Corporate Governance: An International Review

Name: Corporate Governance: An International Review
Creator: vLex
License: https://vlex.com/terms-of-service/

Publisher:: Wiley
Publication date:: 2021-02-01

ISBN:: 0964-8410

Issue Number

No. 32-6, November 2024

Latest documents

Do Board‐Level Employee Representatives Increase Pay Equity in Firms?
Question/Issue This study investigates the role of board‐level employee representatives (BLERs), a common corporate governance practice in Europe, in determining the pay ratio between CEOs and average employees. Research Findings/Insights Using 15,340 firm‐year observations from 17 European countries between 2001 and 2019, we find that BLERs provide greater bargaining power to the board for dealing with CEOs and use this power to reduce the pay gap between CEOs and employees. Subsample analyses indicate that bargaining power is more apparent when BLERs are more socially connected, have longer tenure, and hold more seats on the board. Theoretical/Academic Implications This study supports the role of BLERs in providing workers with more bargaining power to create fairer wage distribution in firms. Furthermore, it supports the fair wage–effort theory, indicating a positive effect of lower pay ratios on firm value following the presence of BLERs. Practitioner/Policy Implications This study demonstrates the effects of a unique corporate governance practice, the presence of BLERs, on companies' wage distribution, with significant policy implications. In particular, the results indicate that when presented with opportunities in affecting companies decision‐making BLERs provide fairer environments for the workers who they represent.
Issue Information
No abstract is available for this article.
Lead Independent Directors and Internal Information Environment
Research Question/Issue This study explores the relationship between the presence of a lead independent director (LID) and firms' internal information environment. LIDs are elected independent members of the board who perform key duties for the independent directors and the board, including reviewing and approving board meeting agendas, chairing non‐executive board meetings, and acting as a liaison between the CEO and other independent directors. We hypothesize that LID presence lowers information barriers between the CEO and the rest of the board members, enabling more rapid information acquisition and integration and enhancing the internal information environment of the firm. Research Findings/Insights Using a sample of US publicly listed companies from 2001 to 2019, we document that LID presence on the board is positively associated with proxies of internal information quality that reflect better information acquisition and information integration: accuracy and precision of management earnings forecasts, speed of earnings announcement, and absence of material weaknesses in internal controls. These results are robust to alternative model specifications, including entropy balancing, Heckman two‐step correction for self‐selection bias, firm fixed effects, and placebo tests. Further analyses suggest that LIDs with financial expertise and audit committee memberships are more effective in positively influencing internal information quality. We also show that LID presence is positively associated with several proxies of external information quality. Theoretical/Academic Implications We build on agency theory to argue that LIDs improve internal information quality by reinforcing the information quality benefits of unified leadership while mitigating potential compromises in information quality arising from entrenchment. Similarly, we use arguments emanating from the novel strategic leadership systems theory to posit that a LID appointment facilitates the tasks of the CEO and the board, enhancing the effectiveness of both groups in their respective roles: the CEO in making operating and investment decisions and the board in strengthening oversight while bringing cohesion in their shared role of strategy visioning and implementation. Practitioner/Policy Implications Our findings suggest that there is scope for shareholders to consider LID appointments as an addition to their firms' corporate governance structures to enhance the internal information environment and decision‐making efficiency. Policymakers can also encourage LID appointments on the board when promoting best practices in corporate governance through regulatory guidelines.
Common Ownership and Goodwill Impairments
Research Question/Issue Are companies monitored by common owners (i.e., institutional investors that block‐own [owning 5% or more] several companies in a single industry) more likely than other companies to record goodwill impairments when their assets are overstated? Research Findings/Insights We find that companies monitored by common owners are more likely than other companies to record goodwill impairments when their assets are overstated. The monitoring effect is stronger for common owners with a stronger incentive to monitor and with more industry knowledge and stronger for the co‐presence of multiple common owners. Our findings are in line with the notion that common owners have an economy of scale in monitoring and internalize the negative externality of delayed recording of goodwill impairment. We also find that common ownership is associated with lower information asymmetry, which in turn increases the timeliness of goodwill impairment. Theoretical/Academic Implications Our research emphasizes the monitoring role of common ownership in recording goodwill impairments. We find support for the mechanisms enabling common owners to be better monitors. Practitioner/Policy Implications The prevalence of common ownership has prompted regulatory and societal concerns regarding under‐investment in the oversight of the companies. Our findings documenting the association between common ownership and the timely recording of goodwill impairments are relevant to the ongoing debate regarding the potential costs and benefits of common ownership.
Institutional Investors and ESG Preferences
Research Question/Issue We examine the effect of multiple environmental, social, and governance (ESG) scores on institutional investor ownership of firms and investor portfolio weightings. We are also the first to analyze the three individual components of ESG rankings to estimate the relative preferences of institutional investors. Research Findings/Insights Using a unique panel dataset covering US companies and institutional investor portfolios over the 2010–2019 period, we find that while investors are driven to add high‐quality ESG companies to their portfolios, there is a negative relationship with ESG when it comes to taking large ownership stakes. Furthermore, ESG scores are negatively related to the portfolio weightings of institutional investors, which raises concerns of greenwashing. Our analysis of individual ESG scores points to significantly larger effects of G scores in terms of holdings, and G is the only score with no negative impact on portfolio weightings. Finally, in support of systematic stewardship theory, top institutional investors allocate higher proportions of their portfolios to firms with high‐ESG ratings. Our results are robust to the use of a difference‐in‐differences analysis addressing endogeneity concerns. Theoretical/Academic Implications The findings in this paper offer important policy implications for institutional investors, managers, and policymakers. Given the ongoing debate on ESG scores, this paper shows the importance of examining greenwashing for investors who have a concern regarding the extent to which the valuation of assets might be influenced by unsupported sustainability claims. In addition, our study adds to the debate regarding ESG investing and stewardship theory.
Board gender diversity, firm risk, and the intermediate mechanisms: A meta‐analysis
Research question The primary focus of this meta‐analysis is to synthesize previously discordant findings on the relationship between board gender diversity (BGD) and different types of firm risk and to explore potential moderating and mediating mechanisms underlying these relationships. Research findings We statistically combine the results from 193 studies and find a negative association between BGD and firm risk. Further investigation indicates that different measures of risk lead to systematically different effect sizes. Our meta‐analysis structural equation modeling (MASEM) analysis reveals that BGD's impact on risk operates primarily through the monitoring rather than advising function of the board. Regarding the moderating role of national institutions, we find that several aspects of the national institutional context (e.g., investor protection, gender equality, and national culture) influence the relationship between BGD and different types of risk. Theoretical implications Overall, our results suggest that agency theory has more explanatory power than resource dependence theory for understanding the association between BGD and risk, and women's board representation is more likely to reduce downside risk than upside risk. Our moderating effect analysis also highlights interesting avenues for further research on the interplay of BGD and different risks in national environments with varying institutional attributes. Practitioner/policy implications Our meta‐analysis offers important practical implications for corporate risk management, suggesting that BGD significantly mitigates downside risks associated with poor corporate transparency without stifling board support for corporate decisions shaping future growth potential. In an era of rising board vulnerability to litigation for insufficient transparency, this study contributes evidence supporting trends toward greater gender diversity.
Executives' Legal Expertise and Corporate Innovation
Research Question This study investigates whether and how executives with legal expertise impact corporate innovation. Research Findings Using a sample of listed firms in China, we have the following findings: (1) Firms that hire executives with legal expertise are associated with more corporate innovation. (2) These firms talk about potential legal risks and legal advisors more often in their annual reports and have lower chances of being sued in patent litigations. (3) The innovation‐promoting effect is stronger when the firms are state‐owned enterprises, have more overseas revenue, operate in high‐tech industries, have prior patent litigation experience, and are in strong legal environments. Theoretical/Academic Implications The findings indicate that executives with legal expertise bring more attention to legal risks and help the firm to shape a stable environment, which can effectively promote innovation activities. Also, the innovation‐promoting effect of lawyer executives complements the role of in‐house legal counsels and the external legal environment. This paper adds to the literature on the value of executives with legal background. Practitioner/Policy Implications Our results emphasize the important role played by executives with legal expertise in corporate innovation. Given the continuing shortage of legal talents and the gradual improvement of the legal system in China, firms need to employ more legal talents to avoid potential legal risks and maintain sustainable growth.
Bank Culture and Bank Liquidity Creation
Research Question/Issue This study aimed to understand the impact of bank culture on liquidity creation by applying textual analysis to data from US bank holding companies. Research Findings/Insights The results indicated a substantial connection between bank culture and liquidity creation. Control and collaborative cultures negatively impacted liquidity creation, whereas a competing culture had a positive effect. The negative impacts were stronger in more diversified, experienced, and profitable banks and weaker in larger banks. In complete culture banks, liquidity creation decreased with increased experience and profitability but increased with size. The influence of culture on the different aspects of liquidity creation was similar across the board for overall liquidity generation. Theoretical/Academic Implications By introducing a new bank culture index, this study offers a unique contribution to the academic understanding of the interplay between organizational culture and financial performance, particularly liquidity creation. Practitioner/Policy Implications The insights from this study are valuable for bank managers and regulators as they highlight the aspects of bank culture that can be leveraged or adjusted to optimize liquidity creation, thereby informing strategies and policy decisions.
Corruption and Bank Risk‐Taking in Dual Banking Systems
Research Question/Issue We investigate whether the risk‐taking of Islamic banks is affected differently by corruption compared to conventional banks. We also examine whether the characteristics of the Shari'ah Supervisory Board (SSB) of Islamic banks and the characteristics of the board of directors of conventional banks play an effective role in moderating such an effect. Research Findings/Insights We find consistent evidence that banks in countries with higher corruption have higher bank risk for both conventional and Islamic banks. However, this association is attenuated by the size of the SSB, the presence of female board members, and higher academic qualifications of SSB members. For conventional banks, the moderating effect of the presence of female directors and academically qualified members on the board of directors is also prevalent but to a lesser extent. Theoretical/Academic Implications This study contributes to the corporate finance literature more generally by highlighting the role played by corporate governance, particularly the presence of female members and academically qualified members on the SSBs of Islamic banks and on the board of directors of conventional banks, in mitigating the effect of corruption on bank risk‐taking for the two bank types. Practitioner/Policy Implications Our findings are based on a matched sample of banks operating in 10 OIC (Organization of Islamic Cooperation) countries and have important implications for bank stability and bank governance reforms. On the detrimental side, urgency of the anti‐corruption campaigns in these countries is justified due to the significant effect of corruption on risk‐taking for both conventional and Islamic banks. Overall, to better fight corruption in countries with dual banking systems, there is a need to enforce stricter rules for all types of banks.
The lines that divide: Board demographic faultlines and proactive environmental strategy
Manuscript Type The manuscript is of an empirical nature. Research Question/Issue The current ecological crisis requires boards of directors to tackle environmental concerns and manage dependencies with the external environment in highly dynamic conditions. Proactive environmental strategies (PESs) seek to establish alternative and innovative processes and products that create new market opportunities. By mobilizing the notion of board demographic faultlines, we investigate their link with PESs and the influence of the internal board dynamics and environmental factors on this relationship. Research Findings/Insights The multilevel regression analysis of a 7‐year sample of UK boards reveals that demographic faultlines hinder their information processing in adopting PESs. The results also show that the negative relationship between demographic faultlines and PESs is attenuated by the social similarity of the CEO and chair in the same subgroup and by the financial materiality of the natural environment. Theoretical/Academic Implications This study draws on faultline theory to analyze how the structure of board diversity through the alignment of multiple directors' demographic attributes affects board dynamics by creating polarized boards that shape sustainability decisions. This study underscores the disruptive effect of having socially distanced subgroups within the board and the salience of board leaders' social similarity and environmental factors in attenuating their dysfunctional effects. Practitioner/Policy Implications Board diversity is considered key to improving board decision‐making. By situating our empirical investigation in a country with a corporate governance model that fosters diversity in a dual leadership board structure that has influenced other countries' governance models, this study provides insights for policymakers and market participants on the unintended effects of the global call for board diversity on firms' proactive environmental stance. Our results call for establishing procedures to incentivize board socialization and facilitate directors' information processing.