The Literature of Corporate Governance Principles 2

Introduction:
???Whatever goes up must come down.??? It is a theory that has been used for many centuries. Observing many businesses, no matter how much they flourished many business eventually face a downfall, leading to failure in businesses. Could it be that businessmen are too confident and end up being careless Or is it a natural force of gravity Despite the theory, the real question is, is there a way to manipulate or avoid this theory Corporate governance is an old phenomenon that was the key to maintaining a businesses??™ stability and attract foreign investments by following certain rules. The implementation to this governance was not deemed important to the Cypriot businessmen. In the 1990s, the economy in Cyprus was flourishing, and as the theory predicted, it rose and will come back down. In September 2002, the Cyprus Stock Exchange collapsed and caused many to lose their investments. Although this event has started the change in the Cypriots??™ view of the Corporate Governance Principles, many companies don??™t take the principles seriously, and the full benefits of these principles are not received.
Problem Statement:
Corporate Governance is a set of rules a company should follow and is the key to the reliability of corporations, financial institutions and markets, maintains the stability of the economies. (OECD, 2010) It was after the collapse of the Cyprus Stock Exchange that many Cypriots began to follow the Corporate Governance Principles. However, according to Maria Krambia-Kapardis and Jim Psaros researches, it is revealed that many companies have either fully, partially, or didn??™t comply with the principles. The question that is then revealed: What are the reasons why most companies chose to or not follow most principles What are the consequences of those who obey or disobey the principles And what would it take for all companies of the Cypriots to show their full compliance to the Corporate Governance Principles
Literature Theoretical Background:
Corporate Governance Principles
In the world today, most companies of different countries are governing their business by using corporate governance principles as a guideline of how to manage their company. The purposes of using these principles are not only beneficial to the stability of a business but to actually attract foreign investors. By doing this, companies will flourish and rise to its highest peak. Maria Krambia-Kapardis and Jim Psaros (2006) conducted a research on the implantation of corporate governance principles in a growing economy, using the events that occurred in Cyprus as an example. According to their research, the occurrence of these principles isn??™t new and it has been spread and preached worldwide since the mid 1990s. When the word ???worldwide??™ comes into view, it is apparent what the difficulty in implementation of the principles or code would be with respect to the differences in cultural, legal, regulatory and economic infrastructures for each country.
Krambia-Kapardis et al. (2006) found from Prowse (1994) notes that are there are two main corporate governance systems, the Anglo-Saxon model and the institutionally-based model. The Cyprus Code is mostly based on the Anglo-Saxon model, where its code originated from the history and economy of the UK. It is natural that the Cypriots to follow this code since it must adapt to the same principles in order to attract foreign investors. In order to determine the effectiveness of the Anglo-Saxon model many facts were reviewed. Most Cypriot companies have high degree in ownership of bank shareholdings, with timely and reliable information flow in the market. They also have securities market that regulate and ensure that there are no insider trading, however, the major weak point in these securities market is that they are still in their early stages and barely provides opportunities for diversification. In addition, Cyprus??™s legal infrastructure are not fully developed and its??™ securities against insider trading is not very convincing. (Krambia-Kapardis & Jim Psaros, 2006, pp. 129)
Corporate Governance Principles: The Code
Following the codes is a major necessity in order for a business to prosper and present a high sense of reliability and confidence of the company. Krambia-Kapardis et al. (2006) stated the most common reviewed codes included four sections: the Principles of the Code, the director??™s remuneration, the accountability of the audit, and the relations with shareholding. (Krambia-Kapardis & Jim Psaros, 2006, pp. 130)
Following the code is like having a governor governing his country while obeying a set of laws. Every company should set an effective board of directors that will help govern a company. To determine an effective board involves meeting at least 6 times a year, provide unbiased judgment, be up to date with the new flow of information in order to make correct decisions, and ensure smooth transfer of power in the higher echelons of the company. Honesty is a must in order to win the trust with each committee. The board must reveal its remuneration policy, reveal the directors??™ remuneration, state the continuation of the consistency, must review annually in order to alert all shareholders, thus gaining their trust and when it comes to any loans, must reveal details.
Another step that follows involves the audit committee. Who the board should appoint as a member of the audit committee depends on the knowledge and experience they have in accounting or finance. Members of this committee should meet up at least twice a year. The importance of the audit committee is due to the fact that they have the skills to keep a balance between the maintenance of objectivity and value for money.
The third step involves the nomination committee. This committee should be comprised of independent non executive directors (NEDs) How they are chosen depends on their honesty, reliability, knowledge and experience. Sometimes the chairman of this committee can be the chairman of the main board which provides the scope for a closely controlled board.
Finally, remuneration committee must be created to avoid conflicts of interests and should consist only in NEDs. They must avoid any close relationship with members to avoid any possible conflict regarding independence. Remuneration packages must be approved by shareholders, even though most shareholders rarely do disapprove.
The management of each committee is determined on how effective and satisfactory are the benefits received. Not following these steps may result in harsh consequences against the company. In order to obtain good corporate governance, that is stability in a company and much more foreign investments, each and every code must be obeyed. These rules apply to companies worldwide. Having different cultures may have an effect on businesses, however in order to maintain a perfect governance, the same rule is applied throughout each country. However, according to Maria Krambia-Kapardis and Jim Psaros statistics, only a few complied with the code and many partially or did not even obey the code. The possibility that many companies??™ interests aren??™t focused on foreign investments is questionable. So what are the actual reasons why most companies chose to or not to follow most principles
When Corporate Governance Principles define the fact that companies need to follow these sets of rules, they will gain foreign investments. This is beneficial to the company??™s progression. Nevertheless, the study of Krambia-Kapardis and Jim Psaros (2006) reveals that not all companies are willing to comply with the code. Little of the companies in the country of Cyprus showed their respects to the rules and regulation to the principle for the good of their company. This issue results in a confusion why others refuse to comply. One of the possible reasons could be that not following the code is not against the law. Companies who aren??™t inspired to follow the code don??™t fear any punishment and see no need to comply with the law.
Krambia-Kapardis et al. (2006) interviewed companies and found that many claim that following the code would be too expensive for them. They also realized that most companies are family oriented and it would be to their advantage not to follow the code since it could mean losing control of governing their own business. Also, with a sign of lack in motivation, companies of Cyprus also stated that their belief in attracting foreign investments are false hopes since they don??™t see what a foreign investor would gain from investing in the shares of a small developing economy. In addition, following the principles is not obligatory. As being culturally related to their behavior, they feel that there is no reason to comply with something that does not seem necessary. (Krambia-Kapardis & Jim Psaros, 2006, pp. 129)
With the study of Krambia-Kapardis and Jim Psaros, the lack of motivation due to the Cypriots??™ cultures and lifestyles are revealed and a question is asked: What would it take for all companies of the Cypriots to show their full compliance to the Corporate Governance Principles Steps to develop the need for the Cypriots to follow the Corporate Governance Principle must be created and taken action. It was suggested by Krambia-Kapardis et al. (2006) that taxes could be an incentives for a higher degree in the number of companies??™ compliance. It could be tax claims for the initial costs of establishing practices, which could be an advantage to a greater governing from a government perspective. (Krambia-Kapardis & Jim Psaros, 2006, pp. 136,137)
Another way of building up motivation is convincing companies that obeying the code would be entirely beneficial to them and give the company more added-value, even for a family owned company. From the researches of Krambia-Kapardis et al. (2006) Ararat and Ugar (2003, pp.72) states that changes in rules, regulations, and enforcement do not mean changes in values, behavior, and attitude. Authorities began to encourage education for local company officials for the sake of the company to comply with the principle. One of the steps they took to encourage education in this field is by inviting foreign guest speakers who preaches the importance of corporate governance and the advantages that comes with it. (Krambia-Kapardis & Jim Psaros, 2006, pp. 137)
These steps to education are also one of the steps that the Cyprus Stock Exchange took. One of the stock exchange strategies involve listing companies according to a different category in markets that resembles different ranks: Main Market, Parallel Market, Alternative Market, Debenture Market, and Investment Organization Market. Companies that fully obey the code are listed under the ???Main Market??™ thus giving them more credibility and opportunity to attract foreign investments. As a result, those who don??™t comply will be lowered by rank and thus affecting their chances of attracting any foreign investors. With this, companies don??™t have a choice but to comply, and as a result obeying the code will not only result in the progression of a company but also improve the economy as a whole.
Hypothesis
According to Maria Krambia-Kapardis and Jim Psaros, to be able to establish a successfully booming business the code and principles of governance must be followed. The hypothesis states that if a company follows the code and all principles they will have a fairly large chance of progressing and enlarging since it attracts foreign investors and is greater publicity for the organization. This fact is believed true even though it faced implementation problems in several countries where the principles where followed. But after revising the principles it has been stated that in order to succeed every country should monitor its corporate governance and also get involved in the international dialogue (Krambia-Kapardis & Jim Psaros, 2006, pp. 127) . In addition to that, every company must have certain rules to follow with regards to employees at the board level of the company to become NEDs, thus independent individuals. These are as such that all employees at the board level must have no familial connections and therefore recruitment is based only on experience and knowledge on economic investment, financial and capital markets and must be controlled by the remuneration committee. Following the case study, Cyprus, the concept is hard to follow since it is a small country where familial ties and directorship is almost everywhere.
If company fails to comply with the set of guidelines for a successful business the company would suffer a downfall in its prosperity or just simply remain in its position until it eventually naturally falls. Although cultures differs from one country to the next and even within the same country, the rules must be implemented and adapted to, in order to maintain stability and prosperity worldwide. And so the internal organization successfulness will be spread from the one organization to global relationships.
Measurement of Variable
As a control variable, past data of pervious years must be looked at for the company this will be considered as the null hypothesis. This control group will be looked at where the principles and codes are not being implemented properly and then compared to the H1, where the rules are in fact being implemented to check the difference in progress and development of the company and its size. When working on a bigger scale to try to comply with the corporate governance code what could be used as a control variable is the GDP of several years back. This may also be compared to those of more recent years after adapting to the system. Maria Krambia-Kapardis and Jim Psaros researched the percentage and degree of compliance with regards to different companies and compared the results (Krambia-Kapardis & Jim Psaros, 2006, pp. 130-135). Variables such as size of company or industry were taken into consideration and were related directly to the results. So larger companies were found to be more ???sensitive to corporate governance than smaller ones??? (Krambia-Kapardis & Jim Psaros, 2006, pp. 131) and thus the size is a dependant variable. The more compliant the company is to the code the larger it can grow in size. The code is therefore the independent variable.
Research Design
Using an Ethnographic strategy, Krambia-Kapardis and Psaros were able to study the compliance of all Cypriot companies with the Code imposed on them. This study shows that for the year ended December 2002, there were 160 listed companies and only 46 of them lodged a corporate governance report with their annual return. Now what these researchers did was analyze both the companies??™ documents (the end of year reports) and the corporate governance report and then determine the extent to which these companies have complied with the Code. The outcome didn??™t look too good. Here is a summary of the results of this research.
Degree of compliance:
After analyzing the 46 corporate governance reports, the researchers found that only five companies had fully complied with the Code, 35 only partially complied and six companies only expressed their intention to comply with the Code in the up-coming year 2003. So 40 out of these 46 companies have at least some level of compliance with the Code. The other 6 just stated their agreeableness to comply with the code in the future. Furthermore, knowing that the remaining 114 companies did not even include a corporate governance report in their yearly report, the most positive thing we can conclude about this research is that 46 out of 160 companies were corporate governance sensitive. In other words, 29 percent of companies in this region turned out to be corporate governance sensitive. This reveals a very low level of company compliance with the Code. A table with numbers and percentages of compliances is provided below.
Table 1: Summary of compliance with the Code at 31 December 2002
(Krambia-Kapardis and Psaros 2006, p131)
N %
Full compliance 5 3
Partial compliance 35 22
Intent to comply in the future 6 4
Non compliance and no stated intent to comply in the future 114 71
Total 160 100

After this observation, the researchers continued to analyze the data retrieved from the reports. They split the degree of compliance of companies into the different industries they belong to. Below is a table that summarizes this observation.
Table 2: Degree of compliance with the Code by industry
(Krambia-Kapardis and Psaros 2006, p131)
Industry

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Companies in industry

N Total non-compliance

N % Some level or intent to comply

N % Full compliance

N % Partial compliance

N % Intent to comply

N %
Banking 4 1 25 3 75 1 25 2 50
Approved investment org. 28 21 75 7 25 6 21 1 4
Insurance 4 1 25 3 75 1 21 2 50
Manufacturing 20 14 70 6 30 4 20 2 10
Tourism 8 7 88 1 12 1 12
Trading 16 13 81 3 19 3 19
Building & cement 10 8 80 2 20 2 20
Info. Tech. 5 3 60 2 40 2 40
Financial services 9 5 56 4 44 1 11 3 33
Hotels 14 9 64 5 36 1 7 4 29
Other 42 32 76 10 24 2 5 7 16 1 3
Total 160 114 71 46 29 5 3 35 22 6 4

From this table, they concluded that the banking and insurance industries appear to be the most sensitive to corporate governance. 75 percent of all banking companies showed some level or intent to comply. Also, 75 percent of all insurance companies showed the like. The financial services industry also showed a better sensitivity to corporate governance than the rest of the industries apart from the banking and insurance industries. 44 percent of the companies in the financial services industry showed some level or intent to comply with the Code. The rest of the industries lacked compliance.
Moreover, Maria and Jim went further to analyze compliance of these companies with the code by size of company (table 3). Of the 160 companies listed, 46 of them were corporate governance sensitive. However, the market value of these companies represented 64 percent of the total market capitalization of the Common Stock Exchange. In addition, Krambia-Kapardis and Psaros (2006) added, ???for 7 of the 11 industries, the percentage of the market capitalization for the corporate governance sensitive companies was greater than the percentage of the corporate governance companies within the industry.??™ Now despite these statistics, a large part of these differences is due to the size of three large banking corporations that were corporate governance sensitive; them having total industry capitalization of 1,148,362,070 Cypriot pounds while the next largest other corporate governance sensitive corporations belonging to an industry having only 184,162,216 Cypriot pounds (other). This here might cause inaccuracy in their findings.
?
Table 3: Degree of compliance with the Code by size
(Krambia-Kapardis and Psaros 2006, p132)

Industry

Companies in industry

N CG sensitive companies

N % Total industry capitalization

CY pounds Market capitalization for companies which were CG sensitive

CY pounds % of market capitalization for companies which were CG sensitive

Banking 4 3 75 1,157,287,679 1,148,362,070 99
Insurance org. 4 3 75 19,292,982 11,216,937 58
Manufacturing 20 6 30 264,063,364 90,847,762 34
Tourism 8 1 13 69,564,998 4,865,100 7
Trading 16 3 19 108,432,614 71,954,985 66
Building & cement 10 2 20 194,432,602 63,259,736 32
Info. Tech. 5 2 40 29,340,144 17,659,474 60
Financial services 9 4 44 142,189,248 57,959,736 40
Hotels 14 5 36 224,725,028 44,671,334 20
Other 42 10 24 373,339,890 184,162,216 51
Approved investment orgs. 28 7 25 140,333,585 40,493,897 29
Total 160 46 29 2,723,002,134 1,735,453,002 64

Now after analyzing these aspects of the companies, Maria and Jim scrutinized other areas of the firms??™ reports. These areas include the board of directors, audit committee, nomination committees and remuneration committees. They checked for any changes made and reviews included about these aspects that coincide with the Code. Similarly, they created tables in order to interpret the results and arrived with the following observations.
? Board of directors (use table 4 for reference):
Pertaining to the Chair of the Board, only 4 out of the 35 companies that provided a corporate governance report gave Chairperson Power to an independent non-executive director (NED). Secondly, 20 out of these 35 companies had a Chairperson who was also the CEO of the company but only 8 of them stated this in their reports. The Code requires all companies that consist of persons having dual roles to provide justification about this matter.

Concerning the composition of the board, only six companies indicated that they did not have any independent directors on their boards. 34 of them stated that they had a Board that was made up of at least one third NED and 18 companies stated that the majority of their NEDs were independent. This is a good sign because this means that the majority of the companies have complied with this law that comes within the Code but according to Maria and Jim, one thing must be taken into consideration while assessing this; it is not for certain that the NEDs that are identified by the companies as independent are actually independent. They might actually be children of important clients in the company, shareholders or founders of the company. So this might account for erroneous findings.

While reviewing the regularity of meetings, the researchers noticed that the findings were mixed. 1 company declared that it met only once a year, 11 companies gave no information about their meetings, and the remaining stated that they met at least 6 times which coincided with the Code requirement.

Finally, the last part of the board analysis was decent. This part has to do with disclosures on various items the Code requires the companies to carry out. From the statistics, we notice that the majority (the lowest 60%) of the companies carried out these requirements.

References

Krambia-Kapardis, M., & Psaros, J. (2006) The Implementation of Corporate Governance Principles in an Emerging Economy: a critique of the situation in Cyprus. Corporate Governance, 14(2), 127, 129-137.
Organization for Economic Co-operation and Development. (n.d.) Retrieved November 31, 2010 from http://www.oecd.org/topic/0,3373,en_2649_37439_1_1_1_1_37439,00.html

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