Adaptive conjoint analysis: A new approach to defining corporate governance

• Date: 01 November 2017
• Author: Alan Kilgore,Christofer Adrian,Sue Wright
• Published date: 01 November 2017
• DOI: http://doi.org/10.1111/corg.12169

SPECIAL ISSUE ARTICLE

Adaptive conjoint analysis: A new approach to defining

corporate governance

Christofer Adrian |Sue Wright |Alan Kilgore

Faculty of Business and Economics Macquarie

University

Correspondence

Faculty of Business and Economics, Macquarie

University.

Tel: +612 9850 4773;

Fax: +612 9850 8497.

Email: christofer.adrian@mq.edu.au

Abstract

Manuscript Type: Empirical

Research Question/Issue: The method introduced to the corporate governance literature

by this paper captures the construct of corporate governance in a small number of attributes,using

responses made by directors and shareholders to an adaptive conjoint analysis questionnaire.

Research Findings/Insights: We demonstrate how to identify the key attributes of corpo-

rate governance from directors' and shareholders' relative preferences among a set of corporate

governance attributes. The dominance of CEO duality as a relatively more important attribute is a

key finding.

Theoretical/Academic Implications: Adaptive conjoint analysis is a useful technique for

research into governance issues characterized by constrained choice. For future researchers

seeking to capture governance in a limited number of measures, we have identified four attri-

butes considered by directors and shareholders to comprise effective corporate governance, with

the single measure of CEO duality being the most important.

Practitioner/Policy Implications: This parsimonious set of attributes can guide the design

of future corporate governance regulations, to avoid costly over‐regulation. We do not suggest

that restrictions on multiple directorships or an appropriate board size should be added to current

requirements, and the surprisingly low perceptions of audit partner tenure and audit committee

size as important to good corporate governance suggest that these attributes could be excluded

from future regulations.

KEYWORDS

Corporate Governance, Directors and Shareholders, Relative Importance, Adaptive Conjoint

Analysis

1|INTRODUCTION

Many national corporate regulators have included and strengthened

corporate governance metrics in their rules and recommendations

since the 2000s, as they sought to improve confidence in capital mar-

kets. The number of those metrics has grown, sometimes in a piece-

meal fashion, in response to broadly recognized problems in practice,

creating the potential for over‐regulation. Further, the metrics have

been selected without reference to academic evidence on what is

“good,”due to the lack of prior research providing guidance on key fac-

tors that comprise good corporate governance. This paper provides

such academic evidence by investigating directors' and shareholders'

perceptions of effective corporate governance.

We describe a method that facilitates this investigation, adaptive

conjoint analysis (ACA), and report on its application in an Australian

setting. By identifying the relative preferences of directors and share-

holders from nine corporate governance attributes, we determine a

parsimonious set of attributes important to these stakeholders' per-

ceptions of good corporate governance.

The movement towards stronger corporate governance require-

ments arose in response to corporate collapses and their adverse con-

sequences. For example, in the UK, the collapse of Polly Peck led to the

establishment of the UK Corporate Governance Code. In the US, the

Sarbanes‐Oxley Act (SOX) was enacted in 2002 after the collapse of

Enron. In Australia, two important regulatory changes to governance

were introduced following a significant corporate collapse: the

Revised: 27 October 2015

DOI: 10.1111/corg.12169

428 © 2016 John Wiley & Sons Ltd Corp Govern Int Rev. 2017;25:428–439.wileyonlinelibrary.com/journal/corg