Comply or Explain Approach and Firm Value on the Bucharest Stock Exchange

Abstract

This paper aims at exploring the influence of compliance with the principles and recommendations stated within the Bucharest Stock Exchange (BSE) Corporate Governance Code on firm value, for a sample of companies listed in Romania, in 2011. Firm value was proxied both through accounting measures (such as return on assets, ROA and return on equity, ROE) and market measures (such as earnings per share, EPS), all being industry-adjusted. Based on the ‘Comply or Explain’ Statement issued by the BSE, there was conceived a questionnaire having the purpose to develop corporate governance ratings. Thus, we report the global corporate governance rating and a set of specific ratings as regards transparency and reporting, board and committees, shareholder rights, as well as corporate social and environmental responsibility. Therefore, by estimating several multivariate linear regression models, our results provide support for a positive and statistically significant relationship between the rating related to transparency and reporting and firm value, likewise between the rating related to corporate social and environmental responsibility and firm value, but only for industry-adjusted ROA. However, there was noticed the lack of any statistically significant relationship between corporate governance ratings and firm value, when industry-adjusted ROE and industry-adjusted EPS were employed.

Appendices

Appendix 1: Corporate Governance Questionnaire Based on the ‘Comply or Explain’ Statement Issued by the BSE

• Transparency and Reporting

• Board and committees

• Shareholder rights

• 1. Has the Issuer drawn up a Statute/Corporate Governance Regulation which describes the main aspects of the corporate governance principles? (P1, R1)

• 2. Is the Statute/Corporate Governance Regulation (mentioning the date of its last update) posted on the website of the Issuer? (P1, R1)

• 3. In the Statute/Corporate Governance Regulation, are there defined corporate governance structures, positions, competences, and responsibilities of the Board of Directors and of the Executive Management? (P1, R2)

• 4. Does the Annual Report of the Issuer contain a chapter referring to corporate governance, which describes all the relevant events related to corporate governance registered in the previous financial year? (P1, R3)

• 5. Does the Issuer disclose on its website the information related to the following aspects of its corporate governance:

  • (a) A description of the Issuer’s corporate governance structures? (P1, R3)

  • (b) The updated Articles of Association?(P1, R3)

  • (c) The internal regulation governing the functioning/its essential aspects for each special commission/specialized committee? (P1, R3)

  • (d) The ‘Comply or Explain’ Statement? (P1, R3)

  • (e) The list of the Board of Directors members specifying which members are independent, of the Executive Management and of the special commissions/committees?(P1, R3)

  • (f) A brief version of the CV of each Board of Directors and Executive Management member? (P1, R3)

• 6. Does the Issuer publish in a special section of its website the details of the holding of the General Meetings of Shareholders (hereinafter ‘GMS’):

  • (a) The GMS convening notice? (P3, R4)

  • (b) The materials/documents relating to the items on the agenda, as well as any other information about the items on the agenda? (P3, R4)

  • (c) The templates of the special power of attorney? (P3, R4)

• 7. Does the Issuer disclose in a special section of its website the shareholders’ rights as well as the rules and procedures for the attendance at GMS? (P3, R8)

• 8. Does the Issuer provide the information in due time (immediately after the GMS) to all shareholders through the special section on the Issuer’s website:

  • (a) The resolutions passed by GMS? (P3, R8)

  • (b) The detailed results of voting? (P3, R8)

• 9. Does the Issuer disseminate through the special section of the Issuer’s website, which is easily identifiable and accessible:

  • (a) Ad-hoc reports/official statements? (P3, R8)

  • (b) The financial calendar, the annual, quarterly, and half-yearly reports? (P3, R8)

• 10. Has the Issuer a set of rules referring to the conduct and the reporting obligations relating to the trading of the shares or of other financial instruments issued by the Issuer (‘issuer securities’) made on their account by the members of the Board of Directors and other related natural persons? (P4, P5, R12)

• 11. Are the trades with the issuer’s securities made by the members of Board of Directors, Executive Management, or any other insiders on their own account disclosed via the Issuer’s website, according to applicable rules? (P4, P5, R12)

• 12. Is the appointment of the Board of Directors members based on a transparent procedure (objective criteria regarding personal/professional qualifications)? (P9)

• 13. Is the remuneration policy of the Issuer mentioned in the Statute/Corporate Governance Regulation? (P11, R24)

• 14. Does the Issuer disclose the information subject of the reporting requirements in English:

  • (a) Periodical information (regular providing information)? (P12, P13, R25)

  • (b) Permanent information (continuous providing information)? (P12, P13, R25)

• 15. Does the Issuer prepare and make public the financial report according to the IFRS standards? (P12, P13, R25)

• 16. Does the Issuer organize, at least once a year, meetings with financial analysts, brokers, rating agencies, and other market specialists with the view to presenting the financial elements relevant for the investment decision? (P12, P13, R26)

• 17. Does the Board of Directors or the Audit Committee, as the case may be, assess on a regular basis the efficiency of financial reporting, internal control, and the risk management system implemented by the Issuer? (P12, P13, R28)

• 18. Has the Issuer approved a procedure regarding the internal flow and disclosure to third parties of the documents and information referring to the Issuer, considering especially inside information? (P17, R36)

• 19. Does the Board of Directors meet at least once a quarter for supervising the activity of the Issuer? (P4, P5, R10)

• 20. Does the structure of the corporate bodies of the Issuer ensure a balance between the executive and non-executive members (and especially independent non-executive members) so that the decision-making is not to be dominated by a single person or a group of persons? (P6)

• 21. Does the structure of the Board of Directors provide a sufficient number of independent members? (P7)

• 22. In the course of its activity, is the Board of Directors supported by any consultative commissions/committees nominated by the Board of Directors, which deal with the analysis of some specific subjects in order to counsel the Board of Directors on such topics? (P8, R15)

• 23. Do the consultative commissions/committees submit activity reports to the Board of Directors on the specific subjects assigned to them? (P8, R15)

• 24. For the assessment of the independence of their members, does the Board of Directors use the assessment criteria listed in Recommendation 16? (P8, R16)

• 25. Do Board of Directors members permanently improve their knowledge through training/information in the corporate governance field? (P8, R17)

• 26. Is there a Nomination Committee within the Issuer set-up? (P10)

• 27. Does the Board of Directors assess the necessity to have a Remuneration Committee/remuneration policy for the Board of Directors and Executive Management members at least once a year? (P11, R21)

• 28. Has the remuneration policy been approved by the GMS? (P11, R21)

• 29. Is there a Remuneration Committee made exclusively of non-executive members of the Board of Directors? (P11, R22)

• 30. Is there an Audit Committee within the Issuer? (P12, P13, R27)

• 31. Is the Audit Committee comprised exclusively of non-executive members of the Board of Directors and is it comprised of a sufficient number of independent members of the Board of Directors? (P12, P13, R29)

• 32. Does the Audit Committee meet at least twice a year, with the view to draw up and disclose to the shareholders half-yearly and annual financial statements? (P12, P13, R30)

• 33. Does the Audit Committee make proposals to the Board of Directors regarding the selection, the appointment, the re-appointment, and the replacement of the financial auditor, as well as the terms and conditions of its remuneration? (P12, P13, R32)

• 34. Does the Issuer respect the rights of the holders of the financial instruments issued by the Issuer, ensuring equal treatment for them while also submitting any change of the granted rights for approval by the special meetings of such holders? (P2)

• 35. Has the Issuer drawn up and submitted for the GMS approval procedures for an efficient and methodical holding of the GMS according to procedure, however without prejudice to the right of any shareholder to freely express their opinion on the topics subject to the debates? (P3, R6)

• 36. Has the Issuer set-up a special department or has appointed a person dedicated to the relation with investors? (P3, R9)

• 37. Has the Issuer approved a procedure with a view to identifying and to settling any conflicts of interest? (P14)

• 38. Do the members of the Board of Directors inform the Board of Directors on conflicts of interests as they occur and do they refrain from debates and the vote on such matters, according to relevant legal provisions? (P15, R33)

• 39. Has the Issuer approved the specific procedures in order to provide procedural compliance (criteria to identify the significant impact of transactions, transparency, impartiality, noncompetition) with the view to identify the transactions between related parties? (P16, R34/R35)

• 40. Does the Issuer carry on activities regarding the Issuer’s social and environmental responsibility? (P18, R37/38).

Appendix 2

Table 5 Estimations’ results towards the impact of the compliance with the principles and recommendations stated within the BSE CGC (2008) on the BSE listed companies’ value (ROEadj—proxy for firm value)

Appendix 3

Table 6 Estimations’ results towards the impact of the compliance with the principles and recommendations stated within the BSE CGC (2008) on the BSE listed companies’ value (EPSadj—proxy for firm value)