Strong Internal Governance Research Articles

Legitimacy or good governance: What drives carbon performance in Australia

Previous studies present diverse views on carbon performance. The legitimacy perspective posits that external forces from a wide range of stakeholders drives environmental performance change, while the governance perspective posits that strong internal governance structure leads to performance improvement. This study empirically examines the validity of these different perspectives. Using data released by top polluting companies included in the Australian National Greenhouse and Energy Reports (NGER), the study finds that better governance structures are significantly associated with higher carbon performance, but there is no significant relationship between external carbon disclosure and carbon performance. The results suggest that future policy needs to focus more on ensuring strong corporate governance system and encouraging the integration of environmental aspects into governance agenda.

Does corporate governance affect restatement of financial reporting? Evidence from China

PurposeThe purpose of this paper is to study the impact of corporate governance on financial restatements in China, with a view to providing reference to strengthen the corporate governance and improve the quality of financial information.Design/methodology/approachThe authors investigate associations between financial restatements and corporate governance via a sample of 1,147 listed companies from the period of 2002 to 2006, which includes 880 annual accounting restatements by 465 companies. Logistic model is used to regress restatement dummy variable on not only the equity and board structure, but also the quality of independent auditors. The restatements in this paper are caused by performance‐related accounting errors.FindingsIt was found that accounting misstatements related to performance could be prevented or restrained by strong internal governance, such as a board of higher percentage of outside directors and an audit committee that could oversee the accounting and financial reporting process on behalf of all shareholders, and outside governance, such as a big stockholder and a strong outside auditor from the Big4 accounting firms. However, the matched test shows the effect of audit committee on controlling restatements is endogenous, which relies on the effects of other governance factors.Originality/valueIn China, studies on the impact of corporate governance on financial restatements are few and the existing empirical researches show the selected samples are small, which constitute small part of the revision of accounting errors. In this paper, the data are more accurate and comprehensive than previous research and matched sample method was used to alleviate the impact of endogeneity of some explanatory variables. So, the conclusions are more reliable than in the past.

Multiple Large Shareholders and Corporate Risk Taking: Evidence from East Asia

Manuscript Type: Empirical Research Question/Issue: Prior literature suggests that weak external governance mechanisms negatively affect corporate risk taking (CRT). However, strong internal governance is likely to mitigate the shortcomings of external governance. In a sample of East Asian firms, we examine whether the presence and voting power of multiple large shareholders (MLS) beyond the dominant shareholder effectively manage internal governance and mitigate agency problems, as measured by their effect on CRT. Research Findings/Insights: In a sample of 1,686 firms from nine countries, while the presence of a dominant shareholder is associated with a lower CRT, the presence and voting rights of the MLS are strongly associated with a higher CRT. Furthermore, the effect of the MLS on CRT is strongly positive in family dominated firms (as opposed to non-family dominated firms). Theoretical/Academic Implications: We interpret these findings as evidence that in firms featuring a dominant shareholder with the power and incentives to extract private benefits of control by undertaking a conservative investment policy, the power and presence of MLS improve internal governance by mitigating agency problems between the dominant shareholder and minority shareholders and help promote a more optimal non-conservative investment policy. Practitioner/Policy Implications: In countries where financial markets are still developing and in countries where the dominant shareholder structures are widespread, the policy makers may encourage MLS structures in general and in the privatization of state enterprises.

Payout Policy, Agency Conflicts, and Corporate Governance

This paper examines the role of corporate governance for payout policy design from the perspective of pre-commitment. We test the effect of external and internal corporate governance on the design of payout policy and use of pre-commitment, level and structure of cash distributions, and firm dividend and repurchase behavior. We argue that firms use pre-commitment to dividend payments to mitigate the agency conflict due to poor governance. We argue that there is an important distinction between dividends and repurchases from the perspective of pre-commitment. Managers that deviate from the chosen dividend policy incur a cost due to a strong negative market response, which reinforces the pre-commitment role of dividends. On the other hand, the market treats share repurchases as more flexible, irregular payouts made at the manager's discretion, which makes repurchases less effective at mitigating the agency conflict. Therefore, a standalone repurchase policy is not sufficient to mitigate the governance failure, introducing the need for dividend pre-commitment as part of payout policy. Empirically, we find that weak governance is associated with a greater emphasis on dividend pre-commitment in total payout composition. Firms with weak governance are also significantly less likely to use standalone repurchase policies as opposed to a dividends - only or a mixed dividends - repurchases payout policy. Costly dividend pre-commitment presents few benefits to well-governed managers. Instead, they either store excess cash in the firm or distribute it through repurchases. We find that the type of monitoring mechanism is relevant for predicting discretionary payouts. Given the generally strong investor protection level in the US, poorly monitored managers are not immune from firing and they will follow a costly dividend policy. Consistent with the proposed explanation, we find that firms with weak corporate governance on average pay higher dividends. The relation between dividends and governance is stronger for firms with high free cash flow. Managers faced with a high takeover threat (external monitoring) are more likely to repurchase and tend to repurchase more on average. On the other hand, strong internal governance (board, institutional blockholder) allows more accurate following of managerial actions and is associated with fewer cash distributions of any kind, including repurchases.

Collective action, governance structure and organizational trust in localized systems of production. The case of the AOC organization of small producers

The objective of this paper is to explore the collective organizational forms that prevail in localized systems of production. More precisely, in a study on the governance of groups of small agricultural producers, we found that a club-based organization with a strong internal governance structure presents great advantages. Collective action, contractual relations and organizational trust are important in this governance system. This paper contributes to the discussion on Appellation d’Origine Contrôlées (AOCs, Designation of Controlled Origin) and more particularly provides new elements that help to understand the forms of collective organization that prevail in these systems. The amount of research dedicated to AOCs has increased so much that it is no longer legitimate to claim that they are just an obsolete form of local production with no future, or a harking back to the past. Yet, they are still often considered as curiosities, and few studies in the field of economic organization have focused on the organizational methods that prevail in these localized groups of producers. Basing ourselves on a specific example – that of the Comté AOC – economic arguments are presented in terms of legitimacy. It is shown (1) that it is possible to analyse the methods of internal organization of an AOC, and (2) that this analysis should be centred on a common good – reputation – that justifies and requires this form of co-ordination and brings into play mechanisms of organizational trust.

Family Governance

Family governance is a hot topic. Just as with countries, the families who can weather the short-term crises are those based on strong internal governance structures. Families do not achieve this by accident. The author addresses three questions. First, who are the families for whom governance is an issue (and who ‘counts’ as members of those families)? Second, what does ‘governance’ mean in the family context? Third, how can a family deliberately establish an internal governance structure to achieve its goals? She concludes with the observation that family governance works in the same way as does any other form of governance. A good governance system is one that provides fairly for its members and adapts well to changing circumstances. Each member feels consulted, respected, and treated fairly. The pride in the family can then be passed on to future generations who will be able to participate in the same flexible process. The shade from the trees that were planted long ago will protect the future generations.