Corporate Governance Process Research Articles

Hurly-Berle – Corporate Governance, Commercial Profits, and Democratic Deficits

The financial crisis over the last couple of years has exacted a heavy toll. Large corporations have gone to the wall, banks have needed to be bailed out, and whole national economies have collapsed. Amidst this mayhem, schemes of corporate governance have come under close scrutiny. Punishing inquiries have been made about their role and performance in contributing to or failing to avert the crisis. As allegations of greed, incompetence and irresponsibility by corporate bigwigs have abounded, many have asked whether the structures and process of corporate governance have been equal to their supposed task of shaping and controlling corporate activities. Indeed, the debate about the validity of the whole approach to corporate governance has become an organizational bell-weather in efforts to diagnose and remedy the ills of the financial crisis. In this essay, I want to make a distinctive contribution to that debate. On the basis that no crisis should be wasted, I propose that substantial and substantive changes are required in prevailing ways of thinking about and implementing corporate governance. Contrary to the views of many commentators, I maintain that it is the whole nature of what counts as ‘good corporate governance’ that must be re-thought and re-constructed from the conceptual ground up. In order to inform and accomplish this goal, I will move beyond the traditional evaluative focus of economic success and instead look to a more inclusive and democratic standard of social well-being. Drawing upon an expansive understanding of the role of corporations in modern society and its recent crises, it will suggest ways in which the performance of corporations can be appreciated and assessed in terms of both economic and social improvement. The essay is based upon and devoted to offering a re-visioning of Berle and Means’ The Modern Corporation and Private Property.

Cost efficiency of selected transport companies of the Czech Republic – an application of data envelopment analysis

The paper analyses the total cost efficiency of selected transport companies of the Czech Republic by means of data envelopment analysis (DEA). This method with using information on input prices and nature of returns to scale provides a detailed insight into the structure of potential inefficiency of analyzed companies. Conclusions of the analysis in the identification of types of inefficiency of individual companies may be beneficial both for the business itself in terms of their orientation to the future, as well as in terms of emphasizing the role of DEA as an important tool in decision-making process of corporate governance.

An exploratory study of governance in the intra‐firm human resources supply chain

AbstractThe human resource management (HRM) literature has paid insufficient attention to supply chain management (SCM) when exploring the architecture of human resources (HR). Drawing on an SCM perspective, this study develops our understanding of (1) the intra‐firm HR supply chain, and (2) how this HR supply chain influences corporate governance processes within large organizations. We argue that the HR function, represented as an internal professional service supply chain, needs appropriate governance principles as it operates through multiple delivery channels and with a wide variety of HRM practices. Exploratory findings from a qualitative empirical study of seven large organizations investigating governance and risk management in the HR supply chain are presented. These in‐depth interviews uncover how formal governance is relatively easy for these organizations to achieve, supported by outcome‐focused monitoring tools, but informal governance mechanisms can fail due to insufficient attention. Although standardized approaches to HR delivery can maximize the opportunity for HR governance, little evidence was found that the organizations were considering the related governance implications explicitly. © 2010 Wiley Periodicals, Inc.

Performance Implications of Ties to the Government and SOEs: A Political Embeddedness Perspective

abstractIn many countries governments not only regulate business activities, but also become involved in the corporate governance of individual firms through ownership and board ties. While existing studies usually focus either on benefits of political connections or on costs of government influence, a political embeddedness perspective helps us consider both advantages and constraints associated with ties to the government. In particular, firms with direct ties to the government will experience significant costs associated with government officials' involvement in the corporate governance process. In contrast, firms with ties to state‐owned enterprises (SOEs) are connected to the government indirectly and thus, while getting access to state‐owned resources, avoid costs associated with the government's interventions. This study compares the performance consequences of board and ownership ties to the government with the consequences of board and ownership ties to SOEs. I find that ties to SOEs are associated with higher profitability, while no significant differences are discovered for firms with direct ties to the government.

THE INFLUENCE OF INDIVIDUAL RANK AND WORKING EXPERIENCE ON PROFESSIONALISM OF INTERNAL AUDITOR (Study on Internal Auditors of Public Corporation at Manufacturing Sector Listed in The Jakarta Stock Exchange)

One of the causes of economic crisis and failure experienced by a number of Indonesian companies is the corporate governance. If the internal audit can be properly implemented, it will contribute to improving the process of corporate governance, risk management, and management control. This research attempts to obtain empirical evidence and better understanding concerning: (1) ) the correlation between individual rank with working experience in manufacturing sector listed at the JSX; (2) the influence of individual rank and working experience on the internal auditors’ professionalism of public companies in manufacturing sector listed at the JSX either partially and simultaneously. The type of research employed in this study is causal relationship by using the census method for 120 internal auditors of public companies in manufacturing sector at the JSX. The data this study consist of both primary and secondary data. Reliability and validity tests were conducted to examine the questionnaires. SEM (Structural Equation Modeling) is used to examine the correlation as well as the effect of the variable. It was found that (1) there is correlation between individual rank and internal auditors’ working experience and between internal auditors’ working experience (R2 =0.52); (2) individual rank and working experience partially influence the internal auditors’ professionalism for with the levels of influence are 6%, and 20% respectively, whilst their simultaneous effect is 30%.

Corporate Governance of Australian Banking: A Lesson in Law Reform or Good Fortune?

The Great Financial Crisis (GFC) highlighted faults within the style of corporate governance and regulatory regimes of both financial and non financial institutions globally. Although the GFC could be summed up as the mismatch between risk and valuation, it also mirrors corporate governance issues.It is unlikely that the GFC would have occurred had it not been a systematic break down of appropriate corporate governance processes necessary to check and balance risk taking, the reward and remunerate of managers.In short, the system of accountability transparency became distorted and dominated by a culture and process of remuneration, driven on managerial not corporate stakeholder objectives.The very reason why corporate governance is a fundamental component of the law is to regulate managers since they are rarely the owners of the body corporate. Since the 1980s the rise of the cult of the manager has emerged to such an extent that in will be argued, government bailout of financial institutions was drive by and for the benefit of the managers whilst the owners carried the loss.One possible exception is the relative health of Australian Authorised Deposit Taking Institutions (ADI). The regulation of Australian ADIs is well beyond capital and liquidity requirements; it is increasingly viewed as a model to drive a better corporate governance culture more attune to value adding and risk management. The Australian model tempered the rise and dominance of management culture with as couture of risk mitigation and accountability.The London G20 Conference 2009 examined the role played by Australian Prudential Regulation Authority (APRA) and foreshadowed a range of corporate and securities law reform in line with the existing ADI regulation developed by APRA. The current reform agenda is not new; it is a culmination of the work carried out by APRA since the demise of HIH Limited and flows from the recommendations made by Basel Committee on Banking Supervision (Basel II). Together a unique codified legal regime evolved to regulate virtually every aspect of the banking business. The idea that legal principles govern behaviour has now been overshadowed by a prescriptive legal model which was to determine who was to manage and how they were to manage (govern) the ADI. The result is that Australian ADIs were discouraged from the temptations of their overseas counterparts to engage in high return high risk management driven business model. It was either good design or good fortune which brought about the changes in law and regulation. Perhaps such changes may also have some relevance for the regulation of carbon emission.The theme of the paper is that perhaps the lessons learnt from HIH and the Basel II recommendation has set the stage for the design, accident or good fortune to navigate Australian ADIs out of the global GFC turmoil and to create what is now regarded as a model of corporate governance internationally. A model that may have some relevance in the way the body corporate through the application of a governance model can regulate carbon emissions much like the way it regulates risk.The paper examines how APRA through its delegated legislation and post HIH period had created a regulatory governance regime to address issues such as risk management, transparency, accountability setting policies to strengthen corporate governance culture, codify board duties and succession planning.The paper outlines how this trend now has gained further momentum as it being considered as a model to regulate carbon risk, value and trading. In such a scenario the common law is less equipped to deal with these emerging forces, the time of general principles will be argued, may be destined to legal history as codification and the rise of civil law doctrines emerge as corporate governance beacons championed by the likes of regulators such as APRA. Finally, imposing a corporate governance regime is now standard within the banking sector as the preferred model to manage risk, rather than leaving risk to credit rating agencies and the price mechanism. The same may apply to mitigating carbon emissions by avoiding a purely price mechanism model which in the final analysis may had contributed to the global financial crisis when it came to incorrectly pricing risk and obligations.

Governance Issues for SMEs

This paper draws on research into the corporate governance practices of small and medium enterprises (SMEs) listed on the Australian Securities Exchange. Interviews were conducted with the directors and/or company secretaries of 19 SMEs. The aim of the research was to explore not only SME corporate governance structures and processes but how SMEs had chosen to implement the Principles and the reasons for their choices. The paper addresses the issue of whether the ASX Corporate Governance Principles and Recommendations were appropriate for SMEs. It describes the SME responses to the requirements, how these differ from those of larger companies, and how these differences impact on small companies.

Intangible Assets and Internal Controls in Global Companies

The effectiveness of corporate governance processes on global markets entails the adoption of ramified internal control systems, and the adaptation of the variables that are significant to this end to respond to the evolution of surrounding conditions. Analysis of the changes that have taken place in the main variables on which global companies concentrate their attention and their controls reveals, in particular, a growing need to evolve from the dominance of tangible components to a situation that takes intangible assets into due consideration. We refer to the corporate culture and the information system which represent both elements on which the effectiveness of governance processes is based and factors to be monitored with suitable internal control procedures.

Internal and External Supervisory Mechanisms in Corporate Governance

Internal and External Supervisory Mechanisms in Corporate GovernanceGood corporate governance depends on well balanced relations between supervisory mechanisms in the corporate governance process. Relations between the supervisory board, as the internal supervisory mechanism, and external auditing, as the external supervisory mechanism, are crucial for the development of good corporate governance practice. This paper focuses on analyzing the relationship between the supervisory board and external auditing in order to determine the current state of that relationship in the Republic of Croatia and to determine possible guidelines for improving the relationship between the supervisory board and external auditing in practice. In addition, this study analyzes the relationship between the supervisory board and external auditing, which could lead to the maximum efficiency of both the supervisory board and external auditing and tests that relationship in practice using publicly traded companies in Croatia. This study also analyzes the impact of the audit committee on the efficiency of the supervisory board and external auditing.

Has the QFII Scheme Strengthened Corporate Governance in China?

Introduction Corporate governance in China has had a difficult journey since economy opened up in late 70s and made gradual transition from a centrally planned economy to a market economy. In 90s, establishment of Shanghai and Shenzhen stock exchanges and promulgation of Companies Law, corporate governance came into vogue. Then, following Asian Financial Crisis in 1997/98, corporate governance assumed greater importance. The China Securities Regulatory Commission (CSRC) is main regulatory body for listed entities and it was set up in 1992. Over last 17 years, it has attempted to institute good corporate governance including transparency, information disclosure, protection of minority shareholders' interests and rules for appointment of independent directors. In an attempt to improve corporate governance in China's listed companies, CSRC established Qualified Foreign Institutional Investor (QFII) scheme reasoning presence of institutional investors on register of shareholders would help improve corporate governance in Chinese companies they invest in. This article seeks to answer whether QFII scheme has in fact strengthened corporate governance in Chinese listed entities. The Qualified Foreign Institutional Investor (QFII) Scheme The QFII scheme was conceived by CSRC and modelled after QFII scheme adopted by Taiwan in 1991.1 Improved corporate governance was a major objective. According to Ferguson and McGuinness, the QFII scheme carries tremendous potential as a vehicle for raising corporate governance standards. (2) Steven Yeo states with advent of institutional investors in PRC market, their more robust due diligence and investment disciplines, it is anticipated QFII Measures will further encourage greater transparency and improve compliance and corporate governance process of A share companies.... (3) Fred Hu opines the participation of global investors in China's domestic securities market has introduced professional funds management expertise and provided a new advocate for improving corporate governance.... (4) This view was further echoed by Richard Ward, Chairman of UBS Warburg who remarked on 26 November 2002 that QFII will be an important stimulus for improving corporate governance in China because increasingly Mainland companies will be benchmarked against their international peers. (5) It was hope of CSRC QFII scheme would contribute to better corporate governance. The Director General of CSRC stated at a seminar in Hong Kong on 8 November 2002 promulgation of QFII scheme, foreign institutional investors would be able to play a positive role in improving corporate governance in China. It was presumed by CSRC QFII participants, all of whom would be from countries well regulated financial systems, would require sound corporate governance in their target companies to justify their long term investment horizons. This article seeks to ascertain what areas of corporate governance were impacted after some five years of operations. Specifically, how did QFIIs impact shareholders, management, board of directors and market discipline? The QFII Scheme--Rules and Regulations The legal basis for QFII scheme is laid out in Provisional Measure on Domestic Securities Investments by Qualified Foreign Institutional Investors--Decree No. 12 of 5 November 2002. The objectives as stated in Article 1 are twofold: (6) (i) To govern Qualified Foreign Institutional Investors' investments in China's securities market (7) and (ii) To promote development of China's securities market (8) What can QFII invest in? Article 18 of Measure states QFII can invest in following RMB financial instruments: (i) Shares listed in China's stock exchanges (excluding B shares) (ii) Treasuries listed in China's stock exchanges (iii) Convertible bonds and enterprise bonds listed in China's stock exchanges and (iv) Other financial instruments as approved by CSRC Conditions of Scheme The rules are very clear. …

THE SEC, CORPORATE GOVERNANCE AND SHAREHOLDER ACCESS TO THE BOARD ROOM

In the shareholder governance area, one of the most contentious issues concerns the right of shareholders to nominate directors and include the nominees in management's proxy statement. This article examines the conflict in the context of the growing importance of independent directors. State law and the Securities and Exchange Commission (SEC) have increasingly relied upon independent directors to protect shareholders and ensure the integrity of the financial disclosure process. Yet because of weak definitions and problems of enforcement, these directors are often not truly independent. One method of addressing these concerns is to allow shareholders to nominate and elect their own candidates. They have the power to nominate under state law but the authority has largely been emasculated by the need to solicit proxies, an expensive and time consuming process. The SEC has from time to time sought, always unsuccessfully, to amend the rules to allow shareholders some access to the company's proxy statement for their nominees, with the first effort taking place in 1942. The article contains a comprehensive analysis of these efforts, including the most recent iteration in 2007 when the Commission reaffirmed its traditional position that shareholders should not have access to the company's proxy statement for nominees. The article takes the position that in an era of activist shareholders, pressure on the SEC to reform its rules will continue to grow. Moreover, continued denial of access will make things worse, leading to efforts by activist shareholders that are more intrusive and more likely to result in contests for the board of directors. The denial of access also leaves in place a serious gap in the disclosure regime for proxy contests. Finally, as the SEC becomes increasingly involved in the corporate governance process, a role it has not historically had to consider, the denial of access raises questions about the agency's willingness to protect the interests of shareholders.

Coercion, copy-cats, and colleagues: staffing the board of the IPO company

122 initial public offerings (IPOs) occurring on the Stockholm Stock Exchange from January 1996 until September 2006 have been examined to assess the impact of institutional isomorphism on the selection of directors for boards facing the transition to listed companies. A high level of union representation as well as the restructuring of boards prior to an IPO and in anticipation of legal changes gives strong support for the influence of coercive isomorphism on IPO firms. Companies within industry sectors make similar choices with regard to their directors, their choices being dissimilar from their associates in other industry groupings. This supports the concepts underlying mimetic isomorphism. Finally normative isomorphism is largely supported by the reliance of corporations on a closed group of directors with similar educational backgrounds. All in all, societal and regulatory pressures, as modelled under institutional theory, are influencing the processes of corporate governance during an IPO

Controllership institutionalisation process of corporate governance in Brazilian companies

The aim of the article was thus to verify how the Controllership institutionalization process takes place in corporate governance companies in Santa Catarina State – Brazil. Research was carried out by means of a multi-case study with a qualitative approach. Five companies were selected, but four answered the questionnaire, all listed in Bovespa’s corporate governance. The research found only one company underwent a restructuring process in controllership. In this, the institutionalization process involved the system and sub-systems used in the company, encompassing every task and practice. The institutionalization of controllership assured the implementations, controls, performance, goals and levels of commitment of those involved.

A contingency theory perspective on the risk management control system within Birmingham City Council

In recent years the topic of risk management has moved up the agenda of both government and industry, and private sector initiatives to improve risk and internal control systems have been mirrored by similar promptings for change in the public sector. Both regulators and practitioners now view risk management as an integral part of the process of corporate governance, and an aid to the achievement of strategic objectives. The paper uses case study material on the risk management control system at Birmingham City Council to extend existing theory by developing a contingency theory for the public sector. The case demonstrates that whilst the structure of the control system fits a generic model, the operational details indicate that controls are contingent upon three core variables—central government policies, information and communication technology and organisational size. All three contingent variables are suitable for testing the theory across the broader public sector arena.

Corporate governance: what about the workers?

PurposeTo stimulate debates about the creation of corporate governance mechanisms and processes which would help to secure an equitable distribution of income and wealth for workers.Design/methodology/approachThe paper builds on a political economy of income and wealth inequalities. It argues that corporate governance mechanisms and processes are rooted in particular politics and histories. The state is a key actor. It provides a brief history of the UK corporate governance debates relating to income distribution, industrial democracy and disclosures. It provides social data about the extent of income inequalities.FindingsThe paper shows that the UK lacks institutional structures and processes and mechanisms to enable workers to secure a higher share of the firm's income.Research limitations/implicationsThe study primarily focuses on some aspects of the corporate governance structures, practices and income/wealth inequalities in the UK. Its implications could also be relevant to market‐oriented liberal states with “consensus” or “majoritarian” electoral systems.Practical implicationsTo encourage debates, the paper puts forward a number of suggestions for changing electoral and corporate governance practices together with disclosures that could give visibility to income and wealth inequalities.Originality/valueThe paper links corporate governance debates to broader political choices.

Bonus Contracts, Private Information and CEO Turnover

In this paper, we address the question whether performance measures that are specified in annual bonus contracts represent overall performance dimensions used by boards of directors in making governance decisions. Recent studies claim that managerial incentives are predominantly provided by equity holdings rather than short-term cash compensation. Given the dominance of equity compensation and the fact that firms invest resources in the design and use of bonus contracts, it is unclear why the vast majority of firms continue to use annual bonus contracts if these would create only minor, or no incentive benefits. We argue that boards of directors use bonus contracts as a channel to ex-ante communicate how performance will be evaluated annually and thus signal the measures relevant for CEO termination decisions, which provides significant incentives. Further, the resulting cash compensation communicates the board's actual performance evaluation of the CEO, which can disclose private information to the capital market. Our empirical results are consistent with these arguments and show that the incentive weight on privately observed performance measures in bonus contracts is systematically related to the importance of these measures for CEO turnover. We further show that the stock market reaction to a management change depends on bonus contract design. We specifically find a positive reaction when boards of directors have signaled to solely use public information in CEO performance evaluation (good news about the board) and a negative reaction when they (also) use private information (bad news about the CEO). Overall, we show that the care taken in designing annual bonus contracts can be explained by its link with governance decisions and indicate that performance measurement issues are an important part of the corporate governance process.

Towards an impartial and effective corporate governance rating system

PurposeThis paper aims to investigate the most popular corporate governance rating systems and to scrutinize their usefulness to shareholders and the public at large. It proposes to examine whether the advertised good governance scores reflect corporate performance, fraud, lawsuits, and the like.Design/methodology/approachThe analysis focused on the methodology used by rating agencies to rank corporate governance practices of companies. Analysis of the categories and variables used in the rating systems were also scrutinized and critiqued.FindingsThis research shows that there is a weak relationship between corporate performance and corporate governance rating. Ideas and suggestions have been proposes to remedy the shortfalls of existing rating systems.Research limitations/implicationsMany researchers use corporate governance scores in their studies to investigate the relationship between these single scores and corporate performance. Potential vulnerability and risk are demonstrated using such kind of methodologies. Research should be accomplished with the corporate governance indicators separately.Practical implicationsSeveral corporate governance ratings systems have been developed and implemented. These systems reduce a complex corporate governance process and related performance into a single score. Such outcome does not in any way reflect the real nature of corporate governance or its performance. Ranking, if it is at all needed, should be interpreted carefully and not be used as a simple measurement of good or bad corporate governance practice.Originality/valueThis paper is the first of its kind to critically evaluate corporate governance systems scores launched by different rating agencies.

The SEC, Corporate Governance, and Shareholder Access to the Board Room

In the shareholder governance area, one of the most contentious issues concerns the right of shareholders to nominate directors and include the nominees in management's proxy statement. This article examines the conflict in the context of the growing importance of independent directors. State law and the Securities and Exchange Commission (SEC) have increasingly relied upon independent directors to protect shareholders and ensure the integrity of the financial disclosure process. Yet because of weak definitions and problems of enforcement, these directors are often not truly independent. One method of addressing these concerns is to allow shareholders to nominate and elect their own candidates. They have the power to nominate under state law but the authority has largely been emasculated by the need to solicit proxies, an expensive and time consuming process. The SEC has from time to time sought, always unsuccessfully, to amend the rules to allow shareholders some access to the company's proxy statement for their nominees, with the first effort taking place in 1942. The article contains a comprehensive analysis of these efforts, including the most recent iteration in 2007 when the Commission reaffirmed its traditional position that shareholders should not have access to the company's proxy statement for nominees. The article takes the position that in an era of activist shareholders, pressure on the SEC to reform its rules will continue to grow. Moreover, continued denial of access will make things worse, leading to efforts by activist shareholders that are more intrusive and more likely to result in contests for the board of directors. The denial of access also leaves in place a serious gap in the disclosure regime for proxy contests. Finally, as the SEC becomes increasingly involved in the corporate governance process, a role it has not historically had to consider, the denial of access raises questions about the agency's willingness to protect the interests of shareholders.

A knowing-in-practice framework for the corporate governance of information systems/technology

This article is motivated by the need felt by today's large globalised organisations to build up and maintain effective integration of processes across functional areas. Information Systems/Information Technology (IS/IT) corporate governance processes are among those that need to be integrated across functional areas. The aim of the article is to build a dynamic capability framework for research and practice of IS/IT corporate governance. The new framework was inspired by the notion of knowing-in-practice and is based on the formation of IS/IT-related competencies within communities of knowing formed by the various stakeholders intervening in the process of IS/IT corporate governance. A matrix formed by the key IS/IT governance stakeholders (top management, IS/IT management and senior line management), four IS/IT managerial processes (clarification, foundation, innovation and organisational change) and three external moderating roles (institutional stakeholders, suppliers of IS/IT products and services, and clients of the company) is put forward as the managerial framework, also suggested as a set of conceptual guidelines for future empirical validation.

Corporate Governance in Emerging Economies: A Review of the Principal–Principal Perspective

abstract Instead of traditional principal–agent conflicts espoused in most research dealing with developed economies, principal–principal conflicts have been identified as a major concern of corporate governance in emerging economies. Principal–principal conflicts between controlling shareholders and minority shareholders result from concentrated ownership, extensive family ownership and control, business group structures, and weak legal protection of minority shareholders. Such principal–principal conflicts alter the dynamics of the corporate governance process and, in turn, require remedies different from those that deal with principal–agent conflicts. This article reviews and synthesizes recent research from strategy, finance, and economics on principal–principal conflicts with an emphasis on their institutional antecedents and organizational consequences. The resulting integration provides a foundation upon which future research can continue to build.