By Vindel Kerr, Contributor
Issa
THIS ARTICLE is in direct response to the concerns of those who require greater corporate governance from corporations throughout the world. People are now cognisant of the importance of good corporate governance to enhance business integrity, reputation and in fulfilling mandatory disclosure requirement to regulators and society at large.
There are those who have expressed curiosity as to whether or not there exists empirical support for the role of good governance on a firm's bottom-line.
WHAT IS GOOD CORPORATE GOVERNANCE?
The characteristics of poor governance can be compared to good governance, as shown in Table 1. As can be seen, the definition focuses mainly on the company's board: the directors themselves, but also the board structures and board procedures are key factors in ensuring good governance.
Shareholders are growing increasingly active in the United States and elsewhere because they believe that better corporate governance will bring them higher rewards. But the relationship between shareholder activism and higher returns remains very complex. Repeated attempts by academics to show an irrefutable link between the two often fails. While most studies on corporate governance are inconclusive on whether or not company bottom-line is affected, McKinsey conducted three separate surveys to determine how shareholders perceive and, more importantly, value corporate governance in developed and emerging markets. Conducted with co-operation from the World Bank, Professor Sangyong Park of Yonsei University, and Institutional Investor's regional institutes, the surveys gathered responses from more than 200 institutional investors, which altogether managed about US$3.25 trillion in assets.
The first survey, which examined attitudes toward investments in Asia, was conducted in September and October 1999 with Institutional Investor's Asia Pacific Institute. The 84 respondents, 82 percent of which had invested in Asia, held an estimated US$1.05 trillion-plus in assets under management. The second survey, which looked at Europe and the United States, was conducted in October and November 1999 with Institutional Investor's US and European institutes. The 42 respondents, 95 percent of which had invested in the United States and Europe, held an estimated US$550 billion-plus in assets under management. The third survey, examining investors' attitudes toward Latin America, was conducted in March and April 2000 with the World Bank. The 90 respondents, 70 percent of which had invested in Latin America, held an estimated US$1.65 trillion-plus in assets under management (Coombes, P. and Watson, M., 2000).
(See Table 2).
Results from other studies performed by Wishire Associates (1995) of the USA among 42 firms, showed that CalPERS-targeted companies outperformed S&P indexes by 52.5 per cent over five years. The CalPERS-targeted companies had previously trailed the S&P indexes by as much as 66 per cent before CalPERS intervention. The surveys consistently found that over 80 per cent of investors say they would pay a premium for shares of a well-governed company than for those of a poorly governed company with comparable financial performance. Based on the McKinsey survey, the actual premium investors say they would be willing to pay for a well-governed company ranges from 18 per cent for well-governed UK and USA companies to 28 for Venezuelan or Indonesian companies. No Caribbean country was covered in the survey, so the premium for good corporate governance in the Caribbean is still an unknown fact. Of interest is the size of the premium institutional investors say they are willing to pay. The McKinsey studies for good board governance, reflects the extent to which they believe there is room for improvement in the quality of financial reporting in a particular country. For example, investors were willing to pay more for well-governed companies in Latin America and Asia where there are poor financial reporting standards. On the contrary, investors were willing to pay less for well-governed companies in Britain and the US where accounting standards and financial reporting are at very high standards.
While no large scale study is yet to be conducted amongst Jamaican firms, preliminary research by this author is indicating that large institutional investors (pension funds), are willing to pay investment premiums for company stocks they perceived to be well-managed; transparent with information disclosure; and those that make their strategic intentions known to would-be investors.
DOES CHAIRMAN/CEO DUALITY IMPACT COMPANY PERFORMANCE?
While there is strong theoretical support for separation of both roles, more than often, opponents of this view assumed that the duality often led to self-interested actions and abuse of executive power. On the other hand, proponents are of the view that CEO/Chairman duality fosters strong and unified leadership, rather than as weakening the board's independence from management and its monitoring role. Many empirical studies, while sometimes supporting the CEO's role, sometimes call it into serious question. For example, Daily and Dalton (1997), found that CEOs who are also chair of the board are not necessarily more independent of management from board influence than CEOs who are not. Other prominent authors such as Balinga, Moyer, Rao and Heracleous, found no significant relationship between duality status, from duality to non-duality.
In Jamaica, and just from observational deductions, there are many examples where chair/CEO duality has proven very successful: Capital & Credit Merchant Bank Limited (with Ryland Campbell-nine year old bank); UGI Group (with Neville Blythe); SuperClubs (with John Issa) and Grace, Kennedy & Company--from Mr. Luis Fred
Kennedy, then Chairman & Governing Director, through Carlton Alexander and A. Rafael Diaz to the highly client-profit-performance-obsessed, Douglas Orane.
DOES BOARD INSIDER/OUTSIDER COMPOSITION IMPACT A COMPANY'S PERFORMANCE?
The Cadbury and many of its successor reports, suggest that the board should include non-executives (outsiders) of sufficient quality and calibre. A study by Bhagat and Black (1999), found no evidence that increasing outsider board representation can improve firm performance; that firms with a super-majority of outsiders performed worse than other firms; and that firms with a higher proportion of inside directors perform as well as firms with a number of outsiders. Results of a review of several empirical works carried out by Wagner, Stimpert and Fubara (1998), proved inconsistent. After a meta-analysis of 29 studies they found that both the greater relative presence of board outsiders and insiders were empirically associated with higher company performance. This curvilinear relationship was shown to hold for asset measures of performance but not for return on equity measures. In yet another recent meta-analysis of 37 samples involving 7,644 organisations, it was found that board composition explains less than one per cent of a firm's financial performance; and that a weak influence on performance occurred when there are either relatively more insiders or outsiders on the board (Heracleous, 2000).
CONCLUSION
In the McKinsey studies, investors say they would pay more for the shares of well-governed companies. It is hard to measure the market impact of these hypothetical premiums, as these studies were not subjected to any rigorous academic peer review, and demonstrated perception and not the actual reality. There is little doubt, however, that good governance does make a difference.
According to a joint World Bank/OECD paper, "many developing and transition economies lack the supporting institutional and human resources so critical to sound corporate governance. The challenge for them is to adapt systems of corporate governance to their own corporate structures and implementation capacities, public and private, to create a culture of enforcement and compliance. They need to do so in a manner that is credible and well understood both internationally and cross borders-and they need to do it more quickly than did developed countries before them".
Good corporate governance has been recognised as a source of competitiveness and is critical to economic and social progress. With globalisation, companies need to tap into domestic and international capital markets in ways that would have been inconceivable less than a decade ago.
It is clear that even in Jamaica, increasingly; individual investors, funds, banks, and other financial houses are basing their decisions not only on a firm's outlook, but also on its reputation and its governance. It is this growing need to access capital, domestic and foreign, more than anytime in Jamaica's history, that the issue of corporate governance reform ought to be placed on the top of any agenda concerning the way companies are formed and operate in the world of business.
Vindel Kerr is researching corporate governance for doctoral studies. He lectures, and is a business consultant. Contact: vkerrl@anngel.com.jm
