Behavioral Finance in Corporate Governance - Independent Directors, Non-Executive Chairs, and the Importance of the Devil’s Advocate

The Common Law, parliamentary democracy, and academia all institutionalize dissent to check undue obedience to authority; and corporate governance reformers advocate the same in boardrooms. Many corporate governance disasters could often be averted if directors asked hard questions, demanded clear answers, and blew whistles. Work by Milgram suggests humans have an innate predisposition to obey authority. This excessive subservience of agent to principal, here dubbed a "type II agency problem", explains directors’ eerie submission. Rational explanations are reviewed, but behavioral explanations appear more complete. Experimental work shows this predisposition disrupted by dissenting peers, conflicting authorities, and distant authorities. Thus, independent directors, chairs, and committees excluding CEOs might induce greater rationality and more considered ethics in corporate governance. Empirical evidence of this is scant – perhaps reflecting problems identifying genuinely independent directors.

Behavioral Finance in Corporate Governance-Independent Directors and Non-Executive Chairs

Corporate governance disasters could often be averted had directors asked their CEOs questions, demanded answers, and blown whistles. Work in social psychology by Milgram (1974) and others shows human subjects to have an innate predisposition to obey legitimate authority. This may explain directors’ eerily compliant behavior towards unrestrained CEOs. Other work reveals factors that weaken this disposition to include dissenting peers, conflicting authorities, and distant authorities. This suggests that independent directors, non-executive chairs, and committees composed of independent directors that meets without the CEO might induce greater rationality and more considered ethics in corporate governance. Empirical evidence of this is scant. This may reflect measurement problems, in that many apparently independent directors actually have financial or personal ties to their CEOs. It might also reflect other behavioral considerations that reinforce director subservience to CEOs.

Corporate ethics and risk management in an uncertain world

A conference theme paper, raising issues and questions for directors ahead of the 2017 Global Convention on Corporate Ethics and Risk Management which is being held at the Bombay Stock exchange on the 17th and 18th February 2017. Areas covered include: corporate ethics, risk management, risk governance, corporate conduct, ethics in business decision making, risk prevention and mitigation, risk and return, risk management frameworks, approaches and responsibilities, corporate fraud, unpredictable risks and natural disasters, systemic risks and shocks, managing risks in the financial sector, cyber security and risks, international collaboration and standards, and corporate boards and ris

The effectiveness of risk mangement in local government with reference to the Nelson Mandela Bay Minicipality

In the 1960s, risk management primarily took the form of purchased insurance against force majeure events. Today, many corporate executives are worried about not only these types of events but also many others (Mair and Cendrowski, 2009:3). “People risks” versus environmental risks, financial risks and technical risks are examples of risks that are often overlooked. People risks include, succession planning (this refers to identifying and developing key talent) and competency and skills building (dealing with employees that do not have requisite skills for success), (William & Paul, 2007:4). Massingham (2010:464) mentions that corporate disasters, such as the collapse of Enron, have increased the need for effective corporate governance, while catastrophic natural disasters, man-made tragedies such as the September 11 terrorist attacks and tsunami of 2004, have increased risk awareness as well as its consequences

Disasters and Disclosures

Many securities fraud lawsuits follow corporate disasters of some sort or another, claiming that known risks were concealed prior to the crisis. Yet for a host of doctrinal, pragmatic and political reasons, there is no clear-cut duty to disclose these risks. The SEC has imposed a set of requirements that sometimes forces risk disclosure, but does so neither consistently nor adequately. Courts in 10b-5 fraud-on-the-market cases, in turn, have made duty mainly a matter of active rather than passive concealment and thus, literally, wordplay: there is no fraud-based duty to disclose risks unless and until the issuer has said enough to put the particular kind of risk “in play.” But when that is, and why, flummoxes them. This incoherence could be rationalized by a more thoughtful assessment of how words matter to investors and better appreciation of the variable role that managerial credibility plays in the process of disclosure and interpretation, which is the main focus of this article. Disasters are an ideal, if disturbing, setting for thinking through the micro-structure of corporate discourse—the implicit rules of interpretation for how marketplace actors interpret what issuers say and don’t say, whether in formal SEC disclosures, conference calls, press conferences and even executive tweets. But even if there is more thoughtfulness to the endeavor, it is fair to ask why wordplay should make so much of a difference as to duty in the first place, or whether instead our impoverished conception of duty and its links to scienter, reliance and causation deserve a more thorough makeover. The study of disasters and disclosures also offers a distinctive reference point for thinking about contemporary controversies associated with bringing matters of social responsibility (e.g., law abidingness) and sustainability (environmental compliance, cybersecurity, product safety, etc.) into the realm of securities law

Do markets love misery? : Stock prices and corporate philanthropic disaster response

While companies have emerged as very proactive donors in the wake of recent major disasters like Hurricane Katrina, it remains unclear whether that corporate generosity generates benefits to firms themselves. The literature on strategic philanthropy suggests that such philanthropic behavior may be valuable because it can generate direct and indirect benefits to the firm, yet it is not known whether investors interpret donations in this way. We develop hypotheses linking the strategic character of donations to positive abnormal returns. Using event study methodology, we investigate stock market reactions to corporate donation announcements by 108 US firms made in response to Hurricane Katrina. We then use regression analysis to examine if our hypothesized predictors are associated with positive abnormal returns. Our results show that overall, corporate donations were linked to neither positive nor negative abnormal returns. We do, however, see that a number of factors moderate the relationship between donation announcements and abnormal stock returns. Implications for theory and practice are discussed

The Relationship Between Urban Community Collaborative Governance and Building Resilience Cities in Zhengzhou City, Henan Province, China

Purpose: This study explores the impact of urban community collaborative governance on building resilience cities.   Theoretical framework: The Synergistic Governance Theory (SGT) was applied in this study.   Design/Methodology/Approach: The population of this study is the community of Zhengzhou City, Henan Province, China. The unit of analysis is individuals living in the community of Zhengzhou City. Through random sampling method, 384 community residents were selected to participate in the research. This study used a questionnaire survey method to obtain primary data for analysis.   Findings: The results of the study show that (1) there is a significant positive correlation between government regulation, corporate capabilities, social organization involvement and building resilience cities. (2) Strengthening government regulation, corporate capabilities, and social organization involvement can effectively strengthen urban community collaborative governance, which is beneficial to building resilience cities. Thus, it is favorable to building Resilience Cities.   Research, Practical & Social implications: This research will be useful in creating a new model of urban community governance that will enhance the ability of cities to cope with disasters and achieve the goal of building resilient cities. A multifaceted and collaborative urban community governance model will be developed by strengthening the collaboration of the three groups - government, corporations, and social organizations，in order to ensure that the collaborative urban community governance model promotes the city's ability to cope with disasters, thereby enhancing the city's resilience. Enhancing urban resilience can fundamentally improve residents' ability to cope with the potential risks that persist in cities, thereby resolving social conflicts and satisfying people's pursuit of a better life.   Originality/Value: This study presents an innovative form of urban community management model that provides valuable insights on the impact of collaborative urban community governance models on resilient city buildings

The Effectiveness of Community-Based Development in Poverty Reduction : A Descriptive Analysis of a Women-Managed NGO in Rural Pakistan

To assess the targeting performance of community-based development activities and deduce the impact of such activities on poverty reduction, we implemented a survey of a non-governmental organization (NGO) in northwestern Pakistan. A distinct characteristic of this NGO is that it is managed mostly by women and its interventions are conducted through community-based organizations (COs), most of whose members are also female. This characteristic is rather unusual for a male-dominated society like Pakistan. Descriptive analyses of village, CO, and household level data shows that the NGO was able to target poorer villages. Villages with COs are characterized by lower adult literacy rates, lower availability of basic amenities, and higher susceptibility to natural disasters. With regard to household-level welfare indicators -- such as consumption, women’s empowerment, children’s school enrolment, and the weight-for-age of infants -- we found that the consumption levels of CO member households tended to be lower than that of households in non-CO villages. However, the difference between CO member households and non-member households in CO villages was insignificant, possibly owing to the mixing of the selection effect (i.e., poorer households are served by the NGO) and the causal effect of interventions on poverty reduction. On women’s empowerment and child schooling, CO member households tend to perform better than other households, suggesting the favorable impact of the interventions and/or the self-selection of such households vis-à-vis program participation.

The Consequences of Mandatory Corporate Sustainability Reporting

We examine the effect of mandatory corporate sustainability reporting (MCSR) on several measures of social responsibility using both country and firm-level data. Using data for 58 countries, we show that after the adoption of MCSR laws and regulations, the social responsibility of business leaders increases and both sustainable development and employee training become a higher priority for companies. Moreover, for companies in countries with MCSR, corporate governance improves and on average, companies implement more ethical practices, bribery and corruption decrease, and managerial credibility increases. These effects are larger for countries with stronger law enforcement and more widespread assurance of sustainability reports. We complement the country-level analysis using environmental, social and governance metrics at the firm-level in conjunction with a differences-in-differences research design and we find that for the treatment group, energy as well as waste and water consumption significantly decline, while investments in employee training significantly increase after the adoption of MCSR laws and regulations.sustainability reporting, mandatory reporting, corporate sustainability, corporate social responsibility