Corporate Governance

University Degree Business and Administrative studies

1.1 Introduction

The ultimate objective of companies is to keep maximising profitability given the rules and regulations implemented by the government and accounting practices i.e. (GAAP). The owners of an entity (shareholders) appoint the appropriate people, (directors) who are responsible to report back to them on performance.

The directors in turn take the responsibilities to delegate day to day decision making activities to line managers who are involve in the business operations. It is also the Directors are also responsibility to implement systems, processes and control measures to ensure proper accountability and transparency in its operations with the view to safeguard stakeholders and increase value for shareholders. (Corporate Governance)

On the other hand shareholders have the right to remove and replace directors if they feel for example financial targets are not been achieved. This gives directors a very thin line to strike the balance between concentrating on achieving financial targets to satisfy shareholders without detailed analysis reporting practices or to be more focused on practices and regulations, which in turn may give lower figures.

In a theoretical perspective there is no obvious answer therefore in this research we ask an empirical question, is there any significant relationship between corporate performance and reporting practices?

We start with brief overview and background of Corporate Governance then proceed to explain reporting practices and also identify some important issues relating to corporate governance.

What is Corporate Governance?

This is one of the most talked about topics in finance it is systems and processes put in place to ensure proper accountability, probity and openness in the conduct of an organisation’s business. In other words corporate governance studies how decisions are made in companies, how mangers are monitored by the stock market or large

Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources.

“The aim is to align as nearly as possible the interests of individuals, corporations and society” (Sir Adrian Cadbury in ‘Global Corporate Governance Forum, World Bank, 2000)

The main focus of corporate governance is based on the following:

Effectiveness and efficiency of business operations
Reliability of financial reporting
Compliance with laws and regulations
Safeguarding of assets

Corporate governance is believed to have emerged in the 19th century due to the separation of ownership and control following the formation of joint stock companies. The owners or shareholders of these companies, who were not involved in day to day operational issues, required assurances that those put in control of the company, the directors and managers, were safeguarding their investments and accurately reporting the financial outcome of their business activities. Thus, shareholders were the original focus of corporate governance however, current thinking recognises a corporation’s obligations to society generally in the form of stakeholders.

1.2 The Audit Committee oversees financial reporting process, selects independent auditors and supervises the relationship with the independent auditors. The Audit Committee is responsible for the pre-approval of all audits and permitted non-audit services to be provided. Additionally, the Committee reviews and discusses with management and the General Counsel legal, regulatory, and compliance matters that may have a material impact on financial statements.

1.3 Reasons for choosing this topic

Corporate governance is not only important to shareholders as believed to be in the past, it is also very important for the economic health of corporations and societies in general.

As ...

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1.3 Reasons for choosing this topic

Corporate governance is not only important to shareholders as believed to be in the past, it is also very important for the economic health of corporations and societies in general.

As companies continue to employ vast quantum of societal resources, corporate governance becomes more and more important not only for shareholders but also for stakeholders. Therefore corporate governance should adopt ideally two basic approaches in order to ensure companies are managed in a manner that meets stakeholder’s aspirations and societal expectations. The processes are briefly listed below but will be explained in further detail in the final report.

Core Principles – Management to have the freedom to drive the entity forward without undue restraints from shareholders. On the other hand their freedom should be exercised within a framework of effective accountability.

Cornerstones – these are the practices that leads to the creation of the right corporate culture in which the company is managed i.e.

Trusteeship

Transparency

Empowerment and Accountability

Control Systems

2.1 Project Title

Is there any significant relationship between corporate performance and reporting practices?

On the other hand, we ask whether the quality of reporting practices i.e. the GAAP in a specific country for example US, UK, Ghana and Nigeria has any influence the financial performance of a company.

I have chosen the above to be the title of the report because there is widely available literature and also I have some background knowledge on International Financial Reporting.

3.1 Objectives of Research

On completion of this research, a minimum of 20 articles related to the field of study will carefully be analysed to establish if there is significant relationship between company performance and reporting practices.

The following information, (returns, corporate governance and reporting practices) from three different continents will be collected on UK, US, Ghana and Nigeria based companies, which will be used to perform a regression analysis. The objective is to establish if the quality of reporting standards has any impact on the company performance.

GAAP Analysis

I will also be looking at some of the differences in Generally Accepted Accounting Principles – GAAP, in the countries under consideration.

I will also use Grays Conservativesm index to establish, each countries optimistic levels of financial reporting.

4.1 Summary of previous related articles

Articles

CORPORATE GOVERNANCE AND EQUITY PRICES

[Quarterly Journal of Economics 118(1), February 2003, 107-155]

Paul A. Gompers

Harvard Business School

Harvard University and NBER

Joy L. Ishii

Department of Economics

Harvard University

Andrew Metrick

Department of Finance, the Wharton School

University of Pennsylvania and NBER

Summary

This report looks at shareholder rights, as they vary from across firms. Using the incidence of 24 governance rules, a “Governance Index” to proxy for the level of shareholder rights at about 1500 large firms during the 1990s. An investment strategy that bought firms in the lowest docile of the index (strongest rights) and sold firms in the highest docile of the index (weakest rights) would have earned abnormal returns of 8.5 percent per year during the sample period. The findings shows that firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and made fewer corporate acquisitions.

Employee Ownership and Corporate Performance

Over the years, the NCEO has reported on new research on employee ownership and corporate performance. Now that a substantial body of work exists on the subject, we thought it would make sense to summarize it in one place. The research comes to a very definite conclusion: the combination of ownership and participative management is a powerful competitive tool. Neither ownership nor participation alone, however, accomplishes very much.

The findings apply mostly to ESOP companies. As of yet, little work has been done on the impact of broad-based stock option plans on corporate performance. The findings also seem to apply primarily to closely held companies. Research indicates that public companies generally do not view employee ownership as much more than another corporate benefit. For this and other reasons explored below, the relationship between employee ownership and corporate performance in public companies is ambiguous.

The New Corporate Equation Visibility Control Accountability

Research has proven that travel and entertainment (T&E) is typically a company's second largest controllable expense (after payroll); often-representing millions of pounds in annual spend. Unlike other expenses listed on a company's income statement, T&E expenses are often subject to a greater degree of personal discretion. The process is one that all too often is fraught with inconsistencies, mistakes, and outright fraud.

The Sarbanes-Oxley Act requires companies to certify that internal controls and process are in place to ensure that:

Transactions are properly authorized;
Assets are safeguarded against unauthorized or improper use; and
Transactions are properly recorded and reported

Which begs the question: how can any corporate officer certify in good faith that appropriate internal controls and processes exist for controlling spendind and fraud when those processes are paper-bound, difficult to track, and tough to audit?

Audit Committee Independence and Disclosure: choice for financially distressed firms

By: Joseph V. Carcello and Terry L. Neal

This study examines the relation between audit committee independence and disclosure choice for financially distressed US firms. The tenor of both the financial statement notes and Management Discussion and Analysis (MD&A) is considered. For firms experiencing financial distress, there is a significant positive relation between the percentage of affiliated directors on the audit committee and the optimism of the going-concern discussion in both the notes and the MD&A. These results add to the growing body of literature documenting a relation between audit committee independence and financial reporting quality.

Will Business Ethics Build Better Financial Reporting?

“Irrespective of the Fannie Mae debacle, it is my hope we see far more progress in ethical reporting standards in 2005. I believe we will. I think the business schools of the world are focusing more on the needs for ethical standards in business. I would like to tender the prediction that while Sarbanes-Oxley was the final straw to enforce accurate financial reporting, it was merely a precursor to the movement away from transgressions in financial reporting”.

The financial health and economic welfare of global corporations is at stake when it comes to accurate financial reporting. Investors won't stand for a repeat of Enron, Tyco or recent allegations in reporting improprieties by Fannie Mae. B-Schools have been propounding ethical behaviour in business for some time. University of Pennsylvania's Wharton describes their focus accordingly:

“The Ethics Project does not guarantee that all Wharton graduates will behave ethically. Rather the goal is to teach an approach for handling ethical questions and to dispel a common attitude among business students that the bottom line is the only relevant consideration. The intellectual understanding of ethical obligations may not be sufficient to insure ethical behaviour, but can be an important contributor to that goal.”

Repairing the Breach of Trust in Corporate Governance

John Child and Suzana B. Rodrigues

The governance of companies, other than very small ones, operates through a double agency relationship. The first agency relationship is that between owners or stakeholders, on the one hand, and corporate management, on the other. The second agency relationship is that between corporate management and the employees of a firm, including middle managers, who execute its plans and policies. This second relationship has been largely ignored in discussions of corporate governance, yet its effectiveness is essential for achieving a firm's objectives. If employees have limited trust in their companies, the ability of corporate managers to have their intentions executed will be impaired. There is considerable evidence that such trust is today at a low ebb. This paper suggests policies that may help to repair employee trust and in so doing strengthen corporate governance. Its underlying theme is that greater attention to the trust that employees have in managers would help to achieve a long overdue realignment of corporate governance theory and policy.

5.1 Methodology

My literature study comes from analysis on corporate governance text books, case studies and articles related to the topic. The first attempt is to obtain a minimum of 20 related articles and carefully observing areas of special consideration, this will then be summarised to get a view of what to expect in the actual hypothetical test we perform later in the report using e-views statistical software.

Descriptive data on corporate governance will be collected and transformed into numeric in a scale of importance for example scale 1 being the most important.

The monthly share prices collected from data-stream on UK, US, Ghana and Nigeria companies will be converted into monthly returns along with transformed descriptive data on corporate governance, we perform a hypothesis testing using E-views.

I will also calculate Grays Indices on the specific companies based on the four different countries.

Final Project Overview

This section of the proposal is to show a brief overview of the different sections and how the final project will be presented.

Chapter 1 - The introduction chapter shows the background of corporate governance and why this topic was chosen for the purpose of this project. We also look at some importance of reporting practices, why they were introduced and how they affect companies.

Chapter 2 - The literature review proceeds from the introduction to give some insight on the chosen topic. In this chapter we review some previous empirical study on corporate governance and company performance the findings are discussed in detail with references to various articles.

Chapter 3 – After reviewing the literature we step close to identifying some of the issues in this area. Therefore chapter gives explains why the specific topic has been chosen, what the outcome of the research will be and the answers it will provide.

Chapter 4 – Methodology will demonstrate the step by step on data collection procedures used to perform

Chapter 5 – Testing Results and Analysis,

Chapter 6 – Conclusion

7.1 Data Sources

I have applied to the financial times annual report services to send me some information on corporate governance for some American companies. I will also be visiting the British library in Kings Cross and the Business library in Moorgate where I am hoping to get more details on the reporting practices in Ghana and Nigeria.

I have collected monthly share prices on some UK companies using Data-Stream; this will be converted to monthly returns. I will also be using the same source to collect data on US and possibly Ghana Nigerian firms.

The secondary data to be collected will include the reporting practices in US, UK, Ghana and Nigeria. In this area we look at some of the significant GAAP differences.

8.1 References

Websites

Text Books

Corporate Governance and Financial Performance: A Study of German and UK Initial Public Offerings

By Marc Goege

Corporate Governance and Economic Performance

By Klaus Gugler

This text makes good references to case studies on corporate governance and financial performance.