Community Research and Development Information Service - CORDIS

ERC

GOV Report Summary

Project ID: 263525
Funded under: FP7-IDEAS-ERC
Country: United Kingdom

Final Report Summary - GOV (Corporate Governance)

The overarching objective of the grant was to expand the thinking of corporate governance to include the human element in the design of mechanisms and contracts. To this end the activity was organized under three streams: (1) how the individual style; and (2) inter-group dynamics aspect of corporate governance play a role in corporate decision making and outcomes, and (3) the regulation of corporate governance. The research under the grant produced findings that range from the individual’s effect on corporate outcomes to macro findings pertaining to the consequences of regulating corporate governance, thereby achieving its overall objectives.

The findings under the “individual style” stream show that individual preferences play a role in corporate outcomes. Having studied the executive compensation setting, we find that individual preferences determined by inherited beliefs and values determine pay levels and structure. Furthermore, individuals’ concern that these preferences may not match with the firm environment (i.e. their uncertainty of fit) is compensated with a pay premium to attract individuals to new employers.

The findings under the “role of inter-group dynamics aspect of corporate governance” stream show that various elements of corporate governance interact to determine outcomes. The social network studies conducted under this stream suggest that social networks improve the quality of information that is disseminated to the markets. Specific findings are that audit partners who are more central in their professional network are able to deliver higher quality audits, improving reporting quality. In addition, more central firms in the corporate network communicate proprietary information via their discretionary accruals, and this enables them to retain their position in the network, and provides them opportunities to innovate. In other work under this stream, we also find that contract level governance (via debt covenants) is determined by the interaction between ownership concentration of creditors and the existing corporate governance mechanisms in place at a borrower, providing additional evidence that governance from multiple sources / mechanisms (shareholders and creditors) interact to determine corporate outcomes.

The findings under the “regulation of corporate governance” stream results in the understanding that although it may be optimal to regulate governance to avoid market failure, regulation also brings some unintended costs. We found that upon the introduction of the Remuneration Code in the UK, firms comply with the regulation and defer more of the executive bonus compensation. This is also accompanied by a lower amount of risk-taking. However, we also find that executive turnover also increases after the implementation of the code, and the departing executives move to unregulated industries (potentially resulting in a loss of talent).

In a nutshell, corporate governance is a complex construct. Considering the human element in its design is important. Various aspects of corporate governance interact to determine corporate outcomes. A one-size fits all approach to measuring and designing corporate governance therefore is not recommended.

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Janet Nippard
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Record Number: 187212 / Last updated on: 2016-07-20