Editorial for the themed issue: corporate governance

Citation

Jallow, K. (2012), "Editorial for the themed issue: corporate governance", Journal of Applied Accounting Research, Vol. 13 No. 2. https://doi.org/10.1108/jaar.2012.37513baa.002

Editorial for the themed issue: corporate governance

Editorial for the themed issue: corporate governance

Article Type: Guest editorial From: Journal of Applied Accounting Research, Volume 13, Issue 2.

Welcome to this themed issue of JAAR. First, allow me to thank Dr Julia Mundy for giving me the opportunity to write this editorial and to Dr Khaled Hussainey for collating the papers in this issue and for providing earlier drafts of this editorial.

I have edited JAAR since its inception, and last year made the decision to pass the baton of editing to Dr Mundy. I thought that a new editor would renew the journal and bring a fresh insight to its content, and I feel that Julia will do this extremely well – she has already galvanised the EAB and made some bold decisions about the structure and content of JAAR. I would therefore like to say a big thank you to the EAB for all their support over the years and for the continued encouragement and belief in what we are trying to do at JAAR. Similarly, a big thank you also goes to all the authors we’ve published, and all their hard work in delivering research papers that really make a difference to our understanding of applied accounting research. I am confident that the new editor and the EAB will continue the original vision to further the research agenda into relevant, real, useful applied accounting research.

The themed issue, like the others in JAAR, came about not because of a special call for papers, but because there were a significant number of papers with the same theme. For JAAR, the research agenda of its authors is often set by events in the real world. Corporate governance issues have become more important during the current economic climate, where the financial crisis has resulted in a number of high profile corporate failures, and has highlighted the need for improved credibility and public confidence in our major corporations. A review of a selection of academic literature by Herath and Freeman (2012) highlighted the increase in academic interest in the area, linking poor corporate governance practices to corporate failure. Corporate failure has an increasing impact globally as our interdependence grows, and the economic system develops with more countries participating in its growth and the global influence of corporations touching us all. A broader discussion of corporate governance mechanisms, tools, processes and systems began with the introduction of more corporate governance regulation (Herath and Freeman, 2012), but this has not resulted in fewer corporate failures (OECD Directorate for Financial and Enterprise Affairs, 2009). In the UK, the financial crisis triggered the Walker Review of governance in banks and financial institutions (Financial Reporting Council (FRC), 2009), and a revision to the UK Corporate Governance Code in 2010 (FRC, 2010). However, there is a question as to whether such corporate governance procedures recognise the complexities of the real world (OECD Directorate for Financial and Enterprise Affairs, 2009). The OECD has recognised four key areas which must be examined in the context of corporate governance: executive pay and bonuses, board performance, risk management and the need for shareholder activism (OECD Directorate for Financial and Enterprise Affairs, 2009). The latter three of these themes are addressed in the papers in this issue.

The paper by Ntim, Opong, Danbolt and Thomas is an important contribution to the debate regarding the voluntary disclosure of corporate governance issues in developing and emerging economies. The authors construct a corporate governance disclosure index to explore the degree to which South African listed companies voluntarily comply with corporate governance best practice, and found that levels of compliance with, and voluntary disclosure of, corporate governance varies between companies. The findings show that a range of corporate governance mechanisms drives companies’ decisions to disclose voluntarily corporate governance information in their annual reports. This has important implications for the implementation of South Africa's King Report 2, a code of corporate governance modelled on the UK Code but acting in a very different context – questioning whether a voluntary code is the most appropriate where a variation in disclosure compliance may suggest the need for regulation.

The study by Leventis and Dimitropoulos makes a significant contribution to our understanding of the impact of corporate governance on the quality of accounting earnings. The authors studied banks in a post-Sarbanes-Oxley USA, and find that banks with efficient corporate governance mechanisms may not need to engage in earnings management – hence, well-governed banks engage less in aggressive earnings management. Corporate governance leads to effective monitoring and this may lead to an effect on investors’ decision making: investors will need more information from the company where they cannot rely on earnings quality as an indication of effective corporate governance. This will also have implications for regulators, who will need to examine the totality of corporate governance mechanisms and their effects in monitoring corporate activity.

The paper by Hussainey and Aljifri contributes to corporate governance research by being the first paper to examine the degree to which corporate governance mechanisms can affect capital structure decisions in a developing country, the United Arab Emirates (UAE). The authors examine the degree to which internal and external corporate governance mechanisms affect capital structure decisions by firms, and how the structures of corporate governance impact upon these decisions. The corporate governance system in UAE is based upon the presence of large investors, who are presumed to have a large monitoring role. However, this may not always be the case. Hence, the paper links decision making and debt structures, and points to the role of the institutional investor. The study highlights that the context here is important and that the results are not those which would be found in other countries – another case of the need for a proper awareness of the situation existing in a particular country, which may not be universally seen. Corporate governance structures must be fit for purpose.

Al-Najjar's study adds to the existing literature by exploring the drivers of frequency of board meetings. This is an examination of the monitoring role of boards, and how the structure of boards may be related to the frequency of meetings held by them. The study examines both internal monitoring and firm-specific factors. Interestingly, whilst the study finds that large boards with independent directors hold more frequent meetings – as may be expected – larger companies hold less frequent board meetings. Corporate governance in these companies is delivered through more external monitoring. The study throws into relief the differing roles of internal and external monitoring mechanisms and questions what is often taken-for-granted board variable effects.

In their paper Adelopo, Jallow and Scott investigate the extent to which multiple large ownership structures and audit committee activity affect audit fees. This continues the investigation of institutional investors raised in Hussainey and Aljifri's paper, and examines the relationship between the monitoring effect of large investors compared with that of the audit committee. Where there is an active external monitoring function, there is a corresponding reduction in the levels of audit fee; surprisingly, however, an increase in audit committee activity leads to higher audit fees. It would seem, then, that positive shareholder activism may be more important in the development of corporate governance regulation than the existence and activity of an audit committee. This may have particular implications for the development of further corporate governance codes.

The final paper by Sarens concerns the internal audit function and its role in delivering corporate governance. By examining the perceptions of audit executives, it attempts to reveal the significance of the internal audit function in effective corporate governance. This is important because internal audit is less well considered than other potential corporate governance mechanisms. This may be because many companies’ internal audit functions do not take an active role in governance, but where they do, it is via the development of a risk-based and quality-assured audit plan, especially where the audit committee has an input. The implications of this study lie in the consideration of the audit executive's role in designing and delivering the internal audit function, and in developing a strong relationship between this function and the audit committee – there are complementary roles which may also be reinforcing. Hence, investment in the internal audit function can improve the corporate governance mechanisms in the organisation.

As I said at the beginning of this editorial, research into corporate governance has become vital if we are to understand how companies perform and how they succeed. External, global influences are creating the real need for companies to fulfill their obligations to all of their stakeholders, and a strong corporate governance framework will go a long way to deliver this. The motivation for research in this area has come from the desire to find means to strengthen the corporate governance function, in order to provide the transparency needed to assess its performance, and to signal protection from failure. Herath and Freeman (2012), in their review of the last ten years of significant corporate governance research, call for more empirical work to enable us to increase our efforts to improve governance in our organisations; the papers presented in this issue are, I believe, an answer to that call.

Kumba Jallow