The effectiveness of corporate governance hybrid models in emerging markets: The case of the Issuer Recognition program

• Published date: 01 May 2021
• Author: Maximiliano González,Alexander Guzmán,Diego Téllez,María‐Andrea Trujillo
• Date: 01 May 2021
• DOI: http://doi.org/10.1111/corg.12358

ORIGINAL ARTICLE

The effectiveness of corporate governance hybrid models in

emerging markets: The case of the Issuer Recognition program

Maximiliano González

1

| Alexander Guzmán

2

| Diego Téllez

3

|

María-Andrea Trujillo

2

1

School of Management, Universidad de los

Andes, Bogotá, Colombia

2

Corporate Governance Studies Center, CESA

School of Business, Bogotá, Colombia

3

School of Economics and Finance, EAFIT,

Medellín, Colombia

Correspondence

María-Andrea Trujillo, CESA School of

Business, Bogotá, Colombia.

Email: maria.trujillo@cesa.edu.co

Abstract

Research question/issue: What is the Issuer Recognition (IR) program, and what has

been its impact as a new and replicable corporate governance hybrid form used in

the Colombian Securities Exchange (CSE)?

Research findings/insights: We find that the IR program has significantly increased

the information disclosure level of the adopting firms. This set of firms that were

among the opaquest businesses in the region in 2010 ranked at the top in terms of

disclosure in 2017. In addition, using as a benchmark the rate of implementation of

the Colombian Country Code (soft law), we are able to show that the IR program

serves as a strong signaling mechanism in the Colombian capital market.

Theoretical/academic implications: The literature is not conclusive on the effective-

ness of hard law and soft law regulations in the emerging markets. In this paper, we

show that hybrid models, such as the innovative Colombian's IR, might serve as a

solution for the effective implementation of good corporate governance practices at

the country level.

Practitioner/policy implications: The advantages and impacts of hybrid models are

relatively unknown for policymakers, stock exchange promoters, and agency surveil-

lance bodies, given the lack of empirical evidence of their application's effects. This

paper seeks to increase the awareness of these models and call for their development

and implementation, especially in emerging markets.

KEYWORDS

Corporate governance, comply or explain regulations, corporate reputation, emerging market

economies, hard versus soft law

1|INTRODUCTION

The best way to foster the implementation of good corporate gover-

nance practices at the country level is a highly studied topic in the cur-

rent corporate governance literature (Aguilera & Cuervo-Cazurra,

2009; Cuomo, Mallin, & Zattoni, 2016). One of the debate strands is

centered on how the hard law and soft law deal with implementation

issues, especially in countries with low investor protection levels. This

paper describes and analyzes the implications of an effective but not

very well-known corporate governance hybrid model in the Colombia

Stock Exchange (CSE), termed the Issuer Recognition (IR) program.

Under this highly replicable model, all listed firms in the market can

decide to adhere to a specific set of corporate disclosure practices. As

usual, in hybrid models, its adherence is not mandatory. However,

once the firm joins the program, the stock exchange supervises full

compliance and grants an annual recognition, with a reputational cost

if the firm fails to follow the IR rules and, therefore, loses this

acknowledgment.

Authors are in alphabetical order and contributed equally to this work.

Received: 10 July 2020 Revised: 28 December 2020 Accepted: 30 December 2020

DOI: 10.1111/corg.12358

252 © 2021 John Wiley & Sons Ltd Corp Govern Int Rev. 2021;29:252–276.wileyonlinelibrary.com/journal/corg

Since La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998), we

can better understand how a country's institutional framework affects

the corporate governance quality at the firm-level. Kappler and Love

(2004) show that improving the country-level efficiency of the legal

framework could significantly increase access to funding, reduce the

cost of capital, increase transparency, foster the development of capi-

tal markets, and ultimately positively impact firm and country growth.

Unfortunately, efforts aimed toward improving the country-level effi-

ciency of legal systems, commonly known as “hard law,”have not

generated the expected results, especially in countries with low inves-

tor protections, such as emerging markets in general and Latin Ameri-

can countries in particular (Chong & López-de-Silanes, 2007;

OECD, 2019).

The soft law approach, or commonly known as “comply or

explain,”seems to be a more realistic model in the context of emerg-

ing markets. Kappler and Love (2004) argue that in weak investor pro-

tection environments, improvement in the firm-level governance

quality relative to the country average could generate higher valuation

for the adopting firms. Nevertheless, Claessens and Yurtoglu (2013)

argue that voluntary and market corporate governance mechanisms

have fewer effects in a weak investor protection environment. This is

probably because the soft law approach is very flexible, and therefore,

it would be difficult for investors to genuinely assess the quality of

corporate governance for a given firm. However, the fact is that 83%

of the countries included in the OECD have such codes involving

these types of voluntary recommendations (OECD, 2019).

A recent development, much less studied, is the regulatory dual-

ism (Gilson, Hansmann, & Pargendler, 2010) in which hard law and

soft law, through specific programs, converge in what is called hybrid

corporate governance models (Aguilera & Cuervo-Cazurra, 2009;

Cuomo et al., 2016). The main characteristic of these models is that

adherence is voluntary (the soft part of the model), but once adopted,

compliance is mandatory (the hard part of the model). The most stud-

ied example of these hybrid programs is the Brazilian Novo Mercado

(Chavez & Silva, 2009; De Carvalho & Pennacchi, 2012). Although it is

not the only “hybrid”corporate governance model,

1

it is the one that

has captured most of the attention not only from academics but also

from investors and market regulators.

Surprisingly, other examples apart from Novo Mercado have not

been fully described and analyzed in academic literature, regardless of

the significant impact that these hybrid models may have on corpo-

rate governance standards, not only at the firm level but also at the

country level, by fostering the adoption of good corporate governance

practices benefitting the capital market as a whole. These hybrid

models may be an important step toward developing better corporate

governance systems around emerging markets. Moreover, they are

easily replicable, and their adoption does not require complicated

country level reforms of corporate laws, nor questionable or cosmetic

adoptions in the “comply or explain”context. The importance of

acquiring a better understanding of these models has already been

called upon in academic literature (Aguilera & Cuervo-Cazurra, 2009;

Aguilera, Goyer, & Kabbach-Castro, 2013; Cuomo et al., 2016). This

paper is a step forward in that direction.

We find that the IR program has significantly increased the level

of information disclosure of the participating firms that have adopted

the program introduced in 2012, with the first annual recognitions

granted in 2013. Before the introduction of the program and using

González et al.'s (2020) Information Disclosure Index (IDI), that ranks a

firm disclosure from a minimum of 0% (opaquest) to 100% (full disclo-

sure), Colombian firms were the opaquest businesses in Latin America

with an average IDI of 46.8%. At the time, the top-ranked firms in the

region were the Brazilian ones listed in the Novo Mercado, with an IDI

of 66.7%. The average IDI in 2010 for the 454 firms studied in eight

different markets was 55.1%. In contrast, in 2017, Colombian firms

that adopted the IR program ranked first in terms of IDI with a score

of 83.7%, substantially higher than the firms listed in the Novo Mer-

cado, which scored 74.5%. The average IDI in 2017 (426 firms) was

65.1%. We argue in this paper that the remarkable increase of 38.3

percentage points is, in fact, due to the IR. The set of listed Colombian

firms that did not adhere to the IR program remained the opaquest

businesses in the region with an IDI score of 56.4% in 2017.

We also support our claim that the IR program substantially

improved the level of information disclosure for Colombian listed

firms using a panel data regression analysis. We found that adhering

to the IR program increases the adopting firm's IDI by approximately

10%. Moreover, in the subindex “Board of directors, risk management,

and responsibility of other stakeholders,”the adopting firms increase

their revelation in more than 20% in absolute terms. These results

passed a set of robustness checks, including propensity score

matching (PSM), that controls the self-selection issues of our sample.

In this paper, we also show, using as a benchmark the implemen-

tation of the Colombian Country Code recommendations (soft law),

that the IR participant adhered to 83.4% to the code's corporate gov-

ernance suggestions in 2014. For the remainder of the Colombian

issuers not included in the IR program, the implementation was 23.4

percentage points lower (60%). The Colombian Country Code was

updated and has become more demanding since 2015. However, the

IR program participants' firms still show a substantially higher fraction

of adherence to the code's recommendations than non-IR firms. By

2017, IR firms achieved a level of implementation of this revised ver-

sion of the country code of 78.5%, whereas the rest of the issuers

demonstrated only a 56.7% adherence. This difference of 21.4 per-

centage points close to the previous version of the code enables us to

argue that this persistent difference that goes as far back as 2007 for

the adopting firms could use the IR program created in 2012 today as

a reliable and credible signaling mechanism. Given the substantially

high disclosure cost for the group of opaque businesses, it allows a

clear separating equilibrium for the Colombian capital market.

These univariate results persisted after running a panel data

regression analysis controlling for a full set of natural control variables

and model specifications. This showed that the rate of country code

implementation through our sample period has a strong positive and

statistically significant coefficient explaining the decision to adhere to

the IR program.

We contribute to the corporate governance literature by analyz-

ing the Colombian IR program as a successful, but mostly unknown,

GONZ

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