The background to the subject
Recently, many people are awareness and expectation of the standard on Corporate Governance in world-wide, the effectiveness of the Corporate Governance has become a global concern. Especially after many corporate collapses (e.g. Enron, Boeing etc), fraud cases (e.g. Lehman Brothers), shareholder suits (Sun Hung Kai Properties between Chairman Walter Kwok Ping-sheung and his younger brothers) or questionable strategic decisions are attracting attention to the top decision-making body of the corporation and the board of directors. Not only the concentrate of the organization, but also the stakeholder for example investor, creditor, customer and financial institutions.
The outline of the corporate governance
Corporate governance is a system by which companies can relay to run, at the centre of the system is the board of director whose actions are subject to the law, regulations and the shareholders in general meetings. Shareholders in turn are responsible for appointing the directors and the auditors and it is to them that the board of directors reports on its stewardship at the annual general meeting.
The main people who interests in corporate governance include director (they are responsible for corporate governance), shareholders (owner of the company) and any stakeholder who are linked to the directors by the financial statement.
Directors play a key role in corporate governance, since directors are responsible ultimately for managing the company, and this includes setting strategy budgets, managing the company's people, maintaining company assets, and ensuring corporate governance rules are kept. An important element of setting strategies is determining and managing risks. Directors are responsible for monitoring the effectiveness of systems and controls.
Non-executive directors are directors who do not have an executive function in the organization. Such non-executive directors may have a particular role in some sensitive areas such as company reporting, nomination of directors and remuneration of executive directors. Often companies will set up sub-committees of the board to deal with such issue.
There are three principle of conduct that is applicable to all board members. Firstly, duty of care board member must attend meetings, be prepared to make informed decisions by reading the information provided and requesting additional information if required, and carry out duties in a reasonable and responsible manner. Secondly, duty of loyalty board member must make decisions in the best interests of the organization solely, but not any group he/she represents, and never for personal gain. Lastly, duty of obedience board member must be faithful to the organization mission and is not permitted to act in ways that are inconsistent with the central goals of the organization.
An audit committee can help a company maintain objectivity with regard to financial reporting and the audit of financial statements. They are sub-committee of the board of directors, usually containing a number of non-executive directors. The role and function of audit committees is improve the quality of financial reporting, by reviewing the financial statement on behalf of the board, create a climate of discipline and control which will reduce the opportunity for fraud. Secondly, to enable the non-executive directors to contribute an independent judgment and pay a positive role, Thirdly, help the finance director, by providing a forum in which he can raise issues of concern, and which he can use to get things done which might otherwise be difficult, Next, strengthen the position of the external auditor, by providing a channel of communication and forum for issues of concern, moreover, provide a framework within which the external auditor can assert his independence in the event of a dispute with management. Also, strengthen the position of the internal audit function, by providing a greater degree of independence from management, last, it can increase public confidence in the credibility and objectivity of the financial statements.
For organization, corporate governance seems is essential to determine the direction and performance criteria which can enhance a motivated and efficient management nowadays. Many research show that good corporate governance will increase company image and improve the operation to meet the goal, it also can reduce the cost of capital and ultimately induce more stable capital flows and prevent the financial crisis.
On the other hand, corporate governance is focus on the duty of care for all directors of company have. This can help to reinforce the confidence of investors because this can help to make a protection, control their interests properly and increase the organization transparency. Independent non-executive directors provide an important role in the corporate governance. Since they are independent and almost appointed by the majority shareholders in real life, they may prefer to look after the interest of the majority shareholders and ignore the interest of the minority shareholders. Thus the independent non-executive director should sit in the board and bring a balance for both interests of majority and minority shareholders
Reason for choosing the topic
My dissertation title is 'How does Corporate Governance affect the investor's decision making'. This study has two aims. The first is to examine whether organization concerned with the good corporate governance practice of firms. In other words, do good corporate governance practices pay? Is it essential for effective management, a healthy corporate culture, successful business growth and enhancing shareholders' value?
The second aim is to investigate does investors believe that a good corporate governance is necessary for make their decision? And which are the essential factors for attracting the shareholder.
The overall research aim
I would like to use literature review and Annual report for investigate how Corporate Governance lead to better firm performance and what is good Corporate Governance practices? I will focus on investigate the responsibilities for internal control and risk management the Board of the director.
I would like to study different companies' annual report and corporate governance report to compare the business and to find out that how corporate governance disclosure help organization to maintain a high standard for integrity, transparency, accountability and equity and also investigate that is it sufficient for user and how can enhancement of shareholder value? The company website was mentioned in particular for providing detailed information about the respective roles and responsibilities of the chairman.
I would like to conduct the questionnaire for obtain primary information on How corporate governance affect to the investor decision making, for reducing the primary data limitation, I send the questionnaire through e-mail and base on the interviewee opinion, I found that corporate governance is one of the important factor for them to make their investment decision. Moreover, I would like to use prior research for support my questionnaire result for reducing the primary information limitation. I would like to use McKinsey's Global Investor Opinion Survey. It is because the research is the most widely quoted opinion-based research into the link between corporate governance and performance as measured by the valuation of the company.
Corporate governance is a system for structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs.
The development of the corporate governance codes
Corporate governance codes developed was associated with the UK closely and this is a good model for organizations have best practice requirements. 'Corporate governance is the system by which companies are directed and controlled.' Report of Cadbury Committee (UK) and good corporate governance is important because the owners of a company and the people who manage the company are not always the same people, in this situation agency theory is occur. Agency relationships occur when one party (the principal) employs another party (the agency) to perform a task on their behalf. It is examines the duties and conflicts that occur between parties who have an agency relationship. Apply agency theory to the company. Shareholders (the principal) employ directors (Agent) to represent them to manage the company. Directors have a fiduciary responsibility to the shareholders of their organization.
The development of different corporate governance models are use in discussing general global best practice. They are include Cadbury Report, Hampel Report, Higgs Report
Cadbury Report (1992) is the first attempt to formalize or codify corporate governance best practice in a written document, to make explicit that which implicit in many top UK companies. The impetus for this report arose form the events of Black Monday, 19 October 1987, when the US stock market lost one quarter of its value in a few hours, the subsequent downturn in economies and trust in business, and the UK's own corporate responsibility scandal relating to the Mirror Group and its owner. According to Sir Adrian Cadbury Corporate Governance was focused on three issues, they were the board of directors, institutional investors and audit and accountability.
The Board of directors required constant monitoring and assessment. One aspect of reform was split the chairman/CEO role and ensure the chairmanship is an independent person at the time of appointment. On the other hand, institutional investors were major shareholders (usually hold 5% or above shares). Company need provide a greater director dialogue and engagement with this group, this dialogue would emerge a greater understanding of the need to appreciate and respond to the needs of other stakeholders. Lastly, Audit and accountability, this is importance of corporate transparency and ensuring good communication and disclosure with shareholders and stakeholders. This code was embraced by the stock exchange in the 'Yellow Book' rules for listing. It is became the foundation of the modern Combined Code of the Financial Services Authority (FSA).
Hampel Report 1998 was a consolidating report that tried to deal with the criticisms arising from the previous two and consolidate them into a Combined Code. It is the currently applicable code of best practice for UK listed companies. This Code was divides into two areas, they are Companies and Institutional investors. Companies was include directors' role, directors remuneration, relations with shareholders and accountability and audit. Institutional investors were included shareholder voting, dialogue with companies and evaluation of governance disclosure.
Higgs Report (2003) was issued after Enron. It is focused on the role of non-executive directors (NEDs). NEDs act as a link between the board and shareholders to reduce the agency problem. It suggested that at least half the board should be made up to NEDs and communicated regularly to shareholders. Tyson Report (2003) was base on the Higgs Report and developing. It was expand the development of NEDs concept. It helped to identify the gene pool of NEDs and found that diversity in background, skills and experience could enhance the board effectiveness.
The Financial Reporting Council (FRC) approved a new draft of the Combined Code to incorporate these new ideas. The reason for developing codes was reduce instances of fraud and corruption improving shareholder perception and market confidence. There is statistical evidence that poor governance equates to poor performance Mckinsey found that global investors were willing to pay a significant premium for companies which had well corporate governance, also even the system does not add value, and it reduces risk and huge potential losses to shareholders.
There are different approaches to the communication, management and monitoring of codes. A rules based approach instills the code into law with appropriate penalties for transgression. The principle based approach requires the company to adhere to the spirit rather than the letter of the code. The company must either comply with the code or explain why it has not through reports to the appropriate body and its shareholders.
For deciding which approach to use for governing could be due to following factor. Firstly, clarity in terms of what director must do, the rules are a legal requirement and so clarity should exist. Next, it is standardization for all business. Lastly, it is sanction, the sanction is criminal and therefore a greater deterrent to transgression.
International convergence codes
Many individual countries and governments have introduced governance codes applicable to corporations registered or listed within their jurisdictions. However, two organizations have published corporate governance codes intended to apply to multiple national jurisdictions. These organizations are including 1) the Organization for Economic Cooperation and Development (OECD) and 2) the International Corporate Governance Network (ICGN).
OECD is established in 1961, the OECD is an international organization composed of the industrialized market economy countries, as well as some developing countries, and provides a forum in which to establish and co-ordinate policies. This principle were updated and republished in 2004, it represent the first initiative by an intergovernmental organization to develop the core elements of a good corporate regime. The OECD Principles are intended to assist OECD and non-OECD governments in their efforts to evaluate and improve the legal, institutional and regulatory framework for corporate governance in their countries and to provide guidance and suggestions for stock exchanges, investors, corporations, and other parties that have a role in the process of developing good corporate governance. The principle was focus on publicly-traded companies, both financial and non-financial. However, to the extent that they are deemed applicable, they might also be a useful tool for improving corporate governance in non-traded companies, e.g. privately-held and state-owned enterprises.
The content of the principles were include 1) ensuring the basis for an effective corporate governance framework, 2) the rights of shareholders and key ownership functions, 3) the equitable treatment of shareholders, 4) the role of stakeholders in corporate governance, 5) disclosure and transparency and the responsibilities of the board.
The international Corporate Governance Network (ICGN) is instigation in 1995 by major institutional investors, investors, companies, academics and other interested in the development of global corporate governance practices. This principle highlights corporate governance elements and allows stakeholder take this element for making decision. It mainly focus on the governance of corporation and also encourage jurisdictions to address certain broader corporate for regulating the policy which are beyond the authority of a corporation. The IGN believes that improved governance should be the objective of all participants in the corporate governance process, which including investors, boards of directors, corporate officers and other stakeholders as well as legislative bodies and regulators.
The content of the ICGN Principles were include 1) corporate objective shareholder returns, 2) disclosure and transparency 3) audit, 4) corporate boards, 5) shareholder's ownership, responsibilities, voting rights and remedies, 6) corporate remuneration policies, 7) corporate citizenship, stakeholder relations and the ethical conduct of business, 8) corporate governance implementation.
The aim for introduce corporate governance is for organization development and increase the sustainability, it can endure for a longer time and also respond to competitive pressures. The principles of corporate governance set out the rights of shareholders, the importance of disclosure and transparency and the responsibilities of the board of director. It can be dividend into five elements. Firstly, it should be protects shareholder's right, secondly, it should ensure the equitable treatment of all shareholders, which include minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. Next, the framework should recognize the rights of stakeholders as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs and the sustainability of financially sound enterprises. Moreover, it should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company. Lastly, it should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board's accountability to the company and the shareholders.
The board of directors roles and responsibilities
The company has a policy for seeking to comply with established best practice in the field of corporate governance. Parties involved in the governance are including the regulatory body (e.g. the Chief Executive Officer, the board of directors, management and shareholders). Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large.
For regulate the organization, the board play a key role in corporate governance, The roles for board is responsible for creating an environment in organization that able stakeholders to maximize their value, the meaning is company should 1) provide a effective and valued social welfare services, 2) provide a accountability to funders and give a trust and respect of the community, 3) provide entrepreneurial leadership of the Group, 4) to approve the Group's strategic objectives and to ensure that the necessary financial and other resources are made available to enable them to meet those objectives. The board, which meets at least ten times a year, has a schedule of matters reserved for its approval.
The specific responsibilities reserved for the Board include: Setting Group strategy and approving an annual budget and medium term projections, reviewing operational and financial performance, approving major acquisitions, divestments and capital expenditure, reviewing the Group's systems of financial control and risk management, ensuring that appropriate management development and succession plans are in place, reviewing the environmental, health and safety performance of the Group, approving appointment to the Board and the Company secretary, approving policies relating to Directors' remuneration and the severance of Directors' contracts and ensuring that a satisfactory dialogue take place with shareholders.
Some resurvey conclude that the ideal board members are including four characteristics, firstly, although they are a team player, they are able to maintain independence of thought in critically analyzing business options. Secondly, they would prepared to make the commitment of time and effort required to properly fulfill his or her duties and responsibilities as a Board member, Thirdly, inspires ethical behaviors in others, and whose presence on the Board enhances the reputation of the Company, lastly, takes a strategic but flexible approach to key issues. For selecting the Board members, it is strong emphasis on the personal qualities such as courage, integrity, honesty, decisiveness and a willingness to listen and learn are personal qualities that may be as important as academic qualifications, business experience and technical know how on the Board.
The Hong Kong Institute of Certified Public Accountants believes that good corporate governance is fundamental to attracting investment, stimulating economic growth and reducing the cost of capital. The primary objective is providing general guidance and recommendations on a basic framework of internal control and risk management. Internal control state that 'the board should ensure that the issuer maintains sound and effective internal control to safeguard the shareholders' investment and the issuer's assets. The directors should at least annually conduct a review of the effectiveness of the system of internal control of the issuer and its subsidiaries and report to shareholder that they have done so in their Corporate Governance Report. The review should cover all material controls, including financial, operational and compliance controls and risk management functions.
Argument for corporate governance
Oppose to the corporate governance
However, there are many studies are argue on the efficiency of corporate governance. The dissenter point out that the relationship between corporate governance practice and firm performance with mixed results indicating that good corporate governance practices may not necessarily lead to better firm performance, also how to measure corporate governance is difficult to evaluate and subjective. Some studies use the ownership structure as an indicator of corporate governance while other uses various board characteristics such as board size, composition, the qualification and independent of directors. Business Week (2000b) has carried out three surveys of corporate governance so far, there features have been influential in drawing public attention to organizations whose boards either excel or are cited as the worst ones. Three main criteria were used, board independence, board accountability to shareholders, and board quality. Rather unsurprisingly, the report concluded that good governance. However is no guarantee of superior performance, as clearly demonstrated by the recent results at Campbell Soup and Compaq.
Independent director is playing an increasingly substantial role in the procedure of corporate governance. But how independent are independent direction? Mark Mobius President of Templeton Emerging Markets Fund and one of the speakers at the roundtable said that non-executive directors are often not as independent as they should be. Many people believe that the concept of independent non-executive director for improving a company's corporate governance system is only a myth. The advantages of having non-executive directors in a company are overridden due to the following reasons:
- Lack of independence
The independent non-executive director can improve the company's corporate governance system is basically relied on his nature of "independence. But in practice, the independent non-executive director may not actually independence. Although there have requirement that the independent non-executive director of the company must not be or have been connected to a director, the chief executive or substantial shareholders, the directors would like to select whose would co-operate with them as the independent non-executive director.
Even though they cannot select the connected person, e.g. their relatives or business partners as the independent not-executive directors, they can find their friends or someone who has the same view (e.g. marketing strategy) with them as the independent non-executive director, instead of finding some who are really independent and helpful in making the right decision. It would be easy to say that they are not connected with each other. It is especially easy to occur in case the directors are also the substantial shareholders, because the substantial shareholders (as the same time the directors of the company) have the voting right in appointing the non-executive directors, just like the family based companies in Hong Kong.
If the independent non executive director being appointed is not 'independent' enough, they may not be able to protect the interests of all shareholders. They may only agree with the directors and the substantial shareholders and may not be able to provide independent and objective judgment and advice to the board of director. For example, the independent non-executive director are usually the members of the audit committee, if they are not independent enough, they may not be able to provide objective opinion or review on the financial reporting process, internal controls and the audit function. Moreover, they may also take part in determining the directors' remuneration, if they are connected with the directors, they may consent to the unreasonable high directors' remuneration without any inquiry.
- Holding of the shareholding interest
The independent non-executive director may hold some shares of the company, subject to the requirement, must not be more that 1% of the total issued share of the company. That means he or she is also the minority shareholder of the company. So this time, instead of having the same view as the directors and the substantial shareholders, he may just concern about the interest of the minority shareholders as he is also one of them. Since on of the roles of the independent non-executive director is to ensure that the interests of all shareholders, and not only the interests of a particular group, are indeed taken into account by the board of directors, if he just concerns about the interest of the minority shareholders, it may not be good to all shareholders and the company. In fact, the independent non-executive director should try to balance the interest between the majority and minority shareholders but not only to protect the interest of one particular group.
- Limited availability beyond regular board meetings
In most of the companies, the non-executive directors are on the part time basis. According to the Listing Rules, their remuneration cannot be fixed high enough that allow them to rely in their livelihood;. As the benefits given to the non-executive directors are low, but they have to bear the same liability as the executive director, they may not have incentive to work hard and do not devote to spend their time to attend all the meetings. Hence, the non-executive directors just attend the meetings that they are interested in or attend the full board meeting. And in overall, the non executive directors only attend 3-4 meeting each year.
With the low attendance of regular board meetings, the non-executive directors cannot check the acts of the directors. And also, they cannot ensure the issues are subjected to dispassionate consideration by the board without attend the board meetings. Therefore, even the listed companies are required by law to have at least 2 non-executive directors, it cannot improve a company's corporate governance system with their limited availability. The non-executive directors cannot check what the executive directors had done and it provides opportunity for the directors to override all the decisions in the board meeting.
- Limited knowledge about the company's internal affairs
As mentioned about, the non-executive directors seldom participate in the board meetings. Also they cannot personally involve in the operation of the company. Therefore, they do not understand the operation and the policies of the company. Hence, even the non-executive directors participated in one or two of the board meetings, they could not give any opinion regarding to the unusual or inappropriate parts.
- Few numbers of non-executive directors
Another problem is related to the number of non-executive directors. In case the company has two independent non-executive directors, which satisfied the minimum requirement that the company should have, but those non-executive directors may not have great influence on the board, as there are only two person present in the meeting, the executive directors may still do thing on their own without hearing non-executive directors' opinion. Thus, non-executive directors have little power to affect the board decision, and thus they cannot improve the company's corporate governance system.
Due to the reasons mentioned about, in real case, it is not necessary true that the independent non-executive director must always improve a company's corporate governance system. It may be only a myth. Whether the independent non-executive director can improve a company's corporate governance system depends on his independence, qualities, integrity, experience and many other conditions.
Loizos Heracleous (2001) point out that recent research on the importance of selected 'best practices' in corporate governance, which has generally failed to find convincing connections between these practices and organizational performance. There are four possibilities reason for against, firstly, the best practices are indeed irrelevant to performance, secondly, the operationalisation of theoretical concepts has low face validity, thirdly, that studies are too narrow, aiming to relate board attributes directly to organizational performance and ignoring other systemic factor and lastly, the possibility that different types of organizations require different practices in corporate governance. The correlation between a firm's corporate governance attributes and its value is weak (Black, 2001)
Niamh Brennan (2006) according to the research before would like attempts to find a relationship between boards of director and firm performance. Academic community is reluctant to conclude that there is no relationship between firm performance and boards of directors. Prior research attempts to relate firm performance and corporate governance, with little convincing evidence found to date (Larcker et al., 2004), although more recent work considerably expands the governance factor examined, it has only been able to find relationship with a minority of those factors (Bebchuk et al., 2004: Brown and Caylor, 2004)
Support to corporate governance
On the other hand, many supporters point out that the ultimate goal of good governance is to ensure the effectiveness, productivity, functioning, accountability, credibility and transparency of the organization. Good corporate governance is fundamental to attracting investment, stimulating economic growth and reducing the cost of capital. Since the Hong Kong Main Board and GEM-listed issuers consider the implications of complying with the Hong Kong Code on Corporate Governance Practices, they will also be considering the information to be included in their Corporate Governance Report (CGR) for accounting periods commencing on or after 1 January 2005.
According to the Hong Kong Code on Corporate Governance Practices issue by KPMG, the company has a policy of seeking to comply with established best practice in the field of corporate governance. The board has adopted core values and group standards, which set out the behaviors, expected of staff in their dealings with shareholders, customers, colleagues, suppliers and other stakeholders of the Group. One of the core values communicated within the Group is a belief that the highest standard of integrity is essential in business.
Moreover, John Carver point out that the Corporate governance exists for one reason alone, it is to ensure that shareholders' values, as informed by knowledgeable agency, are transformed into company performance. To the extent a board fails in this, no matter how many other useful things it accomplishes, it has failed. Based on the about studies, I would like to investigate does corporate governance is important and essential to the organization, is it interesting for the investor make their investment decision.
Investors can be dividend into two categories public investors and institutional investors. Public investors refer to those individuals in the financial market, and institutional investor is a large-scaled organization with plenty of capital available who is controlling a large part of a listed company's stock. Institutional investors are least protected by protective regulations since they are assumed have sufficient knowledgeable to guard themselves (McClure, 2003). Corporate governance is as a main protection to the investor, for example, investors are investing in a list company there is no investment agreement, and there is no equity agreement. As investors, the equity agreement with the company is corporate governance. If people make a loan, they would have a loan agreement. In this agreement both parties will list the terms and conditions which they are dealing, it is legal binding and guarantee document. Nevertheless as equity investors, they only compact with corporate governance, the return will be more or less following the same protocols. For the about reason, investor would like to know more information relate to the company. Not only study financial information, but also get non - financial information for making decision.
Financial institutions are often holding a large amount of stock in the market and meanwhile influencing the public's expectation, so that it directly influences a company's stock price by either purchasing or selling company's stock (Gompers and Metrick, 2001). For this reason, company will try to fulfill investors' wealth and maximize their profit. For institutions in 2005, Morgan Stanley reported that the revenues from investment advisory services had a 27.8% increase compared with that in the pervious year. This is usually achieved through tow approaches, news release and the institutions market behaviors. On the other hand, the decision of the public is shifted by discovering the institutions' market behaviors since a purchase is equivalent to optimistic expectations while a sale is a signal of institutions' lack of confidence in the prospect of the company. In short, financial institutions influence the stock exchange market by acting in the way of a crucial shareholder and vital financial advisors.
A concentrated shareholder ownership can lead to more active monitoring, thereby leading to better corporate governance. Many investors are hope to invest into organization can maximizing their profit, they continuously place high expectations on the firms' output to fulfill their tentative rate of return, subsequently, this generates pressure on the board of directors leading to tension between two. Moreover, the financial institutions are not only concerned about the rate of return on their investment but also the portfolio risk, regardless of systematic or unsystematic.
In general, the analyst community and investors are expecting more from non-financial disclosure now, some organization disclose their corporate strategy, main metrics, business line accounts, the efforts on environmental cleanup, the carbon footprint, any social issues, labor conditions, and political contributions. The reasons for disclosure are provide sufficient information to investors for making them invest company more comfortable. Peter Montagnon point out that investors are not interested in running companies, but they need to know the boards are equipped to make sound decision. Well governed companies could prove a wise strategy for investors.
Good corporate governance practices are active and committed Board members who approach their important task in full knowledge of what it entails and with due responsibility, secondly, focused on the key roles of strategic oversight, financial and performance monitoring, and accountability to stakeholders, next, well defined policies and practices that provide ethical and responsible direction to the management and staff of the organization and self analysis, critique and reflection that enable the Board to continuously improve its corporate governance role.
Another body of the literature considers the Ethical investment has now been increasing perceived as a mainstream element of good corporate governance, both form individual companies and of institutional investors (Mallin, 2002). Ethics and integrity is important in corporate governance. Many investors are guided by a sense of moral duty. Therefore, investors who are not only interested in the maximization of shareholders' wealth but also maximization of stakeholders' wealth will seek out those companies for an above average growth rather than a temporary outsized performance. Ethical investment has now been increasingly perceived as a mainstream element of good corporate governance, both from individual companies and of institutional investors (Mallin, 2002), Cassidy's (2003) believe that good corporate governance can have good effects of longer-term sustainability for shorter term volatility and risk is needed for today's business.
Suwina Cheng and Micheal Firth point out that the higher ownership and board composition are directly affect to the good corporate governance. The journal investigate Hong Kong company, it is because the ownership structure of Hong Kong firm differs substantially from firms in the industrialized countries, many listed firms are majority owned by an individual and his or her family, a phenomenon which has implications for corporate governance, firm performance and the setting of senior executives' pay (La Porta et al., 1999); The management structure of such firms is often autocratic, leading to concerns that some controlling shareholders might treat their company as a personal fiefdom for doing whatever they please (Brewer, 1997). Under these circumstances, the role of independent non-executive directors and large institutional shareholders becomes crucial to curtailing the possible self serving behaviour of top managers (HKSA, 2001)
Corporate governance is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environment and local community needs. McGahan and Porter, 1997 said that corporate governance can be highly influential to organizational performance in so far as it is related to the strategic management of the corporation. This is a proposition theoretically grounded in the findings of several studies that a company's strategy is highly influential on organizational performance. In very tough industries characterized by intense competition and slim profit margins, there are organizations that consistently deliver superior returns to their shareholders, chiefly as a result of effective strategy development and execution. There are some example, Dell and Singapore airlines.
On 9 January 2004, the Royal Dutch/Shell became involved in Britain's biggest business scandal, the company was overstated its proven reserves of oil and gas. According to the Bernard Taylor (2006), the share price of the company was reducing around 40 percent. The management immediately implemented practice, it includes established new corporate governance regime and introduced more active investors and those method was for improving the transparency and increase the investor confidence. We can see that corporate governance is more and more important.
Corporate governance in Japan
However, organization how can improve their performance from corporate governance? Japan criticized on poor corporate governance, a group of the world's most influential institutional investors has express frustration over Japan's slow pace of reform and poor corporate governance, which put its capital markets at risk, and the Financial Times said that, 'It is strongest effort in recent history by institutional investors to push the Japanese companies in which they hold shares to improve corporate governance.' The group said Japan's corporate governance falls short of international standards and as a consequence has caused the recent sell-off of Japanese stocks. Among the leading investors endorsing the policy paper were Aberdeen Asset Management, the California Public Employees' Retirement System and Hermes Fund Management, According to the FT. Jamie Allen, the association's secretary-general said that 'we do feel shareholders aren't being treated fairly and we are trying to seek a level playing field.
Asian Corporate Governance Association said that "The system of corporate governance in most listed companies (in Japan) is not meeting the needs of the stakeholders or the nation at large, he also represents global investors with combined assets of about US $5 trillion. It noted that many listed companies were still run 'as if management, not shareholders, were the owner.
Base on the about argument, I would like to find how does corporate governance affect the investor's decision making.
I would like to use prior research as a starting point for investigating does Corporate Governance provide a positive affect to the company? According to the literature review, I found that many authors sum up that corporate governance only with a little convincing to the company and the relationships between the organization performances are also minority. Larcker et al., 2004 point out that firm performance convincing evidence found to date. Brown and Caylor, 2004 also found that although more recent work considers expanding the governance factors examined, it has only been able to find relationship with a minority of those factors. Chidambaran et al., 2006; Core et al., 2006, Lehn et al., 2005 disclose that there are mixed findings on the direction of causality between firm performance and corporate governance.
Loizons Heracleous also show that 'best practices' in corporate governance that has generally failed to find convincing connections between these practices and organizational performance. He conclude that there are four possibilities for this tenuous relationship, that are not mutually exclusive, firstly, the possibility that 'best practices' are indeed irrelevant to performance, secondly, the operationalisation of theoretical concepts has low face validity, thirdly, since the studies are too narrow, aiming to related board attributes directly to organizational performance and ignoring other systemic factors, and lastly the possibility that different types of organizations require different practices in corporate governance. Combine the above possibilities, the first implies that corporate governance 'best practices' need to be radically rethought and that a healthy dose of skepticism is in order regarding such practices, the second implies the need for higher face validity of operationalisation through behavioral observation and in-depth interviewing of directors. The third implies the need for research models and paradigms that can account for systemic and multi-directional influences, and the fourth one implies that a contingency perspective needs to be incorporated in studies of governance.
Base on the above opinion, it seems that Corporate Governance are not provided positive performance directly, I would like to find the reason why organization are still trying to develop corporate governance. Is the corporate governance as a protecting system to investor, capital market development and corporate governance of banks and other financial institutions?
As described before, I would like to investigate 'How does Corporate Governance affect the investor's decision making?' I would like to obtain data from both primary and secondary source. Primary data refers to information that is developed or gathered by the researcher specifically for the research project at hand. Questionnaire is used in this research paper to gather data from respondents, the data will be analyzed and draw the conclusion. Secondary data refers to information that has previously been gathered by someone other than the researcher and/or for some other purpose than the research project at hand. Literature review and published information are from the topic relate to the "how does corporate governance affect the investors' decision making.
Procedures to conduct questionnaire
Questionnaire is a survey that obtained the response through a set of fixed questions from respondents.
Questionnaire in this research was distributed and to be returned through e-mail. The reason why I chosen because it is time convenience, as the respondent can make the response through e-mail at any time or place where internet is available. It is also cost saving, being no paper is used. The questions are standardized; they are relatively free from several types of errors. Participants can respond at their own convenience, because no interviewer bias is introduced, and because responses can be kept completely confidential. Surveys are flexible in the sense that a wide range of information can be collected. They can be used to study attitudes, values, beliefs, and past behaviors. Convenience sampling approach is used. With this method, it only samples those who are available and willing to participate in the survey. The sample was extracted from researcher's own contact list. Simple random sampling approach is also used as my original targets can further invited others to complete my research which there is no further control on the those samples.
The researcher was through email to answer the questionnaire. On 15 September 2008, the questionnaire was distributed to 90 people of which 10 people who aged is below 20, 20 people who aged from 21 to 30, 20 people who aged from 31 to 40, 20 people who aged from 31 to 50 and 20 people who aged are about 51, and the target was also encouraged to forward the questionnaire to their peers/ friends and is to be returned by e-mail.
There are in total 10 questions, with 8 questions in close-ended questions (which specify all of the possible answers so the respondents are easy to interpret and tabulate) and 2 questions in open-ended question (which allow respondents to express in their own words).
In view of time limit, if the reply is later than 30 October 2008, the result would not be count in my research.
Limitation on questionnaire
Since the questionnaire is convenience to obtain data, however there are some limitation. The results may be distorted if the questions were misunderstood. Also, questionnaire depends on respondents' motivation, honesty, memory, and ability to respond. Respondents may not be aware of their reasons for any given action. They may not be motivated to give accurate answers; in fact, they may be motivated to give answers that present themselves in a favorable light.
Structured questionnaire, particularly those with closed ended questions, may have low validity when researching affective variables. While answer-choices could lead to vague data sets because at times they are relative only to a personal abstract notion concerning "strength of choice". For instance the choice "moderately agree" may mean different thing to different subjects, and to anyone interpreting the data for correlation.
Last, but not least, if there is only small sample, it is possible of losing data validity due to the lack of representation.
Specific research question
I would like to explain my questionnaires, there are in total ten questions, question number one to eight was close-ended questions (which specify all of the possible answers so the respondents are easy to interpret and tabulate) and question number nine to ten was open-ended question (which allow respondents to express in their own words). I would like to conduct questionnaire and the purpose is to find out that how corporate governance affects an investors' decision making. The questionnaire sample was attached in appendix I.
The objection of the first question is to divide the interviewee into investors or potential investors, actually my target interviewee are investor, I would like to focus on them and finding out that will they make a different decision for their real investment.
Question number two and three were only for investor, question no two was to find out that what factor they will more concern and affect to their investment. Since they have stock investment, question number two will be more reliable. On the other hand, question number three was the average length of investor investments. This question is important that for me to find that will different length of investments will have different factor concern.
Question number four to eight was close-ended questions. Those questions were for investing to my purpose 'How Corporate Governance affects the investors' decision making'. The objective of the question number four would like to know the method how investors to obtain their information for investing. It is important that where company provide a way to investor for increasing the investment. Question number five was similar to question number two, I would like to ask this two question to compare the investor will make their decision different in their real life. For potential investors, this question can draw that which factors were much affect to their decision.
Question number six would like to divide the factors which affect the investor make decision much more practicality, and would like find out except financial information, what factor will they concern. Question number seven is relating to the corporate governance. This include different catalogues relate to corporate governance to find out that the factors which investors much concern. Question eight was a very direct question, 'will they invest in a company due to improvements in its corporate governance?' the reason for asking the question was finding the investor believe in the corporate governance. Will corporate governance increase the confident of the investors?
Questions number nine and ten were close-ended question, those questions were the most important questions for conclude my dissertation result. I would like to know what the investors views on the corporate governance. Not only view on investors, but also view on organization performance. Question number nine was investors agree good corporate governance leads to better firm performance. Question number ten was they agree that corporate governance is a system that can protect investor wealth.
At last, the personal information was including. I would like to know that will education level and age will different on their decision making and corporate governance views.
Result of primary information Survey research
I would like to analysis my questionnaire result to find out how does corporate governance affects to the investors' decision making. My target interviewees are investor and potential investor. The results are as following.
Firstly, the background of this result are all the respondents had attained secondary level education or above, 56% of the interviewee were attained master level or about.
According to the about result analyze. I would like to draw a conclusion. Firstly, all of the interviewee agree that companies that are making money, companies that have growth potential and good management. Since the interviewees decide to stock invest, earnings and growth potential aren't enough anymore, they want to see high quality corporate governance whether the company has good internal controls or disclosure records. Most interviewee believed that good corporate governance would improve organization performance. Since the investors allow getting more organization information, it would increase the transparency and they are willing to increase their investing confidence. They are concern on the public information about the independent executive directors' activities to let them know whether independent directors have fulfilled the duties. It is because independent executive directors do in protecting the minority shareholders. Therefore, companies supply more information on connected transactions, including the approval process undertaken in respect of the transactions and their effect on the company is important for investor to make their decision.
Moreover, results showing that investors will increase their confidence then the company provide update and reliability information, the internationally recognized accounting standard.
Secondary information- Survey research
Apart from primary information, there are many secondary research result for supporting that investor are much concern on corporate and willing invest in good internal control company. For example, in the private sector, according to the research by McKinsey & Company was undertaken between April and May 2002, in cooperation with the Global Corporate Governance Forum. This survey was based on the responses from over 200 institutional investors, collectively responsible for some USD 2 trillion of assets under management. The survey result shown that, over 80% of investors are willing to pay a premium for shares in well governance companies (three surveys are undertaken in 1999 and 2000, and published in the McKinsey Quarterly, 2000, Special Edition.) In another article, investors in emerging markets claim to be willing to pay up to 30% more for shares in well governed companies (McKinsey Quarterly, 2002, number 2). Well governed companies will have good internal controls that mitigate risk and enhance the prospects for corporate success, thus making the investment more and more attractive.
Not only the McKinsey & Company survey, but also the research report developed by Julia Rudrum is also agreed that the good corporate governance is effective to the organizations. The research report was conducted in May 2007. The aim of the project was to identify current understanding of governance in the National Health Service(NHS), using a survey to board member (as the key stakeholders), at a time when the focus was not only on the continuous improvement of services, but also on sound financial management to bring the overall NHS financial position back into balance.
The National Health Service (NHS) is the third largest employer in the world, and the budget was spending on health around ?104 bn for 2007/08, due to the size of the company and the added complexity of hundreds separate legal entities commissioning and providing healthcare within this overarching service, good corporate governance become essential. Within this two year, the project also seeks to identify trends and then to provide feedback on the effectiveness of the latest initiatives. The outputs from the survey will be published annually and will provide some useful reference for the company improvement, The following are the summary of the key findings and recommendations that provide useful themes for consideration in other sectors.
Firstly, company agreed corporate governance was importance, those responsible for governance in NHS bodies, i.e. board member, take their responsibilities seriously and recognize the need for good governance. It was also encouraging that they had a significant number of responses from board members, showing their interest in this subject.
Secondly it was understanding, from the broad range of possible terms and phrases associated with governance that were provided for selection in the survey, there was a strong congruence of understanding about what governance is. This understanding was focused on 'control' rather than 'director', and there is a strong association with the Cadbury definition of corporate governance, with accountability being the term most associated with respondents' understanding of corporate governance. There was also give a clear understanding that high ethical standards was key part of corporate governance and, therefore, that behavioural aspects are very important, as well as systems and processes. These people elements do not always get the same level of focus and are essential components of good governance.
Thirdly, the role of the non-executive director (NEDs) are made up of executive and they jointly direct and control the organization through whole board working, as well as having specific roles and responsibilities. There is a positive view of the role of NEDs in establishing effective corporate governance practice.
Julia Rudrum (project author) report commented in Aug 08 in ACCA magazine said that "From an encouragingly large and broad range of board level respondents across the NHS, I am pleased to note that the findings are largely positive. NEDs establish effective corporate governance practice was clearly valued by all board members, For effective scrutiny, organization ability to meet increased demands and in the interest of early identification of risk, ACCA believe that the important of effective corporate governance in the health as well as the other sectors e.g. financial sectors. The report will continue to seek board members' views and follow-up for the next two years in order to monitor progress and to assess the impact of change in effectiveness of the corporate governance.
Secondary information-Roundtable speech
Hong Kong Institute Chief Executive Winnie Cheung in OEBC corporate governance roundtable speech in 13 May 2008 point out that companies risk being pushed into a box-ticking culture because of a regulatory overkill. She also agreed that OECD has been advocating good corporate governance around the world, particularly in Asia. The system can help re-affirm investors' confidence in the region and boost access to global capital market. Delegates in different country in this speech are exchanged their views on the types of actives considered related party transactions, sanctions for non-compliance and challenges in meeting full disclosure standards in the meeting. Marcello Bianchi (chairman of the OEBC Steering Group on Corporate Governance) said that emerging economies are playing a growing role in global capital markets, but Asia still faces important challenges in improving governance. "Abusive related party transaction are at the crux of these issues and the remaining one of the most serious breaches of corporate governance in Asia and around the world. Bianchi said compliance remain a concern because of family and state control over a high number of listed companies. For controlling shareholder often use instruments such as pyramid structures of dual class of ensure strong control with low ownership.
There are important issues on related party transactions in Asia jurisdictions, it is definitions, disclosure, approvals and shareholder redress. They expressed the view that while modifications to the rules may be needed to deal with complexities stemming from government control and ownership in jurisdictions where state-own enterprises are prevalent, the basic principles of disclosure and investor protection should still apply to all. They concluded that the OECD still had a lot to do in this area.
Winnie Cheung said regulatory reforms around the world as an aftermath of big corporate failures in the US has resulted in a "regulatory overkill and companies today face greater compliance burden. The increasing complexity of global standards is causing a concern, and efforts must be made globally to ensure that the standard remain relevant and principle-rather than rule-based, these are essential to keep financial reporting away from a box ticking culture and exercise. Over regulation stifles businesses and professional development and a balance must be put in place to stop such culture taking deeper roots. She also suggest that the regulators around the world should look at converging enforcement just as the profession is working to converge all national accounting standards into a single set of high quality, global accounting standard.
Richard Williams (Head of listing at the Hong Kong Exchanges and Clearing Ltd) said that Hong Kong still have some way to go in terms of establishing regulatory structures that would support governance. For example, the territory still lacks statutory backing for the listing rules. He thinks there is still some room for us to move on the upside, and the upside would involve further examination of internal controls and their inadequacies of those controls. The OECD has been advocating good corporate governance around the world, particularly in Asia, to help re-affirm investors' confidence in the region and boost access to global capital markets.
Enhancing governance, the stock exchange, Bursa Malaysia, recently announced key amendments to its listing requirements in order to raise governance and reassure investors in the wake of unsetting corporate scandals and the exposure of accounting irregularities. Among the recent controversies that were widely reported in the press were the alleged misappropriationf of RM36.3m(?5375m) in funds by a former managing director of Multi-Code Electronics Industries (M) Bhd, claims of fraud and fictitious transaction at Transmile Bhd and Megan Media Holdings Berhad, and alleged missing or destroyed accounting records at OCI Bhd by its previous management. Bursa Malaysia's amendments affect companies listed on the Main Board, Second Board and Malaysian Exchange of Securities Dealing and Automated Quotation (MESDAQ) market. Notably, the independence of the audit committee has been enhanced and the internal audit function mandated in order to improve internal checks and balances for Plcs. Executive directors are now prohibited from sitting on the audit committee. The internal audit function is also made compulsory to provide more effective support to the audit committee, and it is required to report directly to the audit committee.
Other amendments include setting out the rights of the audit committee to convene meetings with either the external auditors or the internal auditors, or both, and excluding the attendance of other directors and employees at these meeting.
Good governance is something that effective organizations in both public and private sectors strive for. Corporate governance was defined by the Cadbury Committee as "the system by which on organization is directed and controlled, at its most senior levels, in order to achieve its objectives and meet the necessary standards of accountability and probity. (Cadbury Report, 1992) it is clear from this definition that corporate governance is not solely about introducing systems of control, it is fundamentally linked to directing the organization in order to achieve objectives. This is critical to the success of the organization and is a central part of the role of the board.
The reason why company failures in corporate governance.
Base on the primary and secondary data result, I believe that good corporate governance practices provide a framework that is essential for effective management, a healthy corporate culture, successful business growth and enhancing shareholders' value. More and more investors are concern on the corporate governance develop for changing their decision making. However, different company should find their own corporate governance code. Company should understanding of good governance in relation to the organization's direction and service delivery.
To sum up, corporate governance is not only protecting patients, accountability and internal controls, but also with strong ethical values, it is integrity and transparency. Good corporate governance is fundamental to attracting investment, stimulating economic growth and reducing the cost of capital. It also can ensure the effectiveness, credibility and viability of the organization.
For organization, corporate governance can act as a monitor system so that have a better governed for reducing the cost of capital. Moreover, better governed companies have a lower cost of debt, they can get a better credit rating from a credit rating agency. Also, better governed company is more productive. That is why corporate governance is important for companies even if it is not accessing capital market.
The common failures of senior management are 1) they fail to create a culture that tolerates dissent. 2) They have a total commitment to a specific project, 'they let their commitment to a particular project or products overwhelm all other consideration financial, ethical or social.' 3) They focus exclusively on financial measures of performance, they do not take non financial risks seriously, e.g. reputation risks. 4) a closed circle, they talk to the same circle of people and information sources all the time and avoid people and organization that disagree with or criticize them. 5) delegating ethical and social issues, 'their senior managers consider ethical or social issues as matters for somebody else to resolve a vice president for social responsibility, the United Nations, the host country government.
Different industry and Structures Company should develop their own corporate governance, this is why there are code in different country. I would like to conclude and provide a recommendation to corporate governance in Hong Kong.
Corporate governance in Hong Kong
In Hong Kong, many companies are family structures, the characteristic for this structure are majority owned by an individual and his or her family. Families tend to have control rights in excess of their cash flow in terms of preferential share voting rights. They are also tending to participate in the management of their firm and other large shareholders are usually not there to monitor controlling shareholders. Since the family is directly involved in the company so that the agency costs are lowers. It is also threats to family honest and this may increase the level of ethical behaviour and disclosure. The longevity of the company and the wealth already inherent in such families suggest long term growth is a bigger issue. When the families are fight and have feuds, this is an added element of cultural complexity in the business operation. If the families are separate and this could be costly in terms of buying out shareholding and restructuring.
The stock exchange of Hong Kong Limited (Stock Exchang) published the Code on Corporate Governance practices ('the Code') and Corporate Governance Report in November 2004, these were subsequently incorporated into Appendices 14and 23 of the Main Board Listing Rules and Appendices 15 and 16 of the Growth Enterprise Market (GEM) Listing Rules respectively. The Code, with one exception, becomes effective for accounting periods commencing on or after 1 January 2005. The exception is in respect of Code provision C.2. On internal controls and the proposed disclosure requirements in the Corporate Governance Report relating to listed issuers' internal controls, which take effect for accounting periods commencing on or after 1 July 2005. In Hong Kong Listing Rule (the code on Corporate Governance Practices), All listed companies must in terms their corporate governance practices and disclosures in their Corporate governance report. This report include disclose the Board structure, Board committees, Audit committees, remuneration Committee, Nomination Committee Members of Board (it can dividend into non executive chairman, chief executive officer, independent non executive director and non executive director) and Senior Management team (Chief executive officer and project director). This report helps the user to understand the organization and increase the transparence. Different industry and Structures Company should develop their own corporate governance, this is why there are code in different country.
However there are problem for developing code is reactionary rather than proactive, responding to major failures in governance rather than setting the agenda. It is impact varies depending on the nature of the company and the global viewpoint. However many directors complain that it restricts or even dilutes individual decision-making power. It also adherence to governance requirements harms competitiveness and does not add value. Although corporate governance existing, it cannot stop fraud. There is doubling of audit fee costs to organizations. Onerous documentation and internal control costs, reduced flexibility and responsiveness of companies, reduced risk taking and competitiveness for organizations, limited impact on the ability to stop corporate abuse and legislation defines a legal minimum standard and little more.
Moreover, having the independent non-executive director must improve a company's corporate governance system.
Recommendation in Hong Kong corporate governance
Independent directors are also important to the corporate governance, Hong Kong has been shaken of late by corporate governance, Sun Hung Kai Properties between chairman Walter Kwok Ping-sheung and his youth brother. Kwok was ousted by the board, which named his 79-year old mother as the new chairman. The company vowed to further strengthen its corporate governance in a statement, but many observers wonder whether giving power to another family member, albeit temporarily, can contribute to good governance.
Most investors have a wish list of essential traits in corporate boards, firstly, independence form management. It seems very straightforward, but in current year, at least in the US, the board had been considered an extension of the CEO's power. Today, too close a relationship with the CEO is a liability for those wanting a board seat. Moreover, a deep understanding of the work, ability to interpret and analyze financial statements, a clear grasp of accounting principles and the capacity to manage risk ranging from politics to currency volatility.
For good corporate governance, the board should remember that they are as representative of shareholders and that the CEO works for the board. Secondly, the board must add shareholders, but not add management value. Thirdly, thinking the ability for shareholders may rise at annual general meeting. Also, do not get behind unfamiliar issues. This will lead to embarrassing situation. Moreover, they should issues any documents that shareholder may rise at annual meetings.
I believe that effective corporate governance can ensure the effectiveness, credibility and viability of the organization. Also provide an appropriate processes and structures of direction and management. On the other hand, any corporate collapses, fraud cases, shareholder suits questionable will reduce and re-built investor confidence. This can build the company image into without box-tacking exercise, increase transparency and to e a caring community.
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