The topic of corporate governance is vital to every listed corporation because the related principles guide the business practice and provide higher values with higher profitability for the corporation, (Aksu and Kosedag 2005). It is about rules and regulations and also a matter of ethics, therefore failure to comply with corporate governance issue has an unfavorable impact on the capital market and their investors, (International Federation of Accountants 2008). The lack of effective corporate governance results in huge amount of financial losses of corporations, like the Hong Kong listed company: CITIC Pacific Limited’s incident in 2008. This signals corporations that good corporate governance practice is fundamental to corporations’ success. This study is to find out the relationship between corporate governance practice and financial performance of corporations. More importantly, the Code of Corporate Governance Practice has become effective from 1 January 2005 onwards and listed corporations in Hong Kong must comply with the mandatory provisions. Corporations are also encouraged to comply with the voluntarily guidelines for best practices. Judges’ Report of the HKMA Best Annual Report Award 1994 pointed out that prior research shows that corporations only comply with minimum disclosure requirements of corporate governance standards. This study is going to assess the level of compliance of corporations with both mandatory provisions and voluntarily practices. It is commonly agreed that corporations in industry other than retail, especially the banking, public utility service, and property development industry, have better performance in corporate governance since 1990s when the corporate governance standards have evolved significantly. For example, Sun Hung Kai Properties Limited obtained the Corporate Governance Asia Recognition Award in 2009 from the Corporate Governance Asia Magazine; CLP Power Hong Kong Limited won the top award from the Hong Kong Institutes of Professional Certified Accountants (HKICPA) for the seventh successive year; and HSBC Holdings plc won the Best Corporate Governance Disclosure Award 2009 from HKICPA too. But for the retail industry, there is less prior research for investigating the corporate governance disclosure of these companies. Therefore this study is going to investigate the practice in the retail industry.
The research aim is to examine how corporate governance practice is disclosed in the retail industry and how it contributes to the corporations by looking at its impact on firms’ performance in operating, financial and stock market aspects.
To critically examine the importance of corporate governance to corporations and identify the contributions of corporate governance framework. To evaluate the disclosure behavior of listed firms in retail industry of Hong Kong. To compare corporate governance practice of the listed firms in retail industry of Hong Kong. To investigate whether or not companies with good governance would have better performance in operating, financial and stock market aspects by conducting ratio analysis.
The remainder of the research is set as follows. Chapter 2 reviews prior research and literature about theoretical framework, importance and contribution of corporate governance, development of governance disclosure, measurement of corporate governance, and hypotheses development. Chapter 3 describes the methodologies of the research. Chapter 4 shows the empirical findings: (1) corporations’ ranking for governance disclosure, and (2) relationship between corporate governance and performance. Chapter 5 concludes the research.
There is no single definition for corporate governance as it varies from countries by countries and firms by firms (Craig et al. 2007) and depends on how one view this (Salehi 2008). Salehi summarized the studies of prior researchers and grouped corporate governance into four views: accountability, integrity, efficiency and transparency. For the purpose of measuring corporate governance, Standard & Poor’s defined corporate governance as the reciprocal actions and influence of agents (managers and directors) and principal (shareholders) to manage the corporation in which the actions enable stakeholders to obtain certain returns from that corporation (Standard & Poor’s Governance Service 2004). It is similarly defined by the Hong Kong Institutes of Certified Professional Accountants (HKICPA) and Organization for Economic Co-operation Development (OECD) as coordination processes between manager, board members, shareholders and stakeholders, and the organizational structures which drive the direction, operation and the monitoring the corporation for achieving the organizational objectives. (Abdullah and Valentine 2009) provided a boarder definition for corporate governance as processes of managerial decisions making and a set of rules of management for both economic and non-economic activities carried out by the corporation.
There had been widely discussed the issue of separation of ownership and control of corporation in prior research (Boubakri et al. 2008). Two major theories were used to explain the issue where the agency theory on one hand presented a divergence of interests of agent and principal, and stewardship theory on the other hand demonstrated alignment of those interests (Davis et al 1997). (Mallin 2007) suggested several theories would influence the development of corporate governance, namely agency theory, stakeholder theory and stewardship theory.
(Jensen and Meckling 1976) famously describes the relationship between shareholders and managers as “pure agency relationship” where the shareholders (principal) who owned and acquired ownership of the corporation and maximized their returns with the assist of agents who serve the shareholders interests and control the corporation. (Davis et al. 1997) quoted the idea of (Walsh and Seward 1990) that organization would lose competitive advantages and would be unable to continue if managers act adversely with the shareholders’ aspiration. The author further explained that agency problem occurred when there is “a lack of attention to maximizing shareholder returns”, i.e. self-interested opportunism, where the principal is affected by the self-interest of their agents. Prior research have suggested two control mechanisms, the alternative executive compensation schemes and governance structures, can be used to solve the agency problem, to ensure shareholders wealth maximization and to guide the agents’ behavior (Demsetz and Lehn 1985; Jensen and Meckling 1976; and Davis et al. 1997). It is proved that agency costs have affected the means and mechanisms of corporation governance (Hutchinson and Gul 2003) and agency costs incurred for providing incentives and compensations for managers and monitoring their conducts can prohibit individualism of managers (Roberts 2005). Researchers had suggested that there are limitations associated with agency theory (Doucouliagos 1994 and Davis et al. 1997) as this assumed divergence of interests resulted from individualism of managers which in reality may not be appropriate to be applied to all agents. Moreover, as stated by (Jensen and Meckling 1976), controls of agency only provide potential profits that pleasing shareholders instead of making certain the shareholders wealth are maximized. (Roberts 2005) provided other opposes to this assumption, for example, (Donaldson and Dais 1991) who applies Mc Gregor’s Theory Y to agents.
(Davis et al. 1997) quoted the definition of stewardship theory introduced by (Donalson and Davis 1989, 1991) as “a means of defining relationships based upon other behavior premises” which is opposed to the agency theory. (Mallin 2007) explain that stewardship theory draws on the assumptions underlying agency theory. With regard to the stewardship theory, organizational structure is supposed to facilitate effective action by the managers and directors and to help them to formulate and implement plans for better corporate performance. However the theory has never been empirically to directly explain agents compensation or been used as an underlying theory (Hengarrtner 2006).
The stakeholder theory applies to a wider context that to give thought to a group of people such as employees, customers, government, creditors and general public, other than just the shareholders (Mallin 2007). The author also stated that corporations strive to maximize shareholders value together with the aim to care about the interests of stakeholders. (Jensen 2001) stated there are theorists oppose to stakeholder theory because it aims to address the interests of all stakeholders which may not be logically possible and theorists provided no explanations of how to trade-off against those interests. The tradition view of stakeholder theory is therefore modified by the author who enlightened value maximization to solve problems that arise from multiple objectives that accompany traditional stakeholder theory.
There are four major types of corporate governance practice models adopted by corporations worldwide (Bhasa 2004). 2.3.1 Market-centric governance model 2.3.2 Relationship-based governance model 2.3.3 Transition governance model 2.3.4 Emerging governance model
Corporate governance is important because it contributes to the well-governed corporation: increase in firm’s value and higher profitability (Brown and Caylor 2005) and lower cost of investment of shareholders (Ashbaugh et al. 2004). Corporate governance can enhance accountability for stakeholders and ensure the corporation meets the needs of the general public (Peter and Nelson 2006). The mechanism can also minimize agency cost and avoid reduction of firm’s market value resulted from managers’ opportunism (Øyvind et al. 2004). Prior researcher had designed methodology and carried out empirical analysis in 30 countries for investigating the contribution of corporate governance, and it is found that better governance report enhance productivity of factors and economic growth (Sadka 2004).
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