Search:
Computing and Library Services - delivering an inspiring information environment

Key drivers of 'good' corporate governance and the appropriateness of UK policy responses : final report

Filatotchev, Igor, Jackson, Gregory, Gospel, Howard and Allcock, Deborah (2007) Key drivers of 'good' corporate governance and the appropriateness of UK policy responses : final report. Project Report. The Department of Trade and Industry and King's College London, London, UK.

[img]
Preview
PDF
Download (846kB) | Preview

    Abstract

    The DTI’s Corporate Law and Governance strategy aims to promote and deliver an effective
    framework for corporate governance in the UK, giving confidence to investors, business, and
    other stakeholders to underpin the relationship between an organisation and those who hold
    future financial claims against that organisation. However, corporate governance involves
    various problems of asymmetric information and incomplete contracts that generate a need for
    public policy responses to mitigate market failures and ensuring that companies moves towards
    ‘good’ corporate governance. Since the early 1990s, the UK has been very active in
    undertaking policy reforms that includes a number of corporate governance codes, expert
    reports, a high level review of company law, and new regulations and legislation. These policy
    initiatives need to be monitored and evaluated in terms of their success in influencing the key
    drivers of ‘good’ corporate governance.
    This Report undertaken for the DTI has several aims: to identify key drivers of good corporate
    governance based on a review of social science literature; to describe the content of UK
    regulatory initiatives with regard to those drivers; and to evaluate gaps in the content and
    implementation of UK policy regarding corporate governance, using those drivers as
    benchmarks. In addition, some further implications of this study are discussed for future policy
    and research on UK corporate governance.
    The Report identifies key drivers of good corporate governance based on extensive review of
    the broad social science literature. Good corporate governance is defined here with regard to
    the rights and responsibilities of company stakeholders, and the wealth-creating and wealthprotecting
    functions of corporate governance within this context. Based on this definition, a
    detailed review of the theoretical and empirical social science literature on corporate
    governance was undertaken across seven broad areas: boards of directors, shareholder
    activism, information disclosure, auditing and internal controls, executive pay, the market for
    corporate control, and stakeholders. The result was the identification of 18 key ‘drivers’ or
    governance mechanisms, which promote ‘good’ corporate governance. An internet-based
    survey of international corporate governance experts was conducted in order to confirm and
    further specify these drivers in relation to the UK context.
    Next, key gaps in the UK regulatory framework are explored with reference to the drivers of
    good corporate governance. A comprehensive review was undertaken to evaluate corporate
    governance-related developments in UK regulation since 1990. Policy initiatives were
    analysed with regard to both their content and effectiveness in promoting each of the identified
    drivers. Several potential gaps in coverage were identified in the areas of executive pay and
    employees stakeholders. A number of potential gaps in effectiveness were also identified with
    regard to other key drivers such as boards, shareholder involvement, information disclosure,
    auditing, and the market for corporate control. The analysis was supported by feedback from a
    Focus Group of expert practitioners that took place at the DTI in January 2006.
    The Report also emphasises that the effectiveness of corporate governance regulation depends
    very much on balancing different governance demands and regulatory trade-offs. Corporate
    governance is shaped by a number of contingencies, complementarities, and costs. Various
    organisational contingencies may place different demands on corporate governance drivers, and
    their implementation is also associated with different sorts of costs. Looking more generally,
    different drivers may act as complements or substitutes for one another. Better appreciation of such interdependencies is crucial to formulating a coherent regulatory strategy and balancing
    important regulatory trade-offs between the following - mandatory regulation (uniform
    requirements) and more flexible forms of soft-law such as codes based on comply-or-explain
    principles and self-regulatory norms of professional groups.
    This analysis suggests a number of areas for future research. Bearing in mind the depth and
    breadth of the UK regulatory initiatives, it is important to verify whether they were followed by
    behavioural changes of the participants in corporate governance mechanisms, including
    unintended consequences such as the development of ‘gaming’ practices. Further research is
    needed on a potential ‘gatekeeper failure’ in situations where reliance on ‘reputational
    intermediaries’, such as auditors, securities analysts, attorneys, and other professionals, is not
    fully justified. Other research recommendations are related to wealth creation and performance
    trade-offs. It is important to go beyond the question of maximizing shareholder returns and
    consider to what extent different corporate governance configurations promote long-term,
    value-creating economic production in a fashion that benefits not only shareholders but also
    other groups that make specific investments in corporations. Finally, a more holistic approach
    to the effectiveness of corporate governance drivers requires further research on such aspects as
    stakeholder involvement, contingencies, complementarities, and cost aspects that may affect the
    effectiveness of corporate governance mechanisms.
    The authors would like to point out that, since the report was written, there have been various
    developments, not least changes in UK law, which have overtaken some of the details in our
    analysis. However, the basic review of the evidence basis and the perspectives offered remain
    very much current.

    ▼ Jump to Download Statistics
    Item Type: Monograph (Project Report)
    Additional Information: UoA 35 (Accounting and Finance) © Crown Copyright 2007
    Subjects: H Social Sciences > HF Commerce
    H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
    H Social Sciences > H Social Sciences (General)
    Schools: The Business School
    The Business School > Financial Ethics and Governance Research Group
    Related URLs:
    References:

    Abhyankar, A., Ho, Keng-Yu and Zhao, Huainan. 2005. Long-run Post Merger Stock
    Performance of UK Acquiring Firms: A Stochastic Dominance Perspective.
    Working Paper Series.
    Abraham, S. and Tonks, I. 2004. Voluntary corporate disclosure by UK companies’:
    mimeo Exeter.
    Addison, J. T., Schnabel, K., and Wagner, J. 2004. The course of research into the
    economic consequences of German works councils. British Journal of Industrial
    Relations, 42(2): 255-281.
    Admati, A., Pfleiderer, P., and Zechner, J. 1994. Large shareholder activism, risk
    sharing, and financial market equilibrium. Journal of Political Economy, 102:
    1097-1130.
    Agrawal, A. and Knoeber, C. 1996. Firm performance and mechanisms to control
    agency problems between managers and shareholders. Journal of Financial and
    Quantitative Analysis, 31: 377-395.
    Agrawal, A. and. J., Jeffrey F. 2002. Do Takeover Targets Under-perform? Evidence
    from Operating and Stock Returns. Working Paper Series.
    Agrawal, A. and Jaffe, J. F. 2003. The Disciplinary Motive for Takeovers: A Review of
    the Empirical Evidence. Journal of Financial and Quantitative Analysis, 31:
    213-234.
    Aguilera, R. V. and Jackson, G. 2003. The Cross-National Diversity of Corporate
    Governance: Dimensions and Determinants. Academy of Management Review,
    XII(3, July): 1-19.
    Aguilera, R. 2005. Corporate governance and director accountability: an institutional
    comparative perspective. British Journal of Management, 16(S39-S53. ).
    Akerlof, G. 1980. The market for “lemons”: qualitative uncertainty and the market
    mechanism. Quaterly Journal of Economics, 84(3): 488-500.
    Alchian, A. A. and Demsetz, H. 1972. Production, information costs, and economic
    organization. American Economic Review, 62: 777-795.
    Alexander, J. A., Fennell, M. L., and Halpern, M. T. 1993. Leadership instability in
    hospitals: The influence of board-CEO relations and organizational growth and
    decline. Administrative Science Quarterly, 38: 74-99.
    Al-Hawamdeh, A. and Snaith, I. 2005. Is "private briefing" illegal in the United
    Kingdom? Corporate Governance: An International Review, 13(4): 489-504.
    Anderson, R., Mansi, S., and Reeb, D. 2003. Founding family ownership and the
    agency costs of debt. Journal of Financial Economics, 68: 263-285.
    Andrade, G., Mitchell, M., and Stafford, E. 2001. New Evidence and Perspectives on
    Mergers? Journal of Economic Perspectives: 103-120.
    Ang, J., Cole, R., and Lin, J. 2000. Agency costs and ownership structure. Journal of
    Finance, 55: 81-106.
    Angelini, P., Di Salvo, R., and Ferri, G. 1998. Availability and cost of credit for small
    businesses. Journal of Banking & Finance, 22: 925-954.
    Aoki, M. 1988. Information, incentives, and bargaining in the Japanese economy.
    Cambridge: Cambridge University Press.
    Aoki, M. 1994. The Japanese Firm as a System of Attributes. In M. Aoki & R. Dore
    (Eds.), The Japanese Firm: Sources of Competitive Strength: 11-40. Oxford:
    Oxford University Press.
    193
    Aoki, M. 2006. Whither Japan’s Corporate Governance? Toward External Monitoring
    of Internal Linkage. In M. Aoki & G. Jackson & H. Miyajima (Eds.), Corporate
    Governance in Japan: Organizational Diversity and Institutional Change.
    Oxford: Oxford University Press.
    Aoki, M. and Patrick, H. (Eds.). 1994. The Japanese Main Bank System: Its Relevance
    for Developing and Transforming Economies. Oxford: Oxford University Press.
    Aoki, M. 2001. Information, Corporate Governance, and Institutional Diversity.
    Oxford: Oxford University Press.
    Aoki, M. 2001. Toward a Comparative Institutional Analysis. Cambridge, MA: MIT
    Press.
    Archambeault, D. and DeZoort, T. 2001. Auditor Opinion Shopping and the Audit
    Committee: An Analysis of Suspicious Auditor Switches. International Journal
    of Auditing, 5: 33–52.
    Arthur, N. 2001. Board Composition as the Outcome of an Internal Bargaining Process:
    Empirical Evidence. Journal of Corporate Finance, 7: 307-340.
    Ascioglu, A., Hegde, S. P., and McDermott, J. B. 2005. Auditor compensation,
    disclosure quality, and market liquidity: Evidence from the stock market.
    Journal of Accounting and Public Policy, 24(4): 325-354.
    Ashbaugh-Skaife, H., LaFond, R., and Mayhew, B. W. 2003. Do Non-Audit Services
    Compromise Auditor Independence? Further Evidence. University of
    Wisconsin Working paper.
    Association of British Insurers. 1994. Long-term remuneration for senior executives.
    London: ABI.
    Association of British Insurers. 1996. Long term incentive schemes - Notes of
    emerging good practice. London: ABI.
    Association of British Insurers. 1999. Share incentives: A statement of principles.
    London: ABI.
    Association of British Insurers. 2002. Executive compensation and share based
    remuneration: Guidelines for share incentive schemes. London: ABI.
    Association of British Insurers. 2004. Principles and Guidelines on Remuneration.
    London: ABI.
    Asthana, S., Balsam, S., and Kim, S. 2004. The Effect of Enron, Andersen, and
    Sarbanes-Oxley on the Market for Audit Services. Mimeo
    Baker, R. C. and Owsen, D. M. 2002. Increasing the role of auditing in corporate
    governance. Critical Perspectives on Accounting, 13(5-6): 783-795.
    Barnes, P. 1999. Predicting UK Takeover Targets: Some Methodological Issues and an
    Empirical Study. Review of Quantitative Finance and Accounting, 12(3): 283.
    Barnhart, S. W. and Rosenstein, S. 1998. Board composition, managerial ownership,
    and firm performance: An empirical analysis. The Financial Review, 33: 1-16.
    Barton, H. 1992. Does top management add value to investment decisions. Long Range
    Planning, 25(5): 43-58.
    Bathala, C. T. and Rao, R. P. 1995. The determinants of board composition: An agency
    theory perspective. Managerial and Decision Economics, 16: 59-69.
    Baums, T. 1993. Takeovers versus institutions in corporate governance in Germany. In
    D. D. Prentice & P. R. J. Holland (Eds.), Contemporary Issues in Corporate
    Governance: 151-183. Oxford: Clarendon Press.
    Baums, T. and Frick, B. 1998. Codetermination in Germany: the impact of court
    decisions on the market value of the firm. Economic Analysis, 1,2: 143-161.
    Baysinger, B. D. and Butler, H. 1985. Corporate governance and the board of directors:
    Performance effects of changes in board composition. Journal of Law,
    194
    Economics, & Organization, 1: 101-134.
    Baysinger, B. D. and Hoskisson, R. E. 1990. The Composition of Boards of Directors
    and Strategic Control: Effects on Corporate Strategy. Academy of Management
    Review, 15: 72-87.
    Baysinger, B. D., Kosnik, D. R., and Turk, T. A. 1991. Effects of board and ownership
    structure on corporate R&D strategy. Academy of Management Journal, 34:
    205-214.
    Bazerman, M. and Schoorman, F. 1983. A limited rationality model of interlocking
    directorates. Academy of Management Review, 8: 206-217.
    Beasley, M. 1996. An empirical analysis of the relation between the board of director
    composition and financial statement fraud. The Accounting Review, 71: 443-
    465.
    Beattie, V. A., Goodacre, A., and Fearnley, S. 2003. And Then There Were Four: A
    Study of UK Audit Market Concentration - Causes, Consequences and the
    Scope for Market Adjustment. University of Stirling Discussion Paper, No.
    03/03.
    Beatty, R. P. and Zajac, E. J. 1994. Managerial incentives, monitoring and risk bearing:
    a study of executive compensation, ownership, and board structure in initial
    public offerings. Administrative Science Quarterly, 39(2): 313-335.
    Beatty, R. and Welch, I. 1996. Issuer expenses and legal liability in initial public
    offerings. Journal of Law and Economics, 39: 545-602.
    Bebchuk, L. 1994. Efficient and inefficient sales of corporate control. . Quarterly
    Journal of Economics 109: 957-994.
    Bebchuk, L. 1999. A rent-protection theory of corporate ownership and control:
    National Bureau of Economic Research Working Paper 7203, Cambridge (MA).
    Bebchuk, L., Kraakman, R., and Triantis, G. 1999. Stock pyramids, cross-ownership,
    and dual class equity: The creation and agency costs of separating control from
    cash flow rights. : National Bureau of Economic Research Working Paper 6951,
    Cambridge (MA).
    Bebchuk, L. A. and Roe, M. J. 1999. A Theory of Path Dependence in Corporate
    Governance and Ownership. Columbia Law School, Center for Law and
    Economic Studies, Working Papers, No. 131.
    Beekes, W. and Brown, P. 2005. Do better governed Australian firms make more
    information disclosures? Mimeo, Lancaster.
    Beekun, R. I., Stedham, Y., and Young, G. J. 1998. Board characteristics, managerial
    controls and corporate strategy: A study of U.S. hospitals. Journal of
    Management, 24: 3-19.
    Bennedsen, M. and Wolfenzon, D. 2000. The balance of power in closely held
    corporations. Journal of Financial Economics, 58: 113-139.
    Berglöf, E. 1990. Capital structure as a mechanism of control: A comparison of
    financial systems. In B. Gustafsson & O. Williamson (Eds.), The Firm as a
    Nexus of Treaties: 237-262. Cambridge MA: MIT Press.
    Berglöf, E. 1991. Corporate control and capital structure : essays on property rights and
    financial contracts. Stockholm School of Economics : Distributed by IIB
    Institute of International Business, Stockholm.
    Berglöf, E. and Perotti, E. 1994. The governance structure of Japanese keiretsu. Journal
    of Financial Economics, 35: 45-57.
    Berle, A. A. and Means, G. C. 1932. The Modern Corporation and Private Property.
    New York: Macmillan.
    Berman, S., Wicks, A., Kotha, S., and Jones, T. M. 1999. ‘Does stakeholder orientation
    195
    matter? The relationship between stakeholder management models and firm
    financial performance’. Academy of Management Journal, 42(5): 488-505.
    Bethel, J. E. and Liebeskind, J. 1993. The Effects of Ownership Structure on Corporate
    Restructuring. Strategic Management Journal, 14 (special issue): 5-31.
    Beyer, J. and Hassel, A. 2002. The Effects of Convergence: Internationalisation and the
    Changing Distribution of Net Value Added in Large German Firms. Economy
    and Society, 31(3): 309-332.
    Bhagat, S., Shleifer, A., and Vishney, R. W. 1990. Hostile Takeovers in the 1980s: The
    Return to Corporate Specialization. In M. N. Baily & C. Winston (Eds.),
    Brookings Papers on Economic Activity: Microeconomics: 1-84. Washington
    DC: Brookings Institution.
    Bhagat, S. and Black, B. 1999. The uncertain relationship between board composition
    and firm performance. Business Lawyer, 54: 921-963.
    Bhattacharya, S. and Chiesa, G. 1995. Proprietary information, financial
    intermediation, and research incentives. Journal of Financial Intermediation, 4:
    328-357.
    Bittlingmayer, G. 1998. The Market for Corporate Control (Including Takeovers). In B.
    Bouckaert & G. D. Geest (Eds.), Encyclopedia of Law and Economics: Edward
    Elgar.
    Black, B. S. 1992. Agents watching agents: the promise of institutional investor voice.
    UCLA Law Review, 39: 811-839.
    Black, B. and Coffee, J. 1994. Hail Britannia: institutional investor behaviour under
    limited regulation Michigan Law Review, 92: 1997-2087.
    Black, B. S. and Gilson, R. J. 1998. Venture Capital and the Structure of Capital
    Markets: Banks Versus Stock Markets. Journal of Financial Economics, 47:
    243-277.
    Blackburn, S. 1999. Managing risk and achieving Turnbull compliance. Accountants'
    Digest, 417: 1-51.
    Blair, M. M. 1993. The Deal decade : what takeovers and leveraged buyouts mean for
    corporate governance. Washington, D.C.: Brookings Institution.
    Blair, M. 1995. Ownership and control: rethinking corporate governance for the
    twenty-first century. Washington.D.C: Brookings Institute.
    Blair, M. and Stout, L. A. 1999. A team production theory of corporate law. Virginia
    Law Review, 85: 247-328.
    Blair, M. M. and Stout, L. A. 2001. Trust, Trustworthiness, and the Behavioral
    Foundations of Corporate Law. University of Pennsylvania Law Review,
    149(June): 1735–1810.
    Blair, M. M. and Stout, L. A. 2006. Specific Investment and Corporate Law. European
    Business Organization Law Review.
    Blair, M. M. 2002. Post-Enron Reflections on Comparative Corporate Governance.
    Georgetown Law and Economics Research Paper, No. 316663.
    Boeker, W. 1992. Power and managerial dismissal: Scapegoating at the top.
    Administrative Science Quarterly, 37: 400-421.
    Boeker, W. and Goodstain, J. 1993. Performance and successor choice: the moderating
    effects of governance and ownership. Academy of Management Journal, 36:
    172-186.
    Bond, S., Meghir, C., and Windmeijer, F. 1998. Productivity, Investment and the
    Threat of Takeover. Mimeo, Institute for Fiscal Studies, London.
    Boot, A. and Thakor, A. 1997a. Financial system architecture. Review of Financial
    Studies, 10: 693-733.
    196
    Boot, A. and Thakor, A. 1997b. Banking scope and financial innovation. Review of
    Financial Studies, 10: 1099-1131.
    Borrie, G. and Dehn, G. 2001. Whistleblowing the new perspective [online]
    www.pcaw.co.uk/policy%5Fpub/newperspective.html [accessed 05/12/05.]
    Botosan, C. A. 1997. Disclosure level and the cost of equity capital The Accounting
    Review, 72(3): 3243-3349.
    Botosan, C. A. and Frost, C. 1998. Regulation, disclosure, and market liquidity.
    Mimeo, Washington University and Dartmouth College.
    Botosan, C. A. and Plumlee, L. A. 2002. A re-examination of disclosure level and the
    expected cost of equity capital. Journal of Accounting Research, 41(1): 21-40.
    Bowie, N. and Duska, R. 1990. Business Ethics. New Jersey: Prentice Hall.
    Boyd, B. K. 1994. Board control and CEO compensation. Strategic Management
    Journal, 15: 335-344. .
    Brady, G. F. and Helmich, D. L. 1984. Executive succession. Englewood Cliffs, NJ:
    Prentice Hall.
    Bratton, W. W. 2002. Enron and the Dark Side of Shareholder Value. Tulane Law
    Review, May: Forthcoming.
    Brav, A. and Gompers, P. A. 1997. Myth or reality? The long-run underperformance of
    initial public offerings: Evidence from venture and nonventure capital-backed
    companies. Journal of Finance, 52(5): 1791-1821.
    Brennan, N. 1999. Voluntary disclosure of profit forecasts by target companies in
    takeover bids. Journal of Business Finance and Accounting, 26: 883-918.
    Brett, M. 2003. Company owners need more say in pay. Estates gazette(322): 40.
    Brickley, J., Lease, R., and Smith, C. 1988. Ownership structure and voting on anti
    takeover amendments’, Journal of Financial Economics. Journal of Financial
    Economics 20: 267-291.
    Brickley, J. A., Coles, J. L., and Terry, R. L. 1994. Outside directors and the adoption
    of poison pills. Journal of Financial Economics, 35: 371-390.
    Brinker Dozier, J. and Miceli, M. P. 1985. Potential predictors of whistle-blowing: A
    prosocial behavior perspective. Academy of Management Review, 10(4): 823-
    836.
    Bruce, A. and Buck, T. 1997. Executive reward and corporate governance. In K.
    Keasey & S. Thompson & M. Wright (Eds.), Corporate governance: Economic,
    management and financial issues. Oxford: Oxford University Press.
    Bruner, R. 2002. Does M&A Pay? A Survey of Evidence for the Decision-Maker.
    Journal of Applied Finance, 57: 1731-1761.
    Bruton, G., Ahlstrom, D., and Wan, J. 2003. Turnaround in East Asian firms: evidence
    from ethnic overseas Chinese communities. Strategic Management Journal, 24:
    519-540.
    Buchholtz, A. K. and Ribbens, B. A. 1994. Role of chief executive officers in takeover
    resistance: Effects of CEO incentives and individual characteristics. Academy
    of Management Journal, 37: 554-579.
    Buck, T., Bruce, A., Main, B. G. M., and Udueni, H. 2003. Long term incentive plans,
    executive pay and UK company performance. Journal of Management Studies,
    40(7): 1703-1721.
    Buck, T. and Sharhrim, A. 2005. The Translation of Corporate Governance Changes
    Across National Cultures: The Case of Germany. Journal of International
    Business Studies, 36: 42-61.
    Bushee, B. J. and Noe, C. F. 2000. Disclosure quality, institutional investors, and stock
    return volatility. Journal of Accounting Research, 38 (Supplement): 171-202.
    197
    Bushee, B. J. and Leuz, C. 2004. Economic consequences of SEC regulation: evidence
    from the OTC bulletin board. Mimeo, Wharton School.
    Bushman, R., Piotroski, J., and Smith, A. 2001. What determines corporate
    transparency? Mimeo, University of Chicago.
    Bushman, R., Piotroski, J., and Smith A. 2004. What determines corporate
    transparency? Journal of Accounting Research, 42(2): 207-252.
    Cadbury, A. 1992. Report of the committee on financial aspects of corporate

    Depositing User: Sara Taylor
    Date Deposited: 15 Nov 2007
    Last Modified: 28 Jul 2010 19:21
    URI: http://eprints.hud.ac.uk/id/eprint/473

    Document Downloads

    Downloader Countries

    More statistics for this item...

    Item control for Repository Staff only:

    View Item

    University of Huddersfield, Queensgate, Huddersfield, HD1 3DH Copyright and Disclaimer All rights reserved ©