Academic Roundup
Manifest-I presents a summary of recently released academic papers on international corporate governance
and corporate social responsibility issues.
Superstar CEOs
Ulrike Malmendier, University of California –
Berkeley; and Geoffrey Tate, UCLA.
The firms of US chief executives who win high-profile
awards from the business press or other organisations suffer declining
performance, while the chief executives in question extract greater
compensation, this paper has found. The awards in question are given by the
likes of Business Week, which publishes an annual list of the 25 “best managers”
in US companies.
What is more, the paper finds, these “superstar CEOs”
are likely to direct more of their time towards activities outside their
company, such as writing books – typically personal memoirs - and sitting on
outside boards. At the same time, it was discovered that they are more likely to
engage in manipulation of company earnings in order to keep up the illusion of
good performance.
It is perhaps pertinent that the authors find award
winning chief executives to be stars on the golf course, having lower handicaps
than average (13 vs. 15).
Furthermore, the authors have uncovered preliminary
evidence to suggest that chief executives make worse investments decisions after
winning awards: market adjusted capital adequacy ratios in the three days around
a merger announcement significantly decrease as the number of prior awards
increases.
What Drives Corporate Transparency Around the World?
Nuno Fernandes, Universidade Católica Portuguesa; and
Miguel Ferreira, ISCTE Business School.
This paper examines company transparency at over 13,000
firms in 31 countries, assessing the relative importance to this of firm,
industry and country characteristics. They find that a country’s particular
regulatory regime is not necessarily the prime influence on variations in
company transparency: within the same country, there are wide variations in
transparency, and the authors argue this can be substantially explained by firm
characteristics. Most of this variation in transparency, the paper suggests, is
the result of company characteristics such as the need for external financing,
along with size and external visibility.
The authors suggest this may in fact be a positive
development. While in the early 1990s country factors were dominant, and
firm-level transparency within a country was rather homogonous, in a globalised
world there is hope for a good firm in a poor-governance country.
Are East Asian companies benefiting from Western board practices?
John Nowland, Queensland University of Technology.
The Asian financial crisis of 1997 was taken as a sign that governance in East
Asia was in major need of improvement, and since then the affected countries
have striven to introduce corporate governance codes and best practice
guidelines. These efforts have not, however been universally accepted by the
region’s companies. The recommendations are based on best practice in the US and
UK, where ownership structures are diverse and board governance mechanisms well
established. In contrast, East Asian companies have concentrated ownership and
weak board governance, and adherence to the new regulations will require
significant change for most companies.
Examining the companies that have made these changes, this paper investigates
whether they have resulted in improved performance. The results indicate that
separating the chairman and chief executive positions and creating nomination
committees – as well as improvements in overall governance – are associated with
improved operating performance.
It was also found that family-owned companies that started with worse corporate
governance are the least likely to have made improvements since the crisis.
Furthermore, it was noted that cultural or institutional factors in Thailand
seem to be preventing significant improvements from being made in that country.
Better firm performance with employees on the board? Not in the long run
R Øystein Strøm, University College of Østfold.
Norway offers employees a legal right to board
representation, and this paper uses data from 1989 to 2002 to explore the direct
and indirect effects of this representation on company performance.
It should, however, be noted that although firms are
legally required to offer employee representation if they have staff levels of
200 or higher - as a general rule, firms with more than 200 employees must have
at least two employee directors, or at least one third of the board - many
companies are exempted and many others choose not to exercise this right.
Indeed, the number of companies choosing not to have employee representation in
the boardroom rose during the period studied.
The paper finds a very clear link between employee
participation and weaker firm performance. It also finds that shareholders take
active steps to neutralise the effects of co-determination, adjusting governance
mechanisms in an effort to further their own interests.
An Ethical Theory of Corporate Governance History
Dirk Zetzsche, Heinrich-Heine-University. Center for
Business and Corporate Law Research Paper Series.
This paper suggests that the different characteristics
of Anglo-American and Continental European systems of corporate control – the
latter evidencing a tendency among strong states to interfere with market forces
– have their roots in religious principles. Different governance developments,
it is argued, can be attributed to the specific strains of Christendom that
prevailed in Anglo-America and Western Europe during the age of
industrialization.
The paper further suggests that convergence of corporate
governance rules is more likely in times of economic growth. In times of
economic growth, it is argued, people tend towards atheism, while during periods
of economic decline people and policy makers reconsider their cultural and
economic identities. This approach, the paper suggests, is compatible with
economic explanations: when there is less wealth to go around, societies look
for rationales to lock competitors out, and intruders can be easily marked out
by incumbents with accusations that they have violated the norms of the
respective society.
This, it is argued, is relevant to the current debate on
convergence as, unless societies become indifferent with respect to cultural
values that are based on religion, transference of foreign legal regimes needs
to be adjusted to suit the specific ethical background of the system to which it
is being transferred.
April, 2007
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