Governance practices and firm performance: Does shareholders’ proximity to management matter?

Abstract

Richard Bozecis a Full Professor of Accounting at the Telfer School of Management, University of Ottawa where he currently teaches advanced financial accounting courses. He is joining the growing number of researchers in the field of corporate governance who are shifting to more holistic analytical approaches, taking into account the variety of controls that interact to affect a firm's performance. ABSTRACT This article investigates the link between corporate governance practices and firm performance, a topic that received a lot of attention by regulators, interest groups and academics. Research in this field has recently shifted from the analysis of one or more specific governance provisions to the analysis of multiple aspects of corporate governance. In fact, most studies now use corporate governance indexes that capture a wide range of corporate governance provisions (index-based studies). The objective and main contribution of this article is to revisit the governance-performance relationship while taking into account shareholders' proximity to the locus of management. Shareholders' proximity is defined based on ownership concentration and whether or not the dominant/controlling shareholder holds top executive positions in the firm. The lowest level of proximity is evidenced in firms with dispersed ownership, the highest level in controlled entities where the controlling shareholder holds the CEO and/or Chair positions. Governance is measured on a global scale using the Report on Business (ROB) index. The study is conducted over a 4-year period (2002)(2003)(2004)(2005) using panel regressions in a two-stage least squares framework on a sample of Canadian publicly traded companies (470 firm-year observations). The results of the study show a positive relationship between the ROB global index (and sub-indexes) and Tobin's Q whether ownership is dispersed or is concentrated in the hands of a dominant or controlling shareholder. Shareholders' proximity to management has no impact on the governance-performance relationship. Overall, the results support a one-size-fits-all approach to governance, a policy adhesion that underlined the widespread adoption of Codes of Good Governance and legal/ regulatory changes in the years following Enron's collapse in the United States. Initiatives were in large part supported by a general consensus toward a stock market-centered model of governance. However, with the recent debt crisis in the United States, public perception has changed. The credibility of such a model for governing our institutions is called into question. Our study tempers these concerns by showing that governance controls should not account for ownership differences in the context of publicly traded companies. Instead, good governance practices based on an independent board of directors that promotes transparency and protects shareholders' rights should be prioritized whether or not ownership is dispersed or concentrated. From a corporate governance standpoint, this study sheds new light on controlled compani...

Corporate governance practices and comprehensive income

“…This topic is a central issue confronting corporate governance scholars, and some areas of research into corporate governance still draw intense interest (Bozec et al, 2010;Kumar and Zattoni, 2013). Some previous empirical studies, such as those of Gompers et al (2003), Caylor (2006, 2009) and Dittmar and Mahrt-Smith (2007) and others, support the link between corporate governance and firm performance, although some papers show conflicting results (Bozec and Dia, 2015). This could be due to the measures of both variables.…”

“…However, actions intended to improve corporate governance have information-processing and opportunity costs for firms; the questions then become, do these strategies have a positive impact on companies' results, and do corporate governance strategies create value for companies? If the answers to these questions are "yes", managers would invest in corporate governance, because this strategy will impact positively on firms' future performance (Bozec and Dia, 2015).…”

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“…Prominent corporate failures have increased public criticism of corporate governance controls (Bozec and Dia, 2015) and have led to a growing interest in the disclosure of risk in both academia and professional practice. The lack of adequate quantity and quality of risk reporting can be considered as one of the major weaknesses in accounting (Cabedo and Tirado, 2004).…”

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“…In addition, there is a causal relationship between the corporate governance rating score and the Tobin Q value, as well as the leverage ratio. Bozec & Dia (2015) examine the link between corporate governance practices and performance while considering the proximity of shareholders and managers. The study suggests that the concentration of ownership and ownership of key strategic positions by shareholders has no effect on the relationship between governance and performance.…”