Abstract

The objective of this thesis is to investigate the corporate governance attributes of smaller listed Australian firms. This study is motivated by evidence that these firms are associated with more regulatory concerns, the introduction of ASX Corporate Governance Recommendations in 2004, and a paucity of research to guide regulators and stakeholders of smaller firms. While there is an extensive body of literature examining the effectiveness of corporate governance, the literature principally focuses on larger companies, resulting in a deficiency in the understanding of the nature and effectiveness of corporate governance in smaller firms. Based on a review of agency theory literature, a theoretical model is developed that posits that agency costs are mitigated by internal governance mechanisms and transparency. The model includes external governance factors but in many smaller firms these factors are potentially absent, increasing the reliance on the internal governance mechanisms of the firm. Based on the model, the observed greater regulatory intervention in smaller companies may be due to sub-optimal internal governance practices. Accordingly, this study addresses four broad research questions (RQs). First, what is the extent and nature of the ASX Recommendations that have been adopted by smaller firms (RQ1)? Second, what firm characteristics explain differences in the recommendations adopted by smaller listed firms (RQ2), and third, what firm characteristics explain changes in the governance of smaller firms over time (RQ3)? Fourth, how effective are the corporate governance attributes of smaller firms (RQ4)? Six hypotheses are developed to address the RQs. The first two hypotheses explore the extent and nature of corporate governance, while the remaining hypotheses evaluate its effectiveness. A time-series, cross-sectional approach is used to evaluate the effectiveness of governance. Three models, based on individual governance attributes, an index of six items derived from the literature, and an index based on the full list of ASX Recommendations, are developed and tested using a sample of 298 smaller firms with annual observations over a five-year period (2002-2006) before and after the introduction of the ASX Recommendations in 2004. With respect to (RQ1) the results reveal that the overall adoption of the recommendations increased from 66 per cent in 2004 to 74 per cent in 2006. Interestingly, the adoption rate for recommendations regarding the structure of the board and formation of committees is significantly lower than the rates for other categories of recommendations. With respect to (RQ2) the results reveal that variations in rates of adoption are explained by key firm differences including, firm size, profitability, board size, audit quality, and ownership dispersion, while the results for (RQ3) were inconclusive. With respect to (RQ4), the results provide support for the association between better governance and superior accounting-based performance. In particular, the results highlight the importance of the independence of both the board and audit committee chairs, and of greater accounting-based expertise on the audit committee. In contrast, while there is little evidence that a majority independent board is associated with superior outcomes, there is evidence linking board independence with adverse audit opinion outcomes. These results suggest that board and chair independence are substitutes; in the presence of an independent chair a majority independent board may

be an unnecessary and costly investment for smaller firms. The findings make several important contributions. First, the findings contribute to the literature by providing evidence on the extent, nature and effectiveness of governance in smaller firms. The findings also contribute to the policy debate regarding future development of Australias corporate governance code. The findings regarding board and chair independence, and audit committee characteristics, suggest that policy-makers could consider providing additional guidance for smaller companies. In general, the findings offer support for the if not, why not? approach of the ASX, rather than a prescriptive rules-based approach.

http://eprints.qut.edu.au/44036/An

analysis of the nature and effectiveness of corporate governance in smaller listed Australian companies

Tuesday, March 9, 2010

Voluntary Nature of Corporate Governance Norms

For the last ten years, corporate governance norms in India have been a mandatory requirement for large listed companies, through Clause 49 of the listing agreement. However, in the recent round of reforms, the Ministry of Corporate Affairs has deviated from that path to set out voluntary guidelines for corporate governance (discussed earlier here). Even though these guidelines come in the wake of the Satyam episode, there seems to have been a conscious departure from the mandatory approach adopted by way of Sarbanes-Oxley Act in the U.S. in the aftermath of Enron and other scandals. The present step is more akin to the comply or explain approach followed by the Combined Code of Corporate Governance in the U.K. A paper titled Corporate Governance in the UK: Is the Comply or Explain Approach Working? observes as follows: We find that the Code fostered compliance, especially in the areas not covered by its forerunner, the Cadbury Code. In an encouraging sign, more than half of the non financial constituents of the FTSE350 were fully compliant with all provisions of the

Code at the end of 2004. In addition, we found that on average less than 10% of all firms were not compliant with a given single provision. However the picture is not so rosy when analyzing those firms that did not comply with the provisions of the Combined Code. We find that the firms that did not comply with the Code often did a very poor job of providing explanations. Even worse, in almost one in five cases, firms did not provide any explanations for their noncompliances at all. Further, even when an explanation is provided, most of the time it fails to identify specific circumstances that could justify such a deviation from the rule. Companies that do not comply tend to stick with the same (poor) explanation until they directly jump to compliance. Once compliant, either a company remains compliant or if it stops complying, does not provide convincing explanations as to why this is the case. It is too early to judge whether similar results will emerge in India. The Voluntary Guidelines are quite recent and will have to be worked for sometime before they can be empirically verified.
http://indiacorplaw.blogspot.com/2010/03/voluntary-nature-of-corporate.html http://www.ifc.org/ifcext/cgf.nsf/AttachmentsByTitle/Focus_1_CG_and_Development/ $FILE/Focus_1_Corp_Governance_and_Development.pdf