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Naeem Tabassum · Satwinder Singh
Corporate
Governance and
Organisational
Performance
The Impact of Board
Structure
Corporate Governance and Organisational
Performance
Corporate Governance
and Organisational
Performance
The Impact of Board Structure
Naeem Tabassum Satwinder Singh
London, UK Dubai Business School
University of Dubai
Dubai, United Arab Emirates
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer
Nature Switzerland AG 2020
This work is subject to copyright. All rights are solely and exclusively licensed by the
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The use of general descriptive names, registered names, trademarks, service marks, etc. in this
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With deepest love and respect for family members past and present
certaines dettes sont difficiles à rembourser
Foreword
vii
viii FOREWORD
environment of the firm. A Board structure that works well in one con-
text may not work so well in another. Managers and policymakers need
to identify the contingent factors determining the type of Board that is
most appropriate in each set of business circumstances. ‘One size fit all’
does not apply to the composition of a Board.
The information provided in this study is invaluable. The research
methodology sets a new standard for other researchers in the field. A
wide range of readers will benefit from studying this book. It addresses
important issues of general concern and does with an exceptional degree
of intellectual rigour.
Mark Casson
Director of the Centre for Institutions
and Economic History/Professor of Economics
University of Reading
Reading, UK
Preface
The work on which this monograph is based was first conducted as doc-
toral work and won the Brunel University Vice Chancellor’s first prize in
2018 for its originality and quality; however, this did not come around
easily. Several years ago, when Naeem—a professional accountant, as a
freshly minted MBA, also from Brunel—came around and started to dis-
cuss the topic, I was apprehensive, and warned of the difficulties and pit-
falls in this type of work. I am an economist by training, but also have an
honours First Degree in accountancy. My contention was that, if we were
to say anything meaningful, it would have to be based on solid factual
analysis, which can only be conducted if detailed time series data on key
accounting and Board structure variables could be collected. After delib-
erations, we agreed to take on the project and also decided to back-up
the findings with the help of a field survey, which was supposed to yield
qualitative insights to supplement the quantitative results. Sadly, owing
to time and financial constraints, we had to drop the latter and focus on
the data side of things only. The survey questionnaire we had drafted
came to be donated to another researcher working on the same topic in
Pakistan.
The fact that work had started to attract attention on its own per-
haps would not have been enough to coax us to publish it as a research
ix
x PREFACE
It is clear that good Corporate Governance makes good sense. The name
of the game for a company in the 21st Century will be conform while it
performs.
—Mervyn King (Chairman: King Report)
1A paper partially based on this work in British Journal of Management, is also now
gradually gaining momentum (cf. Singh S, Tabassum N, Darwish T, Batsakis G (2017),
‘Corporate Governance and Tobin’s Q as a Measure of Organizational Performance’
British Journal of Management. ISSN 1045-3172. DOI: 10.1111/1467-8551.12237.
PREFACE xi
And finally:
Global market forces will sort out those companies that do not have sound
Corporate Governance.
—Mervyn King S.C. (Chairman: King Report)
In the Name of Allah, the Most Gracious and the Most Merciful, for giving
me the opportunity to achieve this success.
I am grateful to many people who have encouraged me through-
out the development of this text. First and foremost, I am thankful to
Professor Satwinder Singh, the co-author of this text and my supervisor,
for his outstanding support in a very professional and positive manner
during my Ph.D. journey at Brunel University, London. My thanks also
go to Rizwan Sayed, Lucy McClements and me ex-colleague Mrinal Ray
(Jack) for their wonderful feedback on this work.
I am grateful to all my family members, especially my wife Sehar and
lovely daughters, Iman and Sara, for their love, support and patience. I am
indebted to my daughter Sara for her ‘editorial skills’ (she changed one
word but is threatening to sue me if I do not give her any credit for it).
Dr. Naeem Tabassum
ACA, FCCA, MBA, Ph.D.
Chartered Accountant and Business Advisor
Naeem and Associates
London, UK
I owe deepest sense of debt to John Dunning (late) and Mark Casson
who were instrumental for my entry in the academic world at the
University of Reading, UK.
My sense of gratitude goes to my ex-colleagues, friends, and stu-
dents at Brunel University Business School Dean Thomas Betteridge,
xiii
xiv ACKNOWLEDGEMENTS
1 Corporate Governance 1
Introduction 1
Corporate Governance (CG) 2
Defining Corporate Governance 3
Narrow View of CG 4
Broader View of CG 5
The Importance of CG 6
Enron 8
Parmalat 9
Palmer & Harvey 10
HIH Insurance 10
China Aviation Oil 11
Satyam Computers 11
Mehran Bank 12
The Rationale for This Study 12
References 14
xv
xvi CONTENTS
Appendices 235
References 273
Index 309
Abbreviations
xxi
xxii ABBREVIATIONS
xxiii
xxiv LIST OF FIGURES
xxv
xxvi LIST OF TABLES
Corporate Governance
• Introduction
• Concept of Corporate Governance
• Definition of Corporate Governance
• Importance of Corporate Governance
• Rationale for This Study
• Motivation for This Study.
Introduction
We are living in an era of unprecedented globalisation that is transform-
ing the face of the world economy. A gradual lifting of trade barriers,
revolution in telecommunications, data processing and transportation
facilities have accelerated the pace of global inter-dependence turning the
world into an increasingly level playing field. Whereas there is no deny-
ing the positive impact of globalisation, its overall benefits remain une-
venly distributed across developed and emerging economies. Inadequate
development of Corporate Governance (CG) principles, particularly in
emerging economies, is seemingly an important factor that contributes
to this disparity. CG ‘is the whole system of controls, both financial and
Despite the fact that CG has become a buzzword, its precise definition
remains blurred (Gillan, 2006). A survey of literature revealed an absence
of consensus as to what constitutes CG (Solomon, 2010). Following sec-
tion presents some of the commonly cited definitions in their narrow and
broad perspectives.
Narrow View of CG
In its narrowest sense, CG is defined as a system of relationships amongst
the internal actors of a firm, namely its Board of Directors, manage-
ment and shareholders. When defined in its narrow sense, the defini-
tion suggests that both the directors and management of the company
are only accountable to its shareholders (Cadbury, 1992; La Porta,
Lopez-de-Silanes, & Shleifer, 1999; Shleifer & Vishny, 1997). Sir Adrian
Cadbury, in his famous and widely recognised report The Financial
Aspects of Corporate Governance, defined CG as follows:
Broader View of CG
The wider view of CG suggests taking a look beyond the interests of
investors and the company’s internal responsibilities. This view of CG
suggests that companies have a set of economic and social responsibilities
as well, towards other stakeholders in the company, including, for exam-
ple, employees, suppliers and the community. OECD has outlined this
perspective as follows:
The system of checks and balances, both internal and external to compa-
nies, which ensures that companies discharge their accountability to all
their stakeholders and act in a socially responsible way in all areas of their
business activity. (Solomon, 2010: 6).
the private and public institutions, including laws, regulations and accepted
business practices, which together govern the relationship, in a market
economy, between corporate managers and entrepreneurs (‘corporate
insiders’) on one hand, and those who invest resources in corporations, on
the other. Investors can include suppliers of equity finance (shareholders),
suppliers of debt finance (creditors), suppliers of relatively firm-specific
human capital (employees) and suppliers of other tangible and intangible
assets that corporations may use to operate and grow. (Oman, 2001: 13)
overall confidence at the aggregate economy level. In both cases, the end
goal is to protect shareholders whilst ensuring an efficient allocation of
resources for benefits of wider communities (OECD, 2004). This dual
objective makes CG more important and more difficult not only to
understand but also to apply to a wider group of stakeholders.
In this book, we argue that CG mechanism is a combination of both
internal and external factors put together to create an environment of
trust, ethics and moral values to direct and control the activities of com-
panies to create economic value for shareholders and to achieve a balance
between public and private interests.
If countries are to reap the full benefits of the global capital market, and
if they are to attract long-term ‘patient’ capital, Corporate Governance
arrangements must be credible and well understood across borders. Even
if companies do not rely primarily on foreign sources of capital, adherence
to good Corporate Governance practices will help improve the confidence
of domestic investors, may reduce the cost of capital, and ultimately induce
more stable sources of financing. (OECD, 2004: 13)
1 CORPORATE GOVERNANCE 7
2 Failure of some high-profile companies has been the driver behind many of these
reforms. Some well-known cases from around the world are: Enron (USA); BHS (UK);
Siemens (Germany); Parmalat (Italy); HIH Insurance (Australia); Satyam Computer
(India); Taj Company (Pakistan); Pakistan Railway (Pakistan).
8 N. TABASSUM AND S. SINGH
which to set the company’s operational and behavioural standards for the
Board, the executive management and the wider staff, it will then be an
essential part of the company’s strategic corporate planning and execu-
tion. We believe that CG-orientated companies attempt to achieve not
only better performance but also access to low-cost financial resources,
combined with the propensity to attract and retain investors. This is par-
ticularly pertinent in the context of the emerging economies, such as
Pakistan, where companies compete fiercely for a limited pool of availa-
ble investible funds from lending institutions. Capital markets are under
developed, and financial institutions are not yet fully established in devel-
oping countries, which ultimately makes it doubly hard for companies to
obtain investment funding (McGee, 2009).
There are a number of high-profile corporate scandals and ultimate
collapses that have occurred despite the fact that accounting records
of these collapsed companies were subject to audit, and on the sur-
face seemed satisfactory. These scandals and consequent collapses not
only shook the capital markets around the world at the time when
they happened, they also had serious repercussion on the lives of inves-
tors, employees who lost their livelihood and savings invested in pen-
sion funds, contractors, and creditors who lent funds to the company.
Invariably, these collapses can be traced back to weak and sometime
blatantly corrupt CG practices. We highlight a selection of such cases.
Enron
Enron an energy company was founded in 1985 and it was one of the
top 10 companies in the USA based on its reported turnover published
in its accounts for the year ending December 2000. Enron’s bank-
ruptcy in December 2001 is hailed as the largest bankruptcy in the US
corporate history.3 Its spectacular fall can be gauged from the fact that
in October 2001 before the bankruptcy was announced, its share price
had plummeted from $90 to $0.50. Enron’s accounting practices were
anything but transparent and not in line with corporate governance
best practices. The company’s auditors Arthur Andresen (who also went
under with it) used fraudulent accounting practices to hide its mount-
ing losses. The company used special purpose entities (SPEs) structure
watch?v=_0vRuHn9MmI.
1 CORPORATE GOVERNANCE 9
to hide its losses and mask liabilities. Enron showed billions of dollars
in profit while in reality it was rapidly losing money. The accounting
practices adopted by the company (and signed off by the auditors) main-
tained the fictitious rise in its share price but made it difficult for inves-
tors to understand how the company was making profit. The financial
irregularities at Enron resulting in its bankruptcy only show the impor-
tance of ethics, integrity, and honesty in corporate governance practices.
This much publicised failure emphasized the need for board of direc-
tors to act with honesty and integrity and external auditors to ask the
right questions to protect the interest of all stakeholders. Enron’s col-
lapse also stresses the need and importance of experienced non-executive
independent directors in the monitoring the activities of the execu-
tive directors. The Cadbury (1992) makes it clear that ‘Non-executive
directors should bring an independent judgement on issues of strategy,
performance, resources, including key appointments and standards of
conduct.’
Parmalat
Parmalat, an Italian company in dairy and food industries and a subsid-
iary of French multinational company Lactalis, was founded in 1961.
Despite becoming a spectacularly successful company, it collapsed in
2003 and has become Europe’s most prominent bankruptcy case study.
The company’s reach extended to 30 countries at its peak where it
acquired companies via debt financing. By the end of 2001, many of the
Parmalat’s acquired companies and divisions were making losses. The
company changed its financial strategy and moved to the use of com-
plex financial derivatives in an attempt to conceal its losses and financial
liabilities. In 2003, Parmalat found itself in serious financial difficulties
when it failed to honour bond payments, despite the fact that finan-
cial statements of the company were showing significant cash reserves.
Eventually, irregularities in its accounting records were discovered and
this highlighted an enormous black hole in its accounts. It was discov-
ered that €3.9 billion which were held in one of its subsidiary (Bonlat)
bank account with Bank of America in the Cayman Islands was forged
and did not exist. The company founder was found guilty of pro-
viding false and factious accounting information and deceiving the
investors. Similar to Enron, the downfall of Parmalat shows the impor-
tance of effective Corporate governance. It reinforces the belief to
10 N. TABASSUM AND S. SINGH
HIH Insurance
The collapse of HIH one of Australia’s leading insurance provider was
an enormous event in the corporate history of the country. This collapse
has become one of the largest corporate failure of the country with debts
of over A$5bn. The company went into financial troubles in 2001 when
company had written its insurance policies cheaply and failed to put
enough provisions to meet future obligations. The collapse of the com-
pany is due to its poor strategy i.e. enormous debt and inability to repay
dues on it brought the company down. The collapse of HIH highlights
the growing importance of the Government, the Regulators, Auditors
1 CORPORATE GOVERNANCE 11
and the role board of directors. The collapse also shows that financial
institutions with their complex rules and reporting requirements, are
more likely to collapse in the absence of effective corporate governance,
due diligence, and leadership.
Satyam Computers
Satyam Computers was a well-known Indian company which, similar
to Enron, its poor corporate practices brought it down. The nature of
the fraud committed at Satyam were similar in nature with the decep-
tion that caused Enron to collapse. In both the companies, the CEO
and the senior management of the companies systematically overstated
profits and understated financial liabilities in order to make their com-
panies look more attractive and appear much healthier than they actu-
ally were. The company tried to hide losses from investors and reported
made up cash balances in the financial statements. Even though Satyam
Computers was bought by another Indian Tech company, the share-
holders of Satyam Computers lost a significant value of their stake
in the business.
12 N. TABASSUM AND S. SINGH
Mehran Bank
Mehran Bank was incorporated in October 1991 as public limited com-
pany and the bank’s shares were quoted on Karachi and Lahore Stock
exchanges in Pakistan. The founder and Chief Operating Officer of the
bank was a retired employee of another bank in Pakistan. He founded the
bank with the help his political allies and supporters. Since its incorpo-
ration, there were serious doubts about the objectives of the bank. With
access to powerful connections, even the State Bank of Pakistan exercised
little control over scrutinizing Mehran Bank’s licence application. The
bank misappropriated billions of Rupees as loans and donations to fund
the election campaign run by the bank’s affiliates. This financial collapse
of the bank exposed weaknesses in the country’s Corporate Governance
practices and raised serious doubts over the fair and transparent func-
tioning of financial institutions. The impacts of this corporate fraud were
widespread and were felt at individual, organisational and national levels.
A selection of cases as briefly discussed above show the importance
of good CG practices for the long-term survival of the company to safe-
guard interests of a myriad of stakeholders who have stakes in the com-
pany. Good CG practices not only safeguard the stakeholders but also
safeguard the enormous resources of the company in which funds are
sunk to yield future profits and value to society.
References
Abdullah, A., & Page, M. (2009). Corporate Governance and Corporate
Performance: UK FTSE 350 Companies. Edinburgh: The Institute of
Chartered Accountants of Scotland.
Aguilera, R. V., Williams, C. A., Conley, J. M., & Rupp, D. E. (2006).
Corporate Governance and Social Responsibility: A Comparative Analysis of
the UK and the US. Corporate Governance: An International Review, 14(3),
147–158.
Aoki, M., & Ki Kim, H. (1995). Corporate Governance in Transitional
Economies—Insider Control and the Role of Banks. Washington, DC: The
World Bank.
Bushee, B. J., Carter, M. E., & Gerakos, J. J. (2014). Institutional Investor
Preferences for Corporate Governance Mechanisms. Journal of Management
Accounting Research, 26(2), 123–149.
Cadbury, A. (1992). The Financial Aspects of Corporate Governance. London:
Gee and Co.
Carpenter, M. A., Geletkanycz, M. A., & Sanders, W. (2004). Upper Echelons
Research Revisited: Antecedents, Elements, and Consequences of Top
Management Team Composition. Journal of Management, 30(6), 749–778.
Chen, J., Chen, D.-H., & Chung, H. (2006, December). Corporate Control,
Corporate Governance and Firm Performance in New Zealand. International
Journal of Disclosure and Governance, 3(4), 263–276.
Choe, H., Kho, B.-C., & Stulz, R. M. (2005). Do Domestic Investors Have an
Edge? The Trading Experience of Foreign Investors in Korea. The Review of
Financial Studies, 18(3), 795–829.
Daily, C. M., Dalton, D. R., & Cannella, A. A., Jr. (2003). Corporate
Governance: Decades of Dialogue and Data. The Academy of Management
Review, 28(3), 371–382.
Garrow, N., & Awolowo, F. I. (2018). Palmer & Harvey: A Case of Governance
and Audit Failure. Journal of Modern Accounting and Auditing, 14(7),
390–398.
Ghoshal, S. (2005). Bad Management Theories Are Destroying Good
Management Practices. Academy of Management Learning & Education,
4(1), 75–91.
Gibson, M. S. (2003, March). Is Corporate Governance Ineffective in Emerging
Markets? The Journal of Financial and Quantitative Analysis, 38(1), 231–250.
1 CORPORATE GOVERNANCE 15
Theories of CG
The development of CG is linked closely with the economic develop-
ment and diverse governance mechanisms developed to accommodate
different forms of corporate structures designed to achieve economic
goals. A number of unique theoretical structures have been developed
in an effort to explain and understand CG, each of which consider
CG from different angles. The theoretical literature on the develop-
ment of CG, as based on a number of theories, has its roots in diverse
Agency Theory
A large amount of CG literature—notably in both developed and devel-
oping economies—has been built around the concept of Agency Theory.
Agency Theory was first introduced by Alchian and Demsetz (1972),
which was then further developed by Jensen and Meckling (1976: 308),
who explained Agency Theory as “a contract under which one or more
persons (the principal(s)) engage another person (the agent) to perform
some service on their behalf which involves delegating some decision making
authority to the agent”.
The theory is based on the concept of a separation within public
companies between shareholders (principals) and executive manage-
ment (agents) due to the company’s diffused ownership structure (Berle
& Means, 1932; Jensen & Meckling, 1976). The theory assumes that,
when both parties in the Agency relationship seek to maximise their own
utility, there is good reason to believe that the agent is unlikely to act in
the best interests of the principal (Jensen & Meckling, 1976). The the-
ory is primarily concerned with two issues that can arise in an Agency
relationship: the first arises when the parties in the relationship have
conflicting goals, and it is costly and difficult for the principal to mon-
itor and confirm both the agent’s actual actions and whether or not the
agent has followed the Agency contract correctly; the second issue relates
to the management of risk when the principal and agent have different
views and attitudes towards risk management. The theory also assumes
that those agents who normally control and possess internal and supe-
rior information may afford less importance to the owner’s interest and
engage in selfish behaviour (Fama & Jensen, 1983). Figure 2.1 illustrates
the various issues involved in the Agency relationship.
An Agency relationship gives agents incentive to expropriate the assets
of their firm by undertaking self-profiting projects with the potential to
2 THEORIES, MODELS AND MECHANISMS 19
Fig. 2.1 Issues in agency theory (Source Adopted and modified from Murthy
[2007])
Stakeholder Theory
Although company management is driven by a number of objectives,
the main objective of any commercial organisation is to create wealth
(value) for its shareholders. Therefore, a company’s management would
usually only adopt a view that supports and creates wealth for its share-
holders (Barney, 2007). However, this narrow focus on the maximisation
of shareholder wealth could have a negative impact on the interests of
other stakeholders in the company: it must be considered that companies
are an inherent part of the society in which they operate, and they also
have legal, social and ethical responsibilities to safeguard the interests of
everyone with a stake in them (Coyle, 2010).
Stakeholder Theory offers a wider view of companies, and considers
the interests of other stakeholders, such as customers, employees, dis-
tributors, suppliers, government and communities. McDonald and Puxty
(1979) argued that companies are no longer the instruments of share-
holders alone, and that they exist within communities, and, as such, have
responsibilities to those communities. The theory is rooted in the man-
agement discipline and has developed gradually following the work of
Freeman (1984). The theory suggests that companies are not merely a
pool of resources put together solely for the ultimate benefit of share-
holders, but that they are also vehicles for achieving social purposes
(Kanter, 2011). There are a number of different groups that are both
involved and participate in the success of a company, with each group
entitled to obtain its fair share of benefits from the company’s success
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TABLE
PROLOGUE 7
I. — DEUX HOMMES, DEUX CHIMÈRES 23
II. — LES CAVALIERS… 34
III. — … ET LEUR MONTURE 55
IV. — PROPOS ENTRE CIEL ET TERRE 64
V. — LE JOUR VIOLET 77
VI. — SUR LA PIERRE BRUNE 91
VII. — CEINTRAS ÉGARE SON OMBRE ET SA RAISON 101
VIII. — LA FACE AURÉOLÉE D’ÉTOILES 118
IX. — HEURES D’ATTENTE 130
X. — L’ÊTRE SE MONTRE 143
XI. — EXCURSIONS SOUTERRAINES 163
XII. — FAUX DÉPART 189
XIII. — L’AGONIE DE LA LUMIÈRE 206
XIV. — ÉCRIT SOUS LA DICTÉE DE LA MORT 226
ÉPILOGUE 233
ACHEVÉ D’IMPRIMER
Le vingt-sept mai mil neuf cent sept
PAR
ARRAULT ET Cie
A TOURS
pour le
MERCVRE
DE
FRANCE
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