 240 days pre-event period and an event period that consisted of 25 days pre and 25 days post the March 2016 board diversity reforms announcement in Kenya. The difference in differences (DiD) method was also used for cause–effect analysis for two years before and three years after the March 2016 board diversity reforms announcement. The outcome variable was firm value, whereas the treatment and control groups were Kenyan listed firms and deposit-taking credit unions, respectively.FindingsThe event study method found cumulative abnormal returns after the date of the board diversity reforms announcement to be positive and significant. The DiD methods found a positive and significant market reaction to the March 2016 board diversity reforms announcement in Kenya.Research limitations/implicationsThis study was limited by the secondary data that was collected and analyzed from financial statements and stock price data from the Nairobi Securities Exchange (NSE). Financial statements have the disadvantage of being affected by the judgment and estimates of their preparers or accountants.Practical implicationsEmerging markets like the NSE are vulnerable to market manipulation by insiders. Efficient stock markets are known to attract more investors who are interested in a trustworthy stock price determination mechanism. The Capital Market Authority should thus continue implementing corporate governance reforms aimed at improving the efficiency of the NSE and the trustworthiness of stock prices therein. The continued reforms thus imply better value for money for the NSE investors.Originality/valueThis study makes an important contribution to literature by combining an event study and DiD analysis to assess market reaction to board diversity reform announcements in emerging markets of sub-Saharan Africa which is a concept that has not been researched before. Past studies have used event studies to investigate the efficiency status of stock markets in sub-Saharan Africa, whereas the current study used an additional method of DiD and hence contributed to literature.

Determinants of Director Remuneration: Monitoring Human Capital and Social Embeddedness

The determinants of director compensation have been studied across the theoretical spectrum with varying findings. Agency theory suggests that monitoring human capital enhances the ability of the individuals to be effective monitors and should be associated with higher director compensation. At the same time, social embeddedness impedes the ability to monitor, and it should be associated with lower director compensation. In contrast, behavioral theory of corporate governance suggests ingratiating behavior and social embeddedness of directors increases their likelihood of higher value, and thus it should lead to higher director compensation. We attempt to reconcile these contradictory predictions of the agency theory and behavioral theory of the firm. We examine the same through the labor market for directors in India using a unique longitudinal dataset of director appointments and compensation in India over 2007-2016. We also exploit a natural experiment brought about by the implementation of the significant corporate governance reforms (Companies Act of India, 2013) to test the labor market norms posited by agency theory versus the behavioral theory of the firm. The finding of our study indicates the importance of monitoring human capital and social embeddedness as they positively affect directors' compensation. Our results also highlight that in emerging market contexts marked by the presence of institutional voids, when the implementation of corporate governance reform increases the risks for individual directors on account of corporate misconduct, they respond by optimizing their structural positions in the interlock network by increasing their reach but reducing their influence/salience in the network.

Corporate Governance Reforms, Ownerships and Innovation Strategies

Institutional changes such as market reforms transform concentrated governance structures, which prevail in emerging economies, to distributed governance structures, which are popular in developed economies. Within this context of transition, this study investigates how different types of ownership structures motivate distinctive technological capabilities and how increased ownership competition resulting from institutional changes influence firm performance. Our findings suggest that CEO, affiliated, and foreign types of ownership are negatively associated with technological exploration (i.e., positively associated with technological exploitation), whereas domestic institutional and individual ownership is positively associated with technological exploration (i.e., negatively associated with technological exploitation). Furthermore, we find that ownership competition has a U-shaped relationship with firm performance, showing that firm performance immediately decreases as more shareholders become involved because of potential goal conflicts. However, firm performance will eventually improve as the mechanism of checks and balances between major shareholders begins to work.

The Reform of Corporate Governance and the Capital Market from the Perspective of Capital Productivity: Lessons and References

The Reform of Corporate Governance and the Capital Market from the Perspective of Capital Productivity: Lessons and References

Corporate governance reforms and risk disclosure quality: evidence from an emerging economy

PurposeThe purpose of this paper is to examine the impact of corporate governance (hereafter, CG) reforms on the risk disclosure quality in an emerging economy, namely Pakistan. The authors also investigate the impact of CG reforms on the relationship between CG practices and risk disclosure quality.Design/methodology/approachThe authors use a manual content analysis method to a sample of non-financial companies listed on the PSX-100 index for 2009–2015, to examine the impact of CG reforms on risk disclosure quality. The authors use pooled ordinary least squares and the system GMM estimations to test the research hypotheses.FindingsThe authors find that CG reforms have a positive impact on risk disclosure quality. The results indicate that certain CG practices such as CEO duality and board independence are associated with risk disclosure quality. Interestingly, the findings also highlight the effectiveness of CG reforms by showing that the revised code positively moderates the CG practices and risk disclosure relationship.Practical implicationsThe findings of the study have policy implications for regulatory bodies of emerging economies trying to strengthen the CG structures and to introduce risk disclosure regulations to cater the information need of stakeholders.Originality/valueThe authors provide new empirical evidence for the impact of CG reforms on risk disclosure quality using a unique setting of an emerging economy, namely Pakistan.

The effect of succession on corporate governance reform under the Chinese clan culture context

PurposeThe fundamental component of Confucian culture is clan culture, which stresses that family ties are the most important of all social relationships and have an essential impact on the governance model of family firms in Southeast Asian countries, especially in China. This study investigates complex relationships among family firm succession and corporate governance reform in the context of Chinese clan culture.Design/methodology/approachDrawing upon the analysis of altruistic behavior and conflict in succession process in family firm, the study uses a moderation model to capture the relationships between succession and governance reform in the context of clan culture. This study conducts an empirical study on 295 Chinese listed family firms that initiated intergenerational succession from 2008 to 2018 to test the model.FindingsThe empirical results suggest that the different stages of the succession will positively affect the family firm's governance reform, whether it is the stage in which the successor takes over the firm or the stage in which the successor completely controls the firm. Furthermore, the succession-governance reform relationship is negatively moderated by the clan concept of the actual controller.Originality/valueThis paper fulfills an identified need to study how succession in the family firm can accelerate corporate governance reform (transition from relation-based governance to rule-based governance). The research results provide evidence from the firm-level under the Chinese clan culture context to understand the complex relationship between succession and corporate governance.

Fundamental Reports on Corporate Governance of the United Kingdom

Establishing sound corporate governance standards are considered to be one of the prominent concept of the financial sector. Substantial corporate governance reforms first have begun in the United Kingdom in the early 1990s. As a result, number of analytical reports were submitted, which later became foundation of the modern corporate governance. The idea was to increase investor’s trust and confidence, improve financial market stability, and increase transparency and accountability amongst shareholders and executives of companies. The first attempt in this direction is believed to be the Cadbury Report, which pioneered the high standards of corporate governance into the financial market and established the progressive method of "comply or explain", obliging the companies listed on the London Stock Exchange to clearly provide in their annual reports how they complied with the requirements or explain the cause of deviation from them. After the Cadbury Report many tried to further enrich and perfect the principles of the corporate governance, namely: the Greenbury Report mainly concentrated on the remuneration of executives as well as on aligning the interests of executives and shareholders; the Hampel Report highligthed the importance of the protection of the interests of employees, consumers, creditors and stakeholders; the UK Combined Governance Code revisited standards of the composition of the board of directors, their remuneration, accountability and compliance with auditing requirements; the Turnbull Report focused on the internal financial and operational control and risk management; the Higgs Report challanged the composition of non-executive directors, their roles, duties and efficiency of their activities; the Walker Review addressed the problems existing in the banking and financial sectors; the Stewardship Code promoted enhanced involvement of institutional investors; the Corporate Governance Code set forth principles of sound governance and efficiency of the board of directors, accountability with and reporting to the shareholders; the Hampton-Alexander Review concentrated on improving gender balance and representation in the board of directors; and the last but not least, the Parker Review encouraged ethnocultural diversity in the board of directors. The purpose of this article is to provide a brief overview of each report, highlight their main principles and outline what was the foundation of modern corporate governance. Keywords: Shareholder, Director, Investor, Corporate Governance, Corporate Governance Code, Corporation, Management, Principle, Risk, Standard.

An Examination of Impact of the Board of Directors’ Capital on Enterprises’ Low-Carbon Sustainable Development

Given the increasingly serious ecological and environmental problems in China, research on enterprises’ low-carbon sustainable development behavior (LCSDB) has become a heated discussion. This is also because enterprises are a primary source of carbon emissions and environmental pollution. From the perspective of the board of directors’ capital (BODC), this study considers empirical evidence from 286 enterprises listed on the Shanghai and Shenzhen stock exchanges in China from 2008 to 2016 to examine the BODC’s impact on enterprises’ LCSDB and its mechanisms. A group test is conducted using the enterprise’s property, nature of rights, and region, among other factors, to investigate the heterogeneity of the impact of board capital on enterprises’ LCSDB and its regulatory role. The research indicates (1) an increase in BODC promotes enterprises’ LCSDB. (2) An awareness of social responsibility (AOSR) plays an intermediary role in the relationship between BODC and corporate LCSDB. (3) Media attention enhances the BODC’s role in promoting enterprises’ LCSDB. (4) Government regulatory factors promote the BODC’s positive impact on LCSDB. These findings significantly impact the effectiveness of decision-makers within the company, the governance mechanism to address climate change risks, and the possible connection between corporate governance reform and carbon-related policies.

Corporate failure in the UK: An examination of corporate governance reforms

In the context of major corporate collapses, executive compensation, board network, gender diversity and oversight committees have all received attention in a package of corporate governance (CG) reforms that were recently issued in the UK. This paper examines whether these reforms of CG can influence the likelihood of corporate failure (CF). It also investigates how efficient they are when CF approaches. After controlling for variables that prior research shows to be related to CF, we find that CF is less likely when a firm is characterized by a lower executive compensation, larger size of the board's social network, and smaller degree of the board's managerial network. However, board gender diversity and independence of oversight committees do not reduce the likelihood of CF. We further observe that the explanatory power of these CG variables is significant but relatively decreased as the time to CF closes. This implies that despite the capability of these variables to render early warning alerts of CF, they are less helpful (efficient) as failure becomes closer. Our results remain robust after a battery of sensitivity tests and addressing potential endogeneity problems. Collectively, the evidence provided by our paper should be of interest to the UK's regulatory bodies (Financial Reporting Council) and legislators (the UK's Parliament), since it shows the practical implications of the UK's CG Code and other governance regulations on reducing future corporate collapses. This paper provides timely evidence-based insights to major recent structural reforms aiming at proposing remedies to CG problems in the UK.

Firms' responses to corporate governance reform in an emerging economy from the perspective of institutional logics

Drawing insights from the institutional logics perspective, this study investigates the roles of interest groups in determining firms’ adoption of a proactive response that goes beyond mandatory compliance with government regulations and the resulting consequences on firm performance. Empirical results from corporate governance reform in Taiwan show that influenced by family logics, family involvement from controlling families has a negative impact on a firm’s proactive response to board regulations, but shareholder-oriented logics conveyed by foreign investors have a positive impact on a firm’s proactive response to board regulations. Furthermore, the results illustrate that firms’ proactive response can improve a firm’s performance. This study is developed from the lens of the institutional logics in a domain of principal–principal conflicts and demonstrates the effects of different interest groups on firms’ strategic choices to institutional pressures. It also extends the existing understanding of firms’ behaviors and the outcome of institutional transitions.

Do ownership structures and governance attributes matter for corporate sustainability reporting? An examination in the Indian context

PurposeBased on the essence of the legitimacy and agency theories, this study empirically investigates the influence of corporate governance attributes and ownership structures on sustainability reporting of companies listed on the National Stock Exchange (NSE), India.Design/methodology/approachThe study is based on panel data regression analysis of sustainability reporting practices of 53 environmentally sensitive companies drawn from NIFTY100 Index at NSE. All data pertaining to sustainability information disclosure, ownership structure and corporate governance characteristics were sourced from sustainability report, business responsibility report, annual report and Centre for Monitoring Indian Economy (CMIE) database for the years 2015–2019.FindingsThe empirical result reveals that sustainability reporting scenario has been consistently improving in India. This study documents that government ownership and frequency of board meetings are the two most important factors significantly influencing the extent of sustainability information disclosure of companies. However, the present study failed to find any significant impact of board size and big4 auditing on sustainability reporting practices. Unexpectedly, a higher number of independent directors does not improve sustainability disclosure of companies in India.Originality/valueThis study is one of the first studies to investigate how the nature of ownership and corporate governance characteristics contribute to or impede sustainability reporting practices of companies in India. This study offers important insights to regulators, practitioners and investors to analyze whether sustainability disclosure of companies is influenced by corporate governance attributes. It also provides a perspective for regulators and corporate strategists to assess the impact of recent corporate governance reforms in India and consider how corporate governance mechanism can be used to improve sustainability reporting practices.

Unnatural selection of outside directors: Consequences of Japanese corporate governance reforms

AbstractWe examine how Japanese listed companies increase the number of outside directors to comply with corporate governance reforms. We find that, after the reforms, there has been an increase in the number of cases in which former company auditors (kansayaku) become outside directors in the same company. This trend is more pronounced for hitherto noncompliant firms with insufficient outside directors before the reforms. Moreover, the firms appointing company auditors as outside directors tend to change their corporate structures to maintain existing practices and minimize compliance costs. Our findings imply that Japanese reforms have increased the unnatural selection of outside directors.

Does compliance with corporate governance increase profitability? Evidence from an emerging economy: Pakistan

Corporate governance reforms have evolved over time, but few studies have addressed firm compliance with corporate governance standards in the context of an emerging market like Pakistan. We build a Corporate Governance Compliance Index for public firms in Pakistan for 2008–2018. Our index consists of six subindices based on the key parameters of governance outlined by the Code of Corporate Governance of Pakistan. Our analysis shows that increased compliance predicts higher firm performance but entails greater compliance costs. Board Structure and Functions & Responsibilities of Audit Committee drive the compliance-performance relationship, which is affected by levels of managerial ownership and ownership concentration.

The Relationship between Analyst Coverage and Overinvestment, and the Mediating Role of Corporate Governance. Evidence From China

This study applied a quantile analysis to test the relationship between analyst coverage and overinvestment in Chinese firms and further sought to demonstrate the mediating effect of corporate governance on overinvestment. The empirical results show that analyst coverage causes overinvestment across all quantiles; however, corporate governance can diminish the effect of firm overinvestment in the higher quantile analysis. Additionally, the difference-in-differences method was used to explore the effectiveness of the Chinese government’s 2013 corporate governance reform, with the results confirming that that governance reform has been effective in inhibiting a firm’s overinvestment. The findings of this study indicate that analysts act as market supervisors in the Chinese capital market, improving corporate governance; however, their coverage does not appear to benefit firms or shareholders. This research highlights the need to review the role of analysts in the market to ensure they can reduce information asymmetry between managers and shareholders without causing overinvestment behavior.

Reformasi Koperasi Terhadap Corporate Governance

This paper tries to determine the effect of cooperative reform on corporate governance in savings and loan cooperatives in Cimahi City, which has carried out various cooperative reforms towards the digital era that aims to improve corporate governance. So far, there is limited information regarding the results of some previous studies. The purpose of this study is to determine the effect of cooperative reform towards the digital era on corporate governance. This study adopted a correlational research design. The research sample is 100 cooperative members taken in January 2022. The constant in the research case is 0.184 and beta1 = 0.698, F is reform in the field of cooperatives and e is the standard error. Therefore, reforms in the cooperative sector affect Corporate Governance because the value of beta1 = 0.698≠0.. Descriptive and inferential statistics are used. The hypothesis was tested using a simple regression coefficient at a confidence level of 90%. This study reveals that cooperative reform has a significant effect on Corporate Governance. The study recommends that cooperatives should determine how to fully adopt reforms. The findings of this study can help scholars and policy makers to understand and formulate policies on reform.

Building a corporate governance index (JCGI) for an emerging market: case of Jordan

A comprehensive corporate governance index (JCGI, 0–100) is constructed to measure the quality of corporate governance practices of the universe of publicly traded Jordanian firms during 2018–2019. We survey all firms' corporate governance practices and manually collect governance data for listed corporations in Amman Stock Exchange to construct the first JCGI, which comprises five sub-indices and 60 elements.The results show that Jordanian companies did not progress in the corporate governance reform during the study period. The overall JCGI mean value is 67.80%. Sub-index results show that governance is weakest in both board procedure and disclosure, with a mean value of 57.36% and 52.43%, respectively. The board procedure subindex shows that most listed firms practice poor governance. Within the board structure sub-index, only 18% of the study sample has the policy to specify the board's professional qualifications and training requirements. Results of shareholders' rights show a rigid and nontransparent environment in the enterprises' control structure.

Corporate governance reform in Nigeria: upstream and downstream interventions

PurposeInternal (e.g. firm performance, internal stakeholders) and external pressures (e.g. globalisation, technology, corporate scandals) have intensified calls for corporate governance reforms across varieties of capitalism. Yet, corporate governance practices among developing economies remain problematic. Drawing insights from Africa’s largest economy (Nigeria) and relying on the resource dependence theorisation, this study aims to address two questions – what are the prerequisites for effective reforms; and what reforms yield robust corporate governance?Design/methodology/approachThis study adopts a qualitative methodology comprising semi-structured interviews with 21 executives in publicly listed Nigerian firms. The interviews were analysed using the content analysis technique.FindingsThis study proposes two sequential reforms (i.e. the upstream and downstream). The upstream factors highlight the preconditions that support corporate governance reforms, i.e. government commitment and enabling environment, while the downstream reforms combine elements of awareness and regulation to proffer robust corporate governance interventions.Originality/valueThis research further stresses the need to consider a bottom-up approach to corporate governance in place of the dominant top-down strategy. This strategy allows agents to participate actively in corporate governance policy-making rather than a top-down model, which imposes corporate governance on agents.

Yes Bank: A Saga of Corporate Governance Conundrum

India’s fifth largest private sector moneylender, YES Bank, was put on moratorium on 5th March, 2020. It was in the midst of a crisis as the Reserve Bank of India (RBI) had taken over its affairs and placed strict limits on its operations. Such a value deterioration because of governance failure and the consequent erosion of investors trust or confidence shows that corporate governance standards remain weak in India and calls for immediate renovation. The present study attempts to review corporate governance reforms in India through a survey of existing research, identifying issues which are not being sufficiently addressed in the existing corporate governance framework of Yes Bank and exemplify the key takeaways to prevent such instances in the future. Lastly, the study suggests some suitable measures to draw the attention of concerned authorities in order to make corporate governance reforms more effective in India.