Antecedents of voluntary corporate governance disclosure: a post-2007/08 financial crisis evidence from the influential UK Combined Code

• DOI: https://doi.org/10.1108/CG-01-2016-0006
• Date: 06 June 2016
• Pages: 507-538
• Published date: 06 June 2016
• Author: Mohamed H. Elmagrhi,Collins G. Ntim,Yan Wang
• Subject Matter: Strategy,Corporate governance

Antecedents of voluntary corporate

governance disclosure: a post-2007/08

financial crisis evidence from the

influential UK Combined Code

Mohamed H. Elmagrhi, Collins G. Ntim and Yan Wang

Mohamed H. Elmagrhi is a

final year Doctoral Student

at the Financial Ethics and

Governance Research

Group, Department of

Accountancy and Finance,

University of Huddersfield,

Huddersfield, UK.

Collins G. Ntim is a

Professor of Accounting

and Finance and Director

of the Financial Ethics and

Governance Research

Group, Department of

Accountancy and Finance,

University of Huddersfield,

Huddersfield, UK.

Yan Wang is a Senior

Lecturer in Finance at the

Financial Ethics and

Governance Research

Group, Department of

Accountancy and Finance,

University of Huddersfield,

Huddersfield, UK.

Abstract

Purpose –The purpose of this study is to investigate the level of compliance with, and disclosure of,

good corporate governance (CG) practices among UK publicly listed firms and consequently ascertain

whether board characteristics and ownership structure variables can explain observable differences in

the extent of voluntary CG compliance and disclosure practices.

Design/methodology/approach –This study uses one of the largest data sets to-date on compliance

and disclosure of CG practices from 2008 to 2013 containing 120 CG provisions drawn from the 2010

UK Combined Code relating to 100 UK listed firms to conduct multiple regression analyses of the

determinants of voluntary CG disclosures. A number of additional estimations, including two stage least

squares, fixed-effects and lagged structures, are conducted to address the potential endogeneity issue

and test the robustness of the findings.

Findings –The results suggest that there is a substantial variation in the levels of compliance with,

and disclosure of, good CG practices among the sampled UK firms. The authors also find that firms

with larger board size, more independent outside directors and greater director diversity tend to

disclose more CG information voluntarily, whereas the level of voluntary CG compliance and

disclosure is insignificantly related to the existence of a separate CG committee and institutional

ownership. Additionally, the results indicate that block ownership and managerial ownership

negatively affect voluntary CG compliance and disclosure practices. The findings are fairly robust

across a number of econometric models that sufficiently address various endogeneity problems

and alternative CG indices. Overall, the findings are generally consistent with the predictions of

neo-institutional theory.

Originality/value –This study extends, as well as contributes to, the extant CG literature by offering

new evidence on compliance with, and disclosure of, good CG recommendations contained in the 2010

UK Combined Code following the 2007/2008 global financial crisis. This study also advances the

existing literature by offering new insights from a neo-institutional theoretical perspective of the impact

of board and ownership mechanisms on voluntary CG compliance and disclosure practices.

Keywords Corporate governance, Board and ownership mechanisms, Comply or explain,

Neo-institutional theory, UK Combined Code

Paper type Research paper

1. Introduction

This study seeks to extend, as well as contribute to, the extant literature by:

investigating why and how UK listed firms may voluntarily comply with and disclose

information relating to CG recommendations contained in the influential 2010 UK

Combined Code; and

Received 4 January 2016

Revised 15 March 2016

Accepted 23 March 2016

The authors gratefully

acknowledge the insightful

and timely suggestions by the

Editor, Professor Gabriel

Eweje and two anonymous

reviewers. Useful comments

received at presentations at

the British Accounting and

Finance Association Annual

Conference (Manchester,

2015) and the Financial Ethics

and Governance Research

Group (Huddersfield, 2015) on

the previous versions of this

paper are gratefully

acknowledged.

DOI 10.1108/CG-01-2016-0006 VOL. 16 NO. 3 2016, pp. 507-538, © Emerald Group Publishing Limited, ISSN 1472-0701 CORPORATE GOVERNANCE PAGE 507

consequently examining whether ownership and board characteristics can explain

observable differences in CG compliance and disclosure practices with specific

focus on providing new empirical insights following the 2007/2008 global financial

crisis.

Our analysis is informed by a neo-institutional theoretical perspective.

The past decade has witnessed an increased interest in the extent of voluntary CG

compliance and disclosure practices (Conyon and Mallin, 1997;Elghuweel et al., 2016;

Elshandidy and Neri, 2015;Melis et al., 2015;Ntim et al., 2012b;Ntim, 2016;Pass, 2006;

Waweru, 2014). Whilst varied justifications have been provided to explain why firms may

voluntarily disclose information relating to their CG practices (Hussainey and Al-Najjar,

2012;Mallin and Ow-Yong, 2012;Ntim, 2015;Al-Bassam et al., 2016;Ntim et al., 2016),

recent theoretical advancements indicate that institutional context and theory can explain

the considerable growth in the issuance and/or adoption of codes of CG practices around

the world (Adegbite, 2015;Zattoni and Cuomo, 2008;Al-Bassam and Ntim, 2016).

Particularly, and from neo-institutional theoretical perspective, institutional forces (e.g.

political, social and economic institutions) can influence the spread and/or the imposition

of business norms/practices on firms (DiMaggio and Powell, 1983,1991;Scott, 2001).

These institutional forces have generally been suggested to be driven by two main reasons:

efficiency (“substantive management”) and legitimation (“symbolic management”)

(Adegbite, 2015;Aguilera and Cuervo-Cazurra, 2004). Observably, neo-institutional

theoretical perspective has been used by prior studies in explaining the institutional forces,

which can facilitate or constrain the diffusion of corporate practices at the national-level of

analysis, including the adoption of international financial reporting standards (Maroun and

Van-Zijl, 2015), CG standards (Adegbite, 2015;Zattoni and Cuomo, 2008) and CSR

practices (Ntim and Soobaroyen, 2013). By contrast, neo-institutional theoretical

perspective has rarely been used towards explaining the rapid adoption of good CG

standards at the firm-level of analysis. Arguably, this limits current understanding of

institutional forces that may be able to explain the rapid proliferation of good CG standards

at the firm level.

Accordingly, this study aims to extend, as well as contribute to, the current literature by

applying neo-institutional theoretical perspective to explain differences in CG practices

and with specific focus on the efficiency and legitimation implications of neo-institutional

theory. The neo-institutional (efficiency view) perspective proposes that institutional

pressures (i.e. coercive, mimetic and normative pressures) can force economic entities to

compete strongly to gain access to critical resources which can maximise the wealth of

shareholders (Adegbite, 2015;Zattoni and Cuomo, 2008). Hence, committing to high levels

of accountability/transparency in the form of engaging in increased voluntary[1]CG

disclosure can allow firms to gain access to crucial resources by improving their reputation

and goodwill (Pfeffer and Salancik, 1978). Additionally, greater engagement in voluntary

CG disclosures can improve the performance of economic entities by reducing the conflict

of interest between management and owners through improvement in the flow of

information between them (Jensen and Meckling, 1976;Fama and Jensen, 1983).

Similarly, the legitimation view of neo-institutional theory proposes that coercive pressures

can force corporations to behave according to socially accepted standards/conventions.

This is because conforming to such socially expected and accepted standards/

conventions can improve legitimacy of a company’s operations and also enhance its social

acceptance (Duff, 2014;Suchman, 1995). Therefore, committing to good CG practices can

be one way by which corporate goals may be aligned with those of the larger society and

that can in turn help legitimise corporate operations via improved corporate image and

reputation. Furthermore, the need to keep good relationships with powerful corporate

stakeholders (Pfeffer and Salancik, 1978), and thus improving corporate reputation and

image, can compel economic entities to conform to or voluntarily mimic socially expected

and accepted standards/conventions (Mizruchi and Fein, 1999). For instance, greater

PAGE 508 CORPORATE GOVERNANCE VOL. 16 NO. 3 2016

commitment to good governance standards in the form of engaging in greater CG

disclosures may improve the legitimacy of firms by gaining the support of influential

stakeholders, including shareholders and governments, who are central to the ability of

corporations to maintain sustainable operations (Zattoni and Cuomo, 2008).

Due to various reasons underlying corporate disclosure behaviour, previous research has

investigated the extent, motives and antecedents of voluntary disclosure practices (Cooke,

1992;Botosan, 1997;Barako et al., 2006). However, the existing voluntary disclosure

literature has a number of observable weaknesses. First, despite the importance of good

CG practices and the considerable amount of CG reforms that have been pursued

worldwide (Aguilera and Cuervo-Cazurra, 2004), existing voluntary disclosure literature is

primarily focused on investigating general financial disclosures (Allegrini and Greco, 2013;

Cheng and Courtenay, 2006), social and environmental disclosures (Cuadrado-Ballesteros

et al., 2015;Grougiou et al., 2016;Reverte, 2009) and risk disclosures (Cabedo and Tirado,

2004;Elshandidy and Neri, 2015;Ntim et al., 2013). In contrast, studies examining why and

how public corporations may voluntarily comply with and disclose information about their

CG practices are scarce (Adegbite, 2015;Pass, 2006;Bozec and Bozec, 2007).

Second, the few studies that have examined voluntary disclosure of CG practices are

impaired in that they measure compliance indirectly through a survey (Adegbite, 2015;

Conyon, 1994;Conyon and Mallin, 1997)/subjective analysts ratings (Patel et al., 2002;

Hussainey and Al-Najjar, 2012) or investigate a small number of CG provisions (Arcot et al.,

2010;Padgett and Shabbir, 2005), thereby arguably limiting the generalisability of their

findings. Third, despite increasing theoretical and empirical suggestions that relying on a

neo-institutional theoretical perspective can help in explaining the varied reasons often

underlying corporate voluntary disclosures (Ntim et al., 2013), existing studies are either

mainly descriptive (Patel et al., 2002;Waweru, 2014) or have used this theory to examine

institutional forces that influence the adoption of CG standards mainly at a national level of

analysis (Adegbite, 2015;Judge et al., 2010;Zattoni and Cuomo, 2008). In contrast, studies

that used neo-institutional theoretical perspectives to examine issues relating to the

adoption of good CG standards at the firm level are rare. Arguably, this impedes our ability

to fully understand and explain the different managerial motives for voluntary CG

disclosures.

Fourth, notwithstanding increasing suggestions that poor CG practices partly contributed

to the 2007/2008 global financial crisis (FRC, 2010,2012), there seems to be generally

inadequate empirical evidence and serious academic reflections on its effects on CG and

disclosure practices (Ferri and Maber, 2013;Ntim et al., 2013). Finally, despite the

theoretical and empirical indications that corporate decisions, such as disclosure is mainly

a function of top management and ownership structure (Ntim et al., 2012a), existing

literature have largely examined how general firm attributes (e.g. size, leverage and

liquidity) can influence voluntary disclosure of CG practices (Cooke, 1992;Patel et al.,

2002;Waweru, 2014). This also limits current understanding of the extent to which

corporate board and ownership characteristics can affect voluntary disclosure of CG

practices.

Given the apparent weaknesses of the extant literature, we seek to examine voluntary CG

disclosure behaviour among listed UK corporations. The UK offers a particularly interesting

context to conduct the current study for the following reasons. First, since 1992, the UK has

been in the leading position of pursuing global CG reforms (e.g. Cadbury Report, 1992;

Greenbury Report, 1995;Hampel Report, 1998;Turnbull Report, 1999;Higgs Report, 2003;

Smith Report, 2003;FRC, 20102012). For example, the influential 1992 Cadbury Report,

which promoted the concept of voluntary CG compliance regime (“comply or explain”), has

been adopted by almost every country in the world. As will be discussed further and since

1992, over 30 good CG guides have been produced and consolidated into the “Combined

Code”. Thus, a study of this nature will have important implications not only for the UK but

also for CG reforms that have been pursued around the world. Second, apart from pursuing

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