Elements Of Corporate Governance Research Articles

The significance of R&D reporting as an element of corporate governance: normative implications and empirical evidence from Germany

Investment activity in research and development (R&D) represents a central component of a company policy directed toward shareholder value maximation. This article discusses business reporting about the corporate R&D activity, in which in addition to the depiction in the (consolidated) balance sheet the authors concentrate on the management reporting. As a result of the restrictions on recording R&D expenditures in the balance sheet according to the German law (“Handelsgesetzbuch” (HGB)) and the International Financial Reporting Standards (IFRS), (consolidated) management reporting as the information interface between financial accounting and voluntary value reporting takes on a key position in corporate governance.

Preface[: New Corporate Governance

This preface introduces papers which present an integrated corporate governance framework, called 'New Corporate Governance' (Hilb, 2008), which is based on the following four recommendations: 'Keep it 1 situational 2 strategic 3 integrated 4 controlled'. This holistic framework for the direction and control of enterprises tries to integrate formerly isolated elements of corporate governance in research, teaching and practice. integrates the interests of shareholders, customers, employees and the public.

The challenge of effective governance: the case of Swiss Air

PurposeThe purpose of this paper is to address corporate governance structures. Effective corporate governance can lead to managerial excellence but managerial ethical excellence does not always exist without effective corporate governance. Embedded in both effective corporate governance and managerial excellence is the “rightness of decisions” or the ethical decision making process. This paper analyzes this key process in the case of the failure of Swissair.Design/methodology/approachThe authors examine the key corporate governance structure through an explanatory case analysis of Swissair. They look at the structure by applying institutional theory rather than agency theory. It is hypothesized that corporate governance structures must comply with the norms generated by various stakeholders as well as economic incentives. No one set of norms may dominate the compliance; otherwise a corporation loses legitimacy and resources. It is contended that this lack of compliance of all stakeholder norms led to the failure of Swissair.FindingsThe authors examined the strategies for governance in Swissair leading up to its failure. Critical examination of the various elements of effective corporate governance results in a model presented here for assimilating appropriate norms of behavior into the corporate decision‐making process. They purport that adoption of the model by corporations will improve decision making leading to improved survival and performance.Originality/valueThe case analysis provides for the development of a model of corporate governance which includes consideration of all facets of society, its stakeholders and the norms the stakeholders generate. It is contended that companies must consider ethical, social and political norms of behavior in corporate governance structures as well as economic concerns.

Corporate Governance, the Timeliness of Financial Reporting and the Russian Banking System: An Empirical Study

Transparency is one of those terms that have many facets. It is used in different ways. It can refer to the openness of governmental functions. It can refer to a country's economy. Or it can refer to various aspects of corporate governance and financial reporting. The OECD (1998) lists transparency as one element of good corporate governance. Kulzick (2004) and others (Blanchet, 2002; Prickett, 2002) view transparency from a user perspective. According to their view, transparency includes the following eight concepts: accuracy, consistency, appropriateness, completeness, clarity, timeliness, convenience, and governance and enforcement. This paper focuses on just one aspect of transparency - timeliness. The International Accounting Standards Board considers timeliness to be an essential aspect of financial reporting. In APB Statement No. 4, the Accounting Principles Board (1970) in the USA listed timeliness as one of the qualitative objectives of financial reporting disclosure. APB Statement No. 4 was later superseded but the Financial Accounting Standards Board continued to recognize the importance of timeliness in its Concepts Statement No. 2 (1980). The U.S. Securities and Exchange Commission also recognizes the importance of timeliness and requires that listed companies file their annual 10-K reports by a certain deadline. The issue of timeliness has several facets. There is an inverse relationship between the quality of financial information and the timeliness with which it is reported (Kenley & Staubus, 1974). Accounting information becomes less relevant with the passage of time (Atiase, Bamber & Tse, 1989; Hendriksen & van Breeda, 1992; Lawrence & Glover, 1998).

Effect of regulatory oversight on the association between internal governance characteristics and audit fees

AbstractWe examine the relationship between internal governance, external audit monitoring and regulatory oversight for a sample comprising industrial companies and financial/utility companies subject to additional industry‐specific regulation. Our results indicate that the association between audit fees and board/audit committee independence and size are weaker for regulated companies. These observations are consistent with the notion that regulatory oversight partially substitutes the external audit as a monitoring mechanism. However, boards/audit committees with more multiple directorships demand a more extensive audit in the presence of regulatory oversight to protect their reputation capital. Our study enhances our understanding of the complex relationships among the major corporate governance elements.

Corporate Governance and Incentive Contracts: Historical Evidence from a Legal Reform

This paper proposes to exploit a reform in legal rules of corporate governance to identify contractual incentives from the correlation of executive pay and firm performance. In particular, we refer to a major shift in the legal and institutional environment, the reform of the German joint-stock companies act in 1884. We analyze a sample of executive pay for 46 firms for the years 1870 to 1911. In 1884, a law reform substantially enhanced corporate control, strengthened the monitoring incentives of shareholders, and reduced the discretionary power of executives in Germany. Pay-performance sensitivity decreased significantly after this reform. While executives received a bonus of about three to five per cent in profits before 1884, after the reform this parameter decreased to a profit share of about two per cent. At least the profit share that is eliminated by the reform must have been incentive pay before. This incentive mechanism was replaced by other elements of corporate governance.

The emerging market for European corporate governance: the relationship between governance and capital expenditures, 1997-2005

We examine European corporate governance with respect to the relationship between shareholder value and capital investment. Based upon Europe’s largest listed companies, it is shown that Anglo-American conceptions of shareholder value are increasingly important for European firms whatever their home jurisdictions and inherited traditions. Using annual capital expenditures (CAPEX) as a proxy for corporate managers’ commitment to shareholder value, it is shown, contra arguments to the effect that the map of European corporate governance regimes is fixed and virtually immutable, even large firms from paradigmatic stakeholder regimes believed focused upon long-term value increasingly act to maximize short-term shareholder value. We divide Europe into three regions based on ownership concentration, legal systems, board structures and the presence of corporate governance codes. In this multi-jurisdictional setting, we compare the effects of different elements of corporate governance on CAPEX in each region. Our analysis shows that the overall effect of investor-sensitive corporate governance on CAPEX is consistently negative notwithstanding differences in the formal nature and quality of governance standards between regions. We explain this finding by reference to the governance standards of the United Kingdom: a market for corporate governance that has come to dominate its continental European neighbours.

Governance factors affecting internal auditors' ethical decision‐making

PurposeThe purpose of this paper is to explore the ethical decision making of internal auditors and the impact of corporate governance mechanisms thereon. It also aims to explore whether ethical decision making is influenced by years of experience in internal auditing.Design/methodology/approachA total of 66 internal auditors were presented with five ethical dilemmas. For each scenario, a key element of corporate governance was manipulated to assess its impact on ethical decision making. These were audit committee support; management integrity regarding accounting policies; management integrity regarding pressure on internal audit; external auditor characteristics; and organisational code of conduct.FindingsParticipants were generally sensitive to ethical dilemmas but were not always confident that their peers would act ethically. A higher quality external audit function was positively associated with internal auditors' ethical decision making. However, the strength of other governance mechanisms did not appear to influence ethical decision making. Finally, more experienced internal auditors adopted a more ethical stance in some cases.Research limitations/implicationsThe sample was self‐selected and may not be representative of internal auditors in general. The lack of significant results may be due to insufficient variability in the manipulations and/or an oversimplification of reality in our scenarios.Practical implicationsThe study has implications for the internal audit profession with respect to training and the provision of support mechanisms to strengthen the ability of internal auditors to withstand pressure when dealing with ethical dilemmas.Originality/valueThis paper is the first to study whether the strength of other governance mechanisms influences internal auditors' ethical decision making.

Corporate governance as a critical element for driving excellence in corporate social responsibility

PurposeThe purpose of this paper is to enhance understanding of corporate governance (CG) in delivering excellence in corporate social responsibility (CSR).Design/methodology/approachThe paper demonstrates models of CG and the associated elements affecting CSR. It addresses the integration of CSR into management systems through a framework as a process‐based management system and studies the role of leadership style for socially responsible organizations. The paper develops a comprehensive questionnaire that enables organizations to audit their commitment to environment and social responsibility.FindingsThe paper reflects that CG encompasses different internal and external factors, by which management of organizations are influenced. This is also compatible with the new corporate community models, in which investors, the public, customers, employees and associated corporations have a mutual impact on management. The leadership style is also found to play an important role in socially responsible organizations. In this respect, transformational leader seems to be more effective, compared with manager and transactional leader. The paper suggests that organizations should audit their CG capabilities towards CSR, based on a proposed questionnaire in order to drive excellence in CSR.Originality/valueThe paper provides a comprehensive study to help understand key elements of CG and CSR and proposes a new questionnaire to organizations for assessing how far they are able to move towards socially responsible organizations.

Internet Financial Reporting: Disclosure about Companies on Websites

The Internet has emerged as a medium of communication of financial reporting information by companies since the mid to late nineties. There are various aspects of Internet based financial reporting that are different from the traditional hard copy presentation. These factors include the actual mode of presentation and, the process of access to the information, that is accessing a company’s website rather then the hard copy version of the financial reports. Various bodies mentioned in this paper have made recommendations to improve financial reporting disclosure online. There is lack of uniformity regarding financial reporting disclosure between companies world wide. This is in relation to various aspects of financial reporting. The three aspects of financial reporting disclosure investigated in this paper include: Fundamental reporting elements, Corporate Social Responsibility reporting elements and Corporate Governance elements. Four samples of companies were selected for comparison regarding financial reporting disclosure. These include: diversified companies, hotels, companies listed on the London and the New York Stock exchanges. It was found that 31 percent of the sample companies did not have a website. The diversified companies had the highest percentage of financial reports on their websites, with the hotels having the least presence of financial reports on their websites. The companies listed on the London Stock exchange had more financial reports available on their websites as compared to the ones listed on the New York Stock Exchange. The item that was least disclosed was the Analysts' Coverage item. Twenty percent of the sample companies with financial reports did not have accompanying audit reports. This is a cause for concern because all companies are required to have audit reports with their annual financial reports under national and international regulatory requirements. Out of the financial statements, the least disclosed statement was the Shareholder's Equity statement. It was found that the disclosure was varied from none to adequate but not 100 percent complete in regards to the three types of financial reporting disclosure mentioned above. It was also found that most companies were not following the best practice guidelines as recommended by various national and international bodied therefore having a negative impact on the implementation of the fundamental qualitative characteristics of accounting information being reliability, understandiblity, completeness, timeliness and verifiability of information. It is important for companies world wide to adopt a uniform approach to financial reporting on the Internet in order to make decision making by users a more informed process.

How “winning” boards contribute to corporate growth

PurposeThis article summarizes findings relating to the conduct of directors and boards from a continuing investigation into why some companies are so much more effective than others at key activities such as business development, building relationships and creating and exploiting know‐how.Design/methodology/approachThe research program ranks companies in terms of the outcomes they achieve in the areas examined and compares the most and least effective to isolate critical success factors and distinguish between successful/winning and unsuccessful/losing approaches.FindingsThe findings of the investigation suggest the performance of many companies depends primarily upon what their boards actually do and how their members behave rather than formal governance considerations such as a board's committee structure.Practical implicationsEffective boards adopt particular approaches and can behave very differently from their less successful peers, for example when communicating with various groups of stakeholders. Many boards would make a more significant contribution to the growth and development of their companies if they understood and adopted the approaches of more effective boards. A key element of good corporate governance is to achieve an appropriate balance between a number of critical factors, for example performance today and the capability to compete and win in the future.Originality/valueIn comparison with what could be achieved if more “winning approaches” were adopted many boards are failing to deliver and could do much better. Many appear to be rubber‐stamping rather than shaping things to come, picking over the past rather than creating the future.

Ethical and Compliance‐Competence Evaluation: a key element of sound corporate governance

Motivated by the ongoing post‐Enron refocusing on corporate governance and the shift by the Financial Services Authority (FSA) in the UK to promoting compliance‐competence within the financial services sector, this paper demonstrates how template analysis can be used as a tool for evaluating compliance‐competence. Focusing on the ethical dimension of compliance‐competence, we illustrate how this can be subjectively appraised. We propose that this evaluation technique could be utilised as a starting point in informing senior management of corporate governance issues and be used to monitor and demonstrate key compliance and ethical aspects of an institution to external stakeholders and regulators.

The Emerging Market for European Corporate Governance: The Relationship between Governance and Capital Expenditures, 1997-2005

We examine European corporate governance with respect to the relationship between shareholder value and capital investment. Based upon Europe's largest listed companies, it is shown that Anglo-American conceptions of shareholder value are increasingly important for European firms whatever their home jurisdictions and inherited traditions. Using annual capital expenditures as a proxy for corporate managers' commitment to shareholder value it is shown contra arguments to the effect that the map of European corporate governance regimes is fixed and virtually immutable, even large firms from paradigmatic stakeholder regimes believed focused upon long-term value increasingly act to maximise short-term shareholder value. We divide Europe into three regions based on ownership concentration, legal systems, board structures, and the presence of corporate governance codes. In this multi-jurisdictional setting, we compare the effects of different elements of corporate governance on capital expenditures in each region. Our analysis shows that the overall effect of investor-sensitive corporate governance on capital expenditures is consistently negative notwithstanding differences in the formal nature and quality of governance standards between regions. We explain this finding by reference to the governance standards of United Kingdom: a market for corporate governance that has come to dominate its continental European neighbours.

Developments in corporate governance in Finland

The recent years have seen many reforms in corporate governance and disclosure in the USA as well as in Europe — so also in Finland. Although the reforms in Europe mostly are based on voluntary corporate governance codes rather than laws such as the Sarbanes–Oxley Act 2002, these developments have in many cases quite radically reshaped elements of corporate governance, such as board work, in Finland. This paper sets out to give an overview of the governance framework in Finland, its recent developments, and reports on some empirical findings concerning governance and compliance.

Striking a Balance Between Rules and Principles-based Approaches for Effective Governance: A Risks-based Approach

Several recent studies and initiatives have emphasized the importance of a strong ethical organizational DNA (ODNA) to create and promote an effective corporate governance culture of trust, integrity and intellectual honesty. This paper highlights the drawbacks of an excessively heavy reliance on rules-based approaches that increase the cost of doing business, overshadow essential elements of good corporate governance, create a culture of dependency, and can result in legal absolutism. The paper makes the case that the way forward for effective corporate governance is to strike an optimal balance between rules-based and principles-based approaches. The recent corporate scandals have demonstrated that the ethical ODNA is critical to the driving force and basis of legal and regulatory requirements. Effective governance means adhering to ethical principles, not merely complying with rules, and is a crucial guardian of a firm’s reputation and integrity. It is through an effective corporate governance program (that is, one that optimally captures and integrates the appropriate aspects of rules-based and principles-based approaches, and identifies and assesses the related risks) that an organization can reconfigure its ODNA for improved performance. Focusing on the ethical ODNA as the basis of new governance measures provides an opportunity to develop a competitive advantage as it represents a potential source of differentiation, strengthens the relationship with all stakeholders of the organization by building a culture of trust and integrity, and re-instills investor confidence. This paper employs dialectical reasoning that links the ODNA through principles-driven rules in developing a risks-based approach. A comparison from a risk assessment perspective between rules-based and principles-based approaches is presented. Although there have been few applications employing dialectical reasoning in business research, this methodology can be extremely useful in isolating ethical issues and integrating them into the business process. The risks-based approach captures the benefits of both rules-based and principles-based approaches, and incorporates trust-based principles such␣as solidarity, subsidiarity and covenantal relationships.

Corporate Governance Determinants: The Firm-Level Evidence from Transitional Country, Ukraine

This paper attempts to empirically investigate the determinants of choices of corporate governance practices by corporations in a transition market. The study offers firm-level evidence benefiting from unique financial and governance data on Ukraine. In particular, we analyze the factors that affect overall level as well as individual elements of corporate governance. We consider such governance elements as shareholder rights, transparency, board independence, chairman independence and ownership. Overall we found that regulatory, industry and firm level factors are important, which is consistent with previous literature for other countries.

CLASS: Five elements of corporate governance to manage strategic risk

Strategic risk management is an increasing concern for both boards and senior executives. Many recent business failures are due to senior level misjudgement and mismanagement of risk, the consequences of which can range from embarrassment to serious setback to bankruptcy. Ineffective risk management puts otherwise strong business models in jeopardy. Here we present CLASS (Culture, Leadership, Alignment, Systems, and Structure), an integrated, five-element model of corporate governance. We identify how attending to the elements in this framework supports development of an integrated and robust approach to corporate risk, and helps senior executives anticipate and handle the complexities of risk inherent in meeting strategic objectives.

Does Corporate Governance Causally Predict Firm Performance? Panel Data and Instrumental Variables Evidence

This study investigates the impact of overall level as well as of separate elements of corporate governance on enterprise performance for open joint-stock companies (OJSC) in transitional country, Ukraine. We use unique data on corporate governance choices for above 5 thousand firms (about a universe of OJSCs in Ukraine) for three years from 2000 to 2002. We construct overall index of corporate governance (UCGI) and sub-indices of corporate governance describing such aspects of corporate governance as shareholder rights, transparency/information disclosure, board independence and chairman independence. We use two different sets of instrumental variables to deal with econometrics problems. First, we use regional variations in social trust factors to instrument for corporate governance choices in cross-sectional framework. Our instruments include political diversity, religion (number of Christian churches) and ethnic diversity across 24 regions in Ukraine. We thoroughly discuss the plausibility of our instruments in a separate section. The hypothesis that our instruments are weak is rejected based on critical values of Stock-Yogo test and thus we use two-stage least squares (2SLS) estimator, and two-stage generalized method of moments (2SGMM) estimator to account for arbitrary heteroskedasticity. Additionally we use time-invariant variables plus time-varying religion variable as instruments after first-differencing transformation. Since in this case we are not able to reject the hypothesis that our instruments are weak we employ also limited-information maximum likelihood estimator (LIML) and testing procedures that are robust to the presence of weak instruments. We find strong evidence that corporate governance predicts firm performance in the transition context. We could not reject the null that UCGI is exogenous in various cross-sectional specifications but we document presence of endogeneity when first differencing estimator employed. Our results predict that one-point-increase in our UCGI index would result in around 0.4-1.9% increase in performance; and based on HOLS results worst to best change in UCGI predicts about 40% increase in company's performance. Additionally we document nonlinear effect of corporate governance suggesting that companies with lower then average level of governance incur losses from an incremental improvement in their governance while those with higher then average level of governance enjoy excessive improvement from that in their performance. We document statistically and economically strong effects of shareholder rights, transparency and board independence on performance. We also find a negative effect of the independence of the board chairman on performance.

Corporate governance of German growth companies. Empirical analysis of the corporate governance quality and the structure of supervisory boards of companies listed on TEC-DAX

This article analyses the importance of corporate governance for growth companies, derives specific requirements for them and evaluates the corporate governance quality for companies listed on TecDax. Growth companies’ characteristics imply a comparatively high importance of corporate governance due to a high level of business and agency risk. Several corporate governance elements are therefore particularly important for growth companies. Overall, the empirical results imply a high conformity of the Tec-Dax companies with the GCGC criteria with some exceptions for specific companies and criteria. But the analysis of the quality of their supervisory boards delivers a differentiated result as in some of the analysed companies the effectiveness of the supervisory board is questionable.

Australia: Financial Sector Assessment Program - Technical Note: Investor Protection, Disclosure, and Financial Literacy

This study reviews selected issues on investor protection and corporate governance in Australia, and concludes that the corporate governance framework for Australian-listed companies is largely healthy and dynamic. Shareholder activism is an important element of corporate governance because it promotes compliance and implementation of disclosure and corporate governance obligations. The legislative and regulatory framework in Australia includes disclosure requirements that meet or exceed the requirements that exist in many other countries. Disclosure and transparency are key components of the OECD Principles of Corporate Governance.