Corporate Governance: Achieving Good Corporate Governance in order to Deal with the Contagion Effects of Financial Crisis

Abstract

This paper investigates the contagion effects of the financial crisis between selected stock markets using the ARCH and ARMA models. Further investigation has been conducted to pursue the importance of corporate governance elements involved in the proposed research models, and a set of mediator variables (dummy variables) have been used to capture the variations, significantly accounting for variations in the financial market contagion . The statistical outcomes revealed that corporate governance performance is positively related to internal and external governance behavior and negatively associated with financial market contagion . The empirical evidence exhibits, after controlling for corporate culture and corporate legality elements, that there has been a significant decrease in the financial market contagion during and post-crisis. The results also imply that it is more important to establish the right firm based corporate governance mechanism for companies prior to reforming capital market provisions to deal with the complexities of market contagion . Also, the objective of establishing the right legal system will continue to be a main priority on the politician’s agenda in order to prevent the impact of financial market contagion . The results could be helpful for investors in portfolio analysis for decision-making and for policymakers for reducing financial instability in crisis periods.

Appendices

Appendix

From the survey it was noted that, most of the participants have answered NO to the following questions regarding the provisions of the key elements of corporate culture .

Collaboration Provisions; Refer to Questionnaire Table 1

• 5. In the organization departments provide employees with right information about ownership interests and profit sharing rights. 70.70% answered NO.

• 6. All employees are given the right to negotiate power and openly reach collaborative decisions. 54.30% answered NO.

• 8. Employees in departments are assigned to work on a project. 77.70% answered NO.

• 10. Employees are happy with the way the reward system and the modes of conduct provisions are implemented in the organization. 50.50% answered NO.

• 11. Employees are allowed to own shares within their company. 93.10% answered NO.

Control Provisions; Refer to Questionnaire Table 2

• 8. Your organization has a management strategy (Mission Statement) to help maintain competitive edge within the environment. 36.20% answered NO.

• 9. Your organization have a Customer Charter (CC) policy (number of standardized rules) to establish excellent customer service. 45.20% answered NO.

Creativity Provisions; Refer to Questionnaire Table 3

• 5. Your organization currently is working on a new innovation. 52.60% answered NO.

• 6. Your organization recently launched a new product.58.50% answered NO.

• 8. Your organization acquires new resources in order to establish new product uniqueness. 62.70% answered NO.

• 9. Your organization maintains a management strategy of doing things first to maintain external discretion. 52.60% answered NO.

• 10. Your organization has a team of Market Research (MR) to help find information about product innovation. 58.00% answered NO.

Compete (Market Culture) Provisions; Refer to Questionnaire Table 4

• 7. Your organization provides feedback forms to customers. 59.90% answered NO.

• 8. Your organization received a market award in last decade. 69.60% answered NO.

• 9. Your organization follows international trading and quality standards (e.g. ISO 9000). 52.60% answered NO.

• 10. Your organization is a member of a trading bloc such as the European Union (EU). 79.20% answered NO.

• 11. You have received a share of profit from your organization in the last decade. 89.80% answered NO.

From the survey it was noted that, most of the participants have answered NO to the following questions regarding the provisions of the key elements of corporate legality .

Board of Directors and Managerial Incentives Provisions; Refer to Questionnaire Table 5

• 1. Your organization has independent board members that are actively involved with the provisions of directing and controlling. 67.70% answered NO.

• 2. Your organization maintains a system of advice to investors and all stakeholders consistent with the current situation regarding the financial position and investment targets. 59.30% answered NO.

• 4. Your company has compensation regulations actively used. 59.30% answered NO.

• 8. Your organization allows more shareholders and employees involvement in terms of dept and voting rights. 91.70% answered NO.

• 12. Shareholders have cumulative voting rights to increase and decrease board size and amend charter/bylaws. 67.70% answered NO.

The Capital Structure Provisions and Control System Provisions; Refer to Questionnaire Table 6

• 1. Your company has an outstanding debt instruments at present in the dept market. 83.30% answered NO.

• 2. Your company has outstanding corporate equities in the equity market. 91.70% answered NO.

• 9. Your company has a strategy investment finance committee. 58.30% answered NO.

Law and Regulations Provisions; Refer to Questionnaire Table 7

• 8. Your organization has a reward system. 50.00% answered NO.

• 11. Your company has its own teams and executives that gather information from external sources and analyse current market situations in order to do things first and fast. 41.70% answered NO.

Capital Markets Provisions; Refer to Questionnaire Table 8

• 7. Your company has a dividend and public information policy. 58.30% answered NO.

• 8. Your organization has an information policy that informs the public about its way of implementing and use of new developments regarding capital market instruments (financial innovations) in accordance with the current law. 67.70% answered NO.

• 9. Your company clearly discloses with evidence of any used capital market instruments abroad, such as in a foreign securities exchange results and financial status of its operations. 75.00% answered NO.

• 10. Your company provides information about its total share capital and voting rights under current laws. 59.30% answered NO.

• 11. All transactions performed by the Board are disclosed to the public. 91.70% answered NO.

Summary statistics^a

Panel D: Firm level corporate governance—frequencies of “NO” answers for corporate market culture (internal governance) and corporate legality (external governance)
	Collaboration	Control	Creativity	Compete	Board of Directors and Managerial Incentives	Capital Structure and Control Systems	Law and Regulation	Capital Markets
1	Q5 70.70	Q8 36.20	Q5 52.60	Q7 59.90	Q1 67.70	Q1 83.30	Q8 50.00	Q7 58.30
2	Q6 54.30	Q9 45.20	Q6 58.50	Q8 69.60	Q2 59.30	Q2 91.70	Q11 41.70	Q8 67.70
3	Q8 77.70	–	Q8 62.70	Q9 52.60	Q4 59.30	Q9 58.30	–	Q9 75.00
4	Q10 50.50	–	Q9 52.60	Q10 79.20	Q8 91.70	–	–	Q10 59.30
5	Q11 93.10	–	Q10 58.00	Q11 89.80	Q12 67.70	–	–	Q11 91.70
Mean	69.26	40.70	56.88	70.22	69.14	77.76	45.85	70.40
Sum	346.30	81.40	284.40	351.10	345.70	233.30	91.70	352.00

1. ^aLimited to first 100 cases
2. Notes The average value added that would contribute to the internal governance is the weighted average of the mean values of (69.26% + 40.70% + 56.88% + 70.22% = 59.27% representing Collaboration, Control, Creativity and Compete elements. Thus, the average value added that would contribute to the external governance is the weighted average of the mean values of (69.14% + 77.76% + 45.85% + 70.40% = 65.79% representing Board of Directors and Managerial Incentives, Capital Structure and Control Systems, Law and Regulation and Capital Markets. The weighted average values have been value added to the CGOV score index illustrating the impact of “YES” answers respectively. Results are presented in Panel E and F

See Figs. 4, 5, 6, 7, 8, 9, 10, 11, 12.

Fig. 4

Source Authors own

Average daily percentage stock returns on international stock indexes from 2002 to 2017.

Fig. 5

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Average daily percentage stock returns on international stock indexes from 2002 to 2017.

Fig. 6

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External governance performance before improvements.

Fig. 7

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Internal governance performance before improvements.

Fig. 8

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Corporate governance performance of all firms before improvements.

Fig. 9

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External governance performance after improvements.

Fig. 10

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Internal governance performance after improvements.

Fig. 11

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Overall corporate governance performance of all firms after improvements.

Fig. 12

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Comparison of firm level corporate governance performance after improvements in no answers.