Coupling compliance with values: an integrative approach to effective corporate governance

Abstract

This dissertation aspires to contribute to a better understanding of the components of good corporate governance. The definition as well as the measurement of sound corporate governance has been an area of intense inquiry since the inception of corporate governance as the principal-agent problem between the owners and the managers of the widely-held corporation by Fama and Jensen in the 1980’s. Up to now the majority of research has attempted to measure good corporate governance using compliance-based approaches. However, a credible link between formal corporate governance controls and firm performance has not yet been established. Furthermore, the financial crisis of 2008 showed a lack of basic corporate governance. These have cast research in identifying other factors, which take into account the ‘human side’ of corporate governance and in fact shape actual corporate governance behavior. This thesis is in this spirit. It aspires to mirror the production function of good corporate governance by identifying potential outcomes of good corporate governance and by investigating the effects of compliance-based and values-based mechanisms on these outcomes. More specifically, the thesis, following a compliance-based approach, develops a formal governance model that investigates whether the degree of compliance with the various structural corporate governance practices is translated into effective corporate governance, as well as other institutional factors that may decouple corporate governance compliance from implementation. Moreover, capitalizing on a values-based approach, this dissertation develops an informal governance model that examines the role of shared values in promoting good corporate governance. Furthermore, the study investigates which approach, the compliance-based or the values-based, is more effective in fostering good corporate governance. Last, the study examines whether good corporate governance, as conceptualized by this dissertation, pays off. Cross-sectional analysis of a sample of 100 Greek listed firms empirically supports the aforementioned ideas. Our findings indicate that the degree of compliance with corporate governance prescriptions claimed in the CG annual statements is not a sine qua non condition for effective corporate governance. Good corporate governance stems primarily from an ethical/relational culture that defines ‘right’ behavior in each and every case, i.e., from coupling compliance with ethical shared values that enhance stakeholders’ relations. Moreover, we show that only the actual implementation of corporate governance guidelines is associated with better firm outcomes, such as CSR engagement. Finally, research and policy implications as well as directions for further research are provided.