Recent Corporate Governance Reforms Research Articles

Board composition, ownership structure and financial distress: insights from UK FTSE 350

PurposeThis study aims to investigate the possible implications of compliance with corporate governance (CG) provisions, including board composition and ownership structures, on the firm’s likelihood of falling into financial distress.Design/methodology/approachThe study applies a random-effects logistic regression model as a baseline analysis using a sample of 110 FTSE 350 manufacturing companies from 2014 to 2019. This technique is supported by conducting a two-stage Heckman regression model to overcome the potential existence of endogeneity problems.FindingsThe empirical evidence suggests that board composition and ownership structure are heterogeneously associated with financial distress probabilities in that they might have either reduced or increased the financial distress of the sampled firms. Specifically, board independence, board gender diversity, audit committee independence and institutional ownership negatively influence the likelihood of financial distress. In contrast, and consistent with the expectations, ownership concentration is positively attributed to financial distress, while the board size, audit committee size and managerial ownership have insignificant impacts on financial distress.Originality/valueThe study extends the existing body of knowledge by examining the collective effect of board characteristics and ownership structures on firms’ financial distress likelihood among a sample of manufacturing firms within the FTSE 350 index post the 2008 global financial crisis and following the recent CG reforms in the UK during the study period from 2014 to 2019.

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.

Corporate governance mechanisms and R&D intensity in OECD countries

The effect of ownership structure and board structure on risk-taking as calculated by R&D intensity in OECD countries is investigated in this study. Around 2010 and 2019, a panel of 300 businesses from Anglo-American and European countries were used. The relationships are investigated using the ordinary least square multiple regression analysis technique. The findings are robust to alternative measures and endogeneities. The findings suggest that institutional ownership, board size, independent directors, and board diversity all have a negative impact on risk-taking, with Anglo-American countries having a greater impact among Continental European countries. Director ownership, on the other hand, is statistically insignificant, according to the findings. This study contributes to the current corporate governance literature by providing additional evidence on the impact of ownership and board structure on risk-taking in two different cultures. The findings will help OECD regulators and policymakers in assessing the effectiveness of recent corporate governance reforms in preventing management misconduct and scandals.

Introduction to Special Issue on Sustainable Corporate Governance

AbstractPapers in this special issue focus on sustainable corporate governance measures in the aftermath of the financial crisis, and a background environment of increased scepticism over executive pay and corporate behaviour more generally. The authors provide an overview of recent corporate governance reforms, including ‘say‐on‐pay’ and gender‐pay‐gap transparency, and explain how the research papers in the special issue contribute to understanding of corporate governance research and practice in the areas of boards of directors, corporate governance reform and corporate culture and risk‐taking.

Evaluating Abe's Third Arrow: How Significant are Japan's Recent Corporate Governance Reforms?

Structural reform, the “third arrow” of the Abe administration’s policy for revitalizing the Japanese economy, centers on corporate governance reform. In recent years, Japan has adopted a Stewardship Code in the hopes of invigorating institutional investor engagement, a Corporate Governance Code recommending that Japanese firms have at least two independent directors, and amendments to the Companies Act to create a new board structure option, the so-called Company with an Audit and Supervisory Committee. In this essay, I take preliminary, impressionistic stock of these reforms. First, I comment on the voluntary “comply or explain” and menu-driven approaches adopted in these reforms. While this approach is politically expedient and avoids one-size-fits-all solutions, it has a status-quo bias, particularly if market forces are insufficient to compel Japanese firms to adopt efficient governance structures. Substantively, I suggest that board composition and enhancement of the “monitoring board” – focal points of the reform effort – are not well suited to address the problems of low profitability, cash hoarding, and loss of global market leadership afflicting Japanese firms. While the recent reform package is well intentioned and may produce some improvements at the margins, transformative change will require more fundamental changes to Japanese capitalist institutions, including most prominently the employment system, the labor market, and incentive structures within firms. Corporate governance reflects, rather than determines, a country’s variety of capitalism. Rather than focusing on details such as the number of independent directors a company should have, a bold revitalization policy would address larger questions about what type of corporate capitalism Japan needs and finds acceptable for the twenty-first century.

Multiple directorships, family ownership and the board nomination committee: International evidence from the GCC

In this paper, we investigate the association between outside board directorships and family ownership concentration. Using a sample of 1091 firm-year observations of non-financial publicly listed firms from Gulf Cooperation Countries (GCC) during the 2005 to 2013 period, we find a positive association between family ownership and the number of outside directorships held by board members. This finding is consistent with the notion that family ownership reduces a board's monitoring capabilities. We also test whether the recent corporate governance reforms in GCC, which were designed to protect investors and minority shareholders, affect firms' incentives to establish a board nomination committee (NC). We find the existence of a board NC and the quality and characteristics of NC membership act to suppress the positive association between outside directorships and family ownership. Our results are robust to the use of alternative measures of outside directorships and family ownership and models that test for endogeneity. Overall, our results suggest that the institutional specificities of emerging economies such as those in the GCC can sustain high levels of multiple directorships, which could impair the quality of corporate governance.

Re: duplication of corporate governance codes and the dilemma of firms with dual regulatory jurisdictions

Purpose This paper aims to examine the evolution of corporate governance in Nigeria and how the duplication of code of corporate best practices is impacting compliance with the key recommendations of these guidelines. The issues of corporate governance and reforms especially those related to the development and implementation of code of corporate best practices have been a subject of academic discuss over the years with more research emphasis placed on developed economies. This paper intends to add the sub-Sahara Africa and the emerging economic perspective to this vibrant stream of research. Design/methodology/approach This paper adopts an explanatory approach in the review of the four different codes of corporate governance that were issued in Nigeria in the past ten years. Findings The paper demonstrated that corporate governance has been a fundamental issue of concern in Nigerian public enterprises since the country gained independence in 1960. The paper equally established that the application of recent corporate governance reforms has been challenged, not on competency grounds but rather by the proliferation of codes which have created implementation and monitoring difficulties for both the affected firms and the regulatory agencies. Originality/value Unlike other previous studies, this paper offers comprehensive analysis of corporate governance evolution in Nigeria and found through documented literatures that shortage of experienced local personnel and the absence of effective external control mechanisms have been the bane against the development of corporate governance in Nigeria. The originality of this paper also lies in being the first paper to have linked developments in the public enterprises to the renewed focus on corporate governance. This is the most inclusive paper to have identified key implications of multiplicity of corporate governance codes and the direct application of governance system within the context of the country’s socio-cultural distinctiveness.

Firm-level governance quality and dividend decisions: evidence from India

Motivated by the outcome model of agency theory, the primary research issue addressed in this paper is to measure firm-level governance quality of Indian firms and examine its impact on dividend payment decision and payout-level decision. The companies with higher corporate governance quality have higher dividends payout ratios. It was found that board size, independence, monitoring quality, and managerial remuneration had positive impact on dividend payout. Insiders' (promoter directors) equity holding had a negative impact on dividend payout; whereas, the share holding of outside owners had a positive impact. The results support the outcome model proposed by La Porta et al. (2000a, 2 000b) and infer that better governed companies tend to have higher payout ratios. The results also provide positive evidence about the impact of recent corporate governance reforms introduced in India.

Corporate Governance and Double Liability: Toward a Bank Shareholder-Orientated Model

The financial crisis of 2007-09 was interpreted by many as evidence that incentives of managers were not optimally aligned with interests of shareholders. As a result, a plethora of proposals have been put forward seeking to increase shareholder engagement. However, this shareholder engagement strategy only makes sense if risk appetite of bank shareholders is not socially excessive. The conventional for corporate governance presumes that costs of failure are largely internalized by firm and so are taken into account when shareholders determine their risk appetite. In this paper I argue, when applied to banks, this view is mistaken. Banks do not internalize costs of failure, hence risk appetite of bank shareholders is socially excessive. I show that shareholder pressure on their management to accept greater risk can help explain excessive risk-taking of banks. My analysis indicates that recent corporate governance reforms that attempt to tighten alignment of managerial and shareholder interests cannot be expected to address problem I identify. To adequately understand what policies should be explored, we must first recognize that excessive risk-taking is also partly a product of conventional of governance. I therefore propose a modification to that model: a regime of double bank shareholder liability that is triggered by bank failure. I discuss how this has potential to reduce bank shareholders’ risk appetite, and, make less likely, excessive risk-taking. Welfare improvement occurs because of heightened risk awareness and enhanced risk-taking controls, decreasing likelihood of failure. I introduce term the bank shareholder-orientated model of governance to characterize this modified approach.

TOWARD A BANK SHAREHOLDER-ORIENTATED MODEL: USING DOUBLE LIABILITY TO MITIGATE EXCESSIVE RISK-TAKING

The conventional model for corporate governance depends on the rarely articulated assumption that the costs of failure are largely internalised by the firm and so are taken into account when shareholders determine their risk appetite. In this paper I argue that, when applied to banks, this view is mistaken. Banks do not internalise the costs of failure, hence the risk appetite of bank shareholders is socially excessive. I show that shareholder pressure on their management to accept greater risk can help explain the excessive risk-taking of banks. My analysis indicates that recent corporate governance reforms that attempt to tighten the alignment of managerial and shareholder interests cannot be expected to address the problem I identify. To adequately understand what policies should be explored, we must first recognise that excessive risk-taking is also partly a product of the conventional model. I therefore propose a modification to the conventional model: a regime of double liability that is triggered by bank failure. I analyse how this will reduce bank shareholders’ risk appetite and make excessive risk-taking less likely. Welfare improvement occurs because of heightened risk awareness and enhanced risk-taking controls, decreasing the likelihood of failure. Finally, examining a range of possible objections, I conclude that they do not provide a good basis for opposing a regime of double liability and the burden is now on proponents to justify the current limited liability regime for bank shareholders.

Corporate Governance as Risk Regulation in China: A Comparative View of Risk Oversight, Risk Management, and Accountability

Risk management and oversight have long been recognized as core corporate governance issues and have gained renewed attention in the wake of the financial crisis. Recent corporate governance reforms in China follow these global trends. This article is the first to examine the intersections between corporate governance and risk regulation in China from a comparative perspective. It surveys corporate governance tools that have been adopted by Chinese regulators and firms to motivate effective risk oversight and risk management across the corporate enterprise, focusing on China's regulation of internal controls and risk management systems. These internal mechanisms are particularly important given the widely recognized limits of external monitoring and enforcement mechanisms in China.This article observes that recent guidelines on enterprise risk management (ERM) and internal controls reflect international corporate governance standards and that China adopts a broad perspective on risk oversight that extends to both financial and non-financial risks. China's adoption of international models offers a new opportunity to reexamine longstanding debates on the potential for global corporate governance convergence. This article argues that China has adopted a regulatory approach to internal risk oversight and management that is consistent with its historical law reform trajectory, the reality of China's state-dominated equity markets, and the continued influence of the state on firm management. Its conclusions support the literature on the path dependency of corporate governance systems and prior comparative studies of corporate governance in China that find convergence of form but divergence of function.

The Evolving Contours of the Board's Risk Management Function in UK Corporate Governance

The well-documented banking company failures that occurred in the UK over 2007 and 2008 have enhanced the perceived importance and scope of the risk management function performed by boards. It is consequently a universal expectation of non-executive directors (NEDs) today that they provide a high-level challenge to a company's executive on core business risks. This article examines the recent corporate governance reforms introduced by Sir David Walker in 2009 and the Financial Reporting Council (FRC) in 2010 as they relate to NEDs' evolving risk oversight role. It also documents the regulatory development of the board's risk management function in the UK prior to 2007, explains the impact of the UK banking collapses of 2007–08 in reframing boards' risk function, and also critically assesses the key Walker and FRC recommendations in this regard. It will be demonstrated that over recent years the board's internal control remit has shifted from one of risk management—denoting the mitigation of the extraneous adverse effects of business activities (with limited questioning of the viability of those underlying practices themselves)—to one of risk moderation—whereby the inherent riskiness of a firm's core entrepreneurial activities is now placed at the very centre of the board's risk compass. The article then explores the relationship between NEDs' extended risk management function today and the independent board paradigm that has been increasingly dominant within UK corporate governance over recent decades, and concludes with a prediction as to the future development of British board structures in light of the recent reforms.

Does chairman independence matter?

This paper examines the relationship between the role of non-executive (independent) chairman and the quality of reported earnings. Recent corporate governance reforms recommend firms to appoint an independent leader to ensure the success of a split leadership structure (The Combined Code on corporate Governance, 2006; Higgs Report, 2003). Research on leadership structure to date has tended to focus solely on role duality and find weak or insignificance relationship between role duality and financial reporting quality. Although separating the roles of the chairman and the CEO seems appropriate, researcher argue that it would not necessarily lead to independence of the board if the chairman is not independent. Consistent with recent recommendations to strengthen board leadership by appointing an independent chair, this study evidences a positive and significant association between non-executive chairman and earnings quality in Malaysia. The study suggests that the non-executive status of the chairman is an important mechanism in enhancing the board‟s independence, thus improving earnings quality.

Board composition and firm performance variance: Australian evidence

PurposeThe purpose of this paper is to investigate the relationship between board composition and firm performance variance in the context of recent corporate governance reforms, based on the agency and organisational literatures.Design/methodology/approachThis paper uses 384 of the top 500 Australian companies as its dataset. Board composition measures include the percentages of affiliated, executive and independent members on the board. Firm risk is represented by the standard deviation of shareholder return. Several control variables are introduced in the regression analysis.FindingsThe results show a negative impact of executive directors on subsequent risk. Affiliated and independent directors, however, have no significant effect on the level of performance variance. Blockholders give a positive influence on firm risk. Moreover, companies with poor dividend payout or low managerial shareholdings tend to be riskier.Research limitations/implicationsThis paper does not examine the actual risk preference of individual directors, which could involve an attitudinal survey of board members. Future research may also examine the specific attributes towards risk for each type of affiliated directors.Practical implicationsThe findings cast doubts on the hope that promoting board independence would reduce agency conflicts relating to managerial risk aversion, and support the proposition that, although firms may comply with the demands for more independent directors, they could employ a number of tactics to neutralize the power of outsiders.Originality/valueThe empirical work surrounding this topic has been scant. This study may present the first Australian empirical evidence on the relationship between board composition and firm performance variance.

Corporate governance reform within the UK banking industry and its effect on firm performance

Using a corporate governance scorecard (Corp-Gov Score) measuring twenty-six areas of corporate governance best practices in four UK banks, this study examined whether improved levels of corporate governance led to higher levels of firm performance within the UK banking industry over the time period 1999-2006. The twenty-six measures were split into four sub-sector areas of Corp-Gov Score comprising Board of Directors, Remuneration Policies, Auditing Policies, and Transparency/Disclosure Policies. Using both correlation and regression analysis on the information extracted from the Annual Reports, the study provides evidence about the extent to which UK banks have complied with recent corporate governance reforms post Enron. The results indicate that improvements in corporate governance can enhance the performance of UK banks when measuring using Return on Equity. The biggest sub-sector driver of this improvement is in the area of the Board of Directors. Our results further indicate that large boards within UK banks can have a negative impact on firm performance, and that increases in directors’ remuneration does not lead to increased levels of firm performance. Evidence is given that corporate governance within UK banks plays an important role, but how it affects firm performance is open to debate.

An investigation of the association between corporate governance, earnings management and the effect of governance reforms

PurposeThe purpose of this study is to examine the impact of recent corporate governance reforms on the association between governance practices and earnings management.Design/methodology/approachThis study examines the impact of corporate governance reforms by using a firm fixed‐effect, cross‐sectional analysis of 200 firms listed on the Australian Stock Exchange (ASX) for the financial years ending in 2000 and 2005. This paper examines the association between firms' corporate governance practices and the quality of financial reports as measured by the magnitude of earnings management pre‐ and post‐the governance reforms (CLERP 9 and ASX Corporate Governance Council (CGC)).FindingsThe results of this study indicate that certain governance practices are important in limiting earnings management. In particular, board independence and audit committee (AC) independence, are associated with lower performance‐adjusted discretionary accruals, one commonly used measure of earnings management. However, increasing executive shareholdings provides incentives to manage earnings.Practical implicationsThis study is important to investors, academics and policy makers as it demonstrates that governance reforms that encourage firms to adopt better governance practices reduces the likelihood of earnings management.Originality/valueThere is limited research on the association between corporate governance practices or the recent corporate governance reforms (ASX CGC Recommendations and CLERP 9) on earnings management in Australia. This study extends the literature by demonstrating the impact of recent corporate governance reforms on board independence, AC effectiveness and executive directors' shareholding and the association with earnings management.

Who Monitors the Monitor? The Effect of Board Independence on Executive Compensation and Firm Value

Recent corporate governance reforms focus on the board's independence and encourage equity ownership by directors. We analyze the efficacy of these reforms in a model in which both adverse selection and moral hazard exist at the level of the firm's management. Delegating governance to the board improves monitoring but creates another agency problem because directors themselves avoid effort and are dependent on the CEO. We show that as directors become less dependent on the CEO, their monitoring efficiency may decrease even as they improve the incentive efficiency of executive compensation contracts. Therefore, a board composed of directors that are more independent may actually perform worse. Moreover, higher equity incentives for the board may increase equity-based compensation awards to management.

Corporate Governance Reforms in Malaysia: the key leading players' perspectives

This paper focuses on the corporate governance reforms in Malaysia since the 1997/1998 Asian financial crisis. Drawing upon ten in‐depth semi‐structured interviews conducted with leading players who were highly involved in Malaysia's corporate governance development, together with a review of the literature in this area, the paper offers evidence on the meaning of corporate governance in the Malaysian context, the factors behind the recent reforms and views on the appropriate corporate governance system for Malaysia. While it is shown that Malaysia's corporate governance reforms has modelled on the Anglo‐American systems to a large extent, the majority of the interviewees placed greater emphasis on the social aspect of corporate governance in contrast to the traditional notion of shareholder accountability. The main concern raised in the paper is that without changes in the previous problematic corporate culture, the intended purpose of the recent corporate governance reforms will unlikely to be achieved.

Who Monitors the Monitor? The Effect of Board Independence on Executive Compensation and Firm Value

Recent corporate governance reforms focus on board independence and encourage equity ownership by directors. We analyze the efficacy of these reforms in a model where both adverse selection and moral hazard are present at the level of the firm's management. Delegating governance to the board improves monitoring but creates another agency problem because directors themselves avoid effort and are dependent on the CEO. We show that as the board's dependence on the CEO increases, its monitoring efficiency may increase even as incentive efficiency deteriorates with respect to compensation contracts awarded to the managers. This endogenous tension implies - contrary to the assumptions underlying recent reforms - that outside shareholders' value can indeed decrease (increase) as board independence increases (falls). Moreover, and again contrary to the general presumption in the literature, higher equity incentives for the board sometimes may increase (equity-based) compensation awards to management.

Illusions of compliance and governance

PurposeThis article aims to place recent corporate governance reforms in the historical context of the good corporate citizenship movement that began in the US in the mid‐1990s and came to an abrupt end in 2002 when the most recent spate of corporate scandals emerged. It explores what the apparent failure of this movement portends for the recently‐enacted governance reforms.Design/methodology/approachThe paper engages in a policy analysis of regulatory reform.FindingsAfter offering the tale of corporate governance, a critical take on current reforms, the paper finds the skeptic's and pessimist's account of corporate good citizenship movement to be most helpful in explaining the illusory nature of corporate reforms and the resilience of the regulatory status quo.Originality/valueThe paper is a critical analysis of corporate governance reforms.