Introduction

Corporate governance is an essential issue in the value measurement or management efficiency

of a corporation, which is a set of methods operated and implemented by all participants in the
governance or management in a corporate. Corporate governance deals with the rights and
responsibilities of a company’s board of directors, its shareholders and various stakeholders. In
the past two decades, corporate governance has become the focus of attention of managers,
academics and policy makers owing, among other things, to an increasing concern over the
incidence of corporate fraud and fraudulent financial reporting arising from scandals and
corporate collapses. The attention given to the corporate governance structure of firms seems to
imply that it has a critical impact on the strategies and policies and hence their performance. The
process is affected by many fields, such as legislation, regulation, market mechanisms, listing
standards and best practices. Good corporate governance seems to bring some perceived
advantages such as enhancing the transparency and accountability in a corporattion. However,
whether good corporate governance improves the financial performance (return) in a corporation
has been discussed during these years and still up in the air. Therefore, this topic is so important
to be analyzed that it can tell managers how to maximize the firm value without harming their
interests.
This research will analyze some typical corporations in the UK market from 2002 to 2012 to find
the evidence whether there is a positive relationship between corporate governance and corporate
financial performance in UK. Previous works have given several financial theories on this
question. Moreover, the importance and advantages of this research is to corporation managers,
investors, and the corporation itself.

1.2 Aim and Objectives

The research aims to find the relationship between corporate governance and financial
performance among corporations in UK. The evaluation of corporate governance variables will
facilitate to understand the positive influences on firm value if the corporate governance is well.

The main objectives are to investigate whether:

(1) To identify that good governance variables are associated with better corporate performance;
(2) To evaluate that governance variables are mutually dependent with other coporation’s
Characteristics
3) To verify that there is a positive relationship between corporate governance and financial
performance among corporations in UK.

1.3 Research Questions and Hypotheses

In order to verify the positive relationship, the following questions will be analyzed:

1) Why well governance improves the firm performance (value).

2) What is the relationship between corporate governance and financial performance among
corporations in UK?
3) How to choose the data and regression methods to do the research?.

On the basis of above listed objectives and questions, there are several hypotheses on the
research model.

H1: the stock returns are used to proxy corporate performance, the assumption of this hypothesis
is that the listed companies can represent typical corporations in UK.

H2: CGQ is a database that is produced by one of the leading governance data providers,
Institutional Shareholder Services (ISS). This hypothesis is based on the assumption that
comprehensive index can measure the governance well and without other factor influences.

2. Literature Review

2.1 Definition of Corporate Governanace

While the Cadbury Report’s (1992, p2) definition of corporate governance as ‘the system by
which companies are directed and controlled’ is frequently cited, other authors have also
attempted to characterise and define governance. The OECD’s Principles of Corporate
Governance (OECD, 2004, p11) suggests: corporate governance involves a set of relationships
between company’s management, its boards, its shareholders and other stakeholders. Tirole
(2001, p4) defines corporate governance as: The design of institutions that induce or force
management to internalise the welfare of stakeholders.
The UK corporate governance framework is now well developed and covers all the main
corporate governance mechanisms: board structure; leadership structure; ownership structure;
internal control systems; and institutional investors. Recent reviews have revealed no widespread
appetite for radical reform on corporate governance (Fraser and Henry, 2003; Financial
Reporting Council, 2006). The FTSE and Institutional Shareholder Services (2005) reviewed a
wide range of accepted standards and codes globally. The review enumerated more than 60
corporate governance criteria which were grouped into five broad themes: structure and
independence of the board (44% of the criteria); equity structure (21%); compensation
systems for executive and non-executive directors (17%); executive and non-executive stock
ownership (9%); and independence and integrity of the audit process (9%).

Theoretical Framework
The most widely used framework for analysing the relationship between the firm and its
shareholders is agency theory. The theory refers to the relationship between one party
(principal/shareholder) that entrusts resources for management to another party (agent/manager).
Under business settings with incomplete information and uncertainty, the principals/shareholders
cannot ascertain whether the agent/manager has put maximum effort into increasing their wealth.
There are three categories of mechanisms that have been identified and can be used to
align the interests and objectives of managers with shareholders: use of executive compensation
plans that align managers’ interests with shareholders; legal and regulatory protection; and
bonding agreements under which management contract to behave in certain ways and achieve
certain goals together with the monitoring of management actions and their outcomes.
Agrawal and Knoeber (1996) examine the use of seven mechanisms to control agency problems
between managers and shareholders. they identified the following mechanisms: shareholdings of
insiders; institutional shareholdings; large block holders; use of outside directors; debt policy; the
managerial labour market; and, the market for takeover or ‘corporate control’. They note that the
use of each mechanism depends upon the choices of other mechanisms as well as other factors
such as technology of production, markets in which the firm operates, and characteristics of the
CEOs.
Previous work has given many explanations and models to verify the relationship. For example,
Love (2011) and Connor (2012) all provided their own innovative thinking on this problem.
Love (2011) compares the interests in a corporation to a pie that better governance will make the
pie bigger as well as distribute it in a more proper way.

Connor (2012) uses the innovative theory— “investable premium” to explain the processing
channels. He says that there has been a gap between well-governed and poorly governed firms
which is called “investable premium”. Well governance brings large premium, and then brings
well performance. This “investable premium” is greatest for single-class share firms. Dual-class
share firms do not experience an “investable premium”, relative to other single- and dual-class
non-investable firms, but do so relative to their counterpart non-investable dual-class firms.
Next, using the agency cost measures; I find that better-governed firms experience the largest
“investable premia”. All in all, these findings are consistent with a large literature, which shows
that investors are less likely to invest in poorly governed firms (Leuz et al., 2009; Aggarwal et
al., 2005), and appear to confirm Stulz’s (2005) assertion that the gains from financial
globalization (stock market liberalizations in this instance) are limited by what he refers to as the
agency problem of “corporate insider discretion”. Here the agency cost arises since insiders run
the firm in their own best interests, and not in the interests of outside minority shareholders.
Consequently outsiders/institutional investors are less likely to invest in these firms. The result is
that poorly-governed firms and dual-class share firms in particular gain little, or at least in the
case of the latter, much less than their single-class share counterparts. As a result, these findings
suggest that firms should improve their governance prior to becoming investable in order
maximize the subsequent valuation gains. Since stock market liberalizations tend to occur when
financial markets are already well-developed (Kim and Kenny, 2007), and the costs of improving
corporate governance tend to be much lower as a result (Doidge et al 2007), then the net effect
(i.e. the benefits of becoming investable less the costs of corporate governance improvements
prior to becoming investable) of becoming investable is still likely to be positive.

In the data processing, there are different measurement on corporate governance and financial
performance. But there is no conclusion that which method is the most proper. Most researchers
use stock returns to proxy corporate performance, while some add Return on Assets (ROA) and
Return on Equity (ROE) as index. Most researchers run one regression, while some run more
than one such as Brown & Caylor (2009) who run six regressions. There are many factors which
are used to proxy corporate governance such as shareholder rights which are used by Gompers,
Ishii & Metrick (2003) and board independence which are used by Bhagat & Black (2002).
Besides, Cheng, Evans & Nagarajan (2008) prefer board sizes as proxy. However, some develop
corporate governance indices to include more provisions. Bhagat & Bolton (2008) create GIM
and BCF as indices, while Brown & Caylor (2009) broaden analysis and cover 51 different
provisions to firm operating performance. Bauer, Eichholtz & Kok (2010) create Corporate
Governance Quotient index (CGQ) as an index.

3. Research Methodology
Choosing an appropriate research technique is central to the success of any research. It is also
important to differentiate between data collection and data analysis. The data collection will be
done through sampling, surveys, interviews and questionnaires. There are different opinions
regarding the quantitative research. Gill and Johnson (2008) are of the view that the variables
and the correlations existing between them are the foundation stone of any research and thus,
carry utmost importance in quantitative research. It is the capacity of relationships between
variables that is important and not the process.

The data to be used in this research is acquired from the annual reports published by the
respective corporations which have been selected for this study. The variables that are important
to this study are executives’/directors’ compensations, corporate governance, authorities of the
Board of Directors, Returns on Equity (ROE), Returns on Investment (ROI), volume of the sales,
total net profit, paid dividends and retained earnings for 2004-2013 period. The internal validity
of this study can only be maintained by having appropriate data variables for the quantitative
research, as stated by Burks and Malhotra (2007). Testing of the hypotheses will be done on the
basis of correlation between variables and ratio analysis will be made on the base of data
acquired from the respective corporations.
3.1 Research Design
There are two methods which can be used in the processing model which are ordinary least
squares (OLS) and three stage least squares (SLS). In the regression, corporate governance
(CGQ) is the independent variable, and financial performance (ROA, ROE and stock returns) is
the dependent variables. Although it is better to use both methods, we will choose OLS for the
consideration of workload. Moreover, CGQ index includes governance measures on eight
different categories, which gives a complete proxy of corporate governance. To check the
robustness of the results, we also research on ROA, ROE and stock returns to represent corporate
performance, and run three regressions respectively.

3.3 Data Access and Collection

This research will focus on corporations in UK, and some methods will be synthesized to form a
regression model. It will use CGQ to be the proxy of corporate governance. This index includes
eight different categories of governance measures and thus represents a much more perfect proxy
of corporate governance. And it will use ROA, ROE and Stock returns to be the proxy of
corporate performance. ROA, ROE and returns will be regressed with CGQ respectively, so
there will be three regressions.

3.3.1 Secondary Data Collection

No research is complete without incorporating secondary data. Secondary data collection mainly
makes use of the resources such as books, magazines, newspapers, journals and of course, in this
day and age, internet. Thus, this study would also acquire financial data such the financial
statements from bank websites and the database of London Stock Exchange. The other major
sites, Thomson One Banker and World Scope are also to be used for data collection.

3.3.2 Primary Data Collection

The research is primarily based on the secondary data and therefore, no primary data is used in
this study. All the analysis and findings will be based on the secondary data collected from the
firms’ resources.
Firstly, the CGQ index will be provided by ISS, which is based on public disclosure documents
of all the chosen listed companies. And then, the ROA, ROE index will be get from the financial
announcements every year of those companies, and there are ten data respectively from 2002 to
2012 for ROA and ROE are accessed in companies’ annual reports.

Stock returns can be measured on a daily basis. And the data will be collected from database in
the university’s library. CGQ index can be found in ISS, and there is a way to be a registered
member of this organization. ROA, ROE index will be found in the annual reports of each
chosen corporations, which are public. And they can be downloaded on the Internet. Stock
returns can be searched on the internet as well. However, the data are too much as in a daily
basis, so the university’s library may help. The daily returns of listed companies can be searched
in the financial market database.

We examine the relationship between corporate governance and sustainability, using the extensive
Bloomberg Environmental, Social and Governance (ESG) data universe. Eccles, Ioannou, and Serafeim
[2012. The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance.
National Bureau of Economic Research, Inc., NBER Working Papers: 17950] argued that a corporate
culture of sustainability plays an important role in various facets of a firm's corporate behaviour and
performance. We argue that quality corporate governance itself can engender high sustainability
performance. We also build on the work of Aras and Crowther [2008. “Governance and Sustainability:
An Investigation into the Relationship Between Corporate Governance and Corporate Sustainability.”
Management Decision 46 (3): 433–448] by investigating the relationship between specific corporate
governance and sustainability characteristics of S&P 100 companies in the USA. Our initial exploratory
findings suggest that environmental disclosure scores and ESG disclosure scores are strongly influenced
by governance disclosure scores. Board meeting attendance is an important predictor of both scores,
suggesting that more disciplined boards result in better sustainability performance. Boards with a higher
percentage of independent directors also have higher disclosure scores and are more likely to have
climate change and an environmental supply chain management policy in place. They are also more
likely to be Global Reporting Initiative compliant, to have a green building policy and social supply chain
management. A disturbing pattern emerges, however, when assessing firms' follow-through on declared
commitments. It turns out that few firms that purport to have climate change policies in place have
actually discussed climate change risks or opportunities. We discuss some implications of these
preliminary

Paul Shrivastavaa* & Amr Addasb

pages 21-37

The impact of corporate governance on sustainability performance

Journal of Sustainable Finance & Investment
Volume 4, Issue 1, 2014 DOI:
10.1080/20430795.2014.887346

We hypothesize that CSR serves as a control mechanism to reduce deviations from optimal risk taking,
and therefore, CSR curbs excessive risk taking and reduces excessive risk avoidance. Based on the
stakeholder theory, firms with CSR focus must balance the interests of multiple stakeholders, and
therefore, managers must allocate resources to satisfy both investing and non-investing stakeholders’
interests. Using five measures of corporate risk taking and a sample of 1,718 U.S. firms during 1998 to
2011, we find that stronger CSR performance is associated with smaller deviations from optimal risk
taking levels. We examine the mechanism through which CSR has an impact on firm value and find a
positive indirect impact of CSR on firm value through the impact of CSR on risk taking. CSR performance
is positively associated with firm value because CSR reduces excessive risk taking and risk avoidance.
Harjoto, Maretno A. and Laksmana, Indrarini, The Impact of Corporate Social Responsibility on Risk
Taking and Firm Value (May 24, 2016). Journal of Business Ethics, Forthcoming. Available at SSRN:
http://ssrn.com/abstract=2782615