The Cadbury Committee recommendations on corporate governance – a review of compliance and performance impacts

In December 1992, the Cadbury Committee published their Code of Best Practice. The recommendations, which largely reflected perceived best practice at the time, included separating the roles of CEO and chairman, having a minimum of three non-executive directors on the board and the formulation of audit committees. The Code also advocated that a more active role be taken by institutional investors in the promotion of good practice in corporate governance. This paper discusses how agency problems may be (partially) resolved by corporate governance, reviews the evidence on compliance with the Cadbury Code and examines the relationship between board structure and firm performance, looking for evidence that the Code has enhanced board performance. While there is no empirical evidence of an association between board structure and firm value, there is some evidence that compliance with the Cadbury recommendations enhances board oversight with respect to the manipulation of accounting numbers and the discipline of the top executive.     

How does interpersonal justice affect outside directors’ governance behavior? A cross-cultural comparison

We examine the impact of interpersonal justice among outside directors on the board and between a director and the CEO regarding the director’s monitoring and resource provision behaviors in different cultural contexts. We argue that directors from individualistic countries are more influenced by CEO interpersonal justice while directors from collectivistic countries are more affected by the board interpersonal justice. Our main effect results indicate that interpersonal justice with board members is positively related to both monitoring and resource provision by a director, while CEO interpersonal justice is related only to resource provision. Our results also show different effects on the director’s behaviors between three countries, i.e., Canada, Singapore, and Spain. We found that CEO interpersonal justice is positively associated with resource provision in Canada, while board interpersonal justice is positively related to both monitoring and resource provision in Singapore and Spain. These results suggest that directors discharge their board duties differently by how they are treated by other directors and the CEO and that their governance behaviors vary by culture. This study contributes to the literature on comparative corporate governance by showing the differences in directors’ behaviors in different cultural contexts.     

SOCIAL NETWORKS IN THE BOARDROOM

This paper provides evidence that social networks strongly affect board composition and are detrimental to corporate governance. Our empirical investigation relies on a large data set of executives and outside directors of French public firms. This data source is a matched employer–employee data set that provides detailed information on directors/CEOs as well as information about the firm employing them. We find a strong and robust correlation between the CEO's network and that of his directors. Networks of former high‐ranking civil servants are the most active in shaping board composition. Our identification strategy takes into account not only firm and directors’ fixed effects but also the matching of firms and director in terms of one observable and one unobservable characteristic. Turning to the direct effects of such network activity, we find that firms in which these networks are most active pay their CEOs more, are less likely to replace a CEO who underperforms, and engage in less value‐creating acquisitions. These findings suggest that social networks are active in the boardroom and have detrimental effects on firms’ governance.     

独立董事连锁对内部控制的影响机理: 基于声誉效应与学习效应的实证研究

本文首次从独立董事连锁的声誉效应和学习效应视角,运用匹配(1:1 Pairing)+双重差分(DID)法研究独立董事连锁对企业内部控制质量的影响机理。研究发现:在声誉效应视角,独立董事连锁能显著提高企业的内部控制质量,且兼任公司家数较多的连锁独立董事对内部控制质量的提高作用更明显;在学习效应视角,独立董事连锁能显著提高其董事会出席率,且该种效应主要出现在高学历的连锁独立董事身上。此外,本研究首次发现了独立董事连锁对企业内部控制质量的传导机制,即通过提高连锁独立董事的董事会出席率进而提升了企业的内部控制质量。本文的结果表明,我国监管部门和上市公司应当重视独立董事连锁的作用,这对公司治理与内部控制相关政策的制定具有重要的启发意义。     

The compensation of non-executive directors: rationale,form, and findings

Corporate governance guidelines in many countries do not specify the determinants of non-executive director compensation and the empirical evidence has only briefly and indirectly addressed this issue. We show that this question is fundamentally complex because (a) whilst the roles of non-executive directors are relatively well stated, their actual contributions remain unclear, (b) governance codes have not discussed the ways in which non-executive directors should undertake their roles and (c) non-executive director contribution may be unobservable. As a result, their efforts, contribution and/or performance are difficult to measure. Nevertheless, we find the literature related to non-executive directors strongly supportive of some sort of remuneration that is a function of performance and effort to align non-executive directors with their duties and make boards more efficient in undertaking their duties.     

Director tenure and contribution to board task performance: A time and contingency perspective

Director tenure is a topic of great interest in the corporate governance debate. Researchers try to assess the effects of tenure on director contribution, board effectiveness and firm performance. Regulators, corporations, and institutional investors advocate for term limits for outside directors to reduce the risks of impaired governance. Despite the burgeoning interest, there is lack of consensus on the mechanisms shaping directors' contributions over time. We argue that next to the ‘loss of independence’ and ‘knowledge acquisition’ hypotheses, respectively predicting a negative and positive effect of tenure on task performance, socio-cognitive and behavioral approaches elucidate the way in which directors' contributions rise and decline with time. Using a multiple case study approach, we document wide variability in directors' contributions at similar levels of tenure. We find this is due to a series of contingencies including whether directors are novice or experienced, the frequency and nature of board interactions, and the relative power of a director. This variability is particularly clear in longer serving directors for whom we find polarizing results: while some grow stale in the saddle, others sustain high levels of contribution despite extreme tenures. The latter finding is at odds with agency-based assumptions and general predictions from the literature. Overall, our study offers a tentative explanation as to why setting an ‘ideal’ tenure for outside directors has proven so difficult and encourages boards and policy makers to consider the influence of director-level features as well as board dynamics in shaping directors' contributions.     

The causes of gender diversity in Malaysian large firms

The issue of women’s representation at the decision-making level in Malaysia has received special attention from the Government since 2004, the year in which it adopted a policy requiring that 30 % of the posts at the decision-making level in the public sector be filled by women. In 2011, the policy was extended to the private sector where 30 % of listed firms’ board seats are to be allocated to women with 2016 being the deadline for compliance. To this end, this paper aims at examining the factors that determine the appointment of women to the boards of Malaysian large firms. Large firms were chosen in this study because they have the resources and the capacity to adopt the policy more readily than smaller firms. The results reveal that gender diversity is positively associated with board size and the presence of family on the board. That is, the larger the board, the more likely it is that women sit on it. The fact that the presence of women on the board is associated with the presence of one or more family members on the board means that the appointment of women to the board is very much influenced by family ties rather than commercial reasons. The results also reveal a positive association between board independence and the proportion of women directors. Further, it is found that board independence is associated positively with the presence of independent women directors. Finally, the results show that firm performance is negatively associated with gender diversity. That is, firms with low financial performance are more likely to have women on their boards. Hence, taken altogether, the evidence suggests that the appointment of women to the board is very much driven by tokenism and family connection rather than by the business case.     

大股东存在下的独立董事对公司业绩的影响——基于内生视角的审视

我国独立董事对公司业绩的治理效果一直是学者们感兴趣的话题,但此前的研究一直忽视了独立董事的内生性问题.本文使用四种模型检验了当大股东存在时独立董事对公司业绩的影响.研究发现,在排除内生性之后,独立董事对业绩的影响并不显著.本文认为,造成这种现象的原因在于当公司存在大股东的时候,公司董事会的构成会受到大股东的控制,从而使得独立董事制度流于形式.     

Does director capital influence board turnover after an incident of fraud? Evidence from Italian listed companies

Studies in U.S. have found that that director capital influences turnover within the board after an incident of fraud. We analyse whether there is a relationship between the probability of non-executive director turnover in Italian listed firms in which fraud has occurred and each director’s level of: (1) general business knowledge, (2) industry knowledge, and (3) relational capital. Our results suggest that non-executive director departure can be explained as a result of decisions by companies to clean their house of directors with lower expertise, industry knowledge and relational capital. These findings indicate that firms encourage the departure of these non-executive directors to signal to their stakeholders that they want to repair legitimacy and want to enhance the monitoring and resource provider tasks of the board. Indeed, in Italy, director turnover is more marked when the fraud visibility is greater. Furthermore, our study findings indicate that the cleaning house strategy is not influenced by the ownership structure and identity.     

CEO duality and firm performance: The moderating roles of other executives and blockholding outside directors

This study examines how the effect of CEO duality on firm performance is affected by two internal governance forces – namely other executives in the top management team and blockholding outside directors. Results based on a longitudinal dataset from the U.S. computer industry were consistent with my hypotheses. Specifically, I found that the effect of CEO duality was negative when the CEO had dominant power relative to other executives and when the board had a blockholding outside director, but was nonsignificant otherwise. This study enriches our understanding of the effect of CEO duality, and helps reinforce the call for the nonduality structure as the default choice and put the burden of proof on those who wish to justify otherwise on special grounds.     

Corporate governance and social norms during financial crisis: evidence from France and Saudi Arabia

The resistance to financial crisis and compliance with social norms and effectiveness of corporate governance mechanisms is considered recently as a good matter of concern. Focusing on differences between French and Saudi firms, we examine the effect of (1) board of directors, (2) audit committee, (3) compliance with Corporate Social Responsibility activities, (4) compliance with Shariah principles on financial volatility during subprime crisis of 2007. We find that larger boards, larger audit committees, independent members on boards and audit committees are related negatively to financial volatility. The result supports corporate governance theory which suggests that corporate governance variables outlined provide effective of monitoring of the management thereby enhancing firm’s resistance to financial crisis. In addition, we find that compliance with CSR alone does not explain the financial volatility. Its concert with corporate governance variables is necessary. This result supports stakeholder theory which argues that companies compliant with CSR activities in their business strategy and have larger boards and audit committees, and independent directors on boards and audit committees resist more financial downturns and any economic shock. Furthermore, we find that compliance with Shariah norms plays a significant role in protecting shareholder interests, improving functioning of corporate governance mechanisms and affect positively the resistance of Saudi firms to financial crisis.     

The Performance Implications of Ownership-driven Governance Reform

This paper explores the performance impact of recent changes in foreign shareholdings and boardroom reforms in Japan. Empirical research on the impact of reform on the Japanese corporate governance system could provide useful lessons for their European counterparts who are themselves facing similar pressures to reform. We found that although participation of outside directors in strategic decision-making was associated with positive stock returns, the increase in the ratio of outside directors, the separation of the board members and executive officers, and the reduction of board size were not related to firm performance.     

董事会非正式层级与高管薪酬契约有效性

董事会治理是影响高管薪酬契约有效性的关键,已有研究主要从董事会结构层面展开,缺乏对董事会内部运作机制与高管薪酬契约有效性关系的具体分析。基于董事权威不平衡性的治理效应视角,系统考察了董事会非正式层级与高管薪酬契约有效性的逻辑关系及其作用机理,得出了一些具有重要价值的结论,主要包括:1.董事会非正式层级对高管薪酬业绩敏感性具有显著的负向调节作用,且主要体现在业绩下滑的样本公司中,表明董事会非正式层级对高管薪酬契约的影响主要体现在公平性和风险匹配性方面。2.只有当最高层级董事身份为独立董事时,董事会非正式层级对高管薪酬业绩敏感性具有显著的负向调节效应。3.董事会非正式层级增强了高管薪酬的行业和地区薪酬敏感性,进一步验证了董事会非正式层级的社会公平效应。论文的研究为从微观运作层面理解董事会治理和高管薪酬契约有效性提供一种新的视角和结论,对于优化董事会治理和提高高管薪酬契约有效性等均具有重要借鉴意义。     

投资机会（IOS）设定下公司内部治理对经营绩效的影响——基于中国上市公司的经验研究

传统的公司治理研究将处于不同组织环境的企业等同对待,造成了研究结论的较大分歧.本文依据投资机会集(IOS)理论,运用我国上市公司的经验证据,在设定投资机会集的条件下,考察了不同成长性的企业其公司治理对经营绩效的影响.研究结果表明:成长性较高的公司,其经营绩效的改善与独立董事比例、高管层的持股比例显著正相关,但与高管层年薪相关关系不显著;成长性较低的公司.其经营绩效的提高与独立董事比例和高管层的持股比例相关关系均不显著,但与高管层年薪存在弱的正相关关系.     

The role of human and social board capital in driving CSR reporting

The objective of this paper is to analyze the effect of the professional, technical and relational background (human and social capital) of outside directors on promoting firm CSR disclosure. Following the Hillman et al. (2000) taxonomy of board members, we classify outside directors as business experts, support specialists and community influential, and examine whether business and technical expertise or political ties in the boardroom affect CSR disclosure.This study confirms that not all outside directors are equally effective in improving CSR disclosure and that only certain kinds of outside directors, those classified as support specialists, help promote it. On the other hand, our findings also show that directors with previous experience as politicians affect CSR disclosure negatively, probably due to their interests in safeguarding their reputation within the company, in avoiding public scrutiny and in protecting their political connections. In addition, our set of analysis with interaction effects reveals that powerful CEOs have the incentive to promote CSR-related strategies and to convince business experts and support specialist directors to enhance profitable sustainability strategies and transparency in CSR disclosure. Nevertheless, the powerful CEO effect is not enough to compensate the negative role of political directors on CSR reporting. Therefore, this paper supports the theories in favor of analyzing the multiple configurations of corporate governance mechanisms by adopting a holistic approach, and the need to combine these configurations in order to analyze their impact on CSR behavior.     

Board attributes and foreign shareholdings in Malaysian listed firms

This study examines the association between foreign shareholdings and several characteristics of board of directors in the context of a developing capital market. Using data of 777 listed firms on Bursa Malaysia for the financial year 2008, the study predicts that foreign shareholdings are positively related to board independence, multiple directorships, and financial literacy of the board of directors. The study finds a strong positive relationship between multiple directorships and foreign shareholdings. Contrary to our expectation, the association between board financial literacy and foreign shareholdings is negative and significant. With regard to the link between board independence and foreign shareholdings, we find weak evidence to support our prediction that there is positive relationship between board independence and foreign shareholdings. The multivariate results also show strong positive relationships between foreign shareholdings and number of foreign directors on boards, and between foreign shareholdings and audit quality. The study also documents a significant negative association between foreign shareholdings and firm size, and between foreign shareholdings and book-to-market ratio. The findings of the study supports the view that multiple directorships is an important asset to firms in emerging markets partly due to limited pool of potential talents and experts which in turn could signal reputational capital and quality of directors. Since there is a mandated presence of finance and accounting qualified director on the audit committee, foreign shareholders can somewhat rely on the oversight of audit committee instead of depending entirely on the board of directors for the quality of financial statements and financial reporting oversight. Finally, the presence of foreign directors on a board of directors may signal a firm’s commitment to adopt good corporate governance practices. It is also possible that foreign investors can influence corporate governance through their participation on the board of directors.     

Executive remuneration in blockholder-dominated firms. How do Italian firms use stock options?

The aim of this study is to explore how stock options are used for executive remuneration in blockholder-dominated listed firms. By analysing how stock options granted to executive directors were designed, this paper sheds light on how stock options are used in Italian blockholder-dominated listed firms. Empirical evidence from a unique hand-collected dataset comprising stock options granted by Italian non-financial listed firms between 2004 and 2006 suggests that stock option design seems to be better explained by rent-extraction theory than by optimal contracting theory. Our results suggest that board independence, particularly in terms of minority shareholders?? representation, seems to have a positive influence on stock option design. These findings are consistent with rent-extraction theory: stock option designs that are not explained by optimal-contracting theory are likely to reflect governance/agency problems. This study provides insights on executive remuneration to policy-makers. It is recommended that codes of best practice should stress the importance of stock option design and of remuneration committees?? independence, in particular in terms of minority shareholders?? representation. Last but not least, this study points out the importance of enforcing substantial compliance with the codes?? recommendations.     

Effect of the board of directors and the audit committee on firm performance: a panel data analysis

This research examines the relationship between independent directors, the audit committee (AC), and firm performance, taking into account the impact of the chief executive officer’s powers and block shareholders. We use the maximum likelihood estimator, based on agency theory assumptions and cylindered panel data, to examine three models of firm performance. The results show that the independence of the board is reflected clearly by increased economic and equity performance of the firm. However, an AC that is fully independent or meets frequently is associated with lower firm performance. Unlike pension funds, institutional shareholders can be considered an effective control mechanism in the context of France. Our results development includes advanced explanations for market liquidity and shareholders’ portfolios. The study period ends before the European regulation on ACs came into effect in 2008. This allows for an appreciation of soft law in French corporate governance. It also lets us compare the data with the way firms operate their boards one decade later. The evidence provides useful guidelines on the supremacy of soft law in corporate governance and suggests that the composition and functioning of the board of directors should be moderated based on the firms’ context. The specificity of the cylindered panel data helps to better examine the impact of the board and AC’s independence and functioning in French corporate governance structure.