Governance Quality in a “Comply or Explain” Governance Disclosure Regime

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: Do firms take advantage of the flexibility of the "comply or explain" corporate governance disclosure regime to adopt governance practices that are best suited to their needs and value-added to the firms as predicted by economic theories of the firm? Using the Canadian "comply or explain" corporate governance disclosure regime, we construct a board score measure based on the Canadian code's 47 "best practices." We employ a unique approach by positing that the "explain" disclosures indicate higher agency costs of best practice adoption or indicate the ability of the firm to improve its governance practices relative to "best practices" in light of firm specific circumstances. Research Findings/Insights: We find that our measure is strongly and positively associated with higher firm value and weakly and positively associated with better operational performance. Further, our measure is more strongly associated with both than best practice adoption measures. Theoretical/Academic Implications: Our unique measure of governance quality reveals differences in governance efficiency and effectiveness that are consistent with the theorized advantages of "comply or explain" governance disclosure regimes. Further, our results suggest that firms in a "comply or explain" regime are not employing, on average, the discretion permitted by such a regime to avoid improvements to their corporate governance practices. Practitioner/Policy Implications: Our results support the proposition that the flexibility of a "comply or explain" governance regime provides tangible financial benefits to shareholders in terms of higher firm value and returns on shareholders' equity investment.

Corporate Governance Codes and Their Role in Improving Corporate Governance Practice

“…Several scholars [1,2,20,25,36] raised doubt about 'one size fits all' corporate governance regulations. It is highly unlikely that a single set of best practices exist for all companies since corporate governance is a very complex and dynamic system and not all mechanisms may work well in all governance contexts [2].…”

“…It is highly unlikely that a single set of best practices exist for all companies since corporate governance is a very complex and dynamic system and not all mechanisms may work well in all governance contexts [2]. The corporate governance practices and regulations should reflect particularities of companies' ownership and control structures that differ across countries and industries and determine the type and severity of agency costs [36].…”

“…The basic idea of this approach is that a company has to disclose the compliance with recommendations of a particular code adopted by a company, or in the case of non-compliance, a company must explain the reasons for it [8]. The 'comply or explain' approach enables a company to adapt its governance practices to its particular circumstances [36], its size and shareholding structure [32,Article 7], to consider sectoral specifics [37], thereby allowing flexibility in choosing 'which corporate governance structure to adopt to better pursue their objectives' [10, p. 223]. Departing from the codes recommendations enables companies to govern themselves more effectively by adapting their corporate governance practice to their particularities [32,Article 7].…”

Governance and Financing of Innovative Very Small Business (VSB): Evidence from a Canadian Biotechnological Firm

“…In this perspective, two areas of study seem to us to be particularly interesting for in-depth examination. First, it appears to us to be necessary to better integrate biotechnology companies in such analyses because of their uncertainty and their evolutionary and diversifi ed character and because of how they affect industrial sectors and other fi rms (Luo & Salterio, 2014). Furthermore, it seems to us also important to extend the refl ection by studying in a more in-depth fashion the nature and the characteristics of coordination problems that exist between biotechnology companies and their investors.…”

“…3 (17), No. 1, 2017 If we disregard the stakeholder -management relationship, the main force in large companies -it seems that to analyse the governance in VSB-, we must focus our attention on other types of relationships, notably those that link the company with its stakeholders and employees, including subcontractors (Luo & Salterio, 2014;Audretsch & Stephan, 1996). Th us, the bank/company relationship or creditor relationships between companies appear to off er tighter constraints and disciplinary measures than those off ered solely by stakeholders ).…”