The role of financial globalization in the changing governance practices.
da Silveira and Dias Jr. contend that ownership structure is crucial for the determination of the relevant agency costs taking place in a given firm. The main governance problem among Brazilian companies occurs between controlling and minority shareholders. Othman and Ameer write that Corporate Environmental Reporting (CER) or disclosure refers to a corporation's release of environmental performance information to the general public, whereas Corporate Social Responsibility Reporting (CSRR) refers to the release of a corporation's societal performance to the general public. Only reported numbers may not be enough to judge a firm's overall performance. Callaghan and Nehmer aim to determine whether voluntary XBRL-filing companies are distinguishable from similar, non-XBRL-filing companies, using four internal characteristics: liquidity, profitability, leverage and size, and three external factors: risk, cost of equity and governance score (GS). Dong and Xue reveal the difference in governance practice among Chinese companies engaged in domestic or overseas jurisdictions, identifying the role of financial globalization in the changing governance practices of Chinese companies.
2. Bad Governance Practices and Environmental Reporting
da Silveira and Dias Jr. maintain that the privatization model adopted in Brazil created large companies with shared control. Most of the conflicts publicly reported in Brazilian listed companies deal with decisions related to control transfers, going private processes and acquisition of other companies with significant equity stakes in the controlling shareholders. There is a substantial negative market reaction to announcements about clashes between controlling and minority shareholders. The market value drop is more related to corporate governance problems taking place than to operational issues within the sample companies. da Silveira and Dias Jr. try to measure the impact of the announcement of bad corporate governance news, and point out the relevance of the media in promoting better corporate governance practices. da Silveira and Dias Jr.'s research line generates practical results for the development of capital markets in emerging economies characterized by concentrated ownership structures, like Brazil. The economically significant results reinforce the importance of firms adopting good governance practices. (1)
Othman and Ameer assert that firms tend to disclose social and environmental issues in narrative (non-monetary) terms. Sustainability reporting focuses mainly on the sustainability of people and the environment. Most large corporations in developing countries do not have mature policies on environmental responsibility. The idea of corporate responsibility reporting has been embraced by a relatively small number of corporations. In developed countries, company size has a significant influence on corporate social and environmental reporting. A country's culture influences type, level and depth of corporate social and environmental disclosure. Othman and Ameer point out that there is a significant influence of culture on total dis closure levels and social themes. Companies listed on a number of stock exchanges outside the domestic market face pressure from the "other" stakeholders. There are industry-specific factors (such as regulations) and firm-specific factors (such size, profit and other economic indicators) that influence the level of CSRR/CER disclosure. Othman and Ameer propose a reporting format consisting of three indispensable and irreplaceable parts of our environment Earth, Water and Air, and a quarterly Corporate Accountability Result Card (CARC) as a medium of information to the stakeholders (national regulators on sustainability should manage the CARC, and national regulators should recommend the XBRL platform to firms for reporting purposes because of its salient novel features). Othman and Ameer claim that with frequent reporting on the three key resources, Earth, Water and Air, society's expectations could be met with continuous assurances. A continuous dialogue between the supply chains across organizations is key to the achievement of resource sustainability. Corporations should provide statistics such as their water consumption rate and water recycling--in m3 (a corporation's water usage should be monitored by water suppliers using water footprints). Corporations should report statistics on their hazardous emissions, and number and type of hazardous sites (the employees' health and safety reporting format should be made more informative). Othman and Ameer propose a radical solution for the reporting of corporate donations. Companies should extend their philanthropy to isolated and disadvantaged people. An understanding of corporate responsibility disclosure allows diverse stakeholders to become more engaged in the issues affecting them. A national regulator could provide resources, expertise and infrastructure suitable to capture industry-wide accountability on EWA. (2)
3. The Benefits of XBRL Reporting
Callaghan and Nehmer explore three external and four internal financial characteristics of firms participating in the VFP matched with similar, non-participating firms. A firm's profitability is often measured by its ROA--an indication of how well management is utilizing the company's assets to generate income. Callaghan and Nehmer divide the book value of total debt by the market value of equity in order to determine financial leverage, and expect larger companies to be under more scrutiny by the public at large and regulators. Larger firms are more likely to voluntarily adopt XBRL. A firm's systematic risk is often measured by its beta (the likelihood that the company's stock price will follow the overall market). XBRL adoption is negatively related to the GS measure (companies with lower governance ratings tend to adopt XBRL voluntarily). Early XBRL adopters tend to be larger firms, and to be less financially leverage. Callaghan and Nehmer maintain that visible companies with higher intrinsic risk and lower GS are adopting XBRL early in a low-cost attempt to improve the perception of their corporate governance quality. The characteristics of early adopters do not provide evidence of the immediate benefits of XBRL adoption. The mandating of XBRL for financial reporting may provide an opportunity to examine over time the benefits of XBRL reporting. Early XBRL adopters are less financially leveraged, larger and have lower corporate governance ratings than pair-matched control companies. XBRL adopters are intrinsically riskier than the control group. The number of companies adopting XBRL increases and investors become more comfortable using it. XBRL will play a significant role in both internal and financial reporting (it will have a significant impact on corporations, investors, analysts, regulators and various other corporate stakeholders). (3)
4. The Nature of China's Corporate Governance Practice
Dong and Xue describe the gap between domestic and overseas governance environments and aim to reveal the nature of China's corporate governance practice from both the local and global perspective, focusing on the effect of globalization on two main governance dimensions: (1) internal governance mechanisms and (2) governance transparency. A sound internal governance environment is expected to result in better governance disclosure. Overseas companies generally disclose more information relating to governance practice than do the local companies. China's corporate governance has increasingly been assimilating the characteristics of the AngloSaxon model, intending to incorporate more of the advantages of common-law-based models. Dong and Xue select six governance variables to describe the internal governance environment: (1) number of special committees, (2) proportion of independent directors, (3) board size (4) separation of chairman versus CEO (5) salary ratio of board members and (6) local government influence. Chinese com panies vary in governance disclosure, depending on the type of information. Salary ratio and the development of a provincial governance environment are the key differences in internal governance between Chinese local and overseas companies. Chinese companies issuing shares in overseas capital markets (or incorporated under foreign jurisdictions) differ fundamentally from local companies in their disclosure behavior. Chinese domestic and overseas companies serve different investors' demands and are regulated under different legislation systems.
Dong and Xue contend that globalization is one of the key concerns of Chinese policymakers who aim to push ahead the revolution of corporate governance in China. China's governance rules are leading Chinese domestic companies to establish governance structure with the characteristics of the two-tier governance model. Chinese companies have succeeded in transforming the governance system from its previous social-economic-based form to a market-orientated-based one. Chinese companies are not resistant to the ongoing reform of corporate governance. Dong and Xue point out that imposing stricter governance rules than the current ones is likely feasible, provided that governance-related institutions are developed consistently in China. Imposing a common-law-based governance system can dramatically change Chinese firms' former code-law-based disclosure practices. Chinese companies design their governance practices according to the applicable legislation systems. The improved governance disclosure in overseas companies is likely to be driven by the legal bonding of the external environment (more globalized companies (4) are opted-into stronger governance regimes). (5)
da Silveira and Dias Jr. assess the relevance attributed by investors to the announcement of disputes taking place between controllers and minority shareholders, and compute ARs relative to a matched control group of firms selected based on industry, market capitalization and operational profitability. Othman and Ameer identify the factors that have led to diversity and uniqueness in corporate disclosures. The notion of personal philanthropy has evolved into one of corporate responsibility for overall social betterment. Callaghan and Nehmer hold that a potential benefit of XBRL is the reduced operating costs attributed to increased speed of data processing and reduced occurrences of data redundancy and re-entry. Neither the company reporting in XBRL nor the potential users of it may consider XBRL adoption to be a significant signal of any underlying characteristics. Dong and Xue observe that governance problems in China are closely related to Chinese special economic, legal and political contexts. The type of applicable governance regimes for Chinese companies depends on the jurisdiction of the country where they are listed and incorporated.
(1.) da Silveira, A. and Dias Jr, A.L. (2010), "What Is the Impact of Bad Governance Practices in a Concentrated Ownership Environment?", International Journal of Disclosure and Governance 7(1): 70-91.
(2.) Othman, R. and Ameer, R. (2009), "Corporate Social and Environmental Reporting: Where Are We Heading? A Survey of the Literature," International Journal of Disclosure and Governance 6(4): 298-320.
(3.) Callaghan, J. and Nehmer, R. (2009), "Financial and Governance Characteristics of Voluntary XBRL Adopters in the United States," International Journal of Disclosure and Governance 6(4): 321-335.
(4.) Zaharia, I. et al. (2009), "The Economic Forces that Shape the Organization of Modern Agriculture," Economics, Management, and Financial Markets 4(4): 114-118.
(5.) Dong, M. and Xue, Q. (2009), "Local versus Global: Corporate Governance Practices in Chinese Domestic and Overseas Companies," International Journal of Disclosure and Governance 6(4): 336-354.
Spiru Haret University
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|Publication:||Economics, Management, and Financial Markets|
|Date:||Jun 1, 2010|
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