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When in Rome: How Non-domestic Companies Listed in the UK May Not Comply with Accepted Norms and Principles of Good Corporate Governance. Does Home Market Culture Explain These Corporate Behaviours and Attitudes to Compliance?

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Abstract

Non-domestic companies are increasingly present on the London Stock Exchange. Such companies have specific governance requirements. They may seek to access capital in a more liquid market and to diversify ownership. The reputational ‘bonding’ (Coffee, Northwest Univ Law Rev 93:641–708, 1999; Columbia Law Rev 102:1757–1831, 2002) to a prestigious exchange should be a statement to the market of a propensity to disclosure and a willingness to protect minority shareholders. Yet, many non-domestic companies retain tightly controlled shareholding structures and are based in emerging regions where national culture norms differ to the UK. We hypothesise that non-domestic companies are likely to be less compliant with the principles of the UK Corporate Governance Code and suggest a correlation between lower levels of compliance and non-domestic companies from countries that demonstrate high power distance in the Hofstede (Culture’s consequences: International differences in work-related values, 1980a) cultural value framework. We find some encouraging signs of compliance with the reigning governance code principles in Board structures. However, we find only partial compliance in leadership and Board effectiveness measures in those companies from cultures high on the power-distance scale. Further, we include analysis into ownership characteristics and find companies from emerging markets are dominated by a single or controlling group of shareholders, which is likely to impact on attitudes to compliance and is particularly evidenced in terms of Board structures with no executive directors or led by an executive Chairman. Much of the prior research effort into the levels of compliance with the UK’s ‘comply-or-explain’ approach to governance has produced mixed results and focused on all companies. In our exploratory approach to analysing only the non-domestic subsample, we report some evidence linking cultural distance to lower levels of compliance with the UK standards. We develop a framework to guide future research into the context and cultural underpinnings of this sub-sample of companies, hypothesising that frequent market capitalisation-induced index changes may divert attention away from any potential compliance issues. On the one hand, our evidence is encouraging for governance regimes based on voluntary compliance disclosures such as the UK and similar European and international markets, as we report partial compliance with the principles of the current governance code. Our research may, however, be helpful in guiding future versions of the UK governance framework and other international governance regimes adopting the ‘comply-or-explain’ approach and in setting policy to improve disclosure. It contributes to the understanding of the specific context of non-domestic companies and any cultural tendencies to non-compliance. By demonstrating evidence of lower levels of compliance with key principles of the Code by non-domestic companies, we present a framework enabling lawmakers to further improve corporate governance codes.

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We acknowledge the financial contribution made by executive search and assessment company Thorburn McAlister in assisting the development of this research.

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  1. Southampton Management School, University of Southampton, Highfield, Southampton, SO17 1BJ, UK

    Peter Rejchrt & Malcolm Higgs

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Appendix: The UK Code of Corporate Governance (2012 Principles)

Appendix: The UK Code of Corporate Governance (2012 Principles)

Leadership and Effectiveness

Every company should be headed by an effective board which is collectively responsible for the long-term success of the company.

There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.

The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role.

As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy.

The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.

There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.

All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.

All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.

The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.

The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.

All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.

Remuneration

Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose.

A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance.

There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration.

Accountability

The board should present a fair, balanced and understandable assessment of the company’s position and prospects.

The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems.

The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting, risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditors.

Relations with Shareholders

There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.

The board should use the AGM to communicate with investors and to encourage their participation.

Source FRC 2012. Available at http://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-September-2012.aspx.

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Rejchrt, P., Higgs, M. When in Rome: How Non-domestic Companies Listed in the UK May Not Comply with Accepted Norms and Principles of Good Corporate Governance. Does Home Market Culture Explain These Corporate Behaviours and Attitudes to Compliance?. J Bus Ethics 129, 131–159 (2015). https://doi.org/10.1007/s10551-014-2151-6

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