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

Author:Mohamed H. Elmagrhi, Collins G. Ntim, Yan Wang
DOI:https://doi.org/10.1108/CG-01-2016-0006
Pages:507-538
Publication Date:06 Jun 2016
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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