Board Characteristics, Compliance, and Firm Performance: Empirical Findings from Colombia

Abstract

Using data from a single database of Colombian firms, we confirmed an endogenous relationship between specific board characteristics, compliance with corporate governance guidelines, and firm performance. A board comprising experts without conflicts of interest is more likely to control ethical behavior, implement audit committees, review compliance with accepted accounting standards, and approve and control the firm’s strategic planning, all of which will lead to an improvement in firm results, and engagement and retention of higher quality board members. Conclusions have strong implications for public policy and managerial practice.

RESUMEN

Con base en informaciones extraídas de una única base de datos sobre empresas colombianas, confirmamos una relación endógena entre amplias características de la Junta, cumplimiento con las directrices de gobernanza corporativa y el desempeño de la empresa. Es mas probable que una Junta formada por especialistas, sin conflicto de interés, controle el comportamiento ético, implemente comités de auditoria, revise la conformidad con las normas contables aceptadas y también apruebe y controle la planificación estratégica de la empresa, todo lo que redundara en una mejora de los resultados de la empresa, y en la retención y en el compromiso y dedicación de los miembros más calificados de la Junta. Las conclusiones ejercen profundos efectos en las políticas públicas y prácticas de Gestión empresarial.

RESUMO

Com o uso de informações de uma única base de dados sobre empresas colombianas, confirmamos uma relação endógena entre as características específicas de conselho de administração, a conformidade às diretrizes de governança e o desempenho da empresa. É mais provável que um conselho de administração, constituído apenas por especialistas entre os quais não haja conflitos de interesse, controle o comportamento ético, implemente comitês de auditoria, revise a conformidade aos padrões contábeis aceitos e também aprove e controle o planejamento estratégico da empresa, sendo que tudo isso irá melhorar os resultados da empresa, o engajamento e a retenção dos membros mais qualificados do conselho de administração. As conclusões apresentam efeitos profundos nas políticas públicas e práticas de gestão.

Keywords:

• Corporate governance
• board characteristics
• board compliance
• firm performance
• emerging markets

Notes

1 OECD, Economic Survey of Colombia 2015. Taken from http://www.oecd.org/eco/surveys/economic-survey-colombia.htm in July 2016.

2 The World Bank, Colombia Overview. Taken from http://www.worldbank.org/en/country/colombia/overview in July 2016.

3 The Cadbury Committee report is one most important studies regarding the financial aspects of corporate governance not only in United Kingdom but also in many overseas countries. It recommends the adoption of some internal monitoring mechanisms with the aim of promoting shareholder interests.

4 By corporate governance guidelines, we mean those related to the main responsibilities generally accepted and that characterize a high performance board in corporate governance codes. These are: to verify, approve, and control firm strategy planning; to disclose and control the ethical behavior of their members; to implement audit and corporate governance committees; to verify compliance with generally accepted accounting standards; to disclose the accomplishment of the strategic objectives to the general meeting of the shareholders.

5 Well-composed boards means that the directors and the boards meet characteristics that the literature has recognized as important for the good functioning of the board. These are: the election of the members of the boards taking into account expertise; whether the board has independent members or not; the size of the board; whether the directors simultaneously belong to more than five boards; whether the members of the board do not have explicit conflicts of interest.

6 For a detailed definition of the variables see Declaration of variables in the Appendix.

7 See Hermalin and Weisbach, (2003) or Adams, Hermalin, and Weisbach (2010) for a detailed description on how board action and characteristics affect firm performance.

8 Public Law aimed at protecting investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes. Retrieved from https://www.sec.gov/about/laws/soa2002.pdf in February 2016.

9 Disclosing and controlling the ethical behavior of their members, having audit and corporate governance committees, verifying the compliance with generally accepted accounting standards, reporting the fulfilment of strategic objectives to the general meeting of the shareholders, and approving and controlling the firm’s strategic planning.