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] PDF
Download (866kB)


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: Huddersfield Business School
Huddersfield 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] [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: 31 Mar 2018 15:17


Downloads per month over past year

Repository Staff Only: item control page

View Item View Item

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