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THE LITERATURE OF CORPORATE GOVERNANCE PRINCIPLES
10 Degree of compliance.Table of Contents Introduction………………………………………………………………………….....………………………………………………………………….4 Hypothesis…………………………………………………………………………..3 Corporate Governance Principles………………………………………………….………………………………………………………………10 References………………………………………………….2 Problem Statement…………………………………………………………………......2 Literature Theoretical Background…………………………………………………..8 Measurement of Variable……………………………………………………………9 Research Design..3 Corporate Governance Principles: The Code……………………………………….………………………..16 1 .
the Cyprus Stock Exchange collapsed and caused many to lose their investments. no matter how much they flourished many business eventually face a downfall. In the 1990s.Introduction: “Whatever goes up must come down. is there a way to manipulate or avoid this theory? Corporate governance is an old phenomenon that was the key to maintaining a businesses‟ stability and attract foreign investments by following certain rules. it is revealed that many 2 . the real question is. it rose and will come back down. Although this event has started the change in the Cypriots‟ view of the Corporate Governance Principles. (OECD. In September 2002. according to Maria Krambia-Kapardis and Jim Psaros researches. and as the theory predicted. financial institutions and markets. The implementation to this governance was not deemed important to the Cypriot businessmen. However. Could it be that businessmen are too confident and end up being careless? Or is it a natural force of gravity? Despite the theory.” It is a theory that has been used for many centuries. maintains the stability of the economies. and the full benefits of these principles are not received. Observing many businesses. many companies don‟t take the principles seriously. 2010) It was after the collapse of the Cyprus Stock Exchange that many Cypriots began to follow the Corporate Governance Principles. Problem Statement: Corporate Governance is a set of rules a company should follow and is the key to the reliability of corporations. leading to failure in businesses. the economy in Cyprus was flourishing.
According to their research. By doing this. It is natural that the Cypriots to 3 . When the word „worldwide‟ comes into view. most companies of different countries are governing their business by using corporate governance principles as a guideline of how to manage their company.companies have either fully. The purposes of using these principles are not only beneficial to the stability of a business but to actually attract foreign investors. companies will flourish and rise to its highest peak. using the events that occurred in Cyprus as an example. Maria Krambia-Kapardis and Jim Psaros (2006) conducted a research on the implantation of corporate governance principles in a growing economy. Krambia-Kapardis et al. regulatory and economic infrastructures for each country. where its code originated from the history and economy of the UK. The question that is then revealed: What are the reasons why most companies chose to or not follow most principles? What are the consequences of those who obey or disobey the principles? And what would it take for all companies of the Cypriots to show their full compliance to the Corporate Governance Principles? Literature Theoretical Background: Corporate Governance Principles In the world today. The Cyprus Code is mostly based on the Anglo-Saxon model. or didn‟t comply with the principles. (2006) found from Prowse (1994) notes that are there are two main corporate governance systems. the occurrence of these principles isn‟t new and it has been spread and preached worldwide since the mid 1990s. it is apparent what the difficulty in implementation of the principles or code would be with respect to the differences in cultural. legal. partially. the Anglo-Saxon model and the institutionallybased model.
130) Following the code is like having a governor governing his country while obeying a set of laws. In addition. the accountability of the audit. state the 4 . Honesty is a must in order to win the trust with each committee. provide unbiased judgment.follow this code since it must adapt to the same principles in order to attract foreign investors. To determine an effective board involves meeting at least 6 times a year. however. 2006. Most Cypriot companies have high degree in ownership of bank shareholdings. Cyprus‟s legal infrastructure are not fully developed and its‟ securities against insider trading is not very convincing. (Krambia-Kapardis & Jim Psaros. (Krambia-Kapardis & Jim Psaros. pp. the major weak point in these securities market is that they are still in their early stages and barely provides opportunities for diversification. 2006. with timely and reliable information flow in the market. In order to determine the effectiveness of the Anglo-Saxon model many facts were reviewed. (2006) stated the most common reviewed codes included four sections: the Principles of the Code. 129) Corporate Governance Principles: The Code Following the codes is a major necessity in order for a business to prosper and present a high sense of reliability and confidence of the company. the director‟s remuneration. pp. Krambia-Kapardis et al. reveal the directors‟ remuneration. The board must reveal its remuneration policy. They also have securities market that regulate and ensure that there are no insider trading. and the relations with shareholding. Every company should set an effective board of directors that will help govern a company. be up to date with the new flow of information in order to make correct decisions. and ensure smooth transfer of power in the higher echelons of the company.
This committee should be comprised of independent non executive directors (NEDs) How they are chosen depends on their honesty. Finally. Another step that follows involves the audit committee. Who the board should appoint as a member of the audit committee depends on the knowledge and experience they have in accounting or finance. the same rule 5 . Having different cultures may have an effect on businesses. They must avoid any close relationship with members to avoid any possible conflict regarding independence. must reveal details. The importance of the audit committee is due to the fact that they have the skills to keep a balance between the maintenance of objectivity and value for money. must review annually in order to alert all shareholders. even though most shareholders rarely do disapprove. The third step involves the nomination committee. however in order to maintain a perfect governance. that is stability in a company and much more foreign investments. These rules apply to companies worldwide. knowledge and experience. Sometimes the chairman of this committee can be the chairman of the main board which provides the scope for a closely controlled board. In order to obtain good corporate governance. Members of this committee should meet up at least twice a year. Remuneration packages must be approved by shareholders. Not following these steps may result in harsh consequences against the company. remuneration committee must be created to avoid conflicts of interests and should consist only in NEDs.continuation of the consistency. each and every code must be obeyed. reliability. The management of each committee is determined on how effective and satisfactory are the benefits received. thus gaining their trust and when it comes to any loans.
Little of the companies in the country of Cyprus showed their respects to the rules and regulation to the principle for the good of their company. according to Maria Krambia-Kapardis and Jim Psaros statistics. This issue results in a confusion why others refuse to comply. Nevertheless. They also realized that most companies are family oriented and it would be to their advantage not to follow the code since it could mean losing control of governing their own business. (2006) interviewed companies and found that many claim that following the code would be too expensive for them. with a sign of lack in motivation. In addition. following the principles is not obligatory. So what are the actual reasons why most companies chose to or not to follow most principles? When Corporate Governance Principles define the fact that companies need to follow these sets of rules.is applied throughout each country. One of the possible reasons could be that not following the code is not against the law. Krambia-Kapardis et al. only a few complied with the code and many partially or did not even obey the code. The possibility that many companies‟ interests aren‟t focused on foreign investments is questionable. This is beneficial to the company‟s progression. However. they will gain foreign investments. Companies who aren‟t inspired to follow the code don‟t fear any punishment and see no need to comply with the law. As being culturally related to their behavior. the study of Krambia-Kapardis and Jim Psaros (2006) reveals that not all companies are willing to comply with the code. companies of Cyprus also stated that their belief in attracting foreign investments are false hopes since they don‟t see what a foreign investor would gain from investing in the shares of a small developing economy. they feel that 6 . Also.
Authorities began to encourage education for local company officials for the sake of the company to comply with the principle. It was suggested by Krambia-Kapardis et al. 2006. and attitude. 2006. 129) With the study of Krambia-Kapardis and Jim Psaros. 137) These steps to education are also one of the steps that the Cyprus Stock Exchange took. (2006) that taxes could be an incentives for a higher degree in the number of companies‟ compliance. pp.137) Another way of building up motivation is convincing companies that obeying the code would be entirely beneficial to them and give the company more added-value. pp. which could be an advantage to a greater governing from a government perspective. (2006) Ararat and Ugar (2003. behavior.there is no reason to comply with something that does not seem necessary. even for a family owned company. regulations. From the researches of Krambia-Kapardis et al. pp. (Krambia-Kapardis & Jim Psaros. (KrambiaKapardis & Jim Psaros. the lack of motivation due to the Cypriots‟ cultures and lifestyles are revealed and a question is asked: What would it take for all companies of the Cypriots to show their full compliance to the Corporate Governance Principles? Steps to develop the need for the Cypriots to follow the Corporate Governance Principle must be created and taken action. (Krambia-Kapardis & Jim Psaros. and enforcement do not mean changes in values. 2006. One of the steps they took to encourage education in this field is by inviting foreign guest speakers who preaches the importance of corporate governance and the advantages that comes with it. One of the stock exchange strategies involve listing companies according to a 7 . 136. pp.72) states that changes in rules. It could be tax claims for the initial costs of establishing practices.
But after revising the principles it has been stated that in order to succeed every country should monitor its corporate governance and also get involved in the international dialogue (Krambia-Kapardis & Jim Psaros. to be able to establish a successfully booming business the code and principles of governance must be followed.different category in markets that resembles different ranks: Main Market. With this. financial and capital markets and must be controlled by the remuneration committee. This fact is believed true even though it faced implementation problems in several countries where the principles where followed. The hypothesis states that if a company follows the code and all principles they will have a fairly large chance of progressing and enlarging since it attracts foreign investors and is greater publicity for the organization. These are as such that all employees at the board level must have no familial connections and therefore recruitment is based only on experience and knowledge on economic investment. Parallel Market. and as a result obeying the code will not only result in the progression of a company but also improve the economy as a whole. Alternative Market. Following the 8 . Debenture Market. thus independent individuals. As a result. those who don‟t comply will be lowered by rank and thus affecting their chances of attracting any foreign investors. Hypothesis According to Maria Krambia-Kapardis and Jim Psaros. Companies that fully obey the code are listed under the „Main Market‟ thus giving them more credibility and opportunity to attract foreign investments. 127) . 2006. every company must have certain rules to follow with regards to employees at the board level of the company to become NEDs. and Investment Organization Market. In addition to that. pp. companies don‟t have a choice but to comply.
pp. So larger companies were found to be more “sensitive to corporate governance than smaller ones” (Krambia-Kapardis & Jim Psaros.case study. the rules must be implemented and adapted to. past data of pervious years must be looked at for the company this will be considered as the null hypothesis. 2006. pp. 131) and thus the size is a 9 . in order to maintain stability and prosperity worldwide. This may also be compared to those of more recent years after adapting to the system. 2006. Measurement of Variable As a control variable. When working on a bigger scale to try to comply with the corporate governance code what could be used as a control variable is the GDP of several years back. And so the internal organization successfulness will be spread from the one organization to global relationships. Cyprus. Although cultures differs from one country to the next and even within the same country. 130-135). Variables such as size of company or industry were taken into consideration and were related directly to the results. the concept is hard to follow since it is a small country where familial ties and directorship is almost everywhere. where the rules are in fact being implemented to check the difference in progress and development of the company and its size. If company fails to comply with the set of guidelines for a successful business the company would suffer a downfall in its prosperity or just simply remain in its position until it eventually naturally falls. This control group will be looked at where the principles and codes are not being implemented properly and then compared to the H1. Maria Krambia-Kapardis and Jim Psaros researched the percentage and degree of compliance with regards to different companies and compared the results (Krambia-Kapardis & Jim Psaros.
The other 6 just stated their agreeableness to comply with the code in the future. Here is a summary of the results of this research. So 40 out of these 46 companies have at least some level of compliance with the Code. This study shows that for the year ended December 2002. Research Design Using an Ethnographic strategy.dependant variable. Now what these researchers did was analyze both the companies‟ documents (the end of year reports) and the corporate governance report and then determine the extent to which these companies have complied with the Code. Krambia-Kapardis and Psaros were able to study the compliance of all Cypriot companies with the Code imposed on them. The more compliant the company is to the code the larger it can grow in size. Furthermore. 35 only partially complied and six companies only expressed their intention to comply with the Code in the up-coming year 2003. knowing that the remaining 114 companies did not even include a corporate governance report in their yearly report. The code is therefore the independent variable. the most positive thing we can conclude about this research is that 46 out of 160 companies were corporate governance sensitive. Degree of compliance: After analyzing the 46 corporate governance reports. In other words. The outcome didn‟t look too good. the researchers found that only five companies had fully complied with the Code. 29 percent of companies in this region turned out to be corporate 10 . there were 160 listed companies and only 46 of them lodged a corporate governance report with their annual return.
p131) Industry Companies in industry Total noncompliance Some level or intent to comply N 3 7 3 6 1 3 2 2 4 5 10 46 % 75 25 75 30 12 19 20 40 44 36 24 29 Full compliance Partial compliance Intent to comply Banking Approved investment org. Table 1: Summary of compliance with the Code at 31 December 2002 (Krambia-Kapardis and Psaros 2006. Below is a table that summarizes this observation. They split the degree of compliance of companies into the different industries they belong to. Tech. A table with numbers and percentages of compliances is provided below. Financial services Hotels Other Total N 4 28 4 20 8 16 10 5 9 14 42 160 N 1 21 1 14 7 13 8 3 5 9 32 114 % 25 75 25 70 88 81 80 60 56 64 76 71 N 1 % 25 1 1 2 5 11 7 5 3 N 2 6 1 4 1 3 2 2 3 4 7 35 % 50 21 21 20 12 19 20 40 33 29 16 22 N 1 2 2 % 4 50 10 1 6 3 4 11 . Table 2: Degree of compliance with the Code by industry (Krambia-Kapardis and Psaros 2006. the researchers continued to analyze the data retrieved from the reports. This reveals a very low level of company compliance with the Code.governance sensitive. Insurance Manufacturing Tourism Trading Building & cement Info. p131) N 5 35 6 114 160 % 3 22 4 71 100 Full compliance Partial compliance Intent to comply in the future Non compliance and no stated intent to comply in the future Total After this observation.
the percentage of the market capitalization for the corporate governance sensitive companies was greater than the percentage of the corporate governance companies within the industry. 46 of them were corporate governance sensitive. However. 75 percent of all banking companies showed some level or intent to comply. The rest of the industries lacked compliance. „for 7 of the 11 industries. Maria and Jim went further to analyze compliance of these companies with the code by size of company (table 3). In addition.216 Cypriot pounds (other). Moreover. Krambia-Kapardis and Psaros (2006) added.070 Cypriot pounds while the next largest other corporate governance sensitive corporations belonging to an industry having only 184.162. them having total industry capitalization of 1. a large part of these differences is due to the size of three large banking corporations that were corporate governance sensitive.148. Also. Of the 160 companies listed. The financial services industry also showed a better sensitivity to corporate governance than the rest of the industries apart from the banking and insurance industries. This here might cause inaccuracy in their findings. 12 . the market value of these companies represented 64 percent of the total market capitalization of the Common Stock Exchange.‟ Now despite these statistics. they concluded that the banking and insurance industries appear to be the most sensitive to corporate governance. 75 percent of all insurance companies showed the like.362. 44 percent of the companies in the financial services industry showed some level or intent to comply with the Code.From this table.
070 11.725. Maria and Jim scrutinized other areas of the firms‟ reports.614 194.897 1.937 90.474 57.259. Similarly.287.998 108.432.847.248 224. Manufacturing Tourism Trading Building & cement Info.453.954.985 63.334 184. Total N 4 4 20 8 16 10 5 9 14 42 28 160 N 3 3 6 1 3 2 2 4 5 10 7 46 % 75 75 30 13 19 20 40 44 36 24 25 29 CY pounds 1.762 4. Tech. only 4 out of the 35 companies that provided a corporate governance report gave Chairperson Power to an independent non- 13 .585 2.982 264.735.028 373.157.002 99 58 34 7 66 32 60 40 20 51 29 64 Now after analyzing these aspects of the companies. p132) Industry Companies in industry CG sensitive companies Total industry capitalization Market capitalization for companies which were CG sensitive % of market capitalization for companies which were CG sensitive Banking Insurance org.736 17. audit committee.723. Board of directors (use table 4 for reference): Pertaining to the Chair of the Board.100 71.865. they created tables in order to interpret the results and arrived with the following observations.063.659.362.890 140.493.002.333.959.216.432.292.134 CY pounds 1. These areas include the board of directors.364 69.144 142.3184.108.40.2061.Table 3: Degree of compliance with the Code by size (Krambia-Kapardis and Psaros 2006.216 40.736 44.148.339.602 29.679 19. nomination committees and remuneration committees.564. Financial services Hotels Other Approved investment orgs. They checked for any changes made and reviews included about these aspects that coincide with the Code.
Finally. 11 companies gave no information about their meetings. the researchers noticed that the findings were mixed. This part has to do with disclosures on various items the Code requires the companies to carry out. 1 company declared that it met only once a year. Secondly. From 14 . While reviewing the regularity of meetings.executive director (NED). the last part of the board analysis was decent. 34 of them stated that they had a Board that was made up of at least one third NED and 18 companies stated that the majority of their NEDs were independent. and the remaining stated that they met at least 6 times which coincided with the Code requirement. only six companies indicated that they did not have any independent directors on their boards. So this might account for erroneous findings. Concerning the composition of the board. They might actually be children of important clients in the company. shareholders or founders of the company. one thing must be taken into consideration while assessing this. 20 out of these 35 companies had a Chairperson who was also the CEO of the company but only 8 of them stated this in their reports. The Code requires all companies that consist of persons having dual roles to provide justification about this matter. This is a good sign because this means that the majority of the companies have complied with this law that comes within the Code but according to Maria and Jim. it is not for certain that the NEDs that are identified by the companies as independent are actually independent.
the statistics. we notice that the majority (the lowest 60%) of the companies carried out these requirements. 15 .
00.d. & Psaros.html 16 .org/topic/0. (n.en_2649_37439_1_1_1_1_37439.. J. 2010 from http://www.3373. Organization for Economic Co-operation and Development.References Krambia-Kapardis.) Retrieved November 31. 127. 14(2). 129-137. M. (2006) The Implementation of Corporate Governance Principles in an Emerging Economy: a critique of the situation in Cyprus.oecd. Corporate Governance.
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