Corporate Governance and Director Accountability: an Institutional Comparative Perspective*

This paper examines the role of boards of directors in light of institutional contingencies and recent best practice governance guidelines and regulation such as the United Kingdom Higgs Review and the United States Sarbanes‐Oxley Act 2002. Particular attention is paid to discussing the role of independent directors across countries, and the implications for corporate governance innovation. It concludes by posing questions about recent corporate governance transformations and providing suggestions for future research.     

The Effects of Information Overload on Software Project Risk Assessment*

Managers are responsible for providing effective information technology governance of the software development process. Ineffective governance leads to serious resource misallocations and negative consequences concerning Sarbanes‐Oxley compliance. In order for managers to make informed decisions about software development projects, they often need more information than is available through normal information channels, that is, they need an in‐depth review of the at‐risk project. Such in‐depth reviews, however, are costly. Hence, accurate identification of at‐risk projects for in‐depth review is critical to management's ability to govern. This research considers how two factors, information load and time pressure, affect the quality of the project‐selection process. We examine quality by observing the decision strategies involved and then relating these strategies to subsequent decision making. An experiment was conducted with experienced information systems auditors using a combination of policy‐capturing and computerized process‐tracing techniques. The participants in our study cope with information overload by accelerating their decision‐making process and adopting noncompensatory decision processes. Contrary to prior research, our process‐tracing analysis suggests that participants rarely filter information, thus implying that decision makers are unable to process all the information. Coping by resorting to noncompensatory strategies did not decrease decision quality unless combined with accelerated information processing. Participants also increase their weight on the software project risk factors that they repeatedly access and that they view for longer periods of time. The theoretical contributions and practical implications regarding what actions managers can take to reduce the negative impact of information overload are discussed.     

Auditor independence, corporate governance and aggressive financial reporting: an empirical analysis

This paper seeks to provide empirical evidence on the efficacy of three important governance mechanisms (auditors, directors, and institutional shareholders) in constraining aggressive financial reporting, proxied by abnormal accruals. It also examines the effects of the Sarbanes–Oxley Act (SOX) on their efficacy. Using a sample of US firms audited by the Big 5 (4) auditors between 2000 and 2004, we document a positive relation between abnormal accruals (our proxy for financial reporting aggressiveness) and auditors’ economic dependence on their clients. Furthermore, we find that this relation is driven by firms with weak non-auditor governance mechanisms before and after the enactment of SOX. The results suggest that aggressive financial reporting occurs only when multiple governance mechanisms ‘fail’. More specifically, such type of reporting requires that a highly dependent auditor operates in a ‘poor’ governance setting. Thus, the paper underscores the importance of strong governance in constraining aggressive financial reporting. Moreover, our results suggest that governance regulation (such as SOX) is not a substitute for strong governance mechanisms and thus caution against the over reliance on SOX-type legislation in other parts of the world.     

Advisers and the Fiduciary Duty Debate

This work concerns itself with the debate taking place in the United States about the duty of care financial advisers owe investors. On one side it is argued that advisers need only concern themselves with recommendations which meet certain suitability standards. On the other side, there are those who argue the suitability standard is not strong enough to adequately protect investor interests. Instead of ensuring investment recommendations are merely suitable, financial advisers owe their investors a fiduciary duty to “act in the best interest of the customer without regard to the financial or other interests … of the investment adviser providing the advice.” (SEC, 2011). In applying a properly understood conception of what fiduciary means I argue that regulations should not be harmonized but that fiduciary duty should apply to all who provide personalized investment advice to retail customers. I will further argue that even if the regulations are harmonized as proposed, because of exemptions for broker‐dealers as envisioned in the proposal, and which currently apply to Registered Investment Advisers, the efficacy of fiduciary duty is diluted to the point of rendering its current application, much less its potential uniform imposition, irrelevant.     

Corporate governance and the market reaction to stock repurchase announcement

This paper investigates the effect of corporate governance on market reaction around of a stock repurchase announcement. We argue that corporate governance affects the ability of a stock repurchase to alleviate agency costs related to free cash flows, and the credibility of the undervaluation signal sent by the announcement of buyback programs. We find a higher 3-day cumulative abnormal return to programs announced by firms with better corporate governance practices than those with bad governance (1.6% and 0.85% respectively), and the market reaction is significantly higher following the successive scandals in year 2001 (Enron, Arthur Anderson, WorldCom??) and the resulting Sarbanes?COxley Act of 2002. Further investigations indicate that firms with a lower Free Cash Flow to Asset ratio have a higher market reaction, which is consistent with the information signaling hypothesis, and this is more significant in firms with good governance practices, and following post Sarbanes?COxley Act.     

The Problem Is Fraud: Is the Solution Government Bounties?

Whistle‐blowing is the disclosure of organizational wrongdoing by internal or external parties either within the organization or publicly to outsiders who may be able to effect a positive change in action or activities. Organizations have been encouraged, especially since the passage in 2002 of the Sarbanes–Oxley Act, to establish a culture in which whistle‐blowing is seen as a positive mechanism to correct misconduct rather than a negative attack. This article addresses (1) whistle‐blowing in relationship fraud and (2) governmental “bounties” paid to persons who are willing to provide knowledge of organizational transgressions. The fraud could occur through a variety of mechanisms but, regardless of the fraud's cause, the long‐run result will be harmful to the organization, its employees, its customers, and the society in which the organization operates. The question is whether bounties are the most effective means by which to reduce the harm created by fraud.     

CEO Incentives and Customer‐Supplier Relations

This study explores how suppliers adjust their relation‐specific investments (RSI) in response to the different risk‐taking incentives provided by the customer firm to its CEO, during normal and transition periods. We investigate this relation using 17,553 customer–supplier transactions over the 1993–2013 period. We find strong evidence consistent with the risk‐taking argument. Specifically, we find that an increase in the risk‐taking incentives of customer CEOs leads to a decline in suppliers’ RSI in normal periods, but an increase in RSI during transition periods. We employ the FAS‐123R mandate to show that an exogenous reduction in customer CEO's incentive pay increases suppliers’ RSI. We reaffirm the effect with the passage of the Sarbanes–Oxley Act as a secondary quasi‐natural experiment. Finally, we examine several scenarios that either amplify or attenuate the observed relation, based on factors such as financial constraints, distress, growth opportunities, industry competition, and other firm characteristics. Our study contributes to the literature that examines the interplay between corporate policy and product market relationships.     

Same same but different: managerial influences on organisational performance in foundations and associations

In the last few years the management orientation of nonprofit organisation (NPOs) has been gaining importance. Management is said to have made the organisation of NPOs more effective and efficient. However, the influence of the institutional settings is often neglected in nonprofit management literature. By using a quantitative empirical approach this study investigates the influence of the legal type of Swiss nonprofits on the relationship between management dimensions and organisational performance. The research findings reveal significant differences in the management of foundations and associations. In particular, foundations have a competitive advantage in terms of innovation and market orientation. Whereas associations profit from investing in governance issues.     

Donor Reliance on Accounting and its Consequences for the Charitable Distribution Channel

The organization of charitable distribution channels to ensure donor contributions reach beneficiaries in an efficient manner and the use of accounting metrics of such efficiency (whether provided directly or by charity rating groups) are oft‐discussed issues in the nonprofit sector. The two issues are inextricably linked since reported efficiency measures influence subsequent donor giving. This study develops a parsimonious model of a charity that must decide how best to employ its resources, either by acting as a direct service provider or as a grant provider to organizations that provide services to beneficiaries. We show that the desire to boost perceptions of efficiency vis‐à‐vis accounting reports leads an organization to rely more on others to provide services rather than being a direct service provider. This temptation to expand either the scope or length of the charity supply line is muted by a desire to avoid redundant costs and improve service delivery. The model's results have implications both for the role of nonprofit accounting and observed distribution strategies of nonprofits.     

The Challenges of Socially Responsible Investment Among Institutional Investors: Exploring the Links Between Corporate Pension Funds and Corporate Governance

During the last few decades, globalization of finance markets has come under increasing pressure to manage the many risks that companies face due to the negative impact that certain financial crises have had on securities quoted on the stock exchange. Simultaneously, there is a growing tendency among different institutional investors to take into account nonfinancial aspects—social, environmental, and ethical values—of company management. In this respect, increasing numbers of asset managers are aware of the importance of nonfinancial aspects of company management for finance markets. Asset managers integrate corporate social responsibility, sustainability policies and corporate governance strategies as indicators in risk management and the search for long‐term investments. The largest segment of socially responsible investment (SRI) screened and mutual funds are portfolios that are privately managed on behalf of institutions. Socially responsible investors include private and public pension funds, mutual funds, and private accounts that are managed on behalf of institutional investors such as corporations, universities, hospitals, religious institutions, and nonprofit organizations, among others. The aim of this paper is to analyze the development of SRI‐screened management corporate pension plans in the Spanish finance market. Spain is one of the European countries with a less developed SRI institutional market. Since SRI is still at the fledgling stage in the Spanish institutional market, this analysis is restricted to the awareness of SRI among a sample of the total number of corporate pension funds or schemes in Spain. The paper concludes with some proposals to encourage wider SRI acceptance and practice in Spain.     

Public Trust in Local Government: Explaining the Role of Good Governance Practices

Public Organization Review - The primary purpose of this study was to examine the role of good governance practices on public trust in local government. In this study, a conceptual model was...     

Drivers and Outcomes of Long‐term Orientation in Cooperative Relationships

We argue in this paper that a buyer may deliberately develop long‐term orientation as a governance mechanism to deal with risks arising from exchange hazards, and to reduce the opportunistic behaviour of a supplier. While the exchange hazards of asset specificity pose a safeguarding problem, those of market uncertainty pose an adaptation problem. We test our model on a sample of 221 procurement partnerships. Our results show that satisfactory prior history of a supplier, asset specificity of the buyer and market uncertainty are all positively related to a buyer's long‐term orientation towards a supplier. Consistent with the idea that asset specificity and market uncertainty pose different governance problems, we find that satisfactory prior history reduces the positive relationship between asset specificity and a buyer's long‐term orientation, but enhances the positive relationship between market uncertainty and a buyer's long‐term orientation. We also find that a buyer's long‐term orientation fully mediates the relationship between satisfactory prior history and a supplier's opportunistic behaviour. Finally, implications on the theory and the practices of relationship governance are discussed.     

Risk based internal auditing within Greek banks: a case study approach

Internal Audit functions within Greek banks are imposed both by the Greek law for publicly listed enterprises (Law 3016/17.5.2002), as well as by the Bank of Greece (Bank of Greece Governor’s Act. Number 2577/9-3-2006). Based on the traditional approach of internal audit within Greek Banks, an inspection of branches and credit on a tick and check (compliance) basis was conducted. Recent research (Koutoupis and Tsamis, Fourth European Academic Conference on Internal Audit and Corporate Governance. Cass Business School, London, United Kingdom, 2006) comes to a conclusion that this approach does not result in adequate coverage of risks. In addition, new international regulations and best practices such as basel committee on banking supervision requirements, COSO enterprise risk management (ERM) suggested framework, as well as The Institute of internal auditors standards for professional practice of internal auditing (standards) were in most cases partially or fully ignored by the vast majority of Greek banks. However, minimum requirements regarding the operation of internal audit functions have been set up by the Bank of Greece, which in most cases are followed by the Greek banks, as well as periodically assessed by the above banking regulator. Risk based internal audit (RBIA) was an unknown concept for the vast majority of publicly listed and non-listed Greek enterprises until very recently. Only Greek subsidiaries of US and UK enterprises were aware of the RBIA audit concept (including big foreign banks which operate in Greece as subsidiaries), as they were periodically audited by group audit functions as an immediate result of relevant risk assessments. Also, the majority of Greek publicly listed enterprises use the audit cycle approach in developing their long term (3 year) and annual audit plans, which means that they audit specific business cycles and activities within a predefined time interval (1–3 years). Audit planning is based on the head’s of internal audit and internal auditors experience without formal application of risk assessment and audit planning techniques. All Greek banks that participated in the corporate governance and internal auditing survey (Koutoupis, Third European Academic Conference on Internal Audit and Corporate Governance, 2005) stated that they follow a risk-based audit approach and develop risk based audit plans; however the vast majority of them could not prove it through a clearly documented risk assessment and risk-based audit plan. Sarbanes–Oxley Act (2002) directed National Bank of Greece to adjust its audit planning process to a risk based one. Also, other big Greek banks (case study 1–3) are now either considering or adopting a RBIA approach, mostly because of Bank of Greece pressures. internal audit functions within small banks still follow the audit cycle approach. In this paper, current status of Greek banks RBIA approach will be discussed based on relevant references, as well as on three case study examples. This research will be based on relevant literature review, as well as authors’ professional experience in past and current projects related to risk assessment, audit planning and RBIA. Specifically, RBIA approach will be critically evaluated based on three big Greek banks analysis on a case study format and benchmark against basel requirements, ERM and standards for professional practice of internal auditing. Based on the relevant assessment, best practices and recommendations for improvement will be identified.     

Executives’ Views of Factors Affecting Governance Change in a Not‐for‐Profit Setting

Knowing the factors that executives deem critical to governance change can improve our understanding of how such changes come about and can help us evaluate those changes. Interviews with business and finance executives at 11 colleges reveal the importance to governance change of chief executive and board member leadership and interactions, as well as executive communication style. Costs are clear constraints to action, particularly since benefits are not quantified and are difficult to describe. Efforts to discuss governance with internal stakeholders require persistence to overcome narrow, individualized concerns. Communication about governance to external stakeholders is rare and represents a missed opportunity for stakeholder feedback and the development of trust. Executives appear willing to adopt governance forms without considering the idiosyncrasies of their institutional field, limiting the working definition of governance and its potential. For corporations and not‐for‐profit enterprises these findings hold implications for the context in which leadership is exercised and the shape of governance structures. They also pose a fundamental ethical dilemma for leaders to address.     

Changing Corporate Governance in Response to Negative Media Reports

We study how organizations change their corporate governance in response to negative publicity in the media. We build on insights from the literature on interpersonal trust to theorize how organizations respond to different types of trust‐damaging information. We suggest that organizations are likely to replace key individuals involved in the corporate governance process when trust‐damaging information provides evidence of low integrity. In contrast, organizations are likely to make changes in how the governance process is organized when trust‐damaging information provides evidence of low benevolence. We test our hypotheses by using data on publicly traded Korean firms from 2006 to 2013. Our results provide general support for our argument about corporate governance changes that organizations initiate in response to different types of trust‐damaging information. We also explore how foreign ownership and state ownership moderate organizational responses to trust‐damaging information.     

How Independent,Competent and Incentivized Should Non‐executive Directors Be? An Empirical Investigation of Good Governance Codes

There is a commonly held conviction among governance scholars and practitioners that increasing the number of non‐executive directors may have beneficial effects on board practices. This view has gained momentum after each wave of scandals. Given the relevance of the issue in governance studies and practices, the aim of this paper is to investigate how independent, competent and incentivized non‐executive directors should be according to governance scholars and board best practices. To answer this question, we conducted a review of the literature on non‐executive directors. We then collected corporate governance codes developed worldwide at the end of 2005, and made a comparative analysis of their recommendations about the independence, the competencies and the incentives of non‐executive directors. Our results show that (i) non‐executive directors' independence is a commonly recommended governance practice, the meaning of which differs widely among countries; (ii) non‐executive directors' competencies and incentives are not considered a governance issue to be regulated in detail; (iii) agency theory and the search for appropriate board demography tend to dominate the recommendations of governance literature and codes. Our findings have implications for both research and practice.     

Does social exchange relationship impair audit committee effectiveness?

This research applies the three-tier agency theory and social exchange theory to study the role of audit committees in improving financial reporting quality and reducing the likelihood of earnings restatements. Utilizing a matched sample of restated and non-restated U.S. listed firms between 2002 and 2005, this paper finds that firms with a larger proportion of audit committee members appointed after the CEO are associated with higher incidences of restatements, while the presence of an all-independent nomination committee is associated with a lower likelihood of restatements. The paper also shows that firms whose audit committee members have longer average tenure and receive higher director compensation are associated with a smaller likelihood of restatements. Finally, the paper documents changes in the impact of audit committee characteristics on financial restatements after the enactment of the Sarbanes–Oxley Act. Overall, our results suggest that audit committees’ effectiveness in supervising financial reporting quality is affected by social exchange processes and the broad social context.     

Operational Best Practices in Business Ethics: A Practical and Systematic Benchmarking Tool

This article describes a benchmarking tool managers can use to determine operational policies and processes that could enhance an organization's social and ethical performance. The benchmarking tool consists of a 13‐dimension, 110‐item survey based on an Optimal Ethics Systems Model. These best practices in business ethics are derived from an analysis and assessment of seven institutional infrastructures and accountability standards developed to help managers improve organizational social and ethical performance.     

参与度、信任与合作效果的关系——基于中国非营利组织与企业合作的实证分析

非营利组织与企业合作共同解决社会问题,是非营利组织和企业共同关注的发展战略,也是和谐社会建设的重要方面。本文基于中国非营利组织与企业合作的现实,通过建立合作双方参与度、信任关系与合作效果的假设模型,根据230个合作项目样本数据,利用回归分析进行了检验。分析结论表明,高的参与程度会带来良好的合作效果;信任在参与度与合作效果关系中的中介作用不完全一致:在参与度影响合作的直接效果中起中介作用;在参与度影响知识创造效果中没有起中介作用;在参与度影响社会效果中起到一定的中介作用。这对改进非营利组织与企业合作管理实践,以及有目的和针对性地实现相应合作效果具有指导意义。