A selection of interesting articles we found recently looking at governance and performance.
Whistleblowing, governance and regulation before the GFC at HBOS
Following the financial crisis of 2008, the Treasury Committee of the UK House of Commons undertook an inquiry into the lessons that might be learned from the banking crisis. Paul Moore, head of group regulatory risk at Halifax Bank of Scotland (HBOS) during 2002–2005, provided evidence of his experience of questioning HBOS policies which resulted in his dismissal from HBOS.
The problems that surfaced at HBOS during the financial crisis were so serious that it was forced to merge with Lloyds TSB, another UK bank, to form the Lloyds Banking Group in which the government took a significant stake. Moore’s evidence to the Treasury Committee revealed that long before the financial crisis, he had raised major concerns with the management of HBOS and with the Financial Services Authority (FSA), the UK financial services regulator. Moore’s evidence led to the submission of further disclosures, replies and rejoinders as evidence to the Treasury Committee. Moore’s case is therefore of considerable interest to researchers of whistleblowing because it is a rare instance of high-level whistleblowing, the details of which subsequently entered the public domain.
The information revealed in evidence to the Treasury Committee sheds light on the process of whistleblowing in the context of the governance and regulation of a major UK bank that subsequently had to be rescued by government intervention during the financial crisis. The paper makes a contribution to the wider literature on whistleblowing, and to a greater understanding of aspects of the financial crisis.
Read more details at: Ian P. Dewing & Peter O. Russell. 2016. Whistleblowing, Governance and Regulation Before the Financial Crisis: The Case of HBOS.
Journal of Business Ethics, 134(1), 155-169.
Does independent directors’ attendance at board meetings matter?
In this paper, Liu and colleagues investigate whether independent directors’ attendance at board meetings enhances investor protection using a difference-in-difference approach. They find that independent directors’ attendance alleviates tunneling. This effect is more pronounced in non-state-owned enterprises (non-SOEs) than in state-owned enterprises.
The reinforcement of external supervision substitutes for the role of independent directors’ attendance and this substitution effect is more significant in non-SOEs. Together, these results imply that independent directors’ attendance at board meetings can play an important role in protecting investors, especially in non-SOEs and when external supervision is weak. This paper sheds new light on independent directors’ function in corporate governance, and has implications for institutional improvements.
Read further: Huilong Liu, Hong Wang & Liansheng Wu. 2016. Removing Vacant Chairs: Does Independent Directors’ Attendance at Board Meetings Matter?
Journal of Business Ethics, 133(2), 375-393.
Shari’ah law screening and returns in Islamic equity indices
Islamic equity funds are subject to the screening criteria for stock selection imposed by the principles of Islamic jurisprudence (Shari’ah). Equities must pass three basic screens: revenue source, business activity, and financial factors to be included in an Islamic fund. However, screening criteria are not universal especially for the financial factors. One can use financial ratios based on either the book-value of total assets or the market-value of equity for screening of stocks. This may not only result in a different portfolio composition but also entail diverse rebalancing and monitoring costs.
The performance of 29 Islamic equity indices (IEIs) versus conventional indices from four major international index providers using different Shari’ah screening criteria are analyzed in a single as well as in a multi-equation framework. The use of a multi-equation framework has the added advantage of utilizing the information content of different screening criteria adopted by different index providers.
The empirical findings suggest that the difference in screening criteria does not significantly affect the performance of IEIs. Returns deviation, if any, stems from the relative riskiness of the IEI as compared with the relevant benchmark. Work needs to done to streamline the quantitative screening criteria to avoid confusion among the investing public.
Find more details at: Dawood Ashraf. 2016. Does Shari’ah Screening Cause Abnormal Returns? Empirical Evidence from Islamic Equity Indices.
Journal of Business Ethics, 134(2), 209-228.
Firms and the next generations – too hard?
Despite the centrality of the topic for the debate on sustainability, future generations have largely been ignored by business ethics. This neglect is in part due to the enormous philosophical challenges posed by the concepts of future generations and intergenerational duties.
This article reviews some of these difficulties and defends that much clarity would be gained from making a distinction between future generations and the next generations. It also argues that the concept of next generations offers a better starting point for business ethics to incorporate the topic in its research agenda. The authors then suggest four potential pathways to explore this territory. The four approaches build on the notion of organisations as communities with memory and vision, on the narrative shape of organisational life, on the affinity of stakeholders with the next generation, and on systems of indirect reciprocity.
These first two approaches are connected to communitarian approaches to business ethics, and the last two engage in a dialog with contractarian views and stakeholder theory. The article ends with some implications for theory and practice.
Read further at: Daniel Arenas & Pablo Rodrigo. 2016. On Firms and the Next Generations: Difficulties and Possibilities for Business Ethics Inquiry.
Journal of Business Ethics, 133(1), 165-178.
Corporate governance and performance persistence in China
This paper examines the relationship between performance persistence and corporate governance (as proxied for by board characteristics and shareholder structure). Lars Haß and his team document systematic differences in performance persistence across listed companies in China during 2001–2011, and empirically demonstrate that firms with better corporate governance show higher performance persistence.
The results are robust over both the short and long terms. The researchers also find that performance persistence is an important factor in refinancing, and it can lower companies’ costs of borrowing. Overall, these findings offer important implications for business ethics, by demonstrating how corporate governance can lower companies’ costs of debt.
Read more in the full paper: Lars Helge Haß, Sofia Johan & Denis Schweizer. 2016. Is Corporate Governance in China Related to Performance Persistence?
Journal of Business Ethics, 134(4), 575-592.
Social capital as informal governance in Chinese entrepreneurial firms
Social capital can serve as informal governance in weak investor-protection regimes. Using hand-collected data on entrepreneurs’ political connections and firm ownership, Jerry Cao and his team construct several original measures of social capital and examine their effect on the performance of entrepreneurial firms in China after their initial public offerings. Political connections or a high percentage of external investors tend to enhance firm performance, but intragroup related-party transactions commonly lead to performance decline.
These forms of social capital have a strong influence on the performance of Chinese firms, whereas formal governance variables such as board size or board independence have little effect. Although social capital may serve as an informal governance mechanism and effectively substitute for formal governance mechanisms in an emerging market, this role of social capital raises several ethical concerns, notably the development of rent-seeking and crony capitalism.
For more details see: Jerry X. Cao, Yuan Ding & Hua Zhang. 2016. Social Capital, Informal Governance, and Post-IPO Firm Performance: A Study of Chinese Entrepreneurial Firms.
Journal of Business Ethics, 134(4), 529-551.