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a Dr Krishna Reddy
b Pr Stuart Locke
c Pr Frank Scrimgeour
DID CORPORATE GOVERNANCE FAIL OR THAT THE BUSINESS OF BUSINESS IS RISKY AND WRONG DECISIONS WILL BE MADE:
What Lessons Can we Learn from Self-Regulation?
ABSTRACT
This study investigates the effectiveness of self-regulatory principle-based initiatives on corporate governance in prompting better governance in listed companies. Four important questions are addressed: (i) whether listed companies have complied with the principle-based corporate governance practices? (ii) Did compliance with the principle-based recommendations lead to an improvement in listed company’s financial performance? (iii) Whether the listed companies that were always in compliance with the principle-based recommendations have better financial performance compared to the companies that were not in compliance? (iv) Can the differences in financial performance listed companies be explained by the differences in governance practices in different industries?
To address the above questions we used both the OLS regression and Seemingly Unrelated Regression (SUR) methods of analysis. Our findings: (i) confirms that the standard of corporate governance practised in New Zealand is similar to that practised in other developed countries; (ii) acknowledges that the application of principle-based governance approaches is effective and efficient; (iii) observes that similar governance mechanisms are applied despite differences in the environment between large and small economies; (iv) highlights the importance of insider ownership, board committees and board diversity.
Adoption of current corporate governance practices across the board will allow both public and private sector entities to learn from each other by sharing the best practices in each sector and helping to improve performance and value for the nation. This type systemic development provide valuable insights relative to the full spectrum of governance arrangements and the understanding of the corresponding impact on outcomes and the facilitation of policy development that are beneficial for all economic entities. Whilst the ‘comply or explain’ provision allows companies to disclose relevant and quality information, it also encourages new forms of stakeholder engagement. Therefore the onus, under the principle-based approach shifts to companies not only providing timely disclosures but also to increasing the quality and range of disclosures. By taking responsibility at the company-level for the disclosure leads to some extent to an improvement in corporate moral and ethical attitude allowing managers to think about issues at hand.
The findings of this research have the following policy implications: first, appropriate support for companies and industries to develop governance structures that are reflective of their specific characteristics will lead to better governance practices in the future and minimise compliance costs. Second, information and education is required for both companies and investors regarding the workings of principle-based guidelines. Third, training of would-be directors on directorship processes and the review of director remuneration to reflect risks and responsibilities has the potential to improve the supply of more skilled independent directors.
Keywords: Corporate Governance, Risk, Self-Regulation
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