Academic Roundup – April 2007

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.

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