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Determinants, mechanisms and consequences of corporate governance reporting: a research framework

  • Published: 03 September 2020
  • Volume 25 , pages 7–26, ( 2021 )

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  • Charl de Villiers   ORCID: orcid.org/0000-0002-0715-8957 1 , 2 &
  • Ruth Dimes 1  

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Corporate governance disclosures form a key part of a company’s non-financial reporting. Several studies consider the determinants of corporate governance reporting, including external factors such as country-specific legislation and scandals, and internal factors such as financial performance, size and culture. Others consider the consequences of corporate governance reporting, using simple proxies for corporate governance mechanisms such as board composition characteristics to analyse the impact on financial reporting quality and company valuation. Yet the determinants and consequences of corporate governance reporting may be interlinked, and many quantitative studies fail to consider these links and their multiple effects adequately. Poor financial performance, for example, can be both a determinant and a consequence of the underlying governance mechanisms that corporate governance reporting aims to capture. The framework provided in this paper considers both the determinants and consequences of corporate governance and likely links between them, and also considers internal corporate governance mechanisms and the measures that are used as their proxies. In combining these three aspects of corporate governance and showing potential links, the framework offers insights into future research opportunities. The framework can be adapted to any country or organisational setting and also offers the opportunity to consider theories other than agency theory when studying corporate governance disclosures.

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1 Introduction

Corporate governance is the “exercise of ethical and effective leadership by the governing body towards the achievement of the following governance outcomes: ethical culture, good performance, effective control and legitimacy” (IODSA 2016 ), p20, and relates to the way that firms are governed rather than to the way they are managed. Reporting on corporate governance traditionally aimed to address and disclose relevant issues faced by boards of directors which were of interest to company stakeholders (Tricker 2015 ), although recently the range of interested stakeholders, and the concept of governance, has become much broader (Lai et al. 2019 ).

Corporate governance reporting can be considered part of the wider literature on corporate non-financial reporting, being subject to many of the same external and internal influences. However, there are also some specific features (such as corporate governance ranking scores) that are unique to corporate governance reporting that will be covered in this review. The aim of this paper is to provide a framework to consider for future research into corporate governance reporting, which is provided in Fig.  1 . By providing an overview of the determinants, mechanisms and consequences of corporate governance reporting, and the many links between them, it suggests avenues for further research that are outlined in the concluding section.

figure 1

Corporate governance reporting: a research framework

There are many external and internal determinants of corporate governance disclosure. Country-specific legislation and cultural norms drive much of the disclosure (La Porta et al. 2000 ) but other external factors such as media interest and stakeholder activism also play a part (Uysal and Tsetsura 2015 ). Within organisations, financial performance (weak or strong) may result in a desire to provide more information regarding an organisation’s corporate governance (Grove et al. 2011 ) as can pressure to conform to industry norms, demonstrate industry leadership to peers or mimic others (Tang et al. 2019 ). Firm-specific governance scandals are also very likely to result in changes to the nature of information provided by a firm (Christensen 2016 ). In addition, less observable factors such as organisational culture can be significant in terms of the level of transparency provided in corporate disclosures (Llopis et al. 2007 ).

The board and its committees not only provide a monitoring role, overseeing and advising on corporate strategy, performance and risk, but can also provide network links and resources to organisations (Endrikat et al. 2020 ). As corporate governance is so central to an organisation’s successful operation, one of the key challenges when researching in this area is finding suitable metrics to use to measure the strength of corporate governance mechanisms (Bhagal et al. 2008 ). Corporate governance mechanisms such as board composition and meeting frequency are often used as proxies for underlying corporate governance quality, yet there are also informal mechanisms such as managerial attitude and organisational culture that, although less studied, are likely to be highly influential (Llopis et al. 2007 ).

Much of the research into corporate governance reporting centres on whether or not there are positive economic outcomes as a result of strong corporate governance practices (Grove et al. 2011 ). These are usually measured by Tobin’s Q, improved cost of capital or changes in corporate governance ranking indices. These outcomes can also become subsequent determinants of corporate governance reporting, as indicated in Fig.  1 . Yet there are also other less explored consequences such as improved corporate reputation and more effective decision making that can result from changes to corporate governance mechanisms (Lightle et al. 2009 ).

There are many complications with studies into corporate governance reporting. Many different input and output models are proposed, using different equations and measures, and coming to varying conclusions. In addition, it is likely that multiple factors will be influential with a concept as fundamental to organisations as corporate governance, even though many quantitative studies attempt to isolate particular characteristics in causal models (Endrikat et al. 2020 ). The dominance of quantitative research methods in this field also means that boards and their processes are often considered as a mysterious ‘black box’ (Parker 2017 ), and that mutual relationships, for example between accounting and governance, are not considered sufficiently in both contemporary and historical perspectives (Lai et al. 2019 ). To complicate it further, corporate governance characteristics and their effects are also often studied at different levels (individual, group, organisational and national) even though corporate governance itself is a broad multi-level construct (Dalton and Dalton 2011 ).

The majority of the literature that considers corporate governance reporting does so from an agency perspective, making the assumption that strong corporate governance reduces the opportunity for rent extraction by managers from shareholders (Jensen and Meckling 1976 ). Yet the increasing move towards providing non-financial information to a broader range of stakeholders (whether mandatory or voluntary) suggests that other theories, in particular stakeholder theory, may be worthy of further consideration in the corporate governance context (Stovall et al. 2004 ). In addition, according to resource dependency theory, effective boards should also not just monitor managers, but should also enable managerial entrepreneurship, bringing network benefits to stakeholders of the firm (Filatotchev 2007 ). Stewardship theory is also another lens through which to study corporate governance reporting, contrasting with agency theory in making the assumption that company directors can be trusted to act in the public good (Calder 2008 ).

The contribution of this study is the proposal of a simple framework to guide corporate governance research. The aim of the framework is to capture the major influences on corporate governance, and to acknowledge the multitude of potential links between them (Endrikat et al. 2020 ), supporting the calls for more multidimensional research into corporate governance (Dalton and Dalton 2011 ). The framework in Fig.  1 provides an overview of the key determinants, internal mechanisms (and corresponding measures) and consequences of corporate governance, and the links between them. Similar frameworks have been proposed to consider the determinants of other types of non-financial disclosure, such as sustainability disclosures (Alrazi et al. 2015 ). The Alrazi et al. framework indicates how both internal and external determinants play a part in internal sustainability mechanisms, and eventually organisational accountability, and bears many similarities to the left hand side of the framework shown in Fig.  1 . However, the Alrazi et al. framework does not consider the consequences of reporting, and the links between consequences and determinants which Fig.  1 does.

The framework above shows the major determinants, mechanisms and consequences of what can determine either strong or weak corporate governance. Determinants and consequences can be both external and internal, and there are also multiple links between them. For example, company performance (financial or non-financial) is both a consequence and possible determinant of corporate governance strength. Section  2 explores the determinants, Sect.  3 the internal mechanisms, and Sect.  4 the consequences of corporate governance, and Sect.  5 discusses the potential links between them. Section  6 considers the opportunity for exploring corporate governance through other theories, such as resource dependency, stakeholder and stewardship theory. Section  7 concludes and suggests avenues for future research.

2 Determinants of corporate governance reporting

Figure  1 indicates that the determinants of corporate governance reporting can be both external and internal, and for most organisations are likely to result from a combination of external and internal factors. Many studies examine causal connections between external factors such as country-specific legal guidance and internal factors such as reactions to company-specific pressures on a company’s likelihood to disclose information about their corporate governance (Cahan et al. 2016 ). Like other types of non-financial disclosure, these disclosures may be superficial (just providing legally required information) or may reflect deeper underlying changes to corporate governance mechanisms and internal control quality (Wang 2010 ). However, corporate governance studies have been criticised for their use and measurement of multiple country-level factors to explain country and firm specific governance mechanisms, making comparisons difficult (Schiehll and Martins 2016 ), and for their focus on an economic rather than an institutional perspective.

2.1 External determinants of corporate governance reporting

2.1.1 legal.

Companies may report corporate governance information because it is mandatory, or offer disclosures information voluntarily. It is important to distinguish between these two types of information provision, as voluntary reporting introduces a number of other potential influences, as for the voluntary reporting of any other type of non-financial information.

Mandatory corporate governance reporting Most countries have their own corporate governance codes which influence corporate governance mechanisms and their disclosure. The level of an organisation’s internationalisation may also mean that it needs to comply with corporate governance codes in multiple jurisdictions. There are two main approaches to governance regulations—a highly prescriptive ‘apply or die’ approach such the Sarbanes–Oxley Act (SOX) 2002, which involves significant financial and criminal penalties for non-compliance, and a more self-regulated principles-based ‘apply or explain’ approach based on the Cadbury Code of 1992 which was subsequently developed into the UK Combined Code (Calder 2008 ). A further development of the principles-based approach is the ‘apply and explain’ (apply principles and explain practice) approach which is a hallmark of the King IV governance code in South Africa, which promotes an outcomes-based view of governance based on Integrated Reporting (IODSA 2016 ). SOX is probably the most significant piece of legislation around corporate governance ever introduced, following a wave of major corporate governance scandals, most notably the Enron case. SOX sets out a series of requirements which has resulted in stock exchanges increasing their requirements for the independence of directors and establishment of committees headed by non-executive directors (Bebchuk et al. 2009 ). The mandatory disclosures required by SOX, for example around internal controls, are aimed at reducing information asymmetry, driven by the need to control the excessive managerial discretion seen in the Enron case. Self-regulated corporate governance codes such as the UK and South African examples above can lead to different interpretations of corporate governance within firms (Okhmatovskiy and David 2012 ), showing that the governance context within which firms operate is a critical determinant to consider.

Voluntary reporting—legal and social Although SOX and other regulations relate specifically to corporate governance activities and disclosures, other types of mandatory disclosure and reporting can also influence corporate governance reporting. For example, the recent EU Directive on non-financial reporting, even though it allows considerable flexibility, is likely to result in firms providing additional corporate governance disclosures (Camilleri 2015 ). Increasing interest in CSR disclosures has also led to improvements in the disclosure of relevant corporate governance information (Kolk and Pinkse 2010 ). As corporate governance is so central to a company’s operations, mandatory disclosures of other types may well result in the provision of additional corporate governance information to shareholders, either explicitly or implicitly. Country-specific governance factors such as legal origin, investor protection regulations and culture may affect how organisations choose to present their corporate governance information (La Porta et al. 2000 ). Increased public scrutiny and regulatory oversight can also result to changes in the type of corporate non-financial information provided (De Villiers and van Staden 2011 ). Many stakeholders, not just financial ones, have an interest in the corporate governance information provided by a firm, and many corporate governance codes (including South Africa’s King codes and the UK’s Combined Code) consider management to have a duty of responsibility to a broad stakeholder base, operating under a social licence which requires them to consider stakeholder needs and prevailing social norms (Suchman 1995 ). The social and cultural norms in different countries can also influence corporate governance, with research showing that countries with a higher preference for rules tend to have better corporate governance (Duong et al. 2016 ).

2.1.2 Stakeholder pressure, media interest and scandals

Other external pressures include stakeholder pressure (Alrazi et al. 2015 ) which can be exacerbated by direct or indirect media pressure (Shipilov et al. 2019 ). The emergence of multi-stakeholder NGOs, and broad initiatives such as the GRI and UN SDGs are increasingly influencing organisational norms (Grosser 2016 ). Corporate scandals for other firms can also trigger a renewed interest in corporate governance in certain sectors or countries. The Enron scandal, for example, renewed interest in corporate governance disclosures for all organisations, regardless of their sector (Calder 2008 ). Scandals specific to a certain industry may also lead to increased regulatory and media scrutiny for all organisations in the industry, regardless of their own track record in corporate governance (Bebchuk et al. 2009 ).

2.2 Internal determinants of corporate governance reporting

2.2.1 size and industry position.

A company’s size, industry position and global scale may influence its likelihood to report corporate governance information voluntarily. Firms providing more CSR information have been found to be large, in high profile industries and more highly leveraged, and also to possess better corporate governance ratings (Chan et al. 2014 ). High quality disclosures may help larger, more successful organisations to differentiate themselves from their competitors (Eccles and Krzus 2010 ). Smaller firms, especially family owned ones, have less incentive to provide information around their corporate governance voluntarily (Satta et al. 2014 ).

2.2.2 Stakeholder relations and company performance

Pressure may also come from the ownership of the organisation, particularly when there are institutional or block shareholders who may influence firm performance (Bushee 1998 ) and disclosures (Bae et al. 2012 ). Depending on the size of the firm, director shareholdings may also be an influencing factor (Satta et al. 2014 ). In addition to shareholder pressure, there may be pressure from other non-owner activists to include particular types of information, for example board diversity statistics (Uysal and Tsetsura 2015 ).

The financial performance of an organisation may also be a contributing factor to corporate governance disclosures. Weak financial performance may result in closer scrutiny of corporate governance practices, and managerial compensation structures for example (Grove et al. 2011 ). An organisation’s level of leverage is also likely to be a contributing factor, as when bank debt levels increase, external monitoring by banks may become exert more significant influence (Jensen 1986 ). Company-specific scandals are also likely to lead to changes in disclosures of ESG information (Utz 2019 ).

2.2.3 Impression management, managerial incentives and organisational culture

Companies often look to their peers when preparing annual report disclosures, resulting in the potential for mimicry, particularly for organisations newer to a particular type of reporting, or smaller organisations attempting to save time and expense by following the disclosures of their larger peers (Tang et al. 2019 ). There may also be peer pressure within the board itself (possibly from NEDs with other board positions) and CEO peer pressure to disclose certain types of corporate information. Agency theory would suggest that managers are only likely to provide such additional disclosures if they paint them in a good light (Beattie 2014 ), and impression management has been shown to contribute to other non-financial disclosures such as business model disclosures (Melloni et al. 2016 ).

There are other more informal reasons for the voluntary disclosure of corporate governance information. Corporate governance is closely related to company culture, which in turn is closely connected to managerial attitudes. A change in corporate culture towards a more transparent and collaborative culture may result in the voluntary provision of additional information externally (Llopis et al. 2007 ). Other researchers have suggested that looking at corporate governance from a behavioural science perspective would be useful, particularly as key managers (the CEO) and board members exert considerable influence over corporate governance practices and organisational culture (Hambrick et al. 2008 ).

3 Corporate governance mechanisms

A board’s role is to help to set and steer an organisation’s strategic direction, monitor planning and policies and ensure accountability. The outcomes of good corporate governance are therefore not only good financial performance, but also the development of an ethical culture, effective control systems and ultimately organisational legitimacy (IODSA 2016 ). A large body of research considers corporate governance characteristics and their influence on effective corporate governance outcomes. Much of this quantitative research assumes that corporate governance characteristics, for example board and committee composition and board meeting frequency, capture the quality of the underlying corporate governance mechanisms. However, many of the studies consider formal mechanisms alone, and do not consider informal mechanisms such as organisational culture, which may be highly influential, particularly in smaller firms (Satta et al. 2014 ).

3.1 Formal corporate governance mechanisms

Corporate governance mechanisms within a firm (as distinct from those mechanisms imposed externally by a country’s legal framework) comprise the set of rules, processes and processes that either formally or informally enable the board of directors to govern. These enable the monitoring of strategy, performance and risk and encourage good corporate citizenship and organisational accountability. There are several proxies used as measurements of formal corporate governance mechanisms, the most common of which are board size and composition, committee size and composition, board independence, and factors such as meeting frequency. The existence of formal procedures and policies, for example whistle-blowing policies, and external assurance, are also examples of formal governance mechanisms.

3.1.1 Monitoring of strategy, performance and risk

One of a board’s primary roles is the monitoring of management (Endrikat et al. 2020 ). In order to be able to monitor effectively, a board needs to have the appropriate capabilities, including experience and a broad perspective. In addition, a board should be independent of a firm’s management in order to be able to oversee activities effectively. Formal procedures such as board evaluation and assurance can help to give confidence in a board’s ability and independence. Consistent with agency theory, a capable and independent board subject to review and assurance should minimize rent extraction by management (Jensen and Meckling 1976 ).

Board characteristics The size of a board (number of board members) can signal managerial ability and expertise, which should improve the quality of information disclosure, and several studies support this view (Cooray and Senaratne 2020 ; Jizi et al. 2014 ). Board size is also positively related to CSR (Endrikat et al. 2020 ). Not only does board size suggest a breadth of experience in order to monitor management, it also means that firms can potentially benefit from the connections of board members (Endrikat et al. 2020 ). Diversity (of gender, race, and experience) is also studied extensively, with studies investigating the impact of different characteristics of the board on firm performance. Gender diversity (usually measured as the proportion of women on boards) is argued to have a positive impact on the quality of voluntary disclosures including environmental disclosures (Cooray and Senaratne 2020 ; De Villiers 1998 ) and it is possible that gender diversity also contributes to the quality of corporate governance disclosures. Certainly research has found women to have a different attitude towards risk than men (Croson and Gneezy 2009 ). However, other studies have found negative associations between both gender and age and firm performance (Shehata et al. 2017 ), and suggest that other factors such as firm size may be influential in the relative importance of board diversity.

Another aspect of corporate governance that is commonly disclosed is board meeting frequency and attendance. Board meeting frequency has been found to have no significant association with financial performance (Grove et al. 2011 ), although others have found that insider ownership reduces board and committee meeting frequency, whereas NEDs increase it, suggesting that board independence may be a contributory factor (Greco 2011 ).

Board independence Board independence is also associated with improved corporate disclosure quality (Xia and De Beelde 2018 ) and financial performance (Chou et al. 2013 ). Board independence can be measured by the number of non-executive directors (NEDs), as the assumption is that they will be able to reduce executive director dominance over decision-making (Forker 1992 ). However, this formal measure may miss the informal network connections between directors and the CEO outside the boardroom which could compromise director independence (Fracassi and Tate 2012 ). Also, from a resource-dependency perspective, the independence of board members suggests more external contacts and connections which could benefit the firm (Hillman and Dalziel 2003 ). The absence of CEO duality (the CEO and board chair roles being held by the same individual) is also a measure of board independence, although findings as to its effectiveness are mixed (Grove et al. 2011 ). In both independence measures the assumption from an agency theory perspective is these mechanisms mean that executive directors will not be able to dominate decision-making, which should improve the information flow to stakeholders (De Villiers et al. 2011 ; Forker 1992 ). However, research supporting these basic assumptions of agency theory are inconclusive, involving multiple differing measures of both board independence and financial performance (Dalton and Dalton 2011 ).

Board committee composition Board committees are a delegation mechanism for boards, allowing for the effective discharge of a board’s duties by the use of smaller, independent, focused decision-making bodies (IODSA 2016 ). The number of committees can mitigate the potential inefficiencies that may result from very large boards (Upadhyay et al. 2014 ). The main committees that are commonly studied in this light are audit committees, risk committees, nomination and remuneration committees and various types of ESG/CSR committee. The existence of such committees, along with their composition (using similar composition metrics as for boards), are variables of interest in several studies looking at financial and non-financial outcomes, and can potentially give insights into how boards discharge their monitoring duties.

Audit committees, a statutory necessity in some jurisdictions, play an active role in improving corporate disclosures through their focus on internal controls and high quality reporting processes. The relative independence of an audit committee (achieved through a higher proportion of independent members) should also improve disclosure quality (Forker 1992 ). Other studies consider a separate risk management committee as an important feature, particularly for the provision of high quality risk-related information disclosures (Tao and Hutchinson 2013 ). Nomination and remuneration committees, with their role in CEO appointment and remuneration in particular, are the subject of focus for academic studies as they can help to indicate the relative independence of management (Kaczmarek et al. 2012 ). Evidence shows that the composition characteristics of ESG and CSR committees can improve social responsibility outcomes (Eberhardt-Toth 2017 ). The existence of committees, however, does not necessarily mean that they function effectively (Carrott 2013 ) and committees may also play a mediating rather than a direct role in terms of corporate disclosures (Endrikat et al. 2020 ), again indicating the importance of not considering causal effects in isolation.

3.1.2 Ensuring responsible corporate citizenship and accountability

Despite the agency focus of much research into corporate governance, there is increased recognition of the importance of CSR and ESG related matters to firms. The board of directors have a responsibility to a broader set of stakeholders than just shareholders and increasingly need to consider society at large to ensure organizational legitimacy (Suchman 1995 ).

Stakeholder inclusivity The emergence of multi-stakeholder global governance initiatives such as the UN SDGs and GRI influence the policies and practices of firms, suggesting that more academic attention should be paid to stakeholders other than shareholders. The existence and composition of ESG and CSR committees, as mentioned earlier, is considered as a proxy for shareholder inclusivity in some studies, but these do not really consider a firm’s multiple stakeholders, particularly marginalised ones (Grosser 2016 ). Board composition may be indicative of stakeholder inclusivity, but is unlikely to reflect how decisions are prioritised internally.

Materiality With the proliferation of data available to directors, and the increasing scope of the firm in society, there needs to be an effective way of prioritizing decisions. Although often associated with corporate reporting, materiality is as much a governance issue as a reporting one (Eccles and Youmans 2016 ). The ultimate responsibility for materiality rests with the board of directors, who need to determine which stakeholders and which particular issues are of the most importance to a firm. Integrated Reports often include a statement around materiality, and some studies have found a link between board diversity statistics and the quality of materiality disclosures (Fasan and Mio 2017 ). Content analysis of such disclosures may yield insights into decision making mechanisms within firms that are not as evident in simple board or committee composition statistics.

3.1.3 Assurance and evaluation

Assurance is a potential mechanism to improve governance, as companies traditionally use external assurance to reduce risks and review the effectiveness of governance practices, implying a managerial commitment to transparency and reliability (Simnett and Huggins 2015 ). However, studies come to mixed conclusions as to the effectiveness of assurance, as without corresponding changes to underlying mechanisms, it can be seen as just a public-relations exercise (Segui-Mas et al. 2018 ). Whistle-blowing regulations and policies are another corporate governance mechanism, although research has shown mixed results on their effectiveness, noting that results are highly dependent on the underlying corporate governance practices both within firms and also within different countries (Pittroff 2016 ). Independent evaluation or self-evaluation of the board’s effectiveness are also assurance mechanisms which are encouraged by many governance codes, including the UK’s Combined Code (Long 2006 ).

3.2 Informal corporate governance mechanisms

3.2.1 ethical culture.

The tone at the top of an organisation is likely to determine how corporate governance practices are institutionalised. Studies have found that when employees perceive management as trustworthy and ethical, the performance of the firm is stronger, indicating that traditional measures of corporate governance may have less of an impact than originally thought (Guiso et al. 2015 ). Indeed, many corporate governance scandals are centred on stories of unethical leadership (Boddy 2013 ). However, despite the importance of corporate culture to the effectiveness of corporate governance mechanisms, it is difficult to measure through corporate governance reporting, although potential measures could include a reduction in corporate scandals, or improvement in corporate reputation rankings.

3.2.2 Effective control systems

Corporate culture can be considered as part of the wider scope of both formal and informal management control systems. However, the different management control mechanisms used for a concept as broad as corporate governance are difficult to isolate for the purpose of causal studies, as many are likely to be interrelated (Endrikat et al. 2020 ). Evidence has shown, however, that not only are management control systems used to embed corporate governance practices, they can also change them (Ferry and Ahrens 2017 ). Control systems are usually studied qualitatively, yet qualitative studies constitute a tiny proportion (less than 1%) of studies into corporate governance, and there have been calls for more research of this type to yield deeper insights (Mcnulty Zattoni and Douglas 2013 ). The dominance of quantitative research methods, rather than qualitative or mixed methods, has led to corporate governance processes themselves being bypassed in academic research and poorly understood as a result (Parker 2017 ).

4 Consequences of corporate governance reporting

The main consequences of corporate governance reporting that are considered by academic studies are improved firm value (usually measured by Tobin’s Q) and reduced cost of capital. In addition, the existence of corporate governance rankings acts as a mediating factor, with these rankings both a consequence of and a determinant of future financial performance. Other consequences of corporate governance reporting include corporate reputation, legitimacy and the potential for scandals and fines. There may also be internal consequences of corporate governance reporting, such as changes to managerial incentive structures and improved decision making.

4.1 External consequences of corporate governance reporting

4.1.1 company performance.

Consistent with agency theory, firms with stronger governance are associated with better financial performance (Grove et al. 2011 ). As a consequence of the disclosures required by SOX, CFOs at organisations with stronger internal controls received higher executive compensation, and were less likely to depart their roles than CFOs at firms with weaker controls (Wang 2010 ). Firms with perceived weaker governance are associated with higher CEO pay, and an increased propensity to use compensation consultants (Armstrong et al. 2012 ). Entrenchment provisions such as staggered boards and supermajority voting requirements for takeovers have been found to reduce firm value, as measured by Tobin’s Q (Bebchuk et al. 2009 ). The transparency of financial and non-financial information should therefore be associated with value creation opportunities (Cooray and Senaratne 2020 ). However, other theories can also explain the links between board characteristics and corporate governance outcomes. As boards also provide access to networks and resources, certain board characteristics resource provision determine the association between board characteristics and firm performance, following resource dependency theory (Hillman and Dalziel 2003 ).

There have also been studies into non-financial consequences of reporting, such as environmental performance (De Villiers et al. 2011 ), and links have been suggested between high corporate governance quality and improved CSR disclosures (Chan et al. 2014 ), although as CSR is a multi-dimensional construct many of these studies use different measurements for CSR (Wang et al. 2016 ). The many similarities between CSR and corporate governance reporting also make it difficult to isolate the effects of the corporate governance reporting alone.

4.1.2 Corporate governance indices

Corporate governance rankings are widely used, and are therefore likely to contribute to how organisations report their corporate governance. There is inconsistent evidence of an association between corporate governance rankings and financial performance, possibly because of the difficulties associated with constructing meaningful measures, and the multitude of different commercial and academic corporate governance indices available (Chan et al. 2014 ). These rankings and indices can be both a determinant and a consequence of corporate governance, and may add to the pressure on corporations to adapt their governance reporting and mechanisms, even to fit a benchmark that may be unsuitable to their unique circumstances (Lysandrou and Parker 2012 ). An additional consequence of corporate governance rankings comes from their relative importance to institutional investors, with some arguing that rankings are not used to predict financial performance, but instead are used to capture reduced risk, useful in the construction of trading portfolios (Lysandrou and Parker 2012 ). CSR ratings are also closely related to corporate governance rankings, and can mediate the effect of corporate governance characteristics on reputation (Bear et al. 2010 ).

4.1.3 Legitimacy and reputation

Legitimacy is a critical outcome of corporate governance reporting, as companies operate under social licences which expect them to conform to certain values and beliefs (Suchman 1995 ). A failure of legitimacy can lead to dissatisfied stakeholders withdrawing capital and business, or voicing their concerns through regulators or the media (Alrazi et al. 2015 ). Some studies have found links between certain corporate governance characteristics, such as gender diversity, and improved firm reputation (Bear et al. 2010 ). However, there may be other mediating influences on firm reputation, such as the legal environment and shareholder and creditor rights (Soleimani et al. 2014 ).

4.2 Internal consequences of corporate governance reporting

4.2.1 decision making capability.

Reporting on corporate governance should improve corporate accountability and operational management, making companies less likely to engage in high-profile misconduct, and less likely to incur financial punishment in terms of stock price reaction if they do (Christensen 2016 ). Certain board and committee characteristics, such as the level of financial expertise, have been found to correlate with internal control quality (Hoitash et al. 2009 ). Generally, it is assumed that boards have significant influence in terms of helping to shape an organisational culture that promotes good corporate governance (Lightle et al. 2009 ). However, it is certainly possible to change external reporting of any type without the underlying decision making processes changing (Stubbs and Higgins 2014 ) if the provision of such additional information is just regarded as a compliance exercise.

5 Links between determinants, mechanisms and consequences

The framework in Fig.  1 indicates the multiple links between determinants, mechanisms and consequences of corporate governance. The existence of these multiple links, in particular the links between consequences and determinants, are important to consider in any causal model, as many of them point to the potential for reverse causality, along with the multiple measurement and correlation issues already discussed. Corporate governance mechanisms may also act as complements or substitutes for one another, depending on the governance context (Satta et al. 2014 ). This framework indicates that although many academic studies into corporate governance use causal models based on agency assumptions, these models are likely to be overly simplistic given the multiple potential influences at both a macro and micro level. Calls for more research using other methodologies and considering different theoretical perspectives appear valid considering this review (Mcnulty et al. 2013 ), and the framework proposed in Fig.  1 allows for these different perspectives.

6 Theories of corporate governance reporting

A key concept of corporate governance is accountability, and corporate governance mechanisms can be used to extend managerial accountability beyond just shareholders to a wider set of stakeholders (Cooray and Senaratne 2020 ). There have been increasing calls to consider corporate governance from a broader perspective than the shareholder primacy perspective that still dominates the literature (Cheung 2018 ; Endrikat et al. 2020 ; Grove et al. 2011 ). The Anglo-American focus on agency theory in the majority of academic research also ignores the fact that in some economies, such as China, the state has control over listed companies, resulting in very different pressures on firms (Habib and Jiang 2015 ). Agency theory assumes that directors are self-serving, needing to be monitored and controlled to ensure that shareholder interests are met (Jensen and Meckling 1976 ). Studies with an agency theory perspective assume that corporate governance mechanisms exist to reduce information asymmetry, thereby minimising the rent extraction by managers from shareholders and maximising the value of the firm (Jensen and Meckling 1976 ). Agency theory therefore proposes that firms with stronger governance are associated with better financial performance (Grove et al. 2011 ) and firms with perceived weaker governance are associated with increased rent extraction such as higher CEO pay (Armstrong et al. 2012 ).

However, other theories can also explain the links between board characteristics and corporate governance outcomes. Stakeholder theory considers managers to be accountable to a much broader set of stakeholders than just shareholders, and posits that information provided by firms should not only reduce information asymmetry (Jensen 2010 ), but also reduce conflicts of interest between different stakeholder groups (Velte and Gerwanski 2020 ). Stewardship theory also considers a broader range of stakeholders than the shareholder primacy model, and with the increase in non-financial and integrated disclosures may need to be considered further as a basis for any type of corporate governance disclosures (Dumay et al. 2019 ). Proponents of stewardship theory are resistant to the regulation of corporate governance, for example restrictions on CEO duality, as the theory holds that directors can generally be trusted to act in the public good (Calder 2008 ). Along with their role as a monitor of managers, boards can also provide access to networks and resources, suggesting that resource dependency theory is also a useful angle to consider (Endrikat et al. 2020 ; Hillman and Dalziel 2003 ). There is also the market theory of corporate governance, which ignores the relative perceptions of managers as stewards or agents and assumes instead that poor investment returns will be punished by shareholders selling their shares. This theory, however, has been undermined by scandals such as Enron where employees were unable to sell their shares even when they were made aware of existing corporate governance weaknesses (Calder 2008 ).

The Framework in Fig.  1 offers the potential to consider theories other than agency theory when considering corporate governance determinants, mechanisms and consequences, responding to more calls for research of this type (Parker 2017 ; Habib and Jiang 2015 ; Mcnulty et al. 2013 ).

7 Conclusion and research avenues

7.1 conclusion.

Strong corporate governance is associated with improved firm performance and organisational reputation and legitimacy (Bear et al. 2010 ; Grove et al. 2011 ). The framework provided in this article recognises that the determinants, mechanisms and consequences of strong or weak corporate governance are often linked, and that many contributing external and internal factors can be studied. This article is not intended to be a comprehensive review of the literature, neither is the framework designed to be exhaustive. Instead, it aims to place the key interlinked factors into a simple model for reflection and for the generation of new research ideas and methods. The framework helps to highlight gaps in existing literature, notably in the area of governance mechanisms. Although there are many different measures that are used as proxies for underlying governance mechanisms, there is little research on the effectiveness of these mechanisms in practice (Parker 2017 ). Potential avenues for future research in this and other areas are highlighted below.

7.2 Avenues for further research

Although reporting on corporate governance aims to convey the underlying strength of corporate governance mechanisms, in reality corporate governance, embedded as it is throughout organisations, is difficult to measure. Metrics taken from reporting on corporate governance, such as board composition statistics, are widely used yet may not reflect underlying corporate governance capability, which can be influenced by less formal mechanisms such as organisational culture (Hambrick et al. 2008 ). As such, qualitative studies into corporate governance, in particular research into management control systems could help in challenging some of the dominant assumptions in the existing corporate governance literature about how actors and organisations actually operate (Mcnulty et al. 2013 ; Parker 2017 ). Looking at corporate governance from a behavioural science perspective would also potentially be useful, particularly as key managers (the CEO) and board members exert considerable power over corporate governance practices and organisational culture (Hambrick et al. 2008 ) and the majority of existing research is focussed on whole boards rather than individual actors (Mcnulty et al. 2013 ). Board and managerial attitudes towards corporate governance may also be captured by narrative disclosures rather than quantitative disclosures in annual reports and other data (for example website data) captured by the firm (Short et al. 2010 ), suggesting that content analysis might be a useful methodology to employ.

Much of corporate governance research focuses on particular reported statistics such as board composition, or board meeting frequency and economic outcomes such as improved financial performance or changes to CEO compensation structures. Yet as with other types of managerial research, corporate governance operates at an individual, group and firm level. Studying firm-level outcomes that relate to individual-specific matters such as CEO duality may be misleading, and it would be useful to consider the multi-level nature of corporate governance when researching into how it is reported (Dalton and Dalton 2011 ). In addition, much of corporate governance research is conducted at an economic rather than an institutional level (Schiehll and Martins 2016 ), and even if it is conducted at a firm level it focuses predominantly on large firms, which have clearer agency structures and different governance issues compared to SMEs (Satta et al. 2014 ).

Traditionally, research into corporate governance takes an agency view of the firm, following (Jensen and Meckling 1976 ), although recent developments towards the reporting of more non-financial information, including movements towards Integrated Reporting, suggest that other theories, such as stakeholder theory and stewardship theory, may be worthy of further consideration. Different corporate governance regimes globally may also make agency theory of less use, as it is reflective of an Anglo-American view of firms (Habib and Jiang 2015 ). Considering the role of the board as a provider of resources, as well as just a monitor of managers, may mean that resource-dependency theory also yields useful insights (Endrikat et al. 2020 ).

Reporting on corporate governance is also linked to developments in other types of corporate reporting, in particular non-financial reporting. Both mandated changes (such as the recent EU Directive on non-financial reporting) and voluntary disclosures required for other purposes, such as CSR or sustainability, may yield useful insights into corporate governance and may also develop corporate governance reporting. It may also be interesting to study whether or not major global events such as the Covid-19 pandemic lead to changes in corporate governance disclosures as many companies face periods of substantial economic disruption, and therefore increased stakeholder scrutiny.

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de Villiers, C., Dimes, R. Determinants, mechanisms and consequences of corporate governance reporting: a research framework. J Manag Gov 25 , 7–26 (2021). https://doi.org/10.1007/s10997-020-09530-0

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The impact of corporate governance measures on firm performance: the influences of managerial overconfidence

  • Tolossa Fufa Guluma   ORCID: orcid.org/0000-0002-1608-5622 1  

Future Business Journal volume  7 , Article number:  50 ( 2021 ) Cite this article

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The paper aims to investigate the impact of corporate governance (CG) measures on firm performance and the role of managerial behavior on the relationship of corporate governance mechanisms and firm performance using a Chinese listed firm. This study used CG mechanisms measures internal and external corporate governance, which is represented by independent board, dual board leadership, ownership concentration as measure of internal CG and debt financing and product market competition as an external CG measures. Managerial overconfidence was measured by the corporate earnings forecasts. Firm performance is measured by ROA and TQ. To address the study objective, the researcher used panel data of 11,634 samples of Chinese listed firms from 2010 to 2018. To analyze the proposed hypotheses, the study employed system Generalized Method of Moments estimation model. The study findings showed that ownership concentration and product market competition have a positive significant relationship with firm performance measured by ROA and TQ. Dual leadership has negative relationship with TQ, and debt financing also has a negative significant association’s with both measures of firm performance ROA and TQ. Moreover, the empirical results also showed managerial overconfidence negatively influences the relationship of board independence, dual leadership, and ownership concentration with firm performance. However, managerial overconfidence positively moderates the impact of debt financing on firm performance measured by Tobin’s Q and negative influence on debt financing and operational firm performance relationship. These findings have several contributions: first, the study extends the literature on the relationship between CG and a firm’s performance by using the Chinese CG structure. Second, this study provides evidence that how managerial behavioral bias interacts with CG mechanisms to affect firm performance, which has not been studied in previous literature. Therefore, the results of this study contribute to the theoretical perspective by providing an insight into the influencing role of managerial behavior in the relationship between CG practices and firm performance in an emerging markets economy. Hence, the empirical result of the study provides important managerial implications for the practice and is important for policy-makers seeking to improve corporate governance in the emerging market economy.

Introduction

Corporate governance and its relation with firm performance, keep on to be an essential area of empirical and theoretical study in corporate study. Corporate governance has got attention and developed as an important mechanism over the last decades. The fast growth of privatizations, the recent global financial crises, and financial institutions development have reinforced the improvement of corporate governance practices. Well-managed corporate governance mechanisms play an important role in improving corporate performance. Good corporate governance is fundamental for a firm in different ways; it improves company image, increases shareholders’ confidence, and reduces the risk of fraudulent activities [ 67 ]. It is put together on a number of consistent mechanisms; internal control systems and external environments that contribute to the business corporations’ increase successfully as a complete to bring about good corporate governance. The basic rationale of corporate governance is to increase the performance of firms by structuring and sustaining initiatives that motivate corporate insiders to maximize firm’s operational and market efficiency, and long-term firm growth through limiting insiders’ power that can abuse over corporate resources.

Several studies are contributed to the effect of CG on firm performance using different market developments. However, there is no consensus on the role CG on firm performance, due to different contextual factors. The role of CG mechanisms is affected by different factors. Prior studies provided different empirical evidence such as [ 14 ], suggested that the monitoring efficiency of the board of directors is affected by internal and external factors like government regulation and internal firm-specific factors; the role of board monitoring is determined by ownership structure and firm-specific characters Boone et al. [ 8 ], and Liu et al. [ 57 ] and Bozec [ 10 ] also reported that external market discipline affects the internal CG role on firm performance. Moreover, several studies studied the moderation role of different variables in between CG and firm value. Mcdonald et al. [ 63 ] studied CEO experience moderating the board monitoring effectiveness, and [ 60 ] studied the moderating role of product market competition in between internal CG and firm performance. Bozec [ 10 ] studied market disciple as a moderator between the board of directors and firm performance. As to the knowledge of the researcher, no study considered the influencing role of managerial overconfidence in between CG mechanisms and firm corporate performance. Thus, this study aims to investigate the influence of managerial overconfidence in the relationship between CG mechanisms and firm performance by using Chinese listed firms.

Managers (CEOs) were able to valuable contributions to the monitoring of strategic decision making [ 13 ]. Behavioral decision theory [ 94 ] suggests that overconfidence, as one type of cognitive bias, encourages decision-makers to overestimate their information and problem-solving capabilities and underestimates the uncertainties facing their firms and the potential losses from litigation associated with claims against them. Several prior studies reported different results of the manager's role in corporate governance in different ways. Previous studies claimed that overconfidence is a dysfunctional behavior of managers that deals with unfavorable consequences for the firm outcome, such as value distraction through unprofitable mergers and suboptimal investment behavior [ 61 ], and unlawful activities (Mishina et al. [ 64 ]). Oliver [ 68 ] argued the human character of individual managers affects the effectiveness of corporate governance. Top managers' behaviors and experience are primary determinants of directors' ability to effectively evaluate their managerial decision-making [ 45 ]. In another way, [ 47 , 58 ] noted managerial overconfidence can encourage some risk and make up for managerial risk aversion, which leads to suboptimal investment decisions. Jensen [ 41 ] suggested in the presence of free cash flow, the manager may overinvest and they can accept a negative net present value project. Therefore, the existence of CG mechanisms aims to eliminate or reduce the effect of agency and asymmetric information on the CEO’s decisions [ 62 ]. This means that the objectives of CG mechanisms are to counterbalance the effect of such problems in the corporate organization that may affect the value of the firms in the long run. Even with the absence of agency conflicts and asymmetric information problems, there is evidence documented for distortions such as the case of corporate investment. Managers will over- or under-invest regarding their optimism level and the availability of internal cash flow.

Agency theory by Jensen and Meckling [ 42 ] has a very clear vision of the problems that exist in the company to know the disagreement of interests between shareholders and managers. Irrational behavior of management resulting from behavioral biases of executive managers is a great challenge in corporate governance [ 44 ]. Overconfidence may create more agency conflict than normal managers. It may lead internal and external CG mechanisms to decisions which damage firm value. The role of CG mechanisms mitigating corporate governance results from agency costs, information asymmetry, and their impact on corporate decisions. This means the behavior of overconfident executives may affect controlling and monitoring role of internal/external CG mechanisms. According to Baccar et al. [ 5 ], suggestion is that one of the roles of corporate governance is controlling such managerial behavioral bias and limiting their potential effects on the company’s strategies. These discussions lead to the conclusion that CEO overconfidence will negatively or positively influence the relationships of CG on firm performance. The majority of studies in the corporate governance field deal with internal problems associated with managerial opportunism, misalignment of objectives of managers and stakeholders. To deal with these problems, the firm may organize internal governance mechanisms, and in this section, the study provides a review of research focused on this specific aspect of corporate governance.

Internal CG includes the controlling mechanism between various actors inside the firm: that is, the company management, its board, and shareholders. The shareholders delegate the controlling function to internal mechanisms such as the board or supervisory board. Effective internal CG is essential in accomplishing company strategic goals. Gillan [ 30 ] described internal mechanisms by dividing them into boards, managers, shareholders, debt holders, employees, suppliers, and customers. These internal mechanisms of CG work to check and balance the power of managers, shareholders, directors, and stakeholders. Accordingly, independent board, CEO duality, and ownership concentration are the main internal corporate governance controlling mechanisms suggested by various researchers in the literature. Thus, the study considered these three internal corporate structures in this study as internal control mechanisms that affect firm performance. Concurrently, external CG mechanisms are mechanisms that are not from the inside of the firm, which is from the outside of the firms and includes: market competition, take over provision, external audit, regulations, and debt finance. There are a lot of studies that examine and investigate the effect of external CG practices on the financial performance of a company, especially in developed nations. In this study, product market competition and debt financing have been taken as representatives of external CG mechanisms. Thus, the study used internal CG measures; independent board, dual leadership, ownership concentration, and product-market competition, and debt financing as a proxy of external CG measures.

Literature review and hypothesis building

Corporate governance and firm performance.

Corporate governance has got attention and developed as a significant mechanism more than in the last decades. The recent financial crises, the fast growth of privatizations, and financial institutions have reinforced the improvement of corporate governance practices in numerous institutions of different countries. As many studies revealed, well-managed corporate governance mechanisms play an important role in providing corporate performance. Good corporate governance is fundamental for a firm in several ways: OECD [ 67 ] indicates the good corporate governance increases the company image, reduces the risks, and boosts shareholders' confidence. Furthermore, good corporate governance develops a number of consistent mechanisms, internal control systems and external environments that contribute to the business corporations’ increase effectively as a whole to bring about good corporate governance.

The basic rationale of corporate governance is to increase the performance of companies by structuring and sustaining incentives that initiate corporate managers to maximize firm’s operational efficiency, return on assets, and long-term firm growth through limiting managers’ abuse of power over corporate resources.

Corporate governance mechanisms are divided into two broad categories: internal corporate governance and external corporate governance mechanisms. Supporting this concept, Keasey and Wright [ 43 ] indicated corporate governance as a framework for effective monitoring, regulation, and control of firms which permits alternative internal and external mechanisms for achieving the proposed company’s objectives. The achievement of corporate governance relies on the mechanism effectiveness of both internal and external governance structures. Gillan [ 30 ] suggested that corporate governance can be divided into two: the internal and external mechanisms. Gillan [ 30 ] described internal mechanisms by dividing into boards, managers, shareholders, debt holders, employees, suppliers, and customers, and also explain external corporate governance mechanisms by incorporating the community in which companies operate, the social and political environment, laws and regulations that corporations and governments involved in.

The internal mechanisms are derived from ownership structure, board structure, and audit committee, and the external mechanisms are derived from the capital market corporate control market, labor market, state status, and investors activate [ 26 ]. The balance and effectiveness of the internal and external corporate governance practices can enhance a better corporate operational performance [ 21 ]. Literature argued that integrated and complete governance mechanisms are better with multi-dimensional theoretical view [ 87 ]. Thus, the study includes both internal and external CG mechanisms to broadly show the connection of these components. Filatotchev and Nakajima [ 26 ] suggest that an integrated approach bringing external and internal mechanisms jointly enhances to build up a more general view on the effectiveness and efficiency of different corporate governance mechanisms. Thus, the study includes both internal and external CG mechanisms to broadly show the connection of these three components.

Board of directors and ownership concentration are the main internal corporate governance mechanisms and product market competition and debt finance also the main representative of external corporate governance suggested by many researchers in the literature that were used in this study. Therefore, the following sections provide a brief discussion of internal and external corporate governance from different angles.

Independent board and firm performance

Board of directors monitoring has been centrally important in corporate governance. Jensen [ 41 ] board of directors is described as the peak of the internal control system. The board represents a firm’s owners and is responsible for ensuring that the firm is managed effectively. Thus, the board is responsible for adopting control mechanisms to ensure that management’s behavior and actions are consistent with the interest of the owners. Mainly the responsibility of the board of directors is selection, evaluation, and removal of poorly performing CEO and top management, the determination of managerial incentives and monitoring, and assessment of firm performance [ 93 ]. The board of directors has the formal authority to endorse management initiatives, evaluate managerial performance, and allocate rewards and penalties to management on the basis of criteria that reflect shareholders’ interests.

According to the agency theory board of directors, the divergence of interests between shareholders and managers is addressed by adopting a controlling role over managers. The board of directors is one of the key governance mechanisms; the board plays a pivotal role in monitoring managers to reduce the problems associated with the separation of ownership and management in corporations [ 24 ]. According to Chen et al. [ 16 ], the strategic role of the board became increasingly important and going beyond the mere approval of strategic management decisions. The board of directors must serve to reconcile management decisions with the objectives of shareholders and stakeholders, which can at times influence strategic decisions (Uribe-Bohorquez [ 85 ]). Therefore, the board's responsibilities extend beyond controlling and monitoring management, ensuring that it takes decisions that are reliable with the corporations [ 29 ]. In the perspective of resource dependence theory, an independent director is often linked firm to outside environments, who are non-management members of the board. Independent boards of directors are more believed to be effective in protecting shareholders' interests resulting in high performance [ 26 ]. This focus on board independence is grounded in agency theory, which addresses inefficiencies that arise from the separation of ownership and control [ 24 ]. As agency theory perspective boards of directors, particularly independent boards are put in place to monitor managers on behalf of shareholders [ 59 ].

A large number of empirical studies are undertaken to verify whether independent directors perform their governance functions effectively or not, but their results are still inconclusive. Studies [ 2 , 50 , 52 , 56 , 85 ], reported the supportive arguments that independent board of directors and firm performance have a positive relationship; in other ways, a large number of studies [ 6 , 17 , 65 91 ], and findings indicated the independent director has a negative relation with firm performance. The positive relationship of independent board and firm performance argued that firms which empower outside directors may lead to their more effective monitoring and therefore higher firm performance. The negative relationship of independent board and firm performance results are based on the argument that external directors have no access to information about the internal business of the firms and their relation with internal management does not allow them to have a sufficient understanding of the firm’s day-to-day business activities or it may arise from the lack of knowledge of the business or the ability to monitor management actions [ 28 ].

Specifically in China, the corporate governance regulation code was approved in 2001 and required that the board of all Chinese listed domestic companies must include at least one-third of independent directors on their board by June 2003. Following this direction, many listed firms had appointed more independent directors, with a view to increase the independence of the board [ 54 ]. This proclamation is staying stable till now, and the number of independent directors in Chinese listed firms is increasing from time to time due to its importance. Thus, the following hypothesis is proposed.

Hypothesis 1

The proportion of independent directors in board members is positively related to firm performance.

Dual leadership and firm performance

CEO duality is one of the important board control mechanisms of internal CG mechanisms. It refers to a situation where the firm’s chief executive officer serves as chairman of the board of directors, which means a person who holds both the positions of CEO and the chair. Regarding leadership and firm performance relation, there are different arguments; there is not consistent conclusion among different researchers. There are two competitive views about dual leadership in corporate governance literature. Agency theory view proposed that duality could minimize the board’s effectiveness of its monitoring function, which leads to further agency problems and enhance poor performance [ 41 , 83 ]. As a result, dual leadership enhances CEO entrenchment and reduces board independence. In this condition, these two roles in one person made a concentration of power and responsibility, and this may result in busyness of CEO which affects the normal duties of a company. This means the CEO is responsible to execute a company’s strategies, monitoring and evaluating the managerial activities of a company. Thus, separating these two roles is better to avoid concentration of authority and power in one individual and separate leadership of board from the ruling of the business [ 72 ].

On the other hand, stewardship theory suggests that managers are good stewards of company resources, which could benefit a firm [ 9 ]. This theory advocates that there is no conflict of interest between shareholders and managers, if the role of CEO and chairman vests on one person, rather CEO duality would promote a clear sense of strategic direction by unifying and strengthening leadership.

In the Chinese firm context, there are different conflicting conclusions about the relationship between CEO duality and firm performance.

Hypothesis 2

CEO duality is negatively associated with firm performance.

Ownership concentration and firm performance

The ownership structure is which has a profound effect on business strategy and performance. Agency theory [ 81 ] argued that concentrated ownership can monitor corporate operating management effectively, alleviate information problems and agency costs, consequently, improve firm performance. The concentration of ownership as a large number of studies grounded in agency theory suggests that it has both the incentive and influence to assure that managers and directors operate in the interests of shareholders [ 19 ]. Concentrated ownership presence among the firm’s investors provides an important driver of good CG that should lead to efficiency gains and improvement in performance [ 81 ].

Due to shareholder concentrated economic risk, these shareholders have a strong encouragement to watch strictly over management, making sure that management does not engage in activities that are damaging the wealth of shareholders. Similarly, Shleifer and Vishny [ 80 ] argue that large share blocks reduce managerial opportunism, resulting in lower agency conflicts between management and shareholders.

In other ways, some researchers have indicated, block shareholders harmfully on the value of the firm, especially when majority shareholders can abuse their position of dominant control at the expense of minority shareholders [ 25 ]. As a result, at some level of ownership concentration the distinction between insiders and outsiders becomes unclear, and block-holders, no matter what their identity is, may have strong incentives to switch resources to the ways that make them better off at the cost of other shareholders. However, concentrated shareholding may create a new set of agency conflicts that may provide a negative impact on firm performance.

In the emerging market context, studies [ 77 , 90 ] find a positive association between ownership concentration and accounting profit for Chinese public companies. As Yu and Wen [ 92 ] argued, Chinese companies have a concentrated ownership structure, limited disclosure, poor investor protection, and reliance on the banking system. As this study argues, this concentration is more controlled by the state, institution, and private shareholders. Thus, ownership concentration in Chinese firms may be an alternative governance tool to reduce agency problems and enhance efficiency.

Hypothesis 3

The ownership concentration is positively related to firm performance.

Product market competition and firm performance

Theoretical models have argued that competition in product markets is a powerful force for overcoming the agency problem between shareholders and managers [ 78 ]. Competition in product markets plays the role of a takeover [ 3 ], and well-managed firms take over the market from poorly managed firms. According to this study finding, competition helps to build the best management team. Competition acts as a substitute for internal governance mechanisms, practically the market for corporate control [ 3 ]. Chou et al. [ 18 ] provided evidence that product market competition has a substantial impact on corporate governance and that it substitutes for corporate governance quality, and they provide evidence that the disciplinary force of competition on the management of the firm is from the fear of insolvency. For instance, Ibrahim [ 39 ] reported firms to operate in competitive industries record more returns of share compared with the concentrated industries. Hart [ 33 ] stated that competition inspires managers to work harder and, thus, reduces managerial slack. This study suggests that in high competition, the selling prices of products or services are more likely to fall because managers are concerned with their economic interest, which may tie up with firm performance. Managers are more focused on enhancing productivity that is more likely to reduce cost and increase firm performance. Thus, competition in product market can reduce agency problems between owners and managers and can enhance performance.

Hypothesis 4

Product market competition is positively associated with firm performance.

Debt financing and firm performance

Debt financing is one of the important governance mechanisms in aligning the incentives of corporate managers with those of shareholders. According to agency theory, debt financing can increase the level of monitoring over self-serving managers and that can be used as an alternative corporate governance mechanism [ 40 ]. This theory argues two ways through debt finance can minimize the agency cost: first the potential positive impact of debt comes from the discipline imposed by the obligation to continually earn sufficient cash to meet the principal and interest payment. It is a commitment device for executives. Second leverage reduces free cash flows available for managers’ discretionary expenses. Literature suggests that when leverage increases, managers may invest in high-risk projects in order to meet interest payments; this action leads lenders to monitor more closely the manager’s action and decision to reduce the agency cost. Koke and Renneboog [ 48 ] have found empirical support that a positive impact of bank debt on productivity growth in German firms. Also, studies like [ 77 , 86 ] examine empirically the effect of debt on firm investment decisions and firm value; reveal that debt finance is a negative effect on corporate investment and firm values [ 69 ] find that there is a significant and negative relationship between debt intensity and firm productivity in the case of Indian firms.

In the Chinese financial sectors, banks play a great role and use more commercial judgment and consideration in their leading decision, and even they monitor corporate activities [ 82 ]. In China listed company [ 77 , 82 ] found that an increase in bank loans increases the size of managerial perks and free cash flows and decreases corporate efficiency, especially in state control firms. The main source of debts is state-owned banks for Chinese listed companies [ 82 ]. This shows debt financing can act as a governance mechanism in limiting managers’ misuse of resources, thus reducing agency costs and enhance firm values. However, in China still government plays a great role in public listed company management, and most banks in China are also governed by the central government. However, the government is both a creditor and a debtor, especially in state-controlled firms. Meanwhile, the government as the owner has multiple objectives such as social welfare and some national (political) issues. Therefore, when such an issue is considerable, debt financing may not properly play its governance role in Chinese listed firms.

Hypothesis 5

Debt financing has a negative association with firm performance

Influence of managerial overconfidence on the relationship of corporate governance and firm performance

Corporate governance mechanisms are assumed to be an appropriate solution to solve agency problems that may derive from the potential conflict of interest between managers and officers, on the one hand, and shareholders, on the other hand [ 42 ].

Overconfidence is an overestimation of one’s own abilities and outcomes related to one’s own personal situation [ 74 ]. This study proposed from the behavioral finance view that overconfidence is typical irrational behavior and that a corporate manager tends to show it when they make business decisions. Overconfident CEOs tend to think they have more accurate knowledge about future events than they have and that they are more likely to experience favorable future outcomes than they are [ 35 ]. Behavioral finance theory incorporates managerial psychological biases and emotions into their decision-making process. This approach assumes that managers are not fully rational. Concurrently, several reasons in the literature show managerial irrationality. This means that the observed distortions in CG decisions are not only the result of traditional factors. Even with the absence of agency conflicts and asymmetric information problems, there is evidence documented for distortions such as the case of corporate investment. Managers will over- or under-invest regarding their optimism level and the availability of internal cash flow. Such a result push managers to make sub-optimal decisions and increase observed corporate distortions as a result. The view of behavioral decision theory [ 94 ] suggests that overconfidence, as one type of cognitive bias, encourages decision-makers to overestimate their own information and problem-solving capabilities and underestimates the uncertainties facing their firms and the potential losses from proceedings related with maintains against them.

Researchers [ 34 ,  61 ] discussed the managerial behavioral bias has a great impact on firm corporate governance practices. These studies carefully analyzed and clarified that managerial overconfidence is a major source of corporate distortions and suggested good CG practices can mitigate such problems.

In line with the above argument and empirical evidence of several researchers, therefore, the current study tried to investigate how the managerial behavioral bias (overconfidence) positively or negatively influences the effect of CG on firm performance using Chinese listed firms.

The boards of directors as central internal CG mechanisms have the responsibility to monitor, control, and supervise the managerial activities of firms. Thus, the board of directors has the responsibility to monitor and initiate managers in the company to increase the wealth of ownership and firm value. The capability of the board composition and diversity may be important to control and monitor the internal managers' based on the nature of internal executives behaviors, managerial behavior bias that may hinder or smooth the progress of corporate decisions of the board of directors. Accordingly, several studies suggested different arguments; Delton et al. [ 20 ] argued managerial behavior is influencing the allocation of board attention to monitoring. According to this argument, board of directors or concentrated ownership is not activated all the time continuously, and board members do not keep up a constant level of attention to supervise CEOs. They execute their activities according to firm and CEO status. While the current performance of the firm desirable the success confers celebrity status on CEOs and board will be liable to trust the CEOs and became idle. In other ways, overconfidence managers are irrational behaviors that tend to consider themselves better than others on different attributes. They do not always form beliefs logically [ 73 ]. They blame the external advice and supervision, due to overestimating their skills and abilities, underestimate their risks [ 61 ]. Similarly, CEOs are the most decision-makers in the firm strategies. While managers are highly overconfident, board members (especially external) face information limitations on a day-to-day activities of internal managers. In other way, CEOs have a strong aspiration to increase the performance of their firm; however, if they achieve their goals, they may build their empire. This situation will pronounce where the market for corporate control is not matured enough like China [ 27 ]. So, this fact affects the effectiveness of board activities in strategic decision-making. In contrast, as the study [ 7 ] indicated, as the number of the internal board increases, the impact of managerial overconfidence in the firm became increasing and positively correlated with the leadership duality. In other ways, agency theory, many opponents suggest that CEO duality reduces the monitoring role of the board of directors over the executive manager, and this, in turn, may harm corporate performance. In line with this Khajavi and Dehghani, [ 44 ] found that as the number of internal board increases, the managerial overconfidence bias will increase in Tehran Stock Exchange during 2006–2012.

This shows us the controlling and supervising role of independent directors are less likely in the firms managed by overconfident managers than normal managers; conversely, the power of CEO duality is more salient in the case of overconfident managers than normal managers.

Hypothesis 2a

Managerial overconfidence negatively influences the relationship of independent board and firm performance.

Hypothesis 2b

Managerial overconfidence strengthens the negative relationships of CEO duality and firm performance.

An internal control mechanism ownership concentration believes in the existence of strong control against the managers’ decisions and choices. Ownership concentration can reduce managerial behaviors such as overconfidence and optimism since it contributes to the installation of a powerful control system [ 7 ]. They documented that managerial behavior affects the monitoring activities of ownership concentration on firm performance. Ownership can affect the managerial behavioral bias in different ways, for instance, when CEOs of the firm become overconfident for a certain time, the block ownership controlling attention is weakened [ 20 ], and owners trust the internal managers that may damage the performance of the firms in an emerging market where external market control is weak. Overconfidence CEOs have the quality that expresses their behavior up on their company [ 36 ]. In line with this fact, the researcher can predict that the impact of concentrated ownership on firm performance is affected by overconfident managers.

Hypothesis 2c

Managerial overconfidence negatively influences the impact of ownership concentration on firm performance.

Theoretical literature has argued that product market competition forces management to improve firm performance and to make the best decisions for the future. In high competition, managers try their best due to fear of takeover [ 3 ], well-managed firms take over the market from poorly managed firms, and thus, competition helps to build the best management team. In the case of firms operating in the competitive industry, overconfidence CEO has advantages, due to its too simple to motivate overconfident managerial behaviors due to being overconfident managers assume his/her selves better than others. Overconfident CEOs are better at investing for future investments like research and development, so it plays a strategic role in the competition. Englmaier [ 23 ] argues firms in a more competitive industry better hire a manager who strongly believes in better future market outcomes.

Therefore, the following hypothesis was proposed:

Hypothesis 2d

Managerial overconfidence moderates the effect of product market competition on firm performance.

Regarding debt financing, existing empirical evidence shows no specific pattern in the relation of managerial overconfidence and debt finance. Huang et al. [ 38 ] noted that overconfident managers normally overestimate the profitability of investment projects and underestimate the related risks. So, this study believes that firms with overconfident managers will have lower debt. Then, creditors refuse to provide debt finance when firms are facing high liquidity risks. Abdullah [ 1 ] also argues that debt financers may refuse to provide debt when a firm is having a low credit rating. Low credit rating occurs when bankers believe firms are overestimating the investment projects. Therefore, creditors may refuse to provide debt when managers are overconfident, due to under-estimating the related risk which provides a low credit rating.

However, in China, the main source of debt financers for companies is state banks [ 82 ], and most overconfidence CEOs in Chinese firms have political connections [ 96 ] with the state and have a better relationship with external financial institutions and public banks. Hence, overconfident managers have better in accessing debt rather than rational managers in the context of China that leads creditors to allow to follow and influence the firm investments through collecting information about the firm and supervise the firms directly or indirectly. Thus, managerial overconfidence could have a positive influence on relationships between debt finance and firm performance; thus, the following hypothesis is proposed:

Hypothesis 2e

Managerial overconfidence moderates the relationship between debt financing and firm performance.

To explore the impact of CG on firm performance and whether managerial behavior (managerial overconfidence) influences the relationships of CG and firm performance, the following research model framework was developed based on theoretical suggestions and empirical evidence.

Data sources and sample selection

The data for this study required are accessible from different sources of secondary data, namely China Stock Market and Accounting Research (CSMAR) database and firm annual reports. The original data are obtained from the CSMAR, and the data are collected manually to supplement the missing value. CSMAR database is designed and developed by the China Accounting and Financial Research Center (CAFC) of Honk Kong Polytechnic University and by Shenzhen GTA Information Technology Limited company. All listed companies (Shanghai and Shenzhen stock Exchange) financial statements are included in this database from 1990 and 1991, respectively. All financial data, firm profile data, ownership structure, board structure, composition data of listed companies are included in the CSMAR database. The research employed nine consecutive years from 2010 to 2018 that met the condition that financial statements are available from the CSMAR database. This study sample was limited to only listed firms on the stock market, due to hard to access reliable financial and corporate governance data of unlisted firms. All data collected from Chinese listed firms only issued on A shares in domestic stoke market exchange of Shanghai and Shenzhen. The researcher also used only non-financial listed firms’ because financial firms have special regulations. The study sample data were unbalanced panel data for nine consecutive years from 2010 to 2018. To match firms with industries, we require firms with non-missing CSRC top-level industry codes in the CSMAR database. After applying all the above criteria, the study's final observations are 11,634 firm-year observations.

Measurement of variables

Dependent variable.

  • Firm performance

To measure firm performance, prior studies have been used different proxies, by classifying them into two groups: accounting-based and market-based performance measures. Accordingly, this study measures firm performance in terms of accounting base (return on asset) and market-based measures (Tobin’s Q). The ROA is measured as the ratio of net income or operating benefit before depreciation and provisions to total assets, while Tobin’s Q is measured as the sum of the market value of equity and book value of debt, divided by book value of assets.

Independent Variables

Board independent (bind).

Independent is calculated as the ratio of the number of independent directors divided by the total number of directors on boards. In the case of the Chinese Security Regulatory Commission (2002), independent directors are defined as the “directors who hold no position in the company other than the position of director, and no maintain relation with the listed company and its major shareholders that might prevent them from making objective judgment independently.” In line with this definition, many previous studies used a proportion of independent directors to measure board independence [ 56 , 79 ].

CEO Duality

CEO duality refers to a position where the same person serves the role of chief executive officer of the form and as the chairperson of the board. CEO duality is a dummy variable, which equals 1 if the CEO is also the chairman of the board of directors, and 0 otherwise.

Ownership concentration (OWCON)

The most common way to measure ownership concentration is in terms of the percentage of shareholdings held by shareholders. The percentage of shares is usually calculated as each shareholder’s shareholdings held in the total outstanding shares of a company either by volume or by value in a stock exchange. Thus, the distribution of control power can be measured by calculating the ownership concentration indices, which are used to measure the degree of control or the power of influence in corporations [ 88 ]. These indices are calculated based on the percentages of a number of top shareholders’ shareholdings in a company, usually the top ten or twenty shareholders. Following the previous studies [ 22 ], Wei Hu et al. [ 37 ], ownership concentration is measured through the total percentage of the 10 top block holders' ownership.

Product market competition (PMC)

Previous studies measure it through different methods, such as market concentration, product substitutability and market size. Following the previous work in developed and emerging markets [product substitutability [ 31 , 57 ], the current study measured using proxies of market concentration (Herfindahl–Hirschman Index (HHI)). The market share of every firm is calculated by dividing the firm's net sale by the total net sale of the industry, which is calculated for each industry separately every year. This index measures the degree of concentration by industry. The bigger this index is, the more the concentration and the less the competition in that industry will be, vice versa.

Debt Financing (DF)

The debt financing proxy in this study is measured by the percentage of a total asset over the total debt of the firm following the past studies [ 69 , 95 ].

Interaction variable

Managerial overconfidence (moc).

To measure MOC, several researchers attempt to use different proxies, for instance CEO’s shareholdings [ 61 ] and [ 46 ]; mass media comments [ 11 ], corporate earnings forecast [ 36 ], executive compensation [ 38 ], and managers individual characteristics index [ 53 ]. Among these, the researcher decided to follow a study conducted in emerging markets [ 55 ] and used corporate earnings forecasts as a better indicator of managerial overconfidence. If a company’s actual earnings are lower than the earnings expected by managers, the managers are defined as overconfident with a dummy variable of (1), and as not overconfident (0) otherwise.

Control variables

The study contains three control variables: firm size, firm age, and firm growth opportunities. Firm size is an important component while dealing with firm performance because larger firms have more agency issues and need strong CG. Many studies confirmed that a large firm has a large board of directors, which increases the monitoring costs and affects a firm’s value (Choi et al., 2007). In other ways, large firms are easier to generate funds internally and to gain access to funds from an external source. Therefore, firm size affects the performance of firms. Firm size can be measured in many ways; common measures are market capitalization, revenue volume, number of employments, and size of total assets. In this study, firm size is measured by the logarithm of total assets following a previous study. Firm age is the number of years that a firm has operated; it was calculated from the time that the company first appeared on the Chinese exchange. It indicates how long a firm in the market and indicates firms with long age have long history accumulate experience and this may help them to incur better performance [ 8 ]. Firm age is a measure of a natural logarithm of the number of years listed from the time that company first listed on the Chinese exchange market. Growth opportunity is measured as the ratio of current year sales minus prior year sales divided by prior year sales. Sales growth enhances the capacity utilization rate, which spreads fixed costs over revenue resulting in higher profitability [ 49 ].

Data analysis methods

Empirical model estimations.

Most of the previous corporate governance studies used OLS, FE, or RE estimation methods. However, these estimations are better when the explanatory variables are exogenous. Otherwise, a system generalized moment method (GMM) approach is more efficient and consistent. Arellano and Bond [ 4 ] suggested that system GMM is a better estimation method to address the problem of autocorrelation and unobservable fixed effect problems for the dynamic panel data. Therefore, to test the endogeneity issue in the model, the Durbin–Wu–Hausman test was applied. The result of the Hausman test indicated that the null hypothesis was rejected ( p  = 000), so there was an endogeneity problem among the study variables. Therefore, OLS and fixed effects approaches could not provide unbiased estimations, and the GMM model was utilized.

The system GMM is the econometric analysis of dynamic economic relationships in panel data, meaning the economic relationships in which variables adjust over time. Econometric analysis of dynamic panel data means that researchers observe many different individuals over time. A typical characteristic of such dynamic panel data is a large observation, small-time, i.e., that there are many observed individuals, but few observations over time. This is because the bias raised in the dynamic panel model could be small when time becomes large [ 75 ]. GMM is considered more appropriate to estimate panel data because it removes the contamination through an identified finite-sample corrected set of equations, which are robust to panel-specific autocorrelation and heteroscedasticity [ 12 ]. It is also a useful estimation tool to tackle the endogeneity and fixed-effect problems [ 4 ].

A dynamic panel data model is written as follows:

where y it is the current year firm performance, α is representing the constant, y it−1 is the one-year lag performance, i is the individual firms, and t is periods. β is a vector of independent variable. X is the independent variable. The error terms contain two components, the fixed effect μi and idiosyncratic shocks v it .

Accordingly, to test the impact of corporate governance mechanisms on firm performance and influencing role of the overconfident executive on the relationship between corporate governance mechanisms and firm performance, the following base models were used:

ROA / TQ i ,t  =  α  + yROA /TQ i,t−1  + β 1 INDBRD + β 2 DUAL + β 3 OWCON +  β 4 DF +  β 5 PMC +  β 6 MOC +  β 7 FSIZE + β 8 FAGE + β 9 SGTH + β 10–14 MOC * (INDBRD, DUAL, OWCON, DF, and PMC) + year dummies + industry Dummies + ή +  Ɛ it .

where i and t represent firm i at time t, respectively, α represents the constant, and β 1-9 is the slope of the independent and control variables which reflects a partial or prediction for the value of dependent variable, ή represents the unobserved time-invariant firm effects, and Ɛ it is a random error term.

Descriptive statistics

Descriptive statistics of all variables included in the model are described in Table 1 . Accordingly, the value of ROA ranges from −0.17 to 0.23, and the average value of ROA of the sample is 0.05 (5.4%). Tobin Q’s value ranges from 0.88 to 10.06, with an average value of 2.62. The ratio of the independent board ranges from 0.33 to 0.57. The average value of the independent board of directors’ ratio was 0.374. The proportion of the CEO serving as chairperson of the board is 0.292 or 29.23% over the nine years. Top 10 ownership concentration of the study ranged from 22.59% to 90.3%, and the mean value is 58.71%. Product market competition ranges from 0.85% to 40.5%, with a mean value of 5.63%. The debt financing also has a mean value of 40.5%, with a minimum value of 4.90% and a maximum value of 87%. The mean value of managerial overconfidence is 0.589, which indicates more than 50% of Chinese top managers are overconfident.

The study sample has an average of 22.15 million RMB in total book assets with the smallest firms asset 20 million RMB and the biggest owned 26 million RMB. Study sample average firms’ age was 8.61 years old. The growth opportunities of sample firms have an average value of 9.8%.

Table 2 presents the correlation matrix among variables in the regression analysis in the study. As a basic check for multicollinearity, a correlation of 0.7 or higher in absolute value may indicate a multicollinearity issue [ 32 ]. According to Table 2 results, there is no multicollinearity problem among variables. Additionally, the variance inflation factor (VIF) test also shows all explanatory variables are below the threshold value of 10, [ 32 ] which indicates that no multicollinearity issue exists.

Main results and discussion

Impact of cg on firm performance.

Accordingly, Tables 3 and 4 indicate the results of two-step system GMM employing the xtabond2 command introduced by Roodman [ 75 ]. In this, the two-step system GMM results indicated the CG and performance relationship, with the interaction of managerial overconfidence. One-year lag of performance has been included in the model and two to three periods lagged independent variables were used  as an instrument in the dynamic model, to correct for simultaneity, control for the fixed effect, and to tackle the endogeneity problem of independent variables. In this model, all variables are taken as endogenous except control variables.

Tables 3 and 4 report the results of three model specification tests to determine whether an appropriate estimation model was applied. These tests are: 1) the Arellano–Bond test for the first-order (AR (1)) and second-order correlation (AR (2)). This test indicates the result of AR (1) and AR (2) is tested for the first-order and second-order serial correlation in the first-differenced residuals, AR (2) test accepted under the null of no serial correlation. The model results show AR (2) test yields a p-value of 0.511 and 0.334, respectively, for ROA and TQ firm performance measurement, which indicates that the models cannot reject the null hypothesis of no second-order serial correlation. 2) Hansen test over-identification is to detect the validity of the instrument in the models. The Hansen test of over-identification is accepted under the null that all instruments are valid. Tables 3 and 4 indicate the p-value of Hansen test over-identification 0.139 and 0.132 for ROA and TQ measurement of firm performance, respectively, so that these models cannot reject the hypothesis of the validity of instruments. 3) In the difference-in-Hansen test of exogeneity, it is acceptable under the null that instruments used for the equations in levels are exogenous. Table 3 shows p-values of 0.313 and 0.151, respectively, for ROA and TQ. These two models cannot reject the hypothesis that the equations in levels are exogenous.

Tables 3 and 4 report the results of the one-year lag values of ROA and TQ are positive (0.398, 0.658) and significant at less than 1% level. This indicates that the previous year's performance of a Chinese firm has a significant impact on the current firm's performance. This study finding is consistent with the previous studies: Shao [ 79 ], Nguyen [ 66 ] and Wintoki et al. [ 89 ], which considered previous year performance as one of the significant independent variables in the case of corporate governance mechanisms and firm performance relationships.

The results indicate board independence has no relation with firm performance measured by ROA and TQ. However, hypothesis 1 indicated that there is a positive and significant relationship between independent board and firm performance, which is not supported. The results are conflicting with the assumption that high independent board on board room should better supervise managers, alleviate the information asymmetry between agents and owners, and improve the firm performance by their proficiency. This result is consistent with several previous studies [ 56 , 79 ], which confirms no relation between board independence and firm performance.

This result is consistent with the argument that those outside directors are inefficient because of the lack of enough information concerning the daily activities of internal managers. Specifically, Chinese listed companies may simply include the minimum number of independent directors on board to fulfill the institutional requirement and that independent boards are only obligatory and fail to perform their responsibilities [ 56 , 79 ]. In this study sample, the average of independent board of all firms included in this study has only 37 percent, and this is one of concurrent evidence as to the independent board in Chinese listed firm simple assigned to fulfill the institutional obligation of one-third ratio.

CEO duality has a negative significant relationship with firm performance measured by TQ ( β  = 0.103, p  < 0.000), but has no significant relationship with accounting-based firm performance (ROA). Therefore, this result supports our hypothesis 2, which proposed there is a negative relationship between dual leadership and firm performance. This finding is also in line with the agency theory assumption that suggests CEO duality could reduce the board’s effectiveness of its monitoring functions, leading to further agency problems and ultimately leads poor firm performance [ 41 , 83 ]. This finding consistent with prior studies [ 15 , 56 ] that indicated a negative relationship between CEO dual and firm performance, against to this result the studies [ 70 ] and [ 15 ] found that duality positively related to firm performance.

Hypothesis 3 is supported, which proposes there is a positive relationship between ownership concentration and firm performance. Table 3 result shows that there is a positive and significant relationship between the top ten concentrated ownership and ROA and TQ (0.00046 & 0.06) at 1% and 5% significance level, respectively. These findings are consistent with agency theory, which suggests that the shareholders who hold large ownership alleviate agency costs and information problems, monitor managers effectively, consequently enhance firm performance [ 81 ]. This finding is in line with Wu and Cui [ 90 ], and Pant et al. [ 69 ]. Concentrated shareholders have a strong encouragement to watch strictly over management, making sure that management does not engage in activities that are damaging to the wealth of shareholders [ 80 ].

The result indicated in Table 3 PMC and firm performance (ROA) relationship was positive, but statistically insignificant. However, PMC has positive ( β  = 2.777) and significant relationships with TQ’s at 1% significance level. Therefore, this result does not support hypothesis 4, which predicts product market competition has a positive relationship with firm performance in Chinese listed firms. In this study, PMC is measured by the percentage of market concentration, and a highly concentrated product market means less competition. Though this finding shows high product market concentration positively contributed to market-based firm performance, this result is consistent with the previous study; Liu et al. [ 57 ] reported high product market competition associated with poor firm performance measured by TQ in Chinese listed firms. The study finding is against the theoretical model argument that competition in product markets is a powerful force for overcoming the agency problem between shareholders and managers, and enhances better firm performance (Scharfstein and [ 78 ]).

Regarding debt finance and firm performance relationship, the impact of debt finance was found to be negative on both firm performances as expected. Thus, this hypothesis is supported. Table 3 shows a negative relationship with both firm performance measurements (0.059 and 0.712) at 1% and 5% significance level. Thus, hypothesis 5, which predicts a negative relationship between debt financing and firm performance, has been supported. This finding is consistent with studies ([ 86 ]; Pant et al., [ 69 ]; [ 77 , 82 ]) that noted that debt financing has a negative effect on firm values.

This could be explained by the fact that as debt financing increases in external loans, the size of managerial perks and free cash flows increase and corporate efficiency decrease. In another way, because the main source of debt financers is state-owned banks for Chinese listed firms, these banks are mostly governed by the government, and meanwhile, the government as the owner has multiple objectives such as social welfare and some national issues. Therefore, debt financing fails to play its governance role in Chinese listed firms.

Regarding control variables, firm age has a positive and significant relationship with both TQ and ROA. This finding supported by the notion indicates firms with long age have long history accumulate experience, and this may help them to incur better performance (Boone et al. [ 8 ]). Firm size has a significant positive relationship with firm performance ROA and negative significant relation with TQ. The positive result supported the suggestion that large firms get a higher market valuation from the markets, while the negative finding indicates large firms are more complex; they may have several agency problems and need additional monitoring, which results in higher operating costs [ 84 ]. Growth opportunity was found to be in positive and significant association with ROA; this indicates that a firm high growth opportunity can increase its performance.

Influences of managerial overconfidence in the relationship between CG measures and firm performance

It predicts that managerial overconfidence negatively influences the relationship of independent board and firm performance. The study findings indicate a negative significant influence of managerial overconfidence when the firm is measure by Tobin’s Q ( β  = −4.624, p  < 0.10), but a negative relationship is insignificant when the firm is measured by ROA. Therefore, hypothesis 2a is supported when firm value is measured by TQ. This indicates that the independent directors in Chinese firms are not strong enough to monitor internal CEOs properly, due to most Chinese firms merely include the minimum number of independent directors on a board to meet the institutional requirement and that independent directors on boards are only perfunctory. Therefore, the impact of independent board on internal directors is very weak, in this situation overconfident CEO becoming more powerful than others, and they can enact their own will and avoid compromises with the external board or independent board. In another way, the weakness of independent board monitoring ability allows CEOs overconfident that may damage firm value.

The interaction of managerial overconfidence and CEO duality has a significant negative effect on operational firm performance (0.0202, p  > 0.05) and a negative insignificant effect on TQ. Thus, Hypothesis 2b predicts that the existence of overconfident managers strengthens the negative relationships of dual leadership and firm performance has been supported. This finding indicates the negative effect of CEO duality amplified when interacting with overconfident CEOs. According to Legendre et al. [ 51 ], argument misbehaviors of chief executive officers affect the effectiveness of external directors and strengthen the internal CEO's power. When the CEOs are getting more powerful, boards will be inefficient and this situation will result in poor performance, due to high agency problems created between managers and ownerships.

Hypothesis 2c is supported

It predicts the managerial overconfidence decreases the positive impact of ownership concentration on firm performance. The results of Tables 3 and 4 indicated that the interaction effect of managerial overconfidence with concentrated ownership has a negative significant impact on both ROA and TQ firm performance (0.000404 and 0.0156, respectively). This finding is supported by the suggestion that CEO overconfidence weakens the monitoring and controlling role of concentrated shareholders. This finding is explained by the fact that when CEOs of the firm become overconfident for a certain time, the concentrated ownership controlling attention is weakened [ 20 ], owners trust the internal managers that may damage the performance of the firms in an emerging market where external market control is weak. Overconfident managers gain much more power than rational managers that they are able to use the firm to further their own interests rather than the interests of shareholders and managerial overconfidence is a behavioral biased that managers follow to meet their goals and reduce the wealth of shareholders. This situation resulted in increasing agency costs in the firm and damages the firm profitability over time.

It predicts that managerial overconfidence moderates the relation of product market competition and firm performance. However, the result indicated there is no significant moderating role of managerial overconfidence in the relationship between product market competition and firm performance in Chinese listed firms.

It proposed that overconfidence managers moderate the relationship of debt financing and performance in Chinese listed firm: The study finding is unobvious; it negatively influenced the relation of debt financing with accounting-based firm performance measure ( β  = −0.059, p  < 0.01) and positively significant market base firm performance ( β  = 0.735, p  < 0.05). The negative interaction results could be explained by the fact that overconfident leads managers to have lower debt due to overestimate the profitability of investment projects and underestimate the related risks. This finding is consistent with [ 38 ] finding that overconfident CEOs have lower debt, because of overestimating the investment projects. In another perspective, the result indicated a positive moderating role of overconfidence managers in the relationship of debt financing and market-based firm performance. This result is also supported by the suggestion that overconfident managers have better in accessing debt rather than rational managers in the context of China because in Chinese listed firms most of the senior CEOs have a better connection with the external finance institutions and state banks to access debt, due to their political participation than rational managers.

The main objectives of the study were to examine the impact of basic corporate governance mechanisms on firm performance and to explore the influence of managerial overconfidence on the relationship of CGMs and firm performance using Chinese listed firms. The study incorporated different important internal and external corporate governance control mechanisms that can affect firm performance, based on different theoretical assumptions and literature. To address these objectives, many hypotheses were developed and explained by a proposing multi-theoretical approach.

The study makes several important contributions to the literature. While several kinds of research have been conducted on the relationships of corporate governance and firm performance, the study basically extends previous researches based on panel data of emerging markets. Several studies have investigated in developed economies. Thus, this study contributed to the emerging market by providing comprehensive empirical evidence to the corporate governance literature using unique characteristics of Chinese publicity listed firms covering nine years (2010–2018). The study also extends the developing stream of corporate governance and firm performance literature in emerging economies that most studies in emerging (Chinese) listed companies give less attention to the external governance mechanisms. External corporate governance mechanisms like product market competition and debt financing are limited from emerging market CG literature; therefore, this study provided comprehensive empirical evidence.

Furthermore, this study briefly indicated how managerial behavioral bias can influence the monitoring, controlling, and corporate decisions of corporate firms in Chinese listed firms. Therefore, as to the best knowledge of the researcher, no study investigated the interaction effect of managerial overconfidence and CG measures to influence firm performance. Thus, the current study provides an insight into how a managerial behavioral bias (overconfidence) influences/moderates the relationship between corporate governance mechanisms and firm performance, in an emerging market. Hence, the study will help managers and owners in which situation managerial behavior helps more for firm’s value and protecting shareholders' wealth (Fig. 1 ).

Generally, the previous findings also support the current study's overall findings: Phua et al. [ 71 ] concluded that managerial overconfidence can significantly affect corporate activities and outcomes. Russo and Schoemaker [ 76 ] found that there is opposite relationship between overconfidence managers and quality of decision making, because overconfident behavioral bias reduces the ability to make a rational decision. Therefore, the primary conclusion of the study is that it attempts to understand the strength of the effect of corporate governance mechanisms on firm performance, and managerial behavioral bias must be taken into consideration as one of the influential moderators.

figure 1

Proposed research model framework

Availability of data and material

I declare that all data and materials are available.

Abbreviations

China accounting and finance center

Chief executive officer

  • Corporate governance

Corporate governance mechanisms

China Stock Market and Accounting Research

China Securities Regulatory Commission

Generalized method of moments

  • Managerial overconfidence

Research and development

Return on asset

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Principles of Corporate Governance

a term paper on corporate governance

The following post is based on a Business Roundtable publication.

Business Roundtable has been recognized for decades as an authoritative voice on matters affecting American business corporations and meaningful and effective corporate governance practices.

Since Business Roundtable last updated Principles of Corporate Governance in 2012, U.S. public companies have continued to adapt and refine their governance practices within the framework of evolving laws and stock exchange rules. Business Roundtable CEOs continue to believe that the United States has the best corporate governance, financial reporting and securities markets systems in the world. These systems work because they give public companies not only a framework of laws and regulations that establish minimum requirements but also the flexibility to implement customized practices that suit the companies’ needs and to modify those practices in light of changing conditions and standards.

Over the last several years, the external environment in which public companies operate has become increasingly complex for companies and shareholders alike. The increased regulatory burdens imposed on public companies in recent years have added to the costs and complexity of overseeing and managing a corporation’s business and bring new challenges from operational, regulatory and compliance perspectives. In addition, many U.S. public companies have a global profile; they interact with investors, suppliers, customers and government regulators around the world and do so in an era in which instant communication is the norm. Further, in the recent past, Congress has abandoned strict adherence to the fundamental principle of materiality, a central tenet of the disclosure requirements of the federal securities laws. Instead, Congress has sought to use the securities laws to address issues that are immaterial to shareholders’ investment or voting decisions. For example, Congress has required public companies to disclose information relating to conflict minerals and payments to foreign governments for resource extraction and mine safety, information that may be relevant in a social context but has little relevance to material information that a shareholder would need to make an investment decision.

The current environment has also been shaped by fundamental changes in shareholder engagement, which has become a central and essential topic for public companies and their boards, managers and investors in the early 21st century. Public companies have undertaken unprecedented levels of proactive engagement with their major shareholders in recent years. Many institutional investors have also increased their engagement efforts, dedicating significant resources to governance issues, company outreach, the development of voting policies and the analysis of the proposals on the ballots of their portfolio companies. In addition, overall levels of shareholder activism remain at record highs, imposing significant pressures on targeted companies and their boards.

Further, many of today’s shareholders—and not only those typically viewed as “activists”—have higher expectations relating to engagement with the board and management than shareholders of years past. These investors seek a greater voice in the company’s strategic decisionmaking, capital allocation and overall corporate social responsibility, areas that traditionally were the sole purview of the board and management. Moreover, some shareholder-driven campaigns to change corporate strategies (through spin-offs, for example) or capital allocation strategies (through share repurchase programs) suggest that in some cases, at least, shareholder input on these matters has been heard in the boardroom. Some commentators view this rise in shareholder empowerment as appropriate, arguing that shareholders are the ultimate owners of the company. Others question, however, whether activists’ goals are overly focused on short-term uses of corporate capital, such as share repurchases or special dividends. Capital allocation strategies focusing on short-term value may be entirely appropriate for a shareholder, regardless of the length of its investment horizon. The board, however, has a very different role when considering the appropriate use of capital for the company and all of its shareholders. Specifically, the board must constantly weigh both long-term and short­ term uses of capital (for example, organic or inorganic reinvestment, returns to shareholders, etc.) and then determine the appropriate allocation of that capital in keeping with the company’s business strategy and the goal of long-term value creation.

Business Roundtable CEOs believe that shareholder engagement will continue to be a critical corporate governance issue for U.S. companies in the years to come. Further, it is our sense that there is a growing recognition in corporate America that an increase in shareholder access to the boardroom cannot come without a corresponding increase in shareholder responsibility. Here, as in many areas of corporate governance, transparency is a basic but essential element—for example, in this “age of information,” a shareholder that wishes to influence corporate behavior should be encouraged to publicly disclose the nature of its identity and ownership, even in cases where the federal securities laws may not specifically require disclosure.

More fundamentally, we believe that the responsibility of shareholders extends beyond disclosure. We sense that there is a rising belief that shareholders cannot seek additional empowerment without assuming some accountability for the goal of long-term value creation for all shareholders. Moreover, we believe that shareholders should not use their investments in U.S. public companies for purposes that are not in keeping with the purposes of for-profit public enterprises, including but not limited to the advancement of personal or social agendas unrelated and/or immaterial to the company’s business strategy.

We believe that this concept of shareholder responsibility and accountability will—and should­—become an integral part of modern thinking relating to corporate governance in the coming years, and we look forward to taking a leadership role in discussions relating to these important issues.

In light of the evolving landscape affecting U.S. public companies, Business Roundtable has updated Principles of Corporate Governance. Although Business Roundtable believes that these principles represent current practical and effective corporate governance practices, it recognizes that wide variations exist among the businesses, relevant regulatory regimes, ownership structures and investors of U.S. public companies. No one approach to corporate governance may be right for all companies, and Business Roundtable does not prescribe or endorse any particular option, leaving that to the considered judgment of boards, management and shareholders. Accordingly, each company should look to these principles as a guide in developing the structures, practices and processes that are appropriate in light of its needs and circumstances.

Guiding Principles of Corporate Governance

Business Roundtable supports the following core guiding principles:

  • The board approves corporate strategies that are intended to build sustainable long-term value; selects a chief executive officer (CEO); oversees the CEO and senior management in operating the company’s business, including allocating capital for long-term growth and assessing and managing risks; and sets the “tone at the top” for ethical conduct.
  • Management develops and implements corporate strategy and operates the company’s business under the board’s oversight, with the goal of producing sustainable long-term value creation.
  • Management, under the oversight of the board and its audit committee, produces financial statements that fairly present the company’s financial condition and results of operations and makes the timely disclosures investors need to assess the financial and business soundness and risks of the company.
  • The audit committee of the board retains and manages the relationship with the outside auditor, oversees the company’s annual financial statement audit and internal controls over financial reporting, and oversees the company’s risk management and compliance programs.
  • The nominating/corporate governance committee of the board plays a leadership role in shaping the corporate governance of the company, strives to build an engaged and diverse board whose composition is appropriate in light of the company’s needs and strategy, and actively conducts succession planning for the board.
  • The compensation committee of the board develops an executive compensation philosophy, adopts and oversees the implementation of compensation policies that fit within its philosophy, designs compensation packages for the CEO and senior management to incentivize the creation of long-term value, and develops meaningful goals for performance-based compensation that support the company’s long-term value creation strategy.
  • The board and management should engage with long-term shareholders on issues and concerns that are of widespread interest to them and that affect the company’s long-term value creation. Shareholders that engage with the board and management in a manner that may affect corporate decisionmaking or strategies are encouraged to disclose appropriate identifying information and to assume some accountability for the long-term interests of the company and its shareholders as a whole. As part of this responsibility, shareholders should recognize that the board must continually weigh both short-term and long-term uses of capital when determining how to allocate it in a way that is most beneficial to shareholders and to building long-term value.
  • In making decisions, the board may consider the interests of all of the company’s constituencies, including stakeholders such as employees, customers, suppliers and the community in which the company does business, when doing so contributes in a direct and meaningful way to building long-term value creation.

This post is intended to assist public company boards and management in their efforts to implement appropriate and effective corporate governance practices and serve as spokespersons for the public dialogue on evolving governance standards. Although there is no “one size fits all” approach to governance that will be suitable for all U.S. public companies, the creation of long-term value is the ultimate measurement of successful corporate governance, and it is important that shareholders and other stakeholders understand why a company has chosen to use particular governance structures, practices and processes to achieve that objective. Accordingly, companies should disclose not only the types of practices they employ but also their bases for selecting those practices.

I. Key Corporate Actors

Effective corporate governance requires a clear understanding of the respective roles of the board, management and shareholders; their relationships with each other; and their relationships with other corporate stakeholders. Before discussing the core guiding principles of corporate governance, Business Roundtable believes describing the roles of these key corporate actors is important.

  • The board of directors has the vital role of overseeing the company’s management and business strategies to achieve long-term value creation. Selecting a well-qualified chief executive officer (CEO) to lead the company, monitoring and evaluating the CEO’s performance, and overseeing the CEO succession planning process are some of the most important functions of the board. The board delegates to the CEO—and through the CEO to other senior management—the authority and responsibility for operating the company’s business. Effective directors are diligent monitors, but not managers, of business operations. They exercise vigorous and diligent oversight of a company’s affairs, including key areas such as strategy and risk, but they do not manage—or micromanage—the company’s business by performing or duplicating the tasks of the CEO and senior management team. The distinction between oversight and management is not always precise, and some situations (such as a crisis) may require greater board involvement in operational matters. In addition, in some areas (such as the relationship with the outside auditor and executive compensation), the board has a direct role instead of an oversight role.
  • Management , led by the CEO, is responsible for setting, managing and executing the strategies of the company, including but not limited to running the operations of the company under the oversight of the board and keeping the board informed of the status of the company’s operations. Management’s responsibilities include strategic planning, risk management and financial reporting. An effective management team runs the company with a focus on executing the company’s strategy over a meaningful time horizon and avoids an undue emphasis on short-term metrics.
  • Shareholders invest in a corporation by buying its stock and receive economic benefits in return. Shareholders are not involved in the day-to-day management of business operations, but they have the right to elect representatives (directors) and to receive information material to investment and voting decisions. Shareholders should expect corporate boards and managers to act as long-term stewards of their investment in the corporation. They also should expect that the board and management will be responsive to issues and concerns that are of widespread interest to long-term shareholders and affect the company’s long-term value. Corporations are for-profit enterprises that are designed to provide sustainable long-term value to all shareholders. Accordingly, shareholders should not expect to use the public companies in which they invest as platforms for the advancement of their personal agendas or for the promotion of general political or social causes.
  • Some shareholders may seek a voice in the company’s strategic direction and decisionmaking—areas that traditionally were squarely within the realm of the board and management. Shareholders who seek this influence should recognize that this type of empowerment necessarily involves the assumption of a degree of responsibility for the goal of long-term value creation for the company and all of its shareholders.

Effective corporate governance requires dedicated focus on the part of directors, the CEO and senior management to their own responsibilities and, together with the corporation’s shareholders, to the shared goal of building long-term value.

II. Key Responsibilities of the Board of Directors and Management

An effective system of corporate governance provides the framework within which the board and management address their key responsibilities.

Board of Directors

A corporation’s business is managed under the board’s oversight. The board also has direct responsibility for certain key matters, including the relationship with the outside auditor and executive compensation. The board’s oversight function encompasses a number of responsibilities, including:

  • Selecting the CEO. The board selects and oversees the performance of the company’s CEO and oversees the CEO succession planning process.
  • Setting the “tone at the top.” The board should set a “tone at the top” that demonstrates the company’s commitment to integrity and legal compliance. This tone lays the groundwork for a corporate culture that is communicated to personnel at all levels of the organization.
  • Approving corporate strategy and monitoring the implementation of strategic plans. The board should have meaningful input into the company’s long-term strategy from development through execution, should approve the company’s strategic plans and should regularly evaluate implementation of the plans that are designed to create long-term value. The board should understand the risks inherent in the company’s strategic plans and how those risks are being managed.
  • Setting the company’s risk appetite, reviewing and understanding the major risks, and overseeing the risk management processes. The board oversees the process for identifying and managing the significant risks facing the company. The board and senior management should agree on the company’s risk appetite, and the board should be comfortable that the strategic plans are consistent with it. The board should establish a structure for overseeing risk, delegating responsibility to committees and overseeing the designation of senior management responsible for risk management.
  • Focusing on the integrity and clarity of the company’s financial reporting and other disclosures about corporate performance. The board should be satisfied that the company’s financial statements accurately present its financial condition and results of operations, that other disclosures about the company’s performance convey meaningful information about past results as well as future plans, and that the company’s internal controls and procedures have been designed to detect and deter fraudulent activity.
  • Allocating capital. The board should have meaningful input and decisionmaking authority over the company’s capital allocation process and strategy to find the right balance between short-term and long-term economic returns for its shareholders.
  • Reviewing, understanding and overseeing annual operating plans and budgets. The board oversees the annual operating plans and reviews annual budgets presented by management. The board monitors implementation of the annual plans and assesses whether they are responsive to changing conditions.
  • Reviewing the company’s plans for business resiliency. As part of its risk oversight function, the board periodically reviews management’s plans to address business resiliency, including such items as business continuity, physical security, cybersecurity and crisis management.
  • Nominating directors and committee members, and overseeing effective corporate governance. The board, under the leadership of its nominating/corporate governance committee, nominates directors and committee members and oversees the structure, composition (including independence and diversity), succession planning, practices and evaluation of the board and its committees.
  • Overseeing the compliance program. The board, under the leadership of appropriate committees, oversees the company’s compliance program and remains informed about any significant compliance issues that may arise.

CEO and Management

The CEO and management, under the CEO’s direction, are responsible for the development of the company’s long-term strategic plans and the effective execution of the company’s business in accordance with those strategic plans. As part of this responsibility, management is charged with the following duties.

  • Business operations. The CEO and management run the company’s business under the board’s oversight, with a view toward building long-term value.
  • Strategic planning. The CEO and senior management generally take the lead in articulating a vision for the company’s future and in developing strategic plans designed to create long-term value for the company, with meaningful input from the board. Management implements the plans following board approval, regularly reviews progress against strategic plans with the board, and recommends and carries out changes to the plans as necessary.
  • Capital allocation. The CEO and senior management are responsible for providing recommendations to the board related to capital allocation of the company’s resources, including but not limited to organic growth; mergers and acquisitions; divestitures; spin-offs; maintaining and growing its physical and nonphysical resources; and the appropriate return of capital to shareholders in the form of dividends, share repurchases and other capital distribution means.
  • Identifying, evaluating and managing risks. Management identifies, evaluates and manages the risks that the company undertakes in implementing its strategic plans and conducting its business. Management also evaluates whether these risks, and related risk management efforts, are consistent with the company’s risk appetite. Senior management keeps the board and relevant committees informed about the company’s significant risks and its risk management processes.
  • Accurate and transparent financial reporting and disclosures. Management is responsible for the integrity of the company’s financial reporting system and the accurate and timely preparation of the company’s financial statements and related disclosures. It is management’s responsibility—under the direction of the CEO and the company’s principal financial officer—to establish, maintain and periodically evaluate the company’s internal controls over financial reporting and the company’s disclosure controls and procedures, including the ability of such controls and procedures to detect and deter fraudulent activity.
  • Annual operating plans and budgets. Senior management develops annual operating plans and budgets for the company and presents them to the board. The management team implements and monitors the operating plans and budgets, making adjustments in light of changing conditions, assumptions and expectations, and keeps the board apprised of significant developments and changes.
  • Selecting qualified management, establishing an effective organizational structure and ensuring effective succession planning. Senior management selects qualified management, implements an organizational structure, and develops and executes thoughtful career development and succession planning strategies that are appropriate for the company.
  • Risk identification . Management identifies the company’s major business and operational risks, including those relating to natural disasters, leadership gaps, physical security, cybersecurity, regulatory changes and other matters.
  • Crisis preparedness . Management develops and implements crisis preparedness and response plans and works with the board to identify situations (such as a crisis involving senior management) in which the board may need to assume a more active response role.

III. Board Structure

Public companies employ diverse approaches to board structure and operations within the parameters of applicable legal requirements and stock market rules. Although no one structure is right for every company, Business Roundtable believes that the practices set forth in the following sections provide an effective approach for companies to follow.

Board Composition

  • Size . In determining appropriate board size, directors should consider the nature, size and complexity of the company as well as its stage of development. Larger boards often bring the benefit of a broader mix of skills, backgrounds and experience, while smaller boards may be more cohesive and may be able to address issues and challenges more quickly.
  • Diversity . Diverse backgrounds and experiences on corporate boards, including those of directors who represent the broad range of society, strengthen board performance and promote the creation of long-term shareholder value. Boards should develop a framework for identifying appropriately diverse candidates that allows the nominating/corporate governance committee to consider women, minorities and others with diverse backgrounds as candidates for each open board seat.
  • Tenure . Directors with a range of tenures can contribute to the effectiveness of a board. Recent additions to the board may provide new perspectives, while directors who have served for a number of years bring experience, continuity, institutional knowledge, and insight into the company’s business and industry.
  • Characteristics. Every director should have integrity, strong character, sound judgment, an objective mind and the ability to represent the interests of all shareholders rather than the interests of particular constituencies.
  • Experience. Directors with relevant business and leadership experience can provide the board a useful perspective on business strategy and significant risks and an understanding of the challenges facing the business.
  • Definition of “independence.” An independent director should not have any relationships that may impair, or appear to impair, the director’s ability to exercise independent judgment. Many boards have developed their own standards for assessing independence under stock market definitions, in addition to considering the views of institutional investors and other relevant groups.
  • Assessing independence . When evaluating a director’s independence, the board should consider all relevant facts and circumstances, focusing on whether the director has any relationships, either direct or indirect, with the company, senior management or other directors that could affect actual or perceived independence. This includes relationships with other companies that have significant business relationships with the company or with not-for-profit organizations that receive substantial support from the company. While it has been suggested that long-standing board service may be perceived to affect director independence, long tenure, by itself, should not disqualify a director from being considered independent.
  • Election. Directors should be elected by a majority vote for terms that are consistent with long­ term value creation. Boards should adopt a resignation policy under which a director who does not receive a majority vote tenders his or her resignation to the board for its consideration. Although the ultimate decision whether to accept or reject the resignation will rest with the board, the board and its nominating/corporate governance committee should think critically about the reasons why the director did not receive a majority vote and whether or not the director should continue to serve. Among other things, they should consider whether the vote resulted from concerns about a policy issue affecting the board as a whole or concerns specific to the individual director and the basis for those concerns.
  • Time commitments. Serving as a director of a public company requires significant time and attention. Certain roles, such as committee chair, board chair and lead director, carry an additional time commitment beyond that of board and committee service. Directors must spend the time needed and meet as frequently as necessary to discharge their responsibilities properly. While there may not be a need for a set limit on the number of outside boards on which a director or committee member may serve—or for any limits on other activities a director may pursue outside of his or her board duties—each director should be committed to the responsibilities of board service, and each board should monitor the time constraints of its members in light of their particular circumstances.

Board Leadership

  • Approaches. U.S. companies take a variety of approaches to board leadership; some combine the positions of CEO and chair while others appoint a separate chair. No one leadership structure is right for every company at all times, and different boards may reach different conclusions about the leadership structures that are most appropriate at any particular point in time. When appropriate in light of its current and anticipated circumstances, a board should assess which leadership structure is appropriate.
  • Lead/presiding director. Independent board leadership is critical to effective corporate governance regardless of the board’s leadership structure. Accordingly, the board should appoint a lead director, also referred to as a presiding director, if it combines the positions of CEO and chair or has a chair who is not independent. The lead director should be appointed by the independent directors and should serve for a term determined by the independent directors.
  • Lead directors perform a range of functions depending on the board’s needs, but they typically chair executive sessions of a board’s independent or nonmanagement directors, have the authority to call executive sessions, and oversee follow-up on matters discussed in executive sessions. Other key functions of the lead director include chairing board meetings in the absence of the board chair, reviewing and/or approving agendas and schedules for board meetings and information sent to the board, and being available for engagement with long-term shareholders.

Board Committee Structure

  • An effective committee structure permits the board to address key areas in more depth than may be possible at the full board level. Decisions about committee membership and chairs should be made by the full board based on recommendations from the nominating/corporate governance committee.
  • The functions performed by the audit, nominating/corporate governance and compensation committees are central to effective corporate governance; however, no one committee structure or division of responsibility is right for all companies. Thus, the references in Section IV to functions performed by particular committees are not intended to preclude companies from allocating these functions differently.
  • The responsibilities of each committee and the qualifications required for committee membership should be clearly defined in a written charter that is approved by the board. Each committee should review its charter annually and recommend changes to the board. Committees should apprise the full board of their activities on a regular basis.
  • Board committees should meet all applicable independence and other requirements as to membership (including minimum number of members) prescribed by applicable law and stock exchange rules.

IV. Board Committees

Audit committee.

  • Financial acumen . Audit committee members must meet minimum financial literacy standards, and one or more committee members should be an audit committee financial expert, as determined by the board in accordance with applicable rules.
  • Overboarding . With the significant responsibilities imposed on audit committees, consideration should be given to whether limiting service on other public company audit committees is appropriate. Policies may permit exceptions if the board determines that the simultaneous service would not affect an individual’s ability to serve effectively.
  • Selecting and retaining the outside auditor . The audit committee selects the outside auditor; reviews its qualifications (including industry expertise and geographic capabilities), work product. independence and reputation; and reviews the performance and expertise of key members of the audit team. The committee reviews new leading partners for the audit team and should be directly involved in the selection of the new engagement partner. The committee oversees the process of negotiating the terms of the annual audit engagement.
  • Overseeing the independence of the outside auditor . The committee should maintain an ongoing, open dialogue with the outside auditor about independence issues. The committee should identify those services, beyond the annual audit engagement. that it believes the outside auditor can provide to the company consistent with maintaining independence and determine whether to adopt a policy for preapproving services to be provided by the outside auditor or approving services on an engagement-by-engagement basis.
  • Financial statements. The committee should discuss significant issues relating to the company’s financial statements with management and the outside auditor and review earnings press releases before they are issued. The committee should understand the company’s critical accounting policies and why they were chosen, what key judgments and estimates management made in preparing the financial statements, and how they affect the reported financial results. The committee should be satisfied that the financial statements and other disclosures prepared by management present the company’s financial condition and results of operations accurately and are understandable.
  • Internal controls. The committee oversees the company’s system of internal controls over financial reporting and its disclosure controls and procedures, including the processes for producing the certifications required of the CEO and principal financial officer. The committee periodically reviews with both the internal and outside auditors, as well as with management, the procedures for maintaining and evaluating the effectiveness of these systems. The committee should be promptly notified of any significant deficiencies or material weaknesses in internal controls and kept informed about the steps and timetable for correcting them.
  • Risk assessment and management. Many audit committees have at least some responsibility for risk assessment and management due to stock market rules. However, the audit committee should not be the sole body responsible for risk oversight, and the board may decide to allocate some aspects of risk oversight to other committees or to the board as a whole depending on the company’s industry and other factors. A company’s risk oversight structure should provide the full board with the information it needs to understand all of the company’s major risks, their relationship to the company’s strategy and how these risks are being addressed. Committees with risk-related responsibilities should report regularly to the full board on the risks they oversee and brief the audit committee in cases where the audit committee retains some risk oversight responsibility.
  • Compliance. Unless the full board or one or more other committees do so, the audit committee should oversee the company’s compliance program, including the company’s code of conduct. The committee should establish procedures for handling compliance concerns related to potential violations of law or the company’s code of conduct, including concerns relating to accounting, internal accounting controls, auditing and securities law issues.
  • Internal audit. The committee oversees the company’s internal audit function and ensures that the internal audit staff has adequate resources and support to carry out its role. The committee reviews the scope of the internal audit plan, significant findings by the internal audit staff and management’s response, and the appointment and replacement of the senior internal auditing executive and assesses the performance and effectiveness of the internal audit function annually.

Nominating/Corporate Governance Committee

  • Director qualifications. The committee should establish, and recommend to the board for approval, criteria for board membership and periodically review and recommend changes to the criteria. The committee should review annually the composition of the board, including an assessment of the mix of the directors’ skills and experience; an evaluation of whether the board as a whole has the necessary tools to effectively perform its oversight function in a productive, collegial fashion; and an identification of qualifications and attributes that may be valuable in the future based on, among other things, the current directors’ skill sets, the company’s strategic plans and anticipated director exits.
  • Background and experience . In connection with renomination of a current director, the nominating/corporate governance committee should review the director’s background, perspective, skills and experience; assess the director’s contributions to the board; consider the director’s tenure; and evaluate the director’s continued value to the company in light of current and future needs. Some boards may undertake these steps as part of the annual nomination process, while others may use a director evaluation process.
  • Independence . The nominating/corporate governance committee should ensure that a substantial majority of the directors are independent both in fact and in appearance. The committee should take the lead in assessing director independence and make recommendations to the board regarding independence determinations. In addition, each director should promptly notify the committee of any change in circumstances that may affect the director’s independence (including but not limited to employment change or other factors that could affect director independence).
  • Tenure limits . The committee should consider whether procedures such as mandatory retirement ages or term limits are appropriate. Other practices, such as a robust director evaluation process, may make these tenure limits unnecessary, but they may still serve as useful tools for ensuring board engagement and maintaining diversity and freshness of thought. Many boards also require that directors who change their primary employment tender their resignation so that the board may consider the desirability of their continued service in light of their changed circumstances.
  • Board leadership. The committee should conduct an annual evaluation of the board’s leadership structure and recommend any changes to the board. The committee should oversee the succession planning process for the board chair, which should involve consideration of whether to combine or separate the positions of CEO and board chair and whether events such as the end of the current chair’s tenure or the appointment of a new CEO may warrant a change to the board leadership structure.
  • Committee structure. Annually, the committee should recommend directors for appointment to board committees and ensure that the committees consist of directors who meet applicable independence and qualification standards. The committee should periodically review the board’s committee structure and consider whether refreshment of committee memberships and chairs would be helpful.
  • Board oversight. The committee should oversee the effective functioning of the board, including the board’s policies relating to meeting agendas and schedules and the company’s processes for providing information to the board (both in connection with, and outside of, meetings), with input from the lead director or independent chair.
  • Corporate governance guidelines. The committee should review annually the company’s corporate governance guidelines, if any, and make recommendations about changes in those guidelines to the board.
  • Shareholder engagement. The committee may oversee the company’s and management’s shareholder engagement efforts, periodically review the company’s engagement practices, and provide to senior management feedback and suggestions for improvement. The committee and the full board should understand the company’s efforts to communicate with shareholders and receive regular briefings on such communications.
  • Director compensation. The committee also may oversee the compensation of the board if the compensation committee does not do so, or the two committees may share this responsibility.

Compensation Committee

  • Authority. The compensation committee has many responsibilities relating to the company’s overall compensation philosophy, structure, policies and programs. To assist it in performing its duties, the compensation committee must have the authority to obtain advice from independent compensation consultants, counsel and other advisers. The advisers’ independence should be assessed under applicable law and stock market rules, and the compensation committee should feel confident and comfortable that its advisers have the ability to provide the committee with sound advice that is free from any competing interests.
  • CEO and senior management compensation. A major responsibility of the compensation committee is establishing performance goals and objectives relating to the CEO, measuring performance against those goals and objectives, and determining and approving the compensation of the CEO. The compensation committee also generally approves or recommends for approval the compensation of the rest of the senior management team.
  • Alignment with shareholder interests. Executive compensation should be designed to align the interests of senior management, the company and its shareholders and to foster the long-term value creation and success of the company. Compensation should include performance-based elements that reward the achievement of goals tied to the company’s strategic plan but are at risk if such goals are not met. These performance goals should be clearly explained to the company’s shareholders.
  • Compensation costs and benefits. The compensation committee should understand the costs of the compensation packages of senior management and should review and understand the maximum amounts that could become payable under multiple scenarios (such as retirement; termination for cause; termination without cause; resignation for good reason; death and disability; and the impact of a transaction, such as a merger, divestiture or acquisition). The committee should ensure that the proper protections are in place that will allow senior management to remain focused on the long-term strategies and business plans of the company even in the face of a potential acquisition, shareholder activism, or unsolicited takeover activity or control bids.
  • Stock ownership requirements. To further align the interests of directors and senior management with the interests of long-term shareholders, the committee should establish stock ownership and holding requirements that require directors and senior management to acquire and hold a meaningful amount of the company’s stock at least for the duration of their tenure and, depending on the company’s circumstances, perhaps for a certain period of time thereafter. The company should have a policy that monitors, restricts or even prohibits executive officers’ ability to hedge the company’s stock and requires ongoing disclosure of the material terms of hedging arrangements to the extent they are permitted.
  • Risk. The compensation committee should review the overall compensation structure and balance the need to create incentives that encourage growth and strong financial performance with the need to discourage excessive risk-taking, both for senior management and for employees at all levels. Incentives should further the company’s long-term strategic plans by looking beyond short-term market value changes to the overall goal of creating and enhancing enduring value. The committee should oversee the adoption of practices and policies to mitigate risks created by compensation programs, such as a compensation recoupment, or clawback, policy.
  • Director compensation. The compensation committee may also be responsible, either alone or together with the nominating/corporate governance committee, for establishing director compensation programs, practices and policies.

V. Board Operations

  • General . Serving on a board requires significant time and attention on the part of directors. Certain roles, such as committee chair, board chair and lead director, carry an additional time commitment beyond that of board and committee service. Directors must spend the time needed and meet as frequently as necessary to discharge their responsibilities properly.
  • Meetings . The board of directors, with the assistance of the nominating/corporate governance committee, should consider the frequency and length of board meetings. Longer meetings may permit directors to explore key issues in depth, whereas shorter, more frequent meetings may help directors stay current on emerging corporate trends and business and regulatory developments.
  • Overboarding . Service on the board of a public company provides valuable experience and insight. Simultaneous service on too many boards may, however, interfere with an individual’s ability to satisfy his or her responsibilities as a member of senior management or as a director. In light of this, many boards limit the number of public company boards on which their directors may serve. Business Roundtable does not endorse a specific limit on the number of directorships an individual may hold, recognizing that decisions about limits on board service are best made by boards and their nominating/governance committees in light of the particular circumstances of individual companies and directors.
  • Executive sessions . Directors should have sufficient opportunity to meet in executive session, outside the presence of the CEO and any other management directors, in accordance with stock exchange rules. Time for an executive session should be placed on the agenda for every regular board meeting. The independent chair or lead director should set the agenda for and chair these sessions and follow up with the CEO and other members of senior management on matters addressed in the sessions.
  • Agenda. The board’s agenda must be carefully planned yet flexible enough to accommodate emergencies and unexpected developments, and it must be structured to maximize the use of meeting time for open discussion and deliberation. The board chair should work with the lead director (when the company has one) in setting the agenda and should be responsive to individual directors’ requests to add items to the agenda.
  • Access to management. The board should work to foster open, ongoing dialogue between management and members of the board. Directors should have access to senior management outside of board meetings.
  • Information. The quality and timeliness of information that the board receives directly affects its ability to perform its oversight function effectively.
  • Technology. Companies should take advantage of technology such as board portals to provide directors with meeting materials and real-time information about developments that occur between meetings. The use of technology (including e-mail) to communicate with and deliver information to the board should be accompanied by safeguards to protect the security of information and directors’ electronic devices and to comply with applicable document retention policies.
  • Confidentiality. Directors have a duty to maintain the confidentiality of all nonpublic information (whether or not it is material) that they learn through their board service, including boardroom discussions and other discussions between and among directors and senior management.
  • Director compensation. The amount and composition of the compensation paid to a company’s non-employee directors should be carefully considered by the board with the oversight of the appropriate board committee. Director compensation typically consists of a mix of cash and equity. The cash portion of director compensation should be paid in the form of an annual retainer, rather than through meeting fees, to reflect the fact that board service is an ongoing commitment. Equity compensation helps align the interests of directors with those of the corporation’s shareholders but should be provided only through shareholder-­approved plans that include meaningful and effective limitations. Further, equity compensation arrangements should be carefully designed to avoid unintended incentives such as an emphasis on short-term market value changes. Due to the potential for conflicts of interest and the duty of directors to represent the interests of all shareholders, directors or director nominees should not be a party to any compensation­ related arrangements with any third party relating to their candidacy or service as a director of the company, other than those arrangements that relate to reimbursement for expenses in connection with candidacy as a director.
  • Director education. Directors should be encouraged to take advantage of educational opportunities in the form of outside programs or “in board” educational sessions led by members of senior management or outside experts. New directors should participate in a robust orientation process designed to familiarize them with various aspects of the company and board service.
  • Reliance. In performing its oversight function, the board is entitled under state corporate law to rely on the advice, reports and opinions of management, counsel, auditors and expert advisers. Boards should be comfortable with the qualifications of those on whom they rely. Boards are encouraged to engage outside advisers where appropriate and should use care in their selection. Directors should hold advisers accountable and ask questions and obtain answers about the processes they use to reach their decisions and recommendations, as well as about the substance of the advice and reports they provide to the board.
  • Board and committee evaluations. The board should have an effective mechanism for evaluating its performance on a continuing basis. Meaningful board evaluation requires an assessment of the effectiveness of the full board, the operations of board committees and the contributions of individual directors on an annual basis. The results of these evaluations should be reported to the full board, and there should be follow-up on any issues and concerns that emerge from the evaluations. The board, under the leadership of the nominating/corporate governance committee, should periodically consider what method or combination of methods will result in a meaningful assessment of the board and its committees. Common methods include written questionnaires; group discussions led by a designated director, employee or outside facilitator (often with the aid of written questions); and individual interviews.

VI. Senior Management Development and Succession Planning

  • Succession planning . Planning for CEO and senior management development and succession in both ordinary and emergency scenarios is one of the board’s most important functions. Some boards address succession planning primarily at the full board level, while others rely on a committee composed of independent directors (often the compensation committee or the nominating/corporate governance committee) to address this key area. The board, under the leadership of the responsible committee (if any), should identify the qualities and characteristics necessary for an effective CEO and monitor the development of potential internal candidates. The board or committee should engage in a dialogue with the CEO about the CEO’s assessment of candidates for both the CEO and other senior management positions, and the board or committee should also discuss CEO succession planning outside the presence of the CEO. The full board should review the company’s succession plan at least annually and periodically review the effectiveness of the succession planning process.
  • Management development . The board and the independent committee (if any) with primary responsibility for oversight of succession planning also should know what the company is doing to develop talent beyond the senior management ranks. The board or committee should gain an understanding of the steps the CEO and other senior management are taking at more junior levels to develop the skills and experience important to the company’s success and build a bench of future candidates for senior management roles. Directors should interact with up-and-coming members of management, both in board meetings and in less formal settings, so they have an opportunity to observe managers directly and begin developing relationships with them.
  • CEO evaluation. Under the oversight of an independent committee or the lead director, the board should annually review the performance of the CEO and participate with the CEO in the evaluation of members of senior management in certain circumstances. All nonmanagement members of the board should have the opportunity to participate with the CEO in senior management evaluations if appropriate. The results of the CEO’s evaluation should be promptly communicated to the CEO in executive session by representatives of the independent directors and used in determining the CEO’s compensation.

VII. Relationships with Shareholders and Other Stakeholders

Corporations are often said to have obligations to stakeholders other than their shareholders, including employees, customers, suppliers, the communities and environments in which they do business, and government. In some circumstances, the interests of these stakeholders are considered in the context of achieving long-term value.

Shareholders and Investors

  • Know who the company’s shareholders are . The nominating/ corporate governance committee and the board should know who the company’s major shareholders are and understand their positions on significant issues relevant to the company.
  • Role of management . Members of senior management are the principal spokespersons for the company and play an important role in shareholder engagement. This role includes serving as the main points of contact for shareholders on issues where management is in the best position to have a dialogue with shareholders.
  • Board communication with shareholders . When appropriate and in consultation with the CEO, directors should be equipped to play a part from time to time in the dialogue with shareholders on topics involving the company’s pursuit of long-term value creation and the company’s governance. Communications with shareholders are subject to applicable regulations (such as Regulation Fair Disclosure) and company policies on confidentiality and disclosure of information. These regulations and policies, however, should not impede shareholder engagement. Direct communication between directors and shareholders should be coordinated through—and with the knowledge of—the board chair, the lead independent director, and/or the nominating/corporate governance committee or its chair.
  • Annual meeting. Directors should be expected to attend the annual meeting of shareholders, absent unusual circumstances. Companies should consider ways to broaden shareholder access to the annual meeting, including webcasts, if requested by shareholders.
  • Shareholder engagement. Companies should engage with long-term shareholders in a manner consistent with the respective roles of the board, management and shareholders. Companies should maintain effective protocols for shareholder communications with directors and for directors to respond in a timely manner to issues and concerns that are of widespread interest to long-term shareholders.
  • Board duties. Shareholders are not a uniform group, and their interests may be diverse. Although boards should consider the views of shareholders, the duty of the board is to act in what it believes to be the long-term best interests of the company and all its shareholders. The views of certain shareholders are one important factor that the board evaluates in making decisions, but the board must exercise its own independent judgment. Once the board reaches a decision, the company should consider how best to communicate the board’s decision to shareholders.
  • Shareholder voting. While some shareholders may use tools such as third-party analyses and recommendations in making voting decisions, these tools should not be a substitute for individualized decisionmaking that considers the facts and circumstances of each company. Companies should conduct shareholder outreach efforts where appropriate to explain the bases for the board’s recommendations on the matters that are submitted to a vote of shareholders.
  • Shareholder proposals. The federal proxy rules require public companies to include qualified shareholder proposals in their proxy statements. Shareholders should not use the shareholder proposal process as a platform to pursue social or political agendas that are largely unrelated and/or immaterial to the company’s business, even if permitted by the proxy rules. Further, a company’s proxy statement is not always the best place to address even legitimate shareholder concerns. Shareholders with concerns about particular issues should seek to engage in a dialogue with the company before submitting a shareholder proposal. If a shareholder submits a proposal, the company’s board or its nominating/corporate governance committee should oversee the company’s response. The board should consider issues raised by shareholder proposals that receive substantial support from other shareholders and should communicate its response to all shareholders.
  • General. Treating employees fairly and equitably is in a company’s best interest. Companies should have in place policies and practices that provide employees with appropriate compensation, including benefits that are appropriate given the nature of the company’s business and employees’ job responsibilities and geographic locations. When companies offer retirement, health care, insurance and other benefit plans, employees should be fully informed of the terms of those plans.
  • Misconduct. Companies should have in place and publicize mechanisms for employees to seek guidance and to alert management and the board about potential or actual misconduct without fear of retribution. As part of fostering a culture of compliance, companies should encourage employees to report compliance issues promptly and emphasize their policy of prohibiting retaliation against employees who report compliance issues in good faith.
  • Communications. Companies should communicate honestly with their employees about corporate operations and financial performance.

Communities, the Environment and Sustainability

  • Citizenship. Companies should strive to be good citizens of the local, national and international communities in which they do business; to be responsible stewards of the environment; and to consider other relevant sustainability issues in operating their businesses. Failure to meet these obligations can result in damage to the company, both in immediate economic terms and in its longer-term reputation. Because sustainability issues affect so many aspects of a company’s business, from financial performance to risk management, incorporating sustainability into the business in a meaningful way is integral to a company’s long-term viability.
  • Community service. A company should strive to be a good citizen by contributing to the communities in which it operates. Being a good citizen includes getting involved with those communities; encouraging company directors, managers and employees to form relationships with those communities; donating time to causes of importance to local communities; and making charitable contributions.
  • Sustainability. A company should conduct its business with meaningful regard for environmental, health, safety and other sustainability issues relevant to its operations. The board should be cognizant of developments relating to economic, social and environmental sustainability issues and should understand which issues are most important to the company’s business and to its shareholders.
  • Legal compliance. Corporations, like all citizens, must act within the law. The penalties for serious violations of law can be extremely severe, even life threatening, for corporations. Compliance is not only appropriate—it is essential. The board and management should be comfortable that the company has a robust legal compliance program that is effective in deterring and preventing misconduct and encouraging the reporting of potential compliance issues.
  • Political activities. Corporations have an important perspective to contribute to the public policy dialogue and discussions about the development, enactment and revision of the laws and regulations that affect their businesses and the communities in which they operate and their employees reside. To the extent that the company engages in political activities, the board should have oversight responsibility and consider whether to adopt a policy on disclosure of these activities.

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What Is Corporate Governance?

  • How It Works
  • Board of Directors
  • Assessing Corporate Governance

The Bottom Line

  • Corporate Finance

Corporate Governance: Definition, Principles, Models, and Examples

Good corporate governance can benefit investors and other stakeholders, while bad governance can lead to scandal and ruin

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

a term paper on corporate governance

Amanda Bellucco-Chatham is an editor, writer, and fact-checker with years of experience researching personal finance topics. Specialties include general financial planning, career development, lending, retirement, tax preparation, and credit.

Investopedia / Jessica Olah

Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders , which can include shareholders, senior management, customers, suppliers, lenders, the government, and the community. As such, corporate governance encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure .

Key Takeaways

  • Corporate governance is the structure of rules, practices, and processes used to direct and manage a company.
  • A company's board of directors is the primary force influencing corporate governance.
  • Bad corporate governance can destroy a company's operations and ultimate profitability.

The basic principles of corporate governance are accountability, transparency, fairness, responsibility, and risk management.

Understanding Corporate Governance

Governance refers to the set of rules, controls, policies, and resolutions put in place to direct corporate behavior. A board of directors is pivotal in governance, while proxy advisors and shareholders are important stakeholders who can affect governance.

Communicating a company's corporate governance is a key component of community and  investor relations . For instance, Apple Inc.'s investor relations site profiles its corporate leadership (the executive team and board of directors) and provides information on its committee charters and governance documents, such as bylaws, stock ownership guidelines, and articles of incorporation .

Most successful companies strive to have exemplary corporate governance. For many shareholders, it is not enough for a company to be profitable; it also must demonstrate good corporate citizenship through environmental awareness, ethical behavior, and other sound corporate governance practices.

Benefits of Corporate Governance

  • Good corporate governance creates transparent rules and controls, guides leadership, and aligns the interests of shareholders, directors, management, and employees.
  • It helps build trust with investors, the community, and public officials.
  • Corporate governance can give investors and stakeholders a clear idea of a company's direction and business integrity.
  • It promotes long-term financial viability, opportunity, and returns.
  • It can facilitate the raising of capital.
  • Good corporate governance can translate to rising share prices.
  • It can reduce the potential for financial loss, waste, risks, and corruption.
  • It is a game plan for resilience and long-term success.

Corporate Governance and the Board of Directors

The board of directors is the primary direct stakeholder influencing corporate governance. Directors are elected by shareholders or appointed by other board members and charged with representing the interests of the company's shareholders.

The board is tasked with making important decisions, such as corporate officer appointments, executive compensation, and dividend policy. In some instances, board obligations stretch beyond financial optimization, as when shareholder resolutions call for certain social or environmental concerns to be prioritized.

Boards are often made up of a mix of insiders and independent members. Insiders are generally major shareholders, founders, and executives. Independent directors do not share the ties that insiders have. They are typically chosen for their experience managing or directing other large companies. Independents are considered helpful for governance because they dilute the concentration of power and help align shareholder interests with those of the insiders.

The board of directors must ensure that the company's corporate governance policies incorporate corporate strategy, risk management, accountability, transparency, and ethical business practices.

A board of directors should consist of a diverse group of individuals, including those with matching business knowledge and skills, and others who can bring a fresh perspective from outside the company and industry.

The Principles of Corporate Governance

While there can be as many principles as a company believes make sense, some of the most common ones are:

  • Fairness : The board of directors must treat shareholders, employees, vendors, and communities fairly and with equal consideration.
  • Transparency : The board should provide timely, accurate, and clear information about such things as financial performance, conflicts of interest, and risks to shareholders and other stakeholders.
  • Risk Management : The board and management must determine risks of all kinds and how best to control them. They must act on those recommendations to manage risks and inform all relevant parties about the existence and status of risks.
  • Responsibility : The board is responsible for the oversight of corporate matters and management activities. It must be aware of and support the successful, ongoing performance of the company. Part of its responsibility is to recruit and hire a chief executive officer (CEO) . It must act in the best interests of a company and its investors.
  • Accountability : The board must explain the purpose of a company's activities and the results of its conduct. It and company leadership are accountable for the assessment of a company's capacity, potential, and performance. It must communicate issues of importance to shareholders.

Corporate Governance Models

Different corporate governance models may be found throughout the world. Here are a few of them.

The Anglo-American Model

This model can take various forms, such as the Shareholder, Stewardship, and Political Models. The Shareholder Model is the principal model at present.

The Shareholder Model is designed so that the board of directors and shareholders are in control. Stakeholders such as vendors and employees, though acknowledged, lack control.

Management is tasked with running the company in a way that maximizes shareholder interest. Importantly, proper incentives should be made available to align management behavior with the goals of shareholders/owners.

The model accounts for the fact that shareholders provide the company with funds and may withdraw that support if dissatisfied. This is supposed to keep management working effectively.

The board will usually consist of both insiders and independent members. Although traditionally, the board chairperson and the CEO can be the same, this model seeks to have two different people hold those roles.

The success of this corporate governance model depends on ongoing communications among the board, company management, and the shareholders. Important issues are brought to shareholders' attention. Important decisions that need to be made are put to shareholders for a vote.

U.S. regulatory authorities tend to support shareholders over boards and executive management.

The Continental Model

Two groups represent the controlling authority under the Continental Model. They are the supervisory board and the management board.

In this two-tiered system, the management board is composed of company insiders, such as its executives. The supervisory board is made up of outsiders, such as shareholders and union representatives. Banks with stakes in a company also could have representatives on the supervisory board.

The two boards remain entirely separate. The size of the supervisory board is determined by a country's laws and can't be changed by shareholders.

National interests have a strong influence on corporations with this model of corporate governance. Companies can be expected to align with government objectives.

This model also greatly values the engagement of stakeholders, as they can support and strengthen a company's continued operations.

The Japanese Model

The key players in the Japanese Model of corporate governance are banks, affiliated entities, major shareholders called Keiretsu (who may be invested in common companies or have trading relationships), management, and the government. Smaller, independent, individual shareholders have no role or voice. Together, these key players establish and control corporate governance.

The board of directors is usually made up of insiders, including company executives. Keiretsu may remove directors from the board if profits wane.

The government affects the activities of corporate management via its regulations and policies.

In this model, corporate transparency is less likely because of the concentration of power and the focus on the interests of those with that power.

How to Assess Corporate Governance

As an investor, you want to select companies that practice good corporate governance in the hope that you can thereby avoid losses and other negative consequences such as bankruptcy.

You can research certain areas of a company to determine whether or not it's practicing good corporate governance. These areas include:

  • Disclosure practices
  • Executive compensation structure (whether it's tied only to performance or also to other metrics)
  • Risk management (the checks and balances on decision-making)
  • Policies and procedures for reconciling conflicts of interest (how the company approaches business decisions that might conflict with its mission statement)
  • The members of the board of directors (their stake in profits or conflicting interests)
  • Contractual and social obligations (how a company approaches issues such as climate change)
  • Relationships with vendors
  • Complaints received from shareholders and how they were addressed
  • Audits (the frequency of internal and external audits and how any issues that those audits raised have been handled)

Types of bad governance practices include:

  • Companies that do not cooperate sufficiently with auditors or do not select auditors with the appropriate scale, resulting in the publication of spurious or noncompliant financial documents
  • Executive compensation packages that fail to create an optimal incentive for corporate officers
  • Poorly structured boards that make it too difficult for shareholders to oust ineffective incumbents.

Examples of Corporate Governance: Bad and Good

Bad corporate governance can cast doubt on a company's reliability, integrity, or obligation to shareholders. All can have implications for the financial health of the business.

Volkswagen AG

Tolerance or support of illegal activities can create scandals like the one that rocked Volkswagen AG starting in September 2015. The details of "Dieselgate" (as the affair came to be known) revealed that for years, the automaker had deliberately and systematically rigged engine emission equipment in its cars to manipulate pollution test results in the U.S. and Europe.

Volkswagen saw its stock shed nearly half its value in the days following the start of the scandal. Its global sales in the first full month following the news fell 4.5%.

VW's board structure facilitated the emissions rigging and was a reason it wasn't caught earlier. In contrast to a one-tier board system common to most U.S. companies, VW had a two-tier board system consisting of a management board and a supervisory board, in keeping with the Continental Model of corporate governance.

The supervisory board was meant to monitor management and approve corporate decisions. However, it lacked the independence and authority to carry out these roles appropriately.

The supervisory board included a large portion of shareholders. Ninety percent of shareholder voting rights were controlled by members of the board. There was no real independent supervisor. As a result, shareholders were in control and negated the purpose of the supervisory board, which was to oversee management and employees, and how they operated. This allowed the rigged emissions to occur.

Public and government concern about corporate governance tends to wax and wane. Often, however, highly publicized revelations of corporate malfeasance revive interest in the subject.

For example, corporate governance became a pressing issue in the United States at the turn of the 21st century, after fraudulent practices bankrupted high-profile companies such as Enron and WorldCom .

The problem with Enron was that its board of directors waived many rules related to conflicts of interest by allowing the chief financial officer (CFO) , Andrew Fastow, to create independent, private partnerships to do business with Enron.

These private partnerships were used to hide Enron's debts and liabilities. If they'd been accounted for properly, they would have reduced the company's profits significantly.

Enron's lack of corporate governance allowed the creation of the entities that hid the losses. The company also employed dishonest people, from Fastow down to its traders, who made illegal moves in the markets.

The Enron scandal and others in the same period resulted in the 2002 passage of the Sarbanes-Oxley Act . It imposed more stringent recordkeeping requirements on companies and stiff criminal penalties for violating them and other securities laws. The aim was to restore confidence in public companies and how they operate.

It's common to hear examples of bad corporate governance. In fact, it's often why companies end up in the news. You rarely hear about companies with good corporate governance because their corporate guiding policies keep them out of trouble.

One company that seems to have consistently practiced good corporate governance, and adapts or updates it often, is PepsiCo. In drafting its 2020 proxy statement, PepsiCo sought input from investors in six areas:

  • Board composition, diversity, and refreshment, plus leadership structure
  • Long-term strategy, corporate purpose, and sustainability issues
  • Good governance practices and ethical corporate culture
  • Human capital management
  • Compensation discussion and analysis
  • Shareholder and stakeholder engagement

The company included in its proxy statement a graphic of its current leadership structure. It showed a combined chair and CEO along with an independent presiding director and a link between the company's "Winning With Purpose" vision and changes to the executive compensation program.

What Are the 4 Ps of Corporate Governance?

The four P's of corporate governance are people, process, performance, and purpose.

Why Is Corporate Governance Important?

Corporate governance is important because it creates a system of rules and practices that determines how a company operates and how it aligns with the interest of all its stakeholders. Good corporate governance fosters ethical business practices, which lead to financial viability. In turn, that can attract investors.

What Are the Basic Principles of Corporate Governance?

Corporate governance consists of the guiding principles that a company puts in place to direct all of its operations, from compensation, risk management, and employee treatment to reporting unfair practices, dealing with the impact on the climate, and more.

Corporate governance that calls for upstanding, transparent behavior can lead a company to make ethical decisions that will benefit all of its stakeholders, including investors. Bad corporate governance can lead to the breakdown of a company, often resulting in scandal and bankruptcy.

Apple. " Investor Relations. Leadership and Governance ."

BBC. " Scandal Cuts VW Sales by 4.5% This Year ."

Dibra, Rezart. " Corporate Governance Failure: The Case of Enron and Parmalat ." European Scientific Journal , vol.12, no. 16, June 2016, pp. 283-290.

Corporate Secretary. " PepsiCo Finds Governance Success Through Evolution ."

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Corporate Governance Research Paper Topics

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This guide provides a comprehensive list of corporate governance research paper topics divided into 10 categories, expert advice on choosing a relevant and feasible topic, and tips on how to write a successful corporate governance research paper. Corporate governance is a critical aspect of modern business that has a significant impact on the success of organizations. As a result, students who study corporate governance are often assigned to write research papers that explore various aspects of the topic. In addition, iResearchNet offers custom writing services that provide expert degree-holding writers, customized solutions, and timely delivery. By using this guide and iResearchNet’s writing services, students can ensure that their corporate governance research papers meet the highest academic standards.

Corporate Governance Research

Corporate governance is a critical aspect of modern business that encompasses the practices, processes, and systems by which organizations are directed, controlled, and managed. As a result, students who study corporate governance are often assigned to write research papers that explore various aspects of the topic, ranging from board structures and executive compensation to shareholder activism and stakeholder engagement.

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Corporate Governance Research Paper Topics

In this guide, we provide a comprehensive list of corporate governance research paper topics divided into 10 categories, expert advice on how to choose a relevant and feasible topic, and tips on how to write a successful corporate governance research paper. In addition, we offer custom writing services through iResearchNet that provide expert degree-holding writers, customized solutions, and timely delivery.

By using this guide and iResearchNet’s writing services, students can ensure that their corporate governance research papers are well-researched, well-written, and meet the highest academic standards.

100 Corporate Governance Research Paper Topics

Corporate governance is a broad and complex topic that encompasses a wide range of issues and challenges facing modern organizations. To help students choose a relevant and feasible corporate governance research paper topic, we have divided our comprehensive list of topics into 10 categories, each with 10 topics.

Board of Directors

  • Board independence and effectiveness
  • Board diversity and gender equality
  • CEO duality and separation of roles
  • Board composition and characteristics
  • Board oversight and accountability
  • Board nominations and elections
  • Board leadership and culture
  • Board committees and responsibilities
  • Board evaluation and performance
  • Board compensation and incentives

Executive Compensation

  • Executive pay and performance
  • Executive pay and firm performance
  • Pay-for-performance and pay-for-skill
  • CEO pay ratios and pay equity
  • Stock options and equity-based compensation
  • Executive severance and golden parachutes
  • Executive perquisites and benefits
  • Executive retirement and pensions
  • Say-on-pay and shareholder activism
  • Institutional investors and executive pay

Shareholder Activism

  • Shareholder rights and activism
  • Shareholder proposals and proxy access
  • Shareholder engagement and communication
  • Shareholder activism and corporate social responsibility
  • Institutional investors and shareholder activism
  • Hedge funds and shareholder activism
  • Shareholder activism and executive compensation
  • Shareholder activism and board independence
  • Shareholder activism and corporate governance reforms
  • Shareholder activism and CEO turnover

Stakeholder Engagement

  • Stakeholder identification and analysis
  • Stakeholder mapping and prioritization
  • Stakeholder communication and dialogue
  • Stakeholder participation and empowerment
  • Stakeholder consultation and feedback
  • Stakeholder engagement and corporate social responsibility
  • Stakeholder engagement and sustainability reporting
  • Stakeholder engagement and risk management
  • Stakeholder engagement and corporate reputation
  • Stakeholder engagement and value creation

Corporate Culture and Ethics

  • Corporate values and ethics
  • Ethical leadership and decision-making
  • Corporate social responsibility and sustainability
  • Business ethics and compliance
  • Corporate citizenship and philanthropy
  • Corporate culture and values alignment
  • Corporate culture and employee behavior
  • Corporate culture and organizational performance
  • Corporate culture and innovation
  • Corporate culture and risk management

Board-Shareholder Relations

  • Board-shareholder communication and engagement
  • Board-shareholder conflict resolution
  • Board-shareholder cooperation and collaboration
  • Board-shareholder activism and response
  • Board-shareholder rights and responsibilities
  • Board-shareholder agreements and charters
  • Board-shareholder engagement and corporate social responsibility
  • Board-shareholder relations and institutional investors
  • Board-shareholder relations and minority shareholders
  • Board-shareholder relations and corporate governance reforms

Regulatory and Legal Environment

  • Corporate governance regulations and compliance
  • Corporate governance laws and policies
  • Corporate governance codes and standards
  • Corporate governance enforcement and penalties
  • Corporate governance and public policy
  • Corporate governance and the role of regulators
  • Corporate governance and antitrust laws
  • Corporate governance and securities laws
  • Corporate governance and data privacy laws
  • Corporate governance and intellectual property laws

Risk Management and Disclosure

  • Enterprise risk management and oversight
  • Risk management and strategic planning
  • Risk management and financial reporting
  • Risk management and sustainability reporting
  • Risk management and cybersecurity
  • Risk management and climate change
  • Risk management and supply chain management
  • Risk management and crisis management
  • Risk management and stakeholder engagement
  • Risk management and disclosure requirements

International Corporate Governance

  • Cross-border mergers and acquisitions and corporate governance
  • Corporate governance and foreign direct investment
  • Corporate governance and multinational corporations
  • Corporate governance and global supply chains
  • Corporate governance and global financial markets
  • Corporate governance and emerging markets
  • Corporate governance and corruption
  • Corporate governance and cultural diversity
  • Corporate governance and the United Nations Sustainable Development Goals
  • Corporate governance and global challenges

Corporate Governance Reform

  • Corporate governance failures and scandals
  • Corporate governance reforms and their impact
  • Corporate governance and shareholder activism
  • Corporate governance and executive compensation reform
  • Corporate governance and board independence reform
  • Corporate governance and stakeholder engagement reform
  • Corporate governance and diversity and inclusion reform
  • Corporate governance and sustainability reform
  • Corporate governance and regulatory reform
  • Corporate governance and future trends

By organizing the corporate governance research paper topics into categories, students can easily identify areas of interest and develop research questions that align with their academic goals and interests. The categories cover a wide range of issues and challenges facing modern organizations, from board structures and executive compensation to stakeholder engagement and international corporate governance.

Choosing a Topic in Corporate Governance

Choosing a relevant and feasible corporate governance research paper topic is critical for success in academia. The following are expert tips on how to choose a corporate governance research paper topic:

  • Consider your interests : Choose a topic that you are interested in and passionate about. Your enthusiasm for the topic will help you stay motivated throughout the research and writing process.
  • Identify a research gap : Choose a topic that fills a research gap or addresses a new research question. This will help you contribute new knowledge to the field and make a meaningful contribution to academic scholarship.
  • Consult with your instructor : Discuss potential topics with your instructor and seek feedback on your ideas. Your instructor can help you refine your research question and suggest relevant literature and sources.
  • Conduct a literature review : Conduct a literature review to identify gaps and areas of interest within the field. This will help you develop research questions and identify key concepts and themes.
  • Consider feasibility : Choose a topic that is feasible given the time and resources available to you. Be realistic about your research scope and the data sources that are available to you.
  • Stay current : Choose a topic that is current and relevant to the field. This will help you stay up-to-date on the latest trends and developments in corporate governance.
  • Identify a manageable scope : Choose a topic that has a manageable scope. Narrow down your research question to a specific aspect of corporate governance that can be explored in-depth within the scope of a research paper.
  • Brainstorm potential topics : Brainstorm a list of potential topics based on your interests, literature review, and discussions with your instructor. Evaluate each topic based on its relevance, feasibility, and potential impact.

By following these expert tips, students can choose a relevant and feasible corporate governance research paper topic that aligns with their academic interests and goals. In the next section, we provide tips on how to write a successful corporate governance research paper.

How to Write a Corporate Governance Research Paper

Writing a successful corporate governance research paper requires careful planning and attention to detail. The following are expert tips on how to write a corporate governance research paper:

  • Develop a clear research question : Develop a clear and concise research question that addresses a gap or new research question within the field of corporate governance. The research question should be specific and focused to ensure a manageable scope for the research paper.
  • Conduct a literature review : Conduct a comprehensive literature review to identify key concepts and themes within the field of corporate governance. This will help you develop a theoretical framework and provide a foundation for your research paper.
  • Select appropriate research methods : Select appropriate research methods that align with your research question and objectives. This may include qualitative, quantitative, or mixed-methods research approaches.
  • Collect and analyze data : Collect and analyze data using appropriate research methods. This may include conducting interviews, surveys, or analyzing financial data. Ensure that your data collection and analysis is rigorous and aligns with the research question and objectives.
  • Develop a clear and structured outline : Develop a clear and structured outline for your research paper. This will help you organize your thoughts and ideas and ensure a logical flow of information.
  • Write a clear and concise introduction : Write a clear and concise introduction that provides background information and context for the research question. The introduction should also clearly state the research question and objectives.
  • Develop a comprehensive literature review : Develop a comprehensive literature review that provides a theoretical framework for the research question. The literature review should be organized thematically and include key concepts and themes within the field of corporate governance.
  • Analyze and interpret findings : Analyze and interpret the findings of the research. Ensure that your analysis and interpretation aligns with the research question and objectives.
  • Develop a clear and concise conclusion : Develop a clear and concise conclusion that summarizes the key findings of the research and provides implications for practice and future research.
  • Ensure proper formatting and citation : Ensure that your research paper is properly formatted and cited. Follow the guidelines of the citation style required by your instructor, such as APA, MLA, or Chicago.

By following these expert tips, students can write a successful corporate governance research paper that contributes new knowledge to the field and makes a meaningful contribution to academic scholarship. In the next section, we provide information on how students can benefit from the iResearchNet writing services for corporate governance research papers.

iResearchNet Writing Services for Corporate Governance Research Papers

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  • Expert degree-holding writers : Our writers are experts in corporate governance with advanced degrees in the field. They have the knowledge and expertise to produce high-quality research papers that meet the academic standards of students.
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  • In-depth research : Our writers conduct in-depth research to ensure that the research papers are well-supported with relevant and reliable sources.
  • Custom formatting : Our writers are well-versed in various citation styles, including APA, MLA, Chicago/Turabian, and Harvard. We ensure that the research papers are properly formatted and cited according to the required citation style.
  • Top quality, customized solutions : We are committed to providing top-quality and customized solutions that meet the unique needs and requirements of each student.
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Writing a successful corporate governance research paper requires careful planning and attention to detail. By choosing a relevant and feasible research paper topic, conducting a comprehensive literature review, and following the tips outlined in this article, students can produce high-quality research papers that make meaningful contributions to the field of corporate governance. Additionally, iResearchNet writing services offer students a valuable resource for producing high-quality research papers that meet the academic standards of their instructors. With expert degree-holding writers, customized solutions, and a range of support features, iResearchNet can help students achieve academic success and excel in their studies. Contact us today to learn more about our writing services and how we can assist you in your corporate governance research paper writing needs.

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Three essays on corporate governance

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  • School of Accounting and Finance - Business School

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Term Paper on Corporate Governance | Company Management

a term paper on corporate governance

Here is a term paper on ‘Corporate Governance’. Find paragraphs, long and short term papers on ‘Corporate Governance’ especially written for school and college students.

Term Paper on Corporate Governance

Term paper # 1. meaning of corporate governance:.

Corporate Governance (CG) refers to the rules, processes and manner in which a company is run and controlled. CG norms address issues arising from the divergence of interests between ownership and management.

Agency theory, based upon the division between ownership and management in corporate firms, states that the interests of the company’s management need not always align with the needs of its shareholders. As the agent of the shareholders (the principal), management may not always work in the interests of the principal, and as Fama and Jensen (1998) stated ‘does not bear a major share of the wealth effects of decisions’. Ensuring that management interests and shareholder interests are aligned, results in agency costs.

Corporate governance practices continue to evolve in response to financial frauds and corporate indifference to issues beyond short- and medium-term profitability. The global financial crisis (2007) was the latest in a long list of events that redrew the battle lines to protect the interests of the shareholders. This article provides a review of corporate governance and its significance for the MNC’s operations.

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Though Agency theory is central to Corporate Governance debates, CG regulations and implementation have been customized to accommodate a variety of factors. We now look at the evolution of the concept of CG and how it is linked to the different aspects of the corporate organization.

Term Paper # 2. Brief History of Corporate Governance :

Corporate governance arose from a need to resolve non- synchronicity between the objectives of the management and stakeholders of large, publicly listed companies with dispersed ownership (in the USA, UK) or concentrated ownership (Germany and Japan). The structure of ownership (dispersed versus concentrated), the extent and multiplicity of relationships that government-owned entities had with a company (as owners/creditors/vendors/customers), and the role of the government (as owner and/or regulator), formed the basis for the development of CG models that offered the best ‘fit’ for CG issues.

CG evolved at a distinct and different pace in different geographic regions, since the structure of ownership displayed geographical differences (dispersed in USA and UK, concentrated in Japan, Germany, and Asia), as did the existence of family held corporate groups, the domination of state owned financial institutions in contribution to private sector fund raising, the tri way relationship between the ruling political elite, financial institutions and family held firms, the monopolistic nature of state owned enterprises in financial and industrial sectors, and the role of the state in private enterprise.

The evolution of CG as a discipline was a post-World War II phenomenon. Its fortunes are inextricably linked to the emergence of the stock market as a wealth creator, and the growing articulation of investor expectations regarding corporate financial performance. During the twentieth century, CG redefined corporate performance, shifting it from a focus on corporate bottom lines, to a more dispersed concern for stakeholder welfare.

This also exacerbated the difficulty in monitoring, measuring, and ensuring corporate adherence to CG above and beyond the letter of the law. In the 1990s, the concept of CG self- regulation emerged as international agencies began enunciating codes of governance, and reputational risk became a crucial aspect of enterprise risk management.

A substantial part of CG literature is devoted to country-wise differences in legal systems, cultures and values, as an explanation for inter-country variations in CG laws, their enforcements, and punitive responses to non-compliance. In the twenty- first century, voluntary CG has been empirically linked to superior corporate financial performance and shareholder wealth creation.

A glance at the publication dates of CG codes provides compelling evidence of CG coming of age after the 1990s. The OECD’s corporate governance guidelines were published in 1998, the United Nation’s Global Compact (a non-binding set of standards on CG and corporate social responsibility) in 1999, the Berlin Initiative code of corporate governance in 2000, and the Equator principles in 2003.

USA’s Sarbanes Oxley Act (SOX) came into effect in 2002, Hong Kong’s Code on Best CG Practices in 2004, and Sweden’s Code for CG in 2004. UK’s CG code was reviewed by the Financial Reporting Council in 2005. In India, there have been the Kumar Mangalam Birla Committee Report (2000) and the Narayana Murthy Committee Report (2003). SEBI’s Clause 49 came into effect in 2002 and its amendment, in 2008.

The French Association of Private Enterprises (AFEP) and the French Employers’ Federation (MEDEF) published a CG Code in December 2008. Stock exchanges across countries as diverse as Australia, Bangladesh, India, Pakistan, New Zealand, the EU, Canada, and USA have made CG mandatory. A whistleblower policy has become a standard part of CG, as corporate disclosure studies, content analysis and disclosure metrics using published indices (such as the Association of Investment Management and Research—AIMR—in USA) shape stakeholder perceptions of corporate conduct.

CG codes lay down the minimum requirements that companies should fulfill with respect to corporate governance. Invariably they contain directives with respect to Board composition and structure, the minimum number of ‘independent’ Directors, the need for and the role of an audit committee, and disclosure requirements. This is in consonance with the fact that the onus of good governance rests with the Board of Directors since it is the bridge between the company and its owners.

The recommendations of successive CG committees, notably the pioneering comments of the Cadbury Committee Report (1992), and the underlying assumption of information asymmetry—management knows more about the internal happenings of the company than do the shareholders do— mean greater levels of transparency and disclosure are essential. CG is not just about indiscriminate exercise of shareholder power through the right to vote. Staggered Boards and super majority provisions are mechanisms that impose limits on the voting power.

The Code of Best Practices lay down by the Cadbury Committee Report (1992) recommended the separation of the posts of Chairman and CEO, and suggested that three of the Directors on the Boards of listed companies in the UK should be outsiders. The objective of the recommendations was to ensure openness (and hence the emphasis on disclosure of information) and accountability of the Board of Directors.

The Report conceded that rules and guidelines are inadequate to enhance corporate governance—the company’s willingness to observe the spirit as well as the rules was a necessary prerequisite. The Report spoke at length about the structure of the Board, duties and responsibilities of the Chairman, executive and non-executive Board members, the need for training Board members to assume their onerous responsibilities, the need for an audit committee and a remuneration committee, the importance of internal controls and internal audit, and the contents of interim financial reports.

According to the Kumar Mangalam Birla Committee Report (2000) ‘the fundamental objective of corporate governance is the enhancement of shareholder value, keeping in view the interests of other stakeholder’. It identified the rights and responsibilities of the three key constituents of corporate governance—management, the Board of Directors and the shareholders.

It concurred with the Cadbury Committee Report that rules of corporate governance were not enough—corporate governance should become a part of corporate ethos. The Narayana Murthy Committee Report (2003) echoed some of the observations of the Cadbury Committee, in terms of the emphasis on disclosure, and the role of the audit committee. It recommended disclosure of risks faced by the business, in the annual report. In line with Agency theory, it stated that CG was about management accepting the ‘inalienable right’ of shareholders as the true owners of the company.

Term Paper # 3. Corporate Governance and Voting Rights :

The equity shareholder’s right to vote is a necessary but not sufficient condition for good governance, for a number of reasons. First, the right to vote is exercised only once a year at annual general body meetings, while corporate governance is woven into the daily decision making process at all levels of the organization. Shareholders may be unaware of the methods by which CG can be made part of organizational systems, processes and strategic decisions, the hierarchical distribution of accountability and responsibility, the degree of good governance in an organization, or whether corporate governance violations have occurred and their consequences.

Second, in an era of non-voting shares and golden shares (shares with voting power in excess of the one share-one vote norm), voting power is not linked to the number of shares held. Third, voting power ignores the influence exerted on all aspects of the business by promoters and families in family controlled chaebols, kieretsus, and other Asian business structures, in which minority block-holders forge long-term bonds with an incumbent management and a handpicked Board.

Shareholding is not the only basis through which influence is exerted on strategic and operational decision-making in companies. Influential investors such as banks, sovereign wealth funds, and other institutional investors can and do exert influence through their debt holdings.

Term Paper # 4. Corporate Governance and Institutional Investors :

Though shareholders have a say in a company’s affairs, they might prefer to vote with their feet, by selling their equity stake and driving down market valuation. Shareholder activism emerged in the USA in the 1980s. Institutional investors are presumed to have a moral duty to enforce good governance by virtue of their large block-holdings (in 2000, they held 60% of the total equity investment in OECD countries), seats on the Board, and privy to strategic decisions.

The fiduciary capacity in which institutional investors operate, and their expertise in investment decision-making vests them with the power to take an active interest in CG compared to geographically dispersed, uninformed and perhaps uninterested, individual investors. ‘Engaged’ institutional investors such as CALPERS and Norway’s pension fund impose market discipline and contribute to deep capital markets. Institutional investors do not always assume the mantle of improving corporate governance, even in the west.

In the 1990s, US pension funds endorsed shareholder proposals originating from religious organizations; hedge funds tend to intervene and effect management changes to protect their interests and this may or may not have governance implications. Institutional activism is often ‘behind doors’ and its corporate governance enhancing motives and consequences are difficult, if not impossible, to ascertain.

Term Paper # 5. Corporate Governance and Capital Markets :

There is compelling evidence that good governance makes good business sense, as companies with better CG have superior triple bottom lines, and are rewarded by the market through higher valuations. Capital flows into countries perceived to have (and enforce) higher CG standards. Not coincidentally such countries also tend to have strong capital markets.

CG can be assessed at two levels:

i. Whether a country’s legislation protects aspects of stakeholder rights, namely creditor protection, investor protection and environmental protection.

ii. Whether firms in the country are made to toe the line in terms of greater transparency and disclosure by capital market regulators and accounting bodies.

Capital market development and improvements in CG share a symbiotic relationship. In a country with a shallow, thin and underdeveloped capital market, there is little connection between firm performance and its market valuation on the one hand, and corporate governance on the other. So there is little incentive at the firm level to pay more attention to, adopt, and invest in CG enhancing behaviour, and at the country level to enact corporate governance enhancing laws. There is a greater onus therefore, on regulations to impose CG initiatives at the firm level.

As capital markets are strengthened, share valuations increasingly reflect the performance augmenting effects of good governance. CG moves from the realm of regulatory imposition to voluntary participation. At the country level, this leads to a reduction in cost of capital, a higher ratio of stock market capitalization to GDP, higher firm valuations, and a reduced risk of financial crises.

CG is not just about transparency, disclosure, accountability and ethical ways of conducting business. It also makes contributions to the bottom line. The Kumar Mangalam Birla Committee (2000) drew a link between levels of CG and corporate performance, stating the well managed companies with high CG have higher valuations.

Since the publication of the Cadbury Committee Report in 1992, there have been several non-binding standards on CG and corporate social responsibility by the OECD, the UN’s Global Compact (1999), and binding CG requirements on corporate governance specified by stock exchanges. Several global financial services companies agreed to adhere to the Equator Principles, while others reiterate their commitment to the Millennium Development Goals.

Term Paper # 6. Country Effect and Corporate Governance :

In the USA, where shareholder activism emerged before spreading to the rest of the world, protecting the shareholders’ interests is viewed as the crux of the corporate governance debate. The Anglo-Saxon model of CG echoes the clear division between ownership and management in U.S. companies. It seeks to align management actions so as to maximize shareholder welfare. Board autonomy and market discipline are considered sufficient to making CG part of corporate philosophy.

In Germany and Japan, institutional investors (especially banks) have a long-term interest in corporations through their dual relationship as equity shareholders and lenders. Banks take close interest in corporate affairs in their advisory, fiduciary and ownership capacities. There is less of a conflict between ownership and management, and the Rhineland model of CG reflects this reality.

In Asian countries, promoters (individuals members of a business family) control a company through minority block-holding, and pyramiding is prevalent. Their control rights exceed their ownership rights, and being the dominant shareholders they enjoy the right to appoint members of the Board of Directors. Corporate governance, then, is about protecting the majority shareholders from the dominant, minority, controlling shareholders, who run the company.

There is often a close relationship between business groups and the government at the national level. Corporate Governance policy is framed with this in view. The ‘insider’ model of corporate governance is designed to describe the often cozy, and long-term relationship between a group of insiders and the company (whether listed or unlisted). State-owned domestic institutional investors in Asia are large but silent block-holders, not known for shareholder activism, or being active advocates of corporate governance, even though they have seats on the Board of Directors.

They are often passive investors that do not upset the status quo. Business groups (often families with inter-generational transfer of power) directly control companies through minority (and sometimes majority) block-holding of equity, and indirectly control other companies through pyramiding. The Asian model of CG is more concerned with protection of shareholders in general from the minority ‘business family’ block-holder who enjoys control that is out of proportion to the voting power.

The legal system from which the country’s law is derived—English Common Law, French Civil Law, German Civil Law, or Scandinavian Civil Law—have influence on CG. In Common Law countries (such as the UK and India), shareholders’ rights protection has been found to be higher than in Civil Law countries (Korea, Taiwan, Japan). The ‘inalienable right to vote’ conferred on shareholders of Asian companies does not carry the same power as it does in companies in the West.

The dilemma of protecting the small investor from the large investor is confronted daily by regulatory authorities, and companies alike. This is reflected in the OECD’s observation that there is no single CG model. The Anglo-Saxon CG model emphasizes its positive impact on shareholder value, through its ability to resolve an agency conflict. In Asia and the Middle East (with chaebols, keiretsus and family controlled businesses) control of management by powerful minority shareholders, is seen less as an ‘agency conflict’ issue, and more as a survival mechanism that is central to corporate success.

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Term Paper on Corporate Governance of Bangladesh in Comparison with USA and EU

Profile image of Saimon  Islam

This study primarily focuses on the Corporate Governance (CG) in Bangladesh, USA and EU which is the driving force for corporate performance and overall economic prosperity, a dire need of the day in view of the global market environment. It generates interest in the structure and the status of CG practices in emerging economies, particularly Bangladesh, which is recognized as one of the developing economies in the world. It is moving according to the world market changes in all dimensions and directions. The corporate sector in Bangladesh would remain changing and moving ahead as per the developments that were taking place in the other counterparts and developed economies like the US, UK and other parts of the corporate world. The notorious collapse of Enron in 2001, one of the America's largest companies, has focused international attention on company failures and the role that strong corporate governance needs to play to prevent them. In fact, the developments in EU had...

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Kathy Rudkin

Following a large number of corporate collapses around the world, for example Enron, WorldCom, Ansett, Harris Scarfe, HIH Insurance, One Tel and Parmalat, the ensuing profound impact on investors resulted in considerable attention been given to studying corporate governance in developed countries such as the United States, the United Kingdom, Australia, Germany and Japan. However, there is a dearth of studies on corporate governance practice in emerging economies such as Bangladesh. This study attempts to examine the corporate governance practice in Bangladeshi companies in the light of two dominate models of corporate governance, first the Anglo-American Model and second, the German-Japanese Model. This study reduces the dearth of literature on corporate governance in Bangladesh. This study finds that many of the characteristics of the Bangladeshi context align with the German-Japanese model, such as a concentration of shareholdings by the banks and financial institutions or domina...

a term paper on corporate governance

Imran Hossain

Corporate Governance (CG) is a relatively newer term both in the public and academic debates. In the case of Bangladesh it has not been flourished enough yet. Before the collapse of some renowned global corporations policy makers did not draw proper attention to it. However, since 2000 the scenario started to change. Bangladesh has implemented a number of changes in corporate laws and regulations. In this backdrop the current study makes an effort to investigate and discuss the development of corporate governance regulations, practices and their contribution in a Bangladesh perspective. It was found that Bangladesh stands far behind and has implemented the wholesale adoption of Anglo-American shareholder model of CG which is not entirely suitable considering the economic, legal and corporate environment of the country. In the conclusion this paper advances that Bangladeshi firms’ governance mechanisms have to be developed within the arena in which it is demanded.

Naheem Mahtab , MD. Nazmul Islam

Corporate governance has become an important topic in transition economies in recent years. Directors, owners and corporate managers have started to realize that there are benefits that can accrue from having a good corporate governance structure. Good corporate governance helps to increase share price and makes it easier to obtain capital. International investors are hesitant to lend money or buy shares in a corporation that does not subscribe to good corporate governance principles. Transparency, independent directors and a separate audit committee are especially important. Some international investors will not seriously consider investing in accompany that does not have these things. Several organizations have popped up in recent years to help adopt and implement good corporate governance principles. This Research paper begins with an overview of some basic corporate governance mechanism the regulation and enforcement relies on the development of an inter-related web of public and private institutions, regulations and rights that underpin the four basic values of corporate governance – transparency, accountability, fairness, and responsibility. Without the guarantee of these institutions, the market-building benefits of good internal corporate governance become tenuous. However, if functioning well, their benefits have far-reaching impact, increasing investor confidence and providing business the legal basis needed to take risk and to grow.

International Journal of Research in Commerce and Management

Md. Zahir Uddin Arif

Asian Journal of Finance & Accounting

Fazluz ZAMAN

Abdus Sobhan

Bangladesh reformed its corporate governance by adopting Bangladesh Corporate Governance Guidelines-2006 (the BCGG-2006 hereafter) due to pressures from international financial institutions (IFIs). However, there is huge controversy in prior literature regarding the IFIs’ suggested reform initiatives. The thesis asks specific research questions: RQ1. Do institutional investors and bankers in Bangladesh perceive that the level of compliance with the BCGG-2006 by the investee or borrowing company influences the investment and lending decisions respectively? RQ2.1. To what extent is the BCGG-2006 implemented in form rather than in substance? RQ2.2 Is there a relationship between the nature of compliance with the BCGC-2006 and firm performance? RQ3.1. To what extent does reported compliance with the BCGG-2006, as reported in annual reports, overstate underlying compliance with the BCGC-2006? RQ3.2 Does the overstatement of compliance reported in annual reports lead to a different relati...

Journal of Business and Retail management Research

Dr Palto Datta FCIM, FRSA, CMBE, FHEA , md.nazmul hossain

Corporate Governance has become one of the most important strategic tools for enterprises and organizations to increase both stakeholders' value and a firm's performance. It ensures the accountability and responsibility of the directors, managers and others who hold key positions of responsibility. It is based on a set of rules and principles, processes and mechanisms by which the affairs of the corporations and firms are directed, managed and controlled. Over the past thirty years the concept of corporate governance has received substantial attention from regulatory bodies, scholars and practitioners worldwide as it has been viewed as one of the most important tools for the progress and prosperity of corporations. However, the concept is still in its infancy in Bangladesh and thus is not as well established and commonplace as it might be elsewhere. The main purpose of this study is to understand the nature of corporate governance, its importance, need and its practices in Bangladesh within the Banking and Finance sector. The study is mainly based on secondary sources of data and information that includes scholarly journal articles, books, the Corporate Governance Act of Bangladesh 2004, and other relevant sources pertaining to the subject. A wide range of factors, including codes of corporate governance, legal and regulatory frameworks, development of the capacity of boards of directors, introduction of good governance and institutional capacity building have been recommended to institutionalize and improve corporate governance in Bangladesh. Issues such as whistleblowing and the efficacy of Bangladesh's Legal system are germane to discussions within the ambit of this research.

Raju Mohammad Kamrul Alam

Sawlat Zaman

Journal of Risk and Financial Management

Md. Mahfuzur Rahman

This research investigates corporate governance (CG) norms in Bangladesh, a developing nation. This study assesses the codes’ key aspects and how they have evolved since the first code was released in 2006. This analysis shows that BSEC changed its recommendations from voluntary to mandatory in the subsequent revisions in 2012 and 2018. The modified versions increased board independence compared to the original code, although it is still lower than in some other emerging nations. Recent changes to the rules include conditions on the nomination and remuneration committees, along with some other amendments. However, critical governance components, such as choosing an independent board member as chair, improving board independence, and assuring gender diversity, could be implemented in future code development. It is believed that investors would be more interested in Bangladesh’s capital market if the policymakers could make the proposed modifications in accordance with the distinctive...

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Boards stepping up: The front line of corporate governance

A board of directors must be more active than ever before in steering a business through a complex, interconnected business environment.

Navigating today’s business environment is akin to steering a ship through increasingly turbulent waters. Boards have more to focus on than well-defined business challenges such as industry competition. They must also confront many emerging challenges, including the pressing demands of climate change, the impacts of geopolitical tensions and transformative technologies.

As such, the nature of board governance has irreversibly expanded; it’s not just about profitability and shareholder value anymore. Sustainability issues are going mainstream, hence the rise of environmental, social and corporate governance (ESG). Global investment funds are increasingly committing to Net Zero carbon targets, emphasizing the urgency for boards to act. As the front lines of corporate governance working with management, boards have the obligation – and the opportunity – to do so. 

Boards have a dual responsibility: they face mandatory reporting requirements along with the need to take an integrated view of long-term value creation. Driven by mandatory global and national requirements, risk reporting and scenario planning for climate and other sustainability matters (such as human capital and biodiversity) are going mainstream around the world. Failure to comply could result in severe financial and reputational impact. 

Beyond compliance, boards also have a responsibility to step up their role in taking an integrated approach to long-term value creation by, for example, promoting efficient transition to alternative renewable resources and integrating ESG/sustainability into their purpose, governance, strategy and enterprise risk assessments. COP28 in Dubai, this year’s edition of the UN’s annual forum on climate change , revealed that while progress is being made on innovative transitions to cleaner sources of energy, the private sector will need to accelerate its climate investments as public funds alone are inadequate to finance the shift to renewables, especially in emerging markets. 

Leading the way  

As the focal point of governance, boards must educate themselves on a wide array of interconnected issues, risks and opportunities and then lead by example. Green financing and environmental innovation are now front and center across industries. Likewise, technological challenges in cyber-security and artificial intelligence have climbed to the top of the agenda. Even public health and wellbeing have been thrust into the spotlight due to the far-reaching impacts of the COVID-19 pandemic. This has necessitated the rethinking of safety protocols and the very nature of work, as the pandemic has led to unprecedented supply chain disruptions while accelerating remote working trends. 

While challenges manifest differently depending on geographical and cultural contexts, the essence remains the same: corporate boards globally must engage proactively with an expanding array of social, environmental and governance issues. 

No matter where a company operates, passivity on these vital issues is no longer an option. Boards must know that their governance decisions resonate far beyond local or national boundaries. Given the interconnected nature of the global business environment, a decision in one region can have far-reaching implications, affecting brand reputation, stakeholder relationships and global operational risk. 

Therefore, boards worldwide must equip themselves to tackle these multidimensional challenges, understanding that they are not isolated but part of a complex global tapestry. Ignoring this global interconnectedness risks not just local fallout but could place the company at a strategic disadvantage on the world stage.

The time to act and win the race for relevance is now  

Being decisive is not an option but a necessity. Boards that choose to ignore these changes do so at their own risk. In today’s fast-paced and interconnected world, looking the other way is a strategy doomed to fail. Boards are better served by proactively acknowledging these emerging risks and opportunities. As Nik Gowing, former BBC News presenter and business consultant, likes to say, boards must even “ think the unthinkable “ in their enterprise risk assessments and scenario planning when working with management. He is even blunter in saying that “ the conformity that got [board members and senior business leaders] their jobs ” is no longer fit for purpose in this new world. 

As the front lines of governance, boards must commit to continuous education and competence-building in an environment of unprecedented change, where speed and sense of urgency is king. Increasingly, regulators are requiring companies to document the specific competencies of their individual board members in ESG and other matters. Survey after survey, including those conducted by Competent Boards in its The Future Boardroom thought leadership portal , shows that boards are lacking in ESG competence. We believe there exists a need for a committed and cost-effective strategic partner to keep boards educated and certified on what matters most to regulators, investors, customers, rating agencies and insurers. 

The stakes – and the opportunities – are too high. Boards must act.

For more information, please visit competentboards.com .

Competent Boards is a Business Reporter client.

a term paper on corporate governance

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Capital One to Acquire Discover, Creating a Consumer Lending Colossus

The all-stock deal, which is valued at $35.3 billion, will combine two of the largest credit card companies in the United States.

A Capital One bank machine.

By Lauren Hirsch and Emma Goldberg

Capital One announced on Monday that it would acquire Discover Financial Services in an all-stock transaction valued at $35.3 billion, a deal that would merge two of the largest credit card companies in the United States.

“A space that is already dominated by a relatively small number of megaplayers is about to get a little smaller,” said Matt Schulz, chief credit analyst at LendingTree.

Capital One, with $479 billion in assets, is one of the nation’s largest banks, and it issues credit cards on networks run by Visa and Mastercard. Acquiring Discover will give it access to a credit card network of 305 million cardholders, adding to its base of more than 100 million customers. The country’s four major networks are American Express, Mastercard, Visa and Discover, which has far fewer cardholders than its competitors.

But consumer advocates pushed back on the possible deal, saying it posed antitrust concerns. “It is very difficult to imagine how federal regulators could allow Capital One to buy Discover given the requirement that mergers benefit the public as well as insiders,” Jesse Van Tol, the chief executive of the National Community Reinvestment Coalition, said in a statement.

The acquisition by Capital One will be one of the first tests of regulatory scrutiny on bank deals since the Office of the Comptroller of the Currency said last month that it intended to slow down approvals for mergers and acquisitions .

“It’s hard to know which way it would go, but there will certainly be a lot of attention paid to this deal because of the money and magnitude of the companies involved,” said Mr. Schulz.

Complicating the landscape is the fact that other deals in the financial industry have come under renewed scrutiny, said David Schiff, a senior partner at West Monroe, a digital services consulting firm. These include New York Community Bank’s acquisition of billions of assets from Signature Bank during the regional banking crisis last year. New York Community Bank recently reported a sizable loss for its most recent quarter, and said it would set aside more capital to act as a buffer against future problems. Much of its troubles stem from the weakening commercial real estate market, but Mr. Schiff said that politicians could point to the deal as an example of one that regulators were too quick to approve.

As part of the acquisition, Capital One will pay Discover shareholders a 26 percent premium based on the company’s closing stock price on Friday. At the close of the deal, which is subject to regulatory approval and is expected in late 2024 or early 2025, Capital One shareholders will own approximately 60 percent of the combined company and Discover shareholders will own the rest.

Discover was valued at about $28 billion when the market closed on Friday, and Capital One was valued at about $52 billion.

The deal is part of Capital One’s strategy to build a global payments network, helping it work directly with merchants and small businesses. And it gives Discover greater scale to compete with other credit card companies. Capital One said the agreement would generate $2.7 billion in pretax savings.

“Our acquisition of Discover is a singular opportunity to bring together two very successful companies with complementary capabilities and franchises, and to build a payments network that can compete with the largest payments networks and payments companies,” Richard Fairbank, founder, chairman and chief executive of Capital One, said in the statement.

In June, Capital One acquired Velocity Black, a digital concierge company that brings together travel, entertainment, shopping and dining offerings for consumers.

Discover is emerging from a period of turbulence. The company’s former chief executive, Roger Hochschild, stepped down in August amid a regulatory review of incorrectly classified credit accounts. In October, the company said it was taking steps to improve its corporate governance, and in December, it announced its new chief executive, Michael G. Rhodes. The company’s profit in the fourth quarter of 2023 fell 62 percent from the same period the year before.

The once-giant retailer Sears introduced the Discover card in 1985. Discover later became a part of Morgan Stanley before the investment bank spun it out through an initial public offering of stock in 2007.

Given Discover’s recent challenges, the question is whether “regulators view this as a white knight coming in to help fix a troubled player in the market or whether they view this as a limitation of competition — and therefore something to avoid,” Mr. Schiff said.

Rob Copeland contributed reporting.

Lauren Hirsch joined The Times from CNBC in 2020, covering deals and the biggest stories on Wall Street. More about Lauren Hirsch

Emma Goldberg is a business reporter covering workplace culture and the ways work is evolving in a time of social and technological change. More about Emma Goldberg

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COMMENTS

  1. Corporate governance in today's world: Looking back and an agenda for

    Corporate governance has been defined in various ways from "the system by which companies are directed and controlled" ( Cadbury, 1992) to "the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment" ( Shleifer and Vishny, 1997: 737).

  2. A Literature Review on Corporate Governance Mechanisms: Past, Present

    This study is a literature review on corporate governance. Its objective is to consolidate our knowledge in this field, examine its evolution, and propose avenues for future research.

  3. Corporate governance and sustainability: a review of the existing

    Corporate governance (CG) is a set of rules and organizational structures that are the basis for correct business operation, understood as compensation for the interests—sometimes divergent—of stakeholders (Du Plessis et al. 2018 ). CG encompasses different areas in a company.

  4. Determinants, mechanisms and consequences of corporate governance

    Corporate governance is the "exercise of ethical and effective leadership by the governing body towards the achievement of the following governance outcomes: ethical culture, good performance, effective control and legitimacy" (IODSA 2016 ), p20, and relates to the way that firms are governed rather than to the way they are managed.

  5. The impact of corporate governance on firms' value in an emerging

    Abstract. Corporate governance is a field that is attracting great attention in the world due to its importance to the destiny of enterprises. More importantly, in the context of escalating environmental and social problems, how businesses are governed towards a balance of economic, social and environmental values receives significant concern by the stakeholders of the business in the globe.

  6. Corporate Governance: A Review of the Literature

    This paper reviews the theoretical and empirical literature on the nature and consequences of the corporate governance problem, providing some guidance on the major points of consensus and...

  7. PDF Corporate Governance: A Framework for Implementation Overview 30446

    Why corporate governance matters-more than ever Corporate governance systems have evolved over centuries, often in response to corporate failures or systemic crises. The first well-documented failure of governance was the South Sea Bubble in the 1700s, which revolutionized business laws and practices in England.

  8. ESG controversies and corporate performance: The moderating effect of

    In the realm of corporate governance, board size (BOA_SIZE) and CEO duality (CEO_DUAL) offer nuanced insights. The positive association between a larger board and performance echoes the sentiment of Adams and Ferreira (2007), who suggested that diverse skills and expertise within larger boards can foster enhanced decision-making.

  9. (PDF) Corporate governance: A review of the fundamental ...

    This paper focused on the concept of corporate governance based on shareholders' and stakeholders' perspectives and the development of corporate governance around the world, including the UK ...

  10. Corporate Governance: Articles, Research, & Case Studies on Corporate

    By exploiting the unique features of Japan's JPX-Nikkei 400 index, this paper examines how membership in a stock index serves as a source of prestige that can motivate managers and influence corporate governance norms. Findings are important for understanding non-pecuniary mechanisms to induce meaningful changes in corporate behavior.

  11. The History of Corporate Governance by Brian R. Cheffins :: SSRN

    Abstract. "Corporate governance" first came into vogue in the 1970s in the United States. Within 25 years corporate governance had become the subject of debate worldwide by academics, regulators, executives and investors. This paper traces developments occurring between the mid-1970s and the end of the 1990s, by which point "corporate ...

  12. PDF The History of Corporate Governance

    "Corporate governance" fi rst came into vogue in the 1970s in the United States. Within 25 years corporate governance had become the subject of debate worldwide by academics, regulators, executives and investors. This paper traces developments occurring between the mid-1970s and the end of the 1990s, by which point "corporate

  13. The impact of corporate governance measures on firm performance: the

    The paper aims to investigate the impact of corporate governance (CG) measures on firm performance and the role of managerial behavior on the relationship of corporate governance mechanisms and firm performance using a Chinese listed firm. This study used CG mechanisms measures internal and external corporate governance, which is represented by independent board, dual board leadership ...

  14. (PDF) Review of Corporate Governance Theories

    This paper talk about corporate governance theories to improve the mechanism of corporate governance understanding from different stakeholders' perspectives. Discover the world's research 25 ...

  15. PDF White Paper Integrated Corporate Governance: A Practical Guide to

    The paper highlights several relevant governance frameworks that have been developed by business ... delivering long‑term in addition to short‑term value. Integrated corporate governance departs from the mindset and associated practices of shareholder primacy and corporate responsibility, which have regarded ...

  16. Principles of Corporate Governance

    Effective corporate governance requires dedicated focus on the part of directors, the CEO and senior management to their own responsibilities and, together with the corporation's shareholders, to the shared goal of building long-term value. II. Key Responsibilities of the Board of Directors and Management.

  17. Corporate Governance: Definition, Principles, Models, and Examples

    Corporate governance is the structure of rules, practices, and processes used to direct and manage a company. A company's board of directors is the primary force influencing corporate...

  18. Corporate Governance Research Paper Topics

    Corporate Governance Research Paper Topics This guide provides a comprehensive list of corporate governance research paper topics divided into 10 categories, expert advice on choosing a relevant and feasible topic, and tips on how to write a successful corporate governance research paper.

  19. Three essays on corporate governance

    Abstract. This thesis consists of three essays, presented as chapters, on corporate governance. The first chapter examines the internal corporate governance channels that focus on CEO compensation structure and the board of directors. The following two chapters study corporate governance mechanisms from an external perspective.

  20. Term Paper on Corporate Governance

    Term Paper # 1. Meaning of Corporate Governance: Corporate Governance (CG) refers to the rules, processes and manner in which a company is run and controlled. CG norms address issues arising from the divergence of interests between ownership and management.

  21. (DOC) Term Paper on Corporate Governance of Bangladesh in Comparison

    Corporate Governance (CG) is a relatively newer term both in the public and academic debates. In the case of Bangladesh it has not been flourished enough yet. Before the collapse of some renowned global corporations policy makers did not draw proper attention to it. However, since 2000 the scenario started to change.

  22. Corporate Governance, Term Paper

    TOPIC: Term Paper on Corporate Governance, IT Governance and Assignment Information security governance (ISG) is an integral element for effective management of organization. The status of information security requires that immediate attention in order to ascertain that information is uncompromised and the systems remains safe. TechNet has the ...

  23. Boards stepping up: The front line of corporate governance

    Sustainability issues are going mainstream, hence the rise of environmental, social and corporate governance (ESG). Global investment funds are increasingly committing to Net Zero carbon targets ...

  24. (PDF) Corporate Governance Research Paper

    Jan 1985. V.F. Nieva. View. Discover more. Xiaolan Zhang. Busaya Virakul. Darlene Russ-Eft. PDF | On Nov 18, 2016, Aghogho Odibo published Corporate Governance Research Paper | Find, read and cite ...

  25. Paper To Pixels: Embracing Governance, Risk And Compliance ...

    Prioritize visibility and corporate culture for a competitive advantage. Organizations can use advanced technologies such as artificial intelligence and machine learning in their GRC platforms to ...

  26. Capital One to Acquire Discover, Creating a Consumer Lending Colossus

    Capital One announced on Monday that it would acquire Discover Financial Services in an all-stock transaction valued at $35.3 billion, a deal that would merge two of the largest credit card ...