Stakeholder-oriented Corporate Governance Research Articles

Board characteristics and corporate cash holding: evidence from the UK, France and Germany

PurposePrior studies suggest that corporate cash holding will reflect firms' corporate governance (CG) environment. Consistent with this prediction, this study aims to examine the impact of board characteristics on firms' cash holding in the UK, France and Germany.Design/methodology/approachUsing 2,805 firm-year observations between 2009 and 2019, the authors examine the relationship between board characteristics and corporate cash holding. The authors used two measures of cash holdings as our dependent variables. As independent variables, the authors used CG characteristics relevant to effective board monitoring such as board meetings, outside directors, board size and board gender diversity.FindingsThe authors find that board characteristics influence firms' cash holdings of firms in the UK, France and Germany. However, this study documents evidence of varying impacts of board monitoring on the cash holding of the UK when compared to German and French firms, the countries that are classifiable as bank-based economies. The result of this study is robust to alternative cash-holding measures and endogeneity.Practical implicationsThis study provides evidence supporting the board's impact in mitigating agency conflict in shareholder- and stakeholder-oriented CG environments.Originality/valueThis study contributes to previous works on firms’ financial orientation by showing that the impact of board characteristics on corporate cash holdings varies between bank- and market-based economies.

Does Integrated Reporting Affect Real Activities Manipulation?

Integrated reporting (IR) by firms is intended to improve not only the quality of information available to external parties, but also internal managerial decision making. IR is considered useful to address the short-term orientation of firms caused by pressure from short-term oriented shareholders. This study examines whether the introduction of IR discourages real activities manipulation, a form of myopic behavior. Using a large sample of Japanese listed companies, the study empirically tests the effect of IR on real activities manipulation through panel data regression analysis. We find that the introduction of IR is related to higher level of abnormal cash flows from operations, lower level of abnormal production costs, and lower level of total activities manipulation. These results generally suggest that firms tend not to engage in real activities manipulation after IR is introduced. Our results also show that while there is insignificant difference in the degree of real activities manipulation between IR and non-IR firms immediately after the introduction of IR, the degree of real activities manipulation is generally smaller in IR firms than in non-IR firms after more time has passed since the introduction of IR, consistent with the view of practitioners that IR is a continuous improvement process of internal decision making. Regarding the non-financial aspects, additional analysis shows that introducing IR is positively associated with the performance of environmental, social and governance (ESG). Our findings suggest that IR could discourage companies’ short-term oriented behavior and promote long-term value creation, which is of interest to a wide range of stakeholders. Thus, our findings provide insightful evidence for researchers, practitioners, and policy makers interested in the role of IR in stakeholder-oriented corporate governance mechanisms.

Examining the Role of Stakeholder-Oriented Corporate Governance in Achieving Sustainable Development: Evidence from the SME CSR in the Context of China

Corporate governance (CG) has been experiencing a shift from the antecedent shareholder-oriented system toward the recent more popular stakeholder-oriented system. To better serve the aim of sustainable development, more and more companies have initiated stakeholder-oriented practices. Increasing social responsibility behaviours demonstrate the prioritisation of stakeholders’ interests. Nevertheless, most extant research on stakeholder-oriented CG focuses on MNEs and large listed companies. Limited attention has been paid to the small and medium-sized enterprises (SMEs) sector. This study aims to fill this gap by providing empirical evidence of Chinese SME corporate social responsibility (CSR). We develop and test two hypotheses by using samples of 172 Chinese listed SMEs. Our result is distinct from most of the extant SME CG literature, given that the stakeholder-oriented CSR types have a negative impact on short-term operational profitability and expansion over a fixed period. Additionally, the government subsidy, as one of the most significant national institutions, partially moderates the relationship between stakeholder-oriented CSR and firm performance. The outcomes of this research make both theoretical and managerial contributions to SMEs’ CG systems. In the context of Chinese SME CSR, managerial stakeholder theory is a more pragmatic means to guide firms toward sustainable development than ethical stakeholder theory.

The Board Structure and Performance in IPO Firms: Evidence from Stakeholder-Oriented Corporate Governance

This study investigates the internal mechanisms as an important factor for shareholders and stakeholders in initial public offering (IPO) firms with stakeholder-oriented corporate governance. Over the period of 2009–2016, we examine the role of independent directors in Japanese stakeholder-oriented corporate governance. According to previous research, the monitoring role of independent directors is strengthened in countries with a market-based financial system. Our empirical analyses show that independent directors do not effectively mitigate conflicts among shareholders such as IPO underpricing in a stakeholder-oriented corporate governance framework. Alternatively, accounting expertise may contribute to mitigating IPO underpricing in accordance with U.S. corporations. The participation of bank-affiliated directors in IPO firms further contributes to the mitigation of underpricing. Accordingly, these findings imply that bank ties through Horizontal Keiretsu’s bank-appointed directors are critical for mitigating conflicts among shareholders in IPO firms. These results imply that stakeholder-oriented corporate governance systems contribute to reducing conflicts among stakeholders.

Impact of Parent Companies and Multiple Large Shareholders on Audit Fees in Stakeholder-Oriented Corporate Governance

This study aimed to investigate the impact of parent companies and other multiple large shareholders (MLSs) on the audit fees in Japanese firms, where stakeholder-oriented corporate governance is adopted. In such a firm, monitoring by many stakeholders can mitigate conflicts among shareholders. However, because the key stakeholders of these firms tend to resolve information asymmetry problems through insider communication, the level of audit effort is affected not only by the audit risk from principal–principal conflicts, but also by the demands of key stakeholders. Japanese parent companies tend to spin off their departments with high growth potential and provide incentives to lower subsidiaries’ cost of capital through information disclosure. Therefore, parent companies require greater audit efforts, and consequently, audit fees are expected to be higher. However, when MLSs are shareholders of the listed subsidiary, they can obtain relevant information via private communication. Thus, the need for quality accounting information will be smaller, the level of audit effort required will be smaller, and as a result, audit fees will be smaller. The results are consistent with these expectations. This paper contributes to the sustainable growth and economic development of firms and markets and has implications for the development of effective corporate governance mechanisms.

Internationalization and the reliance of analyst forecasts in stakeholder-oriented corporate governance: Evidence from Japanese MNEs

This paper investigates whether disclosure quality of analyst forecasts on management forecasts is measured as reliance of analyst forecasts on management forecasts and dispersion of analyst forecasts is affected by the internationalization under a unique setting of effectively mandated management forecasts in Japan. We find that higher internationalization would result in lower disclosure quality of analyst forecasts on management forecasts in Japanese corporations. This implies that firms with higher internationalization face the complexity and uncertainties. Second, greater foreign shareholdings enhance the disclosure quality of analyst forecasts on management forecasts, suggesting the effectiveness of foreign shareholders' disclosure pressure. Finally, greater bank ownership would also enhance the credibility of analyst forecasts on management forecasts under stakeholder-oriented corporate governance.

CONFLICTS BETWEEN PARENT COMPANY AND NON-CONTROLLING SHAREHOLDERS IN STAKEHOLDER-ORIENTED CORPORATE GOVERNANCE: EVIDENCE FROM JAPAN

When a company establishes subsidiaries with capital provided by a third party, the subsidiaries’ shareholders include the parent company (controlling shareholders) and minority (noncontrolling) shareholders. When shareholders’ interests are divergent, conflicts may arise, causing inefficiencies in the management of the subsidiaries or the corporate group. Such conflicts among shareholders are called principal–principal (PP) conflicts. However, adopting stakeholder-oriented corporate governance, a practice prevalent in Japan, may mitigate such PP conflicts. In fact, many Japanese companies report non-controlling interests in their consolidated financial statements. This paper investigates the influence of PP conflicts in Japanese corporate groups. The availability of nonconsolidated and consolidated financial statements in Japan allows for the comparison of parent companies’ data with those of the corporate group. The results reveal that (1) the larger the minority shareholders ratio (MER), the more the profits shifted to the parent company, and (2) the larger the MER, the higher the growth of the subsidiaries’ sales rates. These results suggest that while the parent company exploits the non-controlling shareholders through profit shifting, it also allocates sales growth opportunities to subsidiaries to mitigate PP conflicts.

Family Control and Corporate Innovation in Stakeholder-Oriented Corporate Governance

This study investigates the effects of family control on corporate innovation activity in publicly traded firms in Japan under stakeholder-oriented corporate governance. In a sample of 14,991 firm-year observations in publicly traded firms in Japan during the period 2007 to 2016, we tested whether family owners or board members are enhancing research and development investments. While theoretical perspectives of principal–principal conflicts generally assume a negative relationship between family control and research and development intensity, we find a positive relationship, which supports the stewardship theory perspective. Additionally, we find that main bank ownership positively moderates the relationship between family control and research and development, suggesting that the main bank could affect the decision-making of family board members in the long-term. This result is supported by the close relationships between the main bank and client firms. Furthermore, our study reveals that the shareholder orientation of foreign shareholders suppresses family board members’ long-term orientation. We conclude that the exploitation presumed by principal–principal conflict perspectives has not been thoroughly investigated in Japan’s stakeholder-oriented corporate governance system.

The “Good Corporate Citizen” Beyond BCE

In its landmark corporate law decision of BCE Inc. v. 1976 Debentureholders, the Supreme Court of Canada expressly referenced the “good corporate citizen” when commenting on the best interests of the corporation. The Supreme Court’s reference to good corporate citizenship is often viewed as salient yet ambiguous. As the Supreme Court did not provide any substantive legal analysis of the term, legal scholars and practitioners can only speculate on its intended meaning. This article provides an empirical study on the historical development and usage of good corporate citizenship when referenced in judicial cases. The empirical findings show that Canadian courts have invoked the notion for decades and in a variety of contexts. The meaning of good corporate citizenship varies from context to context and does not necessarily dovetail with corporate social responsibility as commonly perceived. Good corporate citizenship as a legal concept carries some practical yet controversial consequences in the environmental sentencing context. Importantly, the oft-acclaimed corporate governance paradigm shift since BCE seems more symbolic than substantive in judicial practices. The Canadian experience also provides insights into the global emergence of explicit corporate social responsibility legislation and stakeholder-oriented corporate governance.

Global shift towards stakeholder-oriented corporate governance? Evidence from the scholarly literature and future research opportunities

PurposeBy reviewing prior scholarly corporate governance (CG) literature and a review of more recent stakeholder studies, this paper aims to examine the extent to which stakeholders and their interests have gained in importance in recent years compared to the shareholder approach, which is dominant in many national economies and suggest future research opportunities.Design/methodology/approachThis study conducts a literature review to examine major findings in prior studies.FindingsThe reviews and analyses provide support for a formal and informal convergence of CG systems towards more stakeholder-oriented elements globally. In general, at the institutional and firm levels, there are remarkable shifts to adopt stakeholder-oriented rules and practices. However, there is limited evidence that all these trends will actually lead to full convergence towards a single stakeholder-oriented governance model.Originality/valueThe paper offers an extensive summary of prior studies that investigate the impact of CG on firm stakeholder-orientation and social performance. Based on the review, this study suggests promising research directions.

Can product differentiation mitigate conflicts of interest between principal stakeholders? A cournot-bertrand comparison

This paper aims to investigate the impact of product differentiation on the extent of conflict of interest between principal stakeholders (shareholders, employees, and consumers), which is one of the most important concerns of stakeholder-oriented corporate governance. We consider a differentiated duopoly competing either in price or quantity after the wages of employees are negotiated with a labor union. We find that price competition and quantity competition have drastically different implications on whether product differentiation mitigates stakeholders' conflicts. Specifically, product differentiation can mitigate stakeholders' conflicts when firms compete in price, but not when they compete in quantity. Therefore, the product differentiation effect in mitigating stakeholders' conflicts differs across markets characterized by price competition versus quantity competition.

Institutional Ownership and Firm Performance under Stakeholder-Oriented Corporate Governance

This study aimed to reveal the role of institutional investors with shareholder-oriented scopes in a stakeholder-oriented economy such as Japan. With financial globalization, the increasing number of institutional shareholders in Japanese corporations enables us to investigate whether their shareholder-oriented perspectives are conducive to taking on effective monitoring roles under stakeholder-oriented corporate governance. This study’s sample included large listed firms of the TOPIX 500 in Japan during 2010-2016. Using 2924 firm-year observations, the effect of institutional investors on firm performance was analyzed to test the role of institutional investors in stakeholder-oriented corporate governance. Our study showed that the monitoring role of institutional shareholders, or foreign shareholders, functions effectively in Japanese corporations. In addition, we showed that the monitoring roles of these are expected to strengthen firms through higher growth opportunities. These results implied that institutional shareholders contribute to enhancing sustainable firm performance and constructing sustainable corporate governance mechanisms in a stakeholder-oriented system.

Family control and ownership monitoring in Stakeholder-oriented corporate governance

PurposePrincipal–principal conflicts between family shareholders and other shareholders have been investigated in emerging economies, but fewer studies have examined the effect of concentrated ownership on firm profitability and dividend payout in stakeholder-oriented systems. The purpose of this paper is to examine whether family control leads to principal–principal conflicts resulting in wealth expropriation of minority shareholders by family owners in stakeholder-oriented systems.Design/methodology/approachThis study uses large listed firms of the Tokyo Stock Exchange (TSE) in Japan during 2007–2016. Using 14,991 firm year observations, the authors analyze the effect of family control on dividend payout and firm performance to test the possibility of exploitation by family owners.FindingsThe authors find that family board members do not exploit minority shareholders and rather behave as stewards of the firm. The authors also find that foreign shareholders interact with family control to increase firm profitability, suggesting that foreign shareholders enhance the role of family board members as stewards.Originality/valueExisting research on principal–principal conflicts tends to examine expropriation by family board members in emerging markets. This research reveals that family board members behave like stewards in the presence of stakeholder-oriented corporate governance mechanisms. In addition, foreign shareholders strengthen the stewardship role of family controlled firms.

Aggressive Tax Planning and Corporate Social Irresponsibility: Managerial Discretion in the Light of Corporate Governance

The purpose of this contribution is to explore the possibility of integrating tax with corporate social responsibility (CSR). Some corporate directors seem to argue that they do not have a choice with regard to tax planning, implying that a responsible tax planning strategy is not an option. This contribution shows such argument to be wrong. First, the issue of management accountability and choice will be dealt with in the context of corporate governance systems in order to find out what kinds of obligations corporate governance entail for managers. It will be shown that corporate directors enjoy sufficient discretion for making socially responsible decisions. To this end, two existing theoretical frameworks will be analysed, according to which corporate decisions should prioritise either shareholders or stakeholders interests. Both theories allow managers a choice to act with a wider interest than purely shareholder value maximisation. Furthermore, it will be argued that managerial discretion to take CSR into account does not oblige managers to aspire to some kind of ideal social responsibility but rather to stay away from corporate social irresponsibility (CSI). Therefore, corporate managers in different corporate governance regimes have sufficient room for aligning their tax planning strategies with societal expectations and avoiding aggressive tax planning. Thus, this paper aims to make two contributions to academic theory. First, it is shown that both shareholder and stakeholder-oriented corporate governance regimes allow for managerial discretion to take CSR on board in tax matters. Secondly, the concept of corporate social irresponsibility is introduced to enhance a more balanced debate about multinationals’ tax planning practices.

Corporate Governance Models and Practices in Japan and East Asia: Proceedings of a Panel Discussion

Despite general interest in the economic rise of Asia and in the role of law in the development of the region, the literature on comparative corporate governance in Asia is surprisingly undeveloped with respect to in-depth comparisons among Asian countries. In particular, it should be both valuable and feasible to compare and contrast corporate governance systems and practices among countries in East Asia, in light of Japan’s historical influence and more recent divergences from that influence. At a recent conference sponsored by Waseda University, a distinguished group of corporate law scholars from Japan, Korea, Taiwan, and China engaged in a broad-ranging panel discussion centering on the question of the operation and reform of traditional stakeholder-oriented corporate governance systems featuring concentrated ownership and a board of directors involved in day-to- day management against the need to account for greater monitoring of management on behalf of shareholders. For example, the panelists agreed that the traditional internal corporate auditors (or kansayaku in Japanese) have not appeared to operate effectively in monitoring management, and to some extent they should be supplemented or replaced by outside directors. However, the scope and pace of such change varies considerably among countries in East Asia, and skepticism remains about the effectiveness of outside directors. The panel discussion highlighted both the challenges and significant potential rewards for greater scholarly collaboration in making cross-Asian comparisons in the field of corporate governance.

Culture and corporate governance convergence

PurposeThis paper aims to analyse the link between culture and corporate governance. In particular, it demonstrates the impact of culture in inhibiting convergence of corporate governance. Overall, the paper provides an appraisal of corporate governance laws in stakeholder-oriented states that have endured market pressure for convergence.Design/methodology/approachThe paper utilises historical trend in analyzing changes in corporate governance regulation in six countries covering three continents with stakeholder-oriented corporate governance model to determine the effect of culture in the convergence or divergence of corporate governance.FindingsThe view that corporate governance is converging towards the shareholder model largely ignores cultural differences in states. An appraisal of corporate governance rules and principles that have endured Anglo-American influence reveals a strong propensity for cultural norms to dictate areas where changes occur. This paper demonstrates nominal changes in corporate governance regulation and ideologies, as states still turn to design corporate governance rules around their cultural philosophy. The paper also reveals weak political authority for convergencevis-à-vismarket forces.Practical implicationsLaws are strongly embedded in the corporate philosophies of states. Thus, the market and managers need to incorporate national culture into corporate practices for effective implementation.Originality/valueFew studies have examined the effect of culture on the convergence of corporate governance regulation, especially across different countries. This study does not only analyze corporate governance in developed countries but also examines emerging nations in Africa where research on convergence is very scarce.

The Two-Tier Board Structure and Co-determination: Should South Africa follow the Germany Example?

The German corporate governance system differs significantly from the South African system. Unlike the shareholder-oriented corporate governance system that exists in the South Africa, German corporate governance is stakeholder-oriented. Stakeholders, particularly employees, have an important role in German corporate governance. They participate in decisions that affect them directly through workers councils, as well as those that affect the corporation through union representation on the supervisory board. The German corporate governance system is characterized by the two-tier board, with co-determination between employees and shareholders on the supervisory board. This paper examines the German stakeholder-oriented corporate governance. The main concern is whether there are lessons to be drawn from the German model of corporate governance that may influence corporate law reform in South Africa. The paper concludes that for the effective protection of stakeholders’ interests, the German two-tier board structure and co-determination provisions should be adopted in South Africa with some variation. DOI: 10.5901/mjss.2014.v5n9p142

Employee Participation, Corporate Governance and the Firm: A Transatlantic View Focused on Occupational Pensions and Co-Determination

Corporate governance and the theory of the firm are discussed primarily from the shareholders’ perspective. This point of view neglects the tremendous effects of private pensions and of co-determination as well as interdependencies between co-determination, pensions and corporate governance. Since in the private pension world the firm serves as an investment tool, the focus should be shifted from short-term interests to concepts maximising long-term shareholder value. In this context, also moderate forms of co-determination might serve as a tool for long-term oriented corporate governance. Given the rise of the European Company, co-determination is likely to spread in Europe. Both, private pension-based corporate governance systems and stakeholder-oriented corporate governance systems should be re-examined in the light of the financial and economic crisis and due to the rise of behavioural law and economics.

Corporate Governance in Japan: Institutional Change and Organizational Diversity (review)

Debates regarding corporate governance have become increasingly important in Japan as the post-war model of bank-based, stakeholder-oriented corporate governance faces the new pressures associated with globalization and growing investor demands for shareholder value. Bringing together a group of leading scholars from economics, law, sociology and management studies, this book looks at how the Japanese approach to corporate governance and the firm have changed in the post-bubble era. The contributions offer a unique empirical exploration of why and how Japanese firms are reshaping their corporate governance arrangements, leading to greater diversity among firms and new 'hybrid' forms of corporate governance. The book concludes by looking at what effect these incremental but transformative changes may have on Japan's distinctive variety of capitalism. Contributors to this volume - Masahiro Abe, Dokkyo University Christine Ahmadjian, Hitotsubashi University Haruhiko Ando, Ministry of Economy, Trade and Industry (METI) Masahiko Aoki, Stanford University Yasuhiro Arikawa, Waseda University Ronald Dore, LSE Nobuyuki Hata, Kokugakuin University Osamu Hayashida, Osaka University of Economics Takeo Hoshi, University of California, San Diego Yoshiaki Ishii, Ministry of Economy, Trade and Industry (METI) Hideshi Itoh, Hitotsubashi University Gregory Jackson, Kings College, London Tatsuya Kikutani, Kyoto University Fumiaki Kuroki, NLI Research Institute Hideaki Miyajima, Waseda University Mari Sako, Said Business School Zenichi Shishido, Seikei University Peng Xu, Hosei University

Bond Performance in Mergers and Acquisitions: The Impact and Spillover of Governance and Legal Standards

This paper shows that bond performance around M&A announcements is extremely sensitive to cross-country differences in governance and legal standards, using deals involving European bidders with outstanding Eurobonds. Firstly, stakeholder-oriented corporate governance ensures that Continental European bonds fare better in and respond less to the risk effects of M&As. Secondly, bonds fare worse in cross-border M&As ceteris paribus, but perform better when they become exposed to a stakeholder-oriented governance regime or a more creditor-friendly jurisdiction. The creditor protection spillovers we identify are much greater in scope than has been previously assumed, and are intensified by the ability of creditors to arbitrage across legal systems.