Firm attributes and governance compliance

What is it about?

Corporate governance regulations currently tend to be designed to give firms a choice: firms may either comply with a given governance requirement as written or provide an adequate reason for choosing not to comply. This regulatory approach is called "comply or explain", or alternatively in the Australian context, "if not, why not?". This paper explores the possibility that some company attributes (for instance size, ownership concentration, age, industry sector) may be systematically related to the compliance decisions firms make with respect to the composition of their boards of directors. We find, on our sample of firms listed on the Australian Stock Exchange, that size and ownership concentration do matter. The smaller a company is, the less likely it will be to choose compliance; and the greater the degree of concentration of company shares in fewer investors' hands, the less likely the firm will be to choose compliance. The three board composition measures the paper considers are the ASX (2003) requirements that a majority of directors be independent, that the chairperson be an independent director and that the roles of chairperson and company CEO be assigned to different individuals.

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Why is it important?

While there are a number of papers available on the topic of company characteristics and the composition of boards of directors, there are relatively few that directly consider the impact of corporate governance regulation changes. We believe our paper is the first to explore the compliance choices of firms listed on the Australian Stock Exchange with its "if not, why not" regulations governing the composition of boards of directors in terms of company characteristics. This enables readers to gain an insight into as to whether these regulations had achieved what was intended when they were drafted.

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