Aecounting and Business Research. Vol. 39. No, 5, pp. 497-513, 2009 497
On the relatíon between corporate governance compliance and operating performance Heidi Vander Bauwhede
Abstract — Better corporate perfonnance has been cited as one of the main benefits of adopting good corporate govemance structures within organisations. However, in contrast to theory, a prior European study (Bauer et al., 2004) reports evidence of a negative relationship between corporate govemance and corporate performance. This study re-examines this relationship, and reports evidence of a positive relationship between the extent of compliance with intemational best practices concerning board structure and functioning and operating perfonnance when operating perfonnance is measured by the retum on assets (ROA). This resuh is robust to controlling for the firms’ compliance with best practices in other govemance areas, and holds for some other govemance dimensions, namely disclosure of corporate govemance and the range of takeover defences. Further tests indicate that greater compliance with intemational best practices conceming board stmcture and functioning is significantly associated with reporting less income from asset disposals and that studying a performance measure that includes this item obscures the inherently positive relationship between operating perfonnance and the extent of compliance with intemational best practices regarding board stmcture and functioning. The results provide some support for an often- cited motivation for the adoption of good govemance practices, and provide explicit evidence that the measure of operating perfonnance is cmcial in examining firm-level operating performance.
Keywords: corporate govemance; operating performance
1. Introduction This paper examines the relationship between corporate govemance compliance and operating performance for a set of large listed European companies. My focus is on compliance with intemational best practice in corporate govemance. Following Jensen (1993) and prior govemance research, I hypothesise that greater compliance with intemational corporate govemance best practices and, more specifically, best practices conceming the structure and functioning of the board, is associated with better operating performance, ceteris paribus.
I investigate the relationship between corporate govemance compliance and operating performance for a sample of European companies in 2000-2001, because, during that period, there remained consid- erable variation in corporate govemance practices
(see Wójcik, 2006; Bauer et al , 2008), notwith- standing that there were pressures from, for example, institutional investors or cross-listings to comply with intemational corporate govemance best practices and that in some countries local codes were, de facto, mandatory.”‘^
The study focuses on operating performance, and not stock market performance, in order to investi- gate fiirther the result of a prior European study (Bauer et al., 2004) on the relation between compliance with best practices conceming corpor- ate govemance and operating performance which seems to conflict with both theory as well as prior American results. More specifically, Bauer et al. (2004) report evidence of a negative relationship between ratings on the extent of compliance with intemational best practices and firm operating
The author is at Maastricht University and at Ghent University. She also has an affiliation to Katholieke Universiteit Leuven. She gratefiilly acknowledges Ping-Sheng Koh, Kevin McMeeking, Piet Sercu, Konstantinos Stathopoulos, participants at the 2006 European Accounting Association Annual Conference (Dublin, Ireland), the editor and two anonymous reviewers for usefijl comments. She also thanks Deminor for providing the govemance data. The usual disclaimer applies.
Correspondence should be addressed to Dr Heidi Vander Bauwhede, Maastricht University, Department of Accounting & Information Management, P.O. Box 616, Maastricht, 6200 MD, Netherlands. E-mail: H.VanderBauwhede@maastrichtuniversity.nl.
This paper was accepted for publication in July 2009.
‘ I refer to a study commissioned by the European commis- sion (Weil et al., 2002) and to the website of the European Corporate Govemance Institute (http://www.ecgi.org/codes/ all codes.php) for an overview of the corporate govemance codes in the European Union. Intemational govemance codes are, for example, those established by the Intemational Corporate Govemance Network (ICGN), and the Organisation for Economic Co-operation and Development (OECD).