An examination of the application of the 'if not, why not' form of corporate governance in Australia

Abstract

The principal intent of this thesis is to study the impact of the new corporate governance regulations introduced in March 2003 by the Australian Stock Exchange Corporate Governance Council (ASXCGC) which the ASX convened in August 2002 to develop guidelines to reflect international best practice. The new governance guidelines titled 'Principle of Good Corporate Governance and Best practice recommendations' are premised on the principle of the 'if not, why not' model similar to the 'comply-or-explain' introduced by the UK Cadbury Committee in 1992. The best practices recommended by the new guidelines are not strictly mandatory. Companies can choose not to follow the best practices by explaining why they are not appropriate to their circumstances. The ASXCGC adopted this particular model in light of the considerable differences in the size of the companies making up the Australian stock market. In this thesis, the new governance regulation has been examined from two perspectives: (i) responses by companies to the new regulation and (ii) benefits to the companies flowing from adopting the new best practice guidelines particularly with respect to winning investors' trust and confidence which had been severely weakened by the corporate crises of 2001 triggered by the collapses of high profile corporations in Australia and overseas jurisdictions, primarily in the USA. The first research question which relates to the change in the corporate governance practices of Australian listed companies following the introduction of the ASX guidelines was investigated using a descriptive analytical approach. The findings showed a considerable improvement in company's governance practice in the areas of board independence, establishing board subcommittees to effectively deal with controversial issues of audit, remuneration and directors' nomination, and developing and maintaining policies and procedures aimed at encouraging directors and managers to be ethically responsible. However, there appears to be a substantial gap in compliance between guidelines that requires companies to have policies compared to those requiring structural changes. The benefit to the company from adopting the new regulations, particularly in regard to repairing investors' confidence reduced by the financial crises, is addressed by a second research question "" how the company's level of compliance with the ASX guidelines affected investor confidence? This is tested by means of a quantitative analytical approach employing OLS Regression model with the inclusion of a proxy variable for investor confidence. This methodology was a departure from the usual approach to studying investors' opinions (i.e. questionnaire survey). The findings showed that companies adopting the ASX guidelines experienced significantly lower stock return volatility (proxy for the investor confidence), suggesting that compliance with the recommended best practices improved investor confidence. This confirmed the general expectation, and is consistent with previous studies, that the new regulatory guidelines would on average improve investors' confidence. Another important finding of this analysis was that the guidelines governing managers' behaviour and the company's financial integrity are not effective on their own but that they complement the overall effectiveness of the company's corporate governance system. The third research question addresses whether company specific characteristics such as size, age, growth rates, leverage, and industry could help explain the likelihood of the company complying with the best practice guidelines particularly with board and board subcommittee related. This is examined quantitatively, using the Binary Logit Regression model. This analytical method predicts the potential explanatory power of company specific variables in the company's compliance decision instead of simply descriptively presenting level of compliance which has been the common method used by the previous studies. The findings provide statistically significant evidence suggesting that the likelihood of the company complying with recommended best practices is influenced by company specific characteristics. The findings are consistent with the inherent assumption built into the guidelines that companies differ in size and diversity. The final research question addresses whether company specific factors are also associated with the quality of explanations given for deviating from the board and board subcommittee related guidelines. This particular research issue is very important because previous studies, particularly those relating to the Australian context, appear to have overlooked this possibility altogether. Given the polychotomous nature of the outcomes of the dependent variable, a Multinomial Logit Regression model is applied. The findings provide evidence suggesting that company specific factors may explain a company's reason given to justify the deviation. However, the findings also reveal that larger companies do not necessarily provide an adequate reason to justify non-compliance. More importantly, the findings shows that a considerable number of companies have failed to provide any form of reason to justify their deviations while others provided reasons which were generic and uninformative. This not only suggests that those companies have been ignoring the basic intent and spirit of the guidelines, but also implies that the relevant Listing Rule which required companies to explain each instance of non-compliance has not been effectively enforced.

Date of Award	2012
Original language	English