Corporate Governance Quality Project Report

Dissertation Writing Help on factors affecting quality of Corporate Governance in UK

Within Europe, the UK corporate landscape is particularly interesting because of its widely held nature and the liquidity of the market for controlling rights.  This study analysed the relationship between firm performance, as measured by Tobin’s q and the corporate governance index for a sample of 61 UK firms listed in London Stock Exchange over the five year 2001-2006.  Both annual and pooled data are analysed. The results suggest that few measured governance variables are important and the effects depend to some degree on firm ownership.  In general, there is no evidence that a comprehensive measure of governance affects performance. The online survey conducted on 169 senior executives revealed that that good corporate governance significantly enhances investors’ valuations of a company’s shares, but there has been little research into the perceptions and processes that might lead to such a value differential. For corporate management, our findings suggests that corporate governance is indeed of great importance if investors are to be satisfied, but that it cannot be ‘fixed’ by attending to a few high profile issues. Today’s investors don’t want to tick boxes or receive presentations. They want to see inside the corporation, and to engage in open dialogue.

  

1.1  Background of the Study

The surge for an interest in corporate governance has exploded around the world due to a number of factors: the spread of capitalism and the speed of privatization; the growth of corporations; deregulation, and the integration of capital markets and globalisation; pension fund reform and the growth of private savings; shareholder activism; the 1998 East Asia crisis; and a series of U.S. scandals and corporate failures of late, example Enron and WorldCom. According to Plender (2002) “Enron has turned into the greatest case study in unethical business practices for a generation”. In response to these developments, different models or conceptual frameworks have been put forward concerning the critical importance of providing an effective and efficient system of corporate governance. At the core of all these models of corporate governance is the issue of collective action problem, which arises as a consequence of a conflict of interests between various corporate claimholders and those managing the firm. It is within this situation that infectious greed, fraud and corruption develops.

Over the past two decades, particular attention in both the academic and professional literature (Jensen, 1993; ) has been directed towards the role of corporate governance in company administration, more so, following corporate scandals in most of the developed world. On the background of well-known bankruptcies of transnational corporations (e.g. Maxwell Group, Enron, WorldCom) the corporate governance issue is becoming one of the central issues in the aim of secure and continuous economic development in the world.  Indeed, a number of recommendations into the administration of publicly quoted companies in different countries have focused attention on the importance of corporate governance in protecting the interests of shareholders. Such recommendations include Treadway Commission (1987) and the Blue Ribbon Committee (1999) in the US, the Cadbury Committee (1992) and Higgs Committee (2003) in the UK, the Vienot Report (1995) in France, and the Peters Report (1997) in the Netherlands, and these culminated into corporate governance codes in the different countries. This perceived importance of corporate governance derives from the fact that where there is widely dispersed ownership, shareholders designate managers to administer the operations of company in line with the goal of maximizing shareholder wealth (Jensen and Meckling, 1976; Ajinkya et al., 2005). In this context, the agency theory (Jensen and Meckling, 1976) suggests that because shareholders are not involved in the daily company activities, corporate governance mechanisms are important in monitoring managers thereby aligning their interests with those of shareholders.

The evidence on whether there is a link between governance structure and performance remains weak. We argue that one possible reason could be due to the research methodology. Earlier research has examined subsets of governance mechanisms, usually one or two governance variables only. As the firms can choose and modify the structure of their governance system to suit their circumstances, we argue that we should examine a number of governance variables and over a longer time period.

1.2 Motivation for the Study

It has become commonplace to observe that improved corporate governance enhances shareholder returns. In 1996 a McKinsey & Company survey reported that American institutional investors would on average be prepared to pay a premium of 11% for a well-governed company compared with one with the same profitability and market share that was not well governed (Felton et al, 1996). A larger global survey of over 200 institutional investors carried out in 2000 revealed even stronger views. Over 80% responded that they would pay more for the shares of a well-governed company than for a less well-governed but otherwise equivalent one, with the averages of the suggested premiums ranging from 18% in the UK to over 25% in some developing countries (McKinsey & Company, 2000). A repeat survey two years later produced similar results but with slightly smaller reported premiums ranging from 12-15% in the USA and major European economies to 20-25% for most emerging and recently developed economies (McKinsey & Company, 2002). But what exactly is the significance of such responses, and how do they relate to actual investor behaviour? In this paper we draw on empricial and survey method of 61 listed companies in London Stock Exchange (LSE) to unpack director’s perceptions of what constitutes good corporate governance, how this relates to corporate performance, and how perceptions of corporate governance are built into investment decision-making.

1.3 Contribution from the study

This paper looks at the correlation between good governance and operating performance and share-price returns. We also tested the strength and direction of any potential link between the two. The findings strongly suggest that there is a robust causal relationship between good corporate governance and superior company performance.

This paper addresses the question whether “good” corporate governance has a positive impact on the valuation of listed companies in UK. There has been an ongoing debate in the literature how to measure the quality of firm-level corporate governance. In the meantime, many countries have adopted new standards, rules, or codices of best practice to establish guidelines for publicly listed companies in an attempt to improve the overall level of corporate governance. This research seeks to answer two questions: does good governance lead to stronger operating performance, and does it lead to higher share price returns? Our findings suggest the answer is yes.

1.4 Organisation of the study

The remainder of this paper is organised as follows. The next section briefly summarises the literature review on corporate governance. The third section provides a description of the database and the research design that is used throughout the analysis. In the fourth section, the main empirical results are presented.  In the fifth section the survey results are presented. Finally, conclusions are drawn, and the implications of the results for investors are discussed.

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