What Questions Do Board Members in Public Service Organizations Ask about Executive Compensation?

The purpose of this study is to investigate the governance questions that board members in public service organizations ask as they go about fulfilling their responsibilities for the oversight of executive compensation. We investigate the usage and perceived importance by board members of the 24 questions proposed by the Canadian Institute of Chartered Accountants that directors should ask about executive compensation. The study is based on a usable sample of 47 board members from public service organizations who attended a Canadian director training program. Our results suggest that the recommended executive compensation governance questions are not being asked with the same frequency or considered equally important by board members of public service organizations. Furthermore, the correlation between a question’s usage frequency and its perceived importance was not perfect. However, there appears to be a significantly positive relationship among the number of executive compensation governance questions asked and selected elements of a board’s governance structure.     

Information Control, Career Concerns, and Corporate Governance

We examine corporate governance effectiveness when the CEO generates project ideas and the board of directors screens these ideas for approval. However, the precision of the board's screening information is controlled by the CEO. Moreover, both the CEO and the board have career concerns that interact. The board's career concerns cause it to distort its investment recommendation procyclically, whereas the CEO's career concerns cause her to sometimes reduce the precision of the board's information. Moreover, the CEO sometimes prefers a less able board, and this happens only during economic upturns, suggesting that corporate governance will be weaker during economic upturns.     

The One.Tel Collapse: Lessons for Corporate Governance

One.Tel was a major corporate collapse in Australia in 2001. At the time of its collapse, it was the fourth largest telecommunications company in Australia with more than two million customers and operations in eight countries. Analyses of quantitative and qualitative data from diverse sources suggest that One.Tel's collapse is a classic case of failed expectations, strategic mistakes, wrong pricing policy, and unbridled growth. The company's meteoric rise and fall was associated with serious deficiencies in its corporate governance, including weaknesses in internal control, financial reporting, audit quality, board's scrutiny of management, management communication with the board, and poor executive pay‐to‐performance link. Thus, the collapse of One.Tel has several important lessons on the role of corporate governance in preventing corporate collapse.     

Board governance and corporate performance

We examine the link between the monitoring capacity of the board and corporate performance of UK listed firms. We also investigate how firms use the flexibility offered by the voluntary governance regime to make governance choices. We find a strong positive association between the board governance index we construct and firm operating performance. Our results imply that adherence to the board‐related recommendations of the UK Corporate Governance Code strengthens the board's monitoring capacity, potentially helping mitigate agency problems, but that investors do not value it correspondingly. Moreover, in contrast to prior UK findings suggesting efficient adoption of Code recommendations, we find that firms at times use the Code flexibility opportunistically, aiming to decrease the monitoring capacity of the board, which is followed by subsequent underperformance. This finding questions the effectiveness of the voluntary approach to governance regulation followed in the UK and in many countries around the world.     

Chair-CEO generation gap and bank risk-taking

Poor bank governance has disastrous consequences for economies as the 2007–2009 financial crisis has shown. In the aftermath, board diversity is identified as an effective mechanism to enhance bank governance. Diversity, creating cognitive conflict between board members, is expected to enhance board's independence of thought to better perform monitoring and advising functions. Age is a key demographic measure and age dissimilarity between the chair and the CEO in non-financial firms leads to better economic outcomes (Goergen, Limbach, & Scholz, 2015). In this paper, we examine whether chair-CEO age dissimilarity can mitigate banks' excessive risk-taking behaviour. Using a unique sample of 100 listed banks in Europe between 2005 and 2014, we find that age difference between the chair and the CEO reduces bank risk-taking. A chair-CEO generational gap –defined as a minimum of 20 years' age difference– has a larger impact in reducing risk-taking.     

An Assessment of the Currency Board Regime in Bosnia and Herzegovina

This paper describes currency board regime operations in Bosnia and Herzegovina and assesses their performance and sustainability in the context of the economic, political, and institutional environment. To the best of our knowledge, our study seems to be unique in this respect. Based on our analysis, we judge that Bosnia and Herzegovina's currency board regime is well suited and appropriate, given the country's history, its current state, and its future goals. Nevertheless, we believe that the key to the currency board's sustainability, and an eventual accession to the European Union, is a stronger legal and regulatory infrastructure and a more unified political system.     

Paper and Hill: An In‐Class Corporate Governance Case

Corporate governance is a set of rules and processes that help ensure that firms are effectively run for the benefit of their stakeholders. Good corporate governance is predicated on having directors fulfill their fiduciary duties while acting as stewards of the corporation. The fact that good corporate governance is essential to a well‐functioning and prosperous society is reflected in CPA Canada's Strategy and Governance competency. Unfortunately, there are few in‐class Canadian corporate governance cases that instructors can use to help accounting students improve their understanding of these three fundamental governance concepts: director duty of care, director duty of loyalty, and the business judgment rule. This Canadian corporate governance case is based on the actual events regarding the approval of Steven Hill's employment contract as the Chair of Paper Enterprises Inc. The case is presented using PowerPoint slides, rather than in a traditional narrative format, as it intended to be used as an in‐class case that does not require advance student preparation.     

Renewable Governance: Good for the Environment?

We conjecture that board renewal mechanisms—those substantive enough to renew the thinking of the board—are required before investors can address the mismatch between their preferences regarding environmental sustainability and what insiders at firms are actually doing. We identify the adoption of majority voting for directors and the introduction of a female director as two corporate governance mechanisms potentially strong enough to renew a board's thinking on sustainability. Using a sample of 3,293 firms from 41 countries, along with quasi-exogenous shocks to board renewal mechanisms in Canada and France, we find that both board renewal mechanisms are associated with significantly higher future environmental performance. Further tests provide suggestive evidence that board renewal is more strongly associated with environmental performance in settings with better institutions and more motivated institutional investors. These results suggest the importance of board renewal for alignment of firm policies with investor preferences around the world.     

Board diversity and corporate propensity to R&D spending

Drawing on collective contributions and group performance perspectives, this paper examines the role of board diversity in firms' R&D investment decisions. Building on a fault-line argument about a team's demographic attributes, this study also decomposes the impact of demographic and cognitive diversity on R&D spending. The study sample contains UK data of non-financial companies covering the period between 2005 and 2018. We employ panel data analysis techniques and control for potential endogeneity issues through the application of the two-step system Generalised Method of Moments (GMM) estimations. The findings demonstrate a positive and significant relationship between board diversity and level of corporate R&D spending. The findings also show cognitive diversity as significantly positively associated with corporate R&D investments. Demographic diversity, however, has an insignificant relationship with corporate spending on R&D. The results further show that demographic diversity negatively moderates the relationship between cognitive diversity and spending on R&D. Our main findings document that the board's attributes as a group significantly influence decisions of strategic importance such as, investment in R&D projects. The findings on sub-dimensions of board diversity imply that as compared to demographic diversity, functional/cognitive diversity is more relevant to strategic decisions and related outcomes. The study has practical implications for shareholders in documenting the importance of board diversity, and policy implications for regulators in highlighting the separate roles of behavioural and cognitive diversity in shaping firms' strategic investment decisions.     

Is Busy Really Busy? Board Governance Revisited

We investigate the relationship between firm governance and the board's position in the social network of directors. Using a sample of 133 German firms over the four‐year period from 2003 to 2006, we find that firms with intensely connected supervisory boards are (1) associated with lower firm performance, and (2) pay their executives significantly more. We interpret these results as evidence of poor monitoring in firms with directors who are more embedded in the social network. In both cases, simple measures for busy directors that were used by other studies in the past fail to show any significant pattern. The findings suggest that the quality and structural position of additional board seats may play a bigger role than simply the number of board appointments.     

Corporate failure in the UK: An examination of corporate governance reforms

In the context of major corporate collapses, executive compensation, board network, gender diversity and oversight committees have all received attention in a package of corporate governance (CG) reforms that were recently issued in the UK. This paper examines whether these reforms of CG can influence the likelihood of corporate failure (CF). It also investigates how efficient they are when CF approaches. After controlling for variables that prior research shows to be related to CF, we find that CF is less likely when a firm is characterized by a lower executive compensation, larger size of the board's social network, and smaller degree of the board's managerial network. However, board gender diversity and independence of oversight committees do not reduce the likelihood of CF. We further observe that the explanatory power of these CG variables is significant but relatively decreased as the time to CF closes. This implies that despite the capability of these variables to render early warning alerts of CF, they are less helpful (efficient) as failure becomes closer. Our results remain robust after a battery of sensitivity tests and addressing potential endogeneity problems. Collectively, the evidence provided by our paper should be of interest to the UK's regulatory bodies (Financial Reporting Council) and legislators (the UK's Parliament), since it shows the practical implications of the UK's CG Code and other governance regulations on reducing future corporate collapses. This paper provides timely evidence-based insights to major recent structural reforms aiming at proposing remedies to CG problems in the UK.     

Internal and external influences on IT control governance

This study provides empirical evidence on the effects of internal and external governance on IT control quality proxied by IT related material weaknesses. IT control governance is defined as the leadership and organizational structures and control processes which ensure that the company's IT sustains and extends the company's strategies and objectives. Specifically, we examine the influence of senior management, the board of directors, and audit committees regarding IT control governance. We find that companies with more IT-experienced senior managers, with CIO positions or longer tenured CIOs and with higher percentages of independent board directors are less likely to have IT material weaknesses. We also provide partial evidence that more IT-experienced audit committee members are associated with less IT material weakness. The results suggest that both internal and external governance serve important roles in IT control quality.     

How to Evaluate Risk Management Units in Financial Institutions?

Based on the existing Enterprise Risk Management framework and current government regulations, “banks are required to establish risk management units (RMUs) to review and evaluate their risks, monitor them, and to advise top management.” Currently an integral part of the risk governance and management process, RMUs in financial institutions have become increasingly important since the 2007–2008 financial crisis. This article details the authors' creation of an index to evaluate the performance of risk management units in financial institutions, and then examines some of their findings. The index transforms twelve parameters into a simple and convenient index that isolates the RMU's activities from the rest of the organizational risk management process, its risk preferences and the activities of the rest of the units. The index's parameters are divided into three dimensions of the RMU's performance: professionalism, organizational status and relationship with top management and the board. The authors found a positive relationship between their RMUI and some important risk governance characteristics: CROs who are among the five highest paid executives at the bank, banks with at least one independent director serving on the board's risk committee having banking and finance experience and boards with greater efficacy.     

Boards of Directors, Market Discipline and Firm Performance

Abstract:   The board of directors is generally seen as an important internal governance structure. However, the empirical evidence on the board‐performance relationship is not conclusive. On the other hand, a growing literature suggests that different control mechanisms, either internal or external to the firm, can interact with each other and affect performance. One such important factor is product market competition. The objective of the study is to investigate further the board‐performance relationship taking into consideration the potential effect of market competition. More precisely, the study analyzes the combined effect of boards of directors' characteristics, and market discipline on firm performance. Overall, the results suggest that competition has a positive and significant impact on firm profitability and productivity. Moreover, this determinant factor creates the conditions for which the board‐performance relationship is supported. In other words, for boards to be effective, firms should be exposed to a competitive environment.     

Corporate Governance,Managers' Independence,Exporting, and Performance of Firms in Transition Economies

Using data on 157 large companies in Poland and Hungary, this paper employs Bayesian structural equation modeling to examine the relations among corporate governance, managers' independence from owners in terms of strategic decision making, exporting, and performance. Managers' independence is positively associated with firms' financial performance and exporting. In turn, the extent of managers' independence is negatively associated with ownership concentration, but positively associated with the percentage of foreign directors on the firm's board. We interpret these results as indicating that concentrated owners tend to constrain managerial autonomy at the cost of the firm's internationalization and performance, but board participation of foreign stakeholders enhances the firm's export orientation and performance by encouraging executives' decision-making autonomy.     

Clawback policy enforcement: To disclose or not to disclose

The SEC proposed in 2015 to require the disclosure of incentive compensation recovery efforts by companies' boards of directors. While such disclosure of enforcement can signal the effectiveness of corporate governance as the SEC suggested, firms have argued that the proposed enforcement disclosure may harm executives' reputation regardless of their involvement in misstatement because the clawback includes a no-fault clause. Results of our experimental study suggest that when the board does not disclose its clawback enforcement, investors perceive weak corporate governance, particularly when a restatement results from an intentional misstatement. This, in turn, leads investors to be less willing to invest than when clawback enforcement is disclosed. We also find that investors' perception of management reputation is not negatively affected following the board's clawback enforcement disclosure. Overall, our study provides insights into the potential effect of the SEC's proposal requiring the disclosure of clawback enforcement and addresses concerns raised in comment letters.     

Materiality in Corporate Governance: The Statement of Significant Audiences and Materiality

Materiality is an elusive, but fundamentally important concept in corporate reporting of all kinds—not only in traditional financial reporting, but in sustainability and integrated reporting as well. In the end, materiality is entity‐specific and based on judgment. Moreover, it is a judgment that should ultimately be made by a company's board of directors, which makes materiality as much a governance as a reporting issue. Whether a given ESG issue is material is in large part a function of the corporate stakeholders, or “audiences,” that the company's board of directors deems to be “significant”—that is, important to the company's ability to create value over the short, medium, and long term. The identification of such audiences—together with the time frames the board uses to evaluate the impact of the company's decisions on these audiences—provides the basis for determining the sustainability issues that corporate management must focus on for performance and reporting purposes. To help ensure that decisions about materiality receive the attention they deserve, the authors propose that corporate boards articulate their views in an annual “Statement of Significant Audiences and Materiality.” Contrary to the prevailing belief that the fiduciary duty of the board is to place shareholders’ interests first, nothing precludes corporate boards from issuing such a statement. Recent research, including the compilation of legal memos on fiduciary duty and nonfinancial reporting for all G20 countries, makes it clear that the board's fiduciary duty is to “the corporation itself.” In exercising this duty, directors have full discretion, under the business judgment rule and other authorities, to decide which audiences, along with the company's shareholders, should be deemed significant.     

Productivity in “Top‐Ten” Academic Accounting Journals by Researchers at Canadian Universities*

We examine the research productivity of academic accountants at Canadian universities for the 11‐year period 1990‐2000. Our analysis is based on the “top‐ten” ranked refereed journals in accounting, auditing, and taxation, as documented by Brown and Huefner (1994). We first provide an overview of the importance of publishing in highly ranked accounting journals for individual academics, departments, and business faculties. We then provide details of the proportion of articles published in each of these journals by academics from Canadian universities; the type of research published in each journal (auditing, financial accounting, managerial accounting, and taxation); and details of editorial board service. Our results indicate that even at the most productive Canadian university (in terms of “top‐ten” publications), faculty members publish (on average) approximately one article every seven years. Six Canadian universities have faculty members with, on average, more than one article in “top‐ten” journals every 10 years. We also provide results of analyses that rank each Canadian university, after controlling for the relative quality of each journal, using impact factors published by the Social Science Citation Index. In addition, statistics are provided with regard to the 15 most productive researchers, in terms of “top‐ten” publications, in the 11‐year period. Finally, in conjunction with the 25th anniversary of the Canadian Academic Accounting Association, we examine the productivity of academic accountants at Canadian universities over the past 25 years by combining our results with those reported by Richardson and Williams (1990).     

Corporate governance post-Enron: Effective reforms,or closing the stable door?

We examine Enron's collapse to provide insights as to the efficacy of recent governance reforms. In doing so, we explore two main issues. First, if recently mandated governance changes had been in place earlier, would they have constrained actions by Enron's management? Second, and more generally, which of the recent governance changes might act to constrain governance failures going forward? Although many aspects of corporate governance failed at Enron, the firm's viability ultimately rested on an inherently risky business strategy, a strategy that the board and others apparently failed to understand. However, it is not apparent that increasing board independence would have changed Enron's strategic direction, or prevented the firm's collapse. From this perspective, many recent reforms, including those mandating specific board structures likely move firms away from their optimal governance structure and are tantamount to closing the stable door after the horse has bolted. We assert that, ceteris paribus, stronger internal controls coupled with reduced potential for conflicts of interest on the part of the external auditor might have constrained management's ability to hide the firm's true financial condition and are likely to constrain aspects of fraudulent behavior going forward.     

Monitoring Legal Compliance: The Growth of Compliance Committees*

The Committee of Sponsoring Organizations’ (COSO) framework outlines three objectives of internal control. This paper addresses the third and least emphasized component, compliance with laws and regulations. We address the growing importance of board‐level oversight of legal compliance and the emerging role of a separate board committee dedicated to the compliance function. A recent COSO project emphasizes the importance of the monitoring function; COSO observes that many companies are not conducting this function effectively. We examine the use of a board‐level compliance committee to monitor legal compliance. We also discuss the roles of corporate counsel and internal auditors in assisting with monitoring. Our results show that over the last 15 years a growing percentage of S&P 500 firms have adopted a board‐level compliance committee. Internal auditors’ specialized training and expertise in the areas of monitoring and prevention would complement the company’s legal expertise and be of significant value to boards of directors in helping them fulfill their compliance oversight responsibilities.