Why Do Joint Stock Companies Adopt One or Two-Tier Board? The Effect of the Reform of Corporate Governance in Italy Carlo Bellavite Pellegrini Department of Economics and Business Università Cattolica del Sacro Cuore di Milano, Via Necchi 5, 20123 Milano Paolo Baffi” Centre on Central Banking and Financial Regulation Università Commerciale Luigi Bocconi, Via Roentgen 1, 20136 Milano E-mail:
[email protected]
Laura Pellegrini Department of Economics and Business Università Cattolica del Sacro Cuore di Milano, Via Necchi 5, 20123 Milano E-mail:
[email protected]
Emiliano Sironi Department of Statistics Università Cattolica del Sacro Cuore di Milano, Via Necchi 9, 20123 Milano “Paolo Baffi” Centre on Central Banking and Financial Regulation Università Commerciale Luigi Bocconi, Via Roentgen 1, 20136 Milano E-mail:
[email protected]
Abstract The 2003 Italian Corporate Law Reform, establishing one-tier vs two-tier board for listed and unlisted joint stock companies, introduced alternative corporate governance systems. Besides the traditional model, which, at least in its basic features, has been continued by the Italian legislator, the two other “alternative” models of corporate governance generated by the 2003 Reform show different peculiarities in the methods of appointment of managing and controlling bodies. Considering the surprisingly limited adoption of the new systems introduced by the Reform after five years, this work implements regression analyses in order to compare the choice of the corporate governance system for a sample of Italian unlisted firms: corporations with lowest performances in sales and return on assets adopt a two tier board system; moreover, firms showing a more concentrated ownership structure and with the highest proportion of shareholders in terms of individuals maintain a traditional system.
Keywords: Corporate governance, one-tier board, two-tier board JEL Classification: G34, K22, M42.
1. Introduction Recent economic and financial crisis, starting from the strong reduction of prices on capital market in 2007, highlight the idea of an exponential growth of global risk (Krugman 2008). This empirical evidence seems to be in contrast with preexistent models of the modern finance stating that diversification could eliminate specific portfolio risk (Sharpe 1964). The reasons of the great growth in risk are not completely recognized by the economists, but lead the researchers, public opinion (Mutti 2008) and the legislator to focus their attention on the relationships between systems of control and governance issues. In the highlight of the consideration underlined above, Law and Economics and Law and Finance studies identify in these fields an important role to contrast market failures. The recent history of European corporate law has been affected by relevant changes, in particular on corporate governance branch, which affect both national and European institutions and companies. Corporate governance relies on a variety of institutional factors, such as economic and financial indices, ownership characteristics and board structure, aimed at aligning the interests of stakeholders. This paper is based on the Italian 2003 Reform of corporate governance introduced since the beginning of 2004, which allowed companies to choose among three different models of corporate governance. Actually, besides the traditional model of corporate governance, based on a board of directors and an external audit committee, two alternative Corporate Governance Systems (CGSs from now onward) have been introduced: the one-tier model, based on the Anglo-American tradition, and the two-tier model, derived from the German tradition. Most countries have adopted only one of the two considered board structures: the one-tier is the unitary board of directors used in common law countries, while the two-tier board structure, is used in several code law countries. Italy is a country where companies can choose between the adoption of a traditional system and two alternative models: the one-tier and two-tier model. Following a previous paper by Bellavite Pellegrini, Pellegrini and Sironi (2010), we explore the relationships between board structure, firm performance and ownerships structure in Italy, implementing accurate analyses on a larger sample with updated data at 2008. The target of this contribution is try to verify the existence of some driving elements that lead Italian companies in the choice among the three different models as well as analyzing how far alternative and traditional model of corporate governance mechanism are substitutes. In particular, we concentrate our attention at verifying whether firms who have abandoned a traditional system of corporate governance may be identified in terms of size, economic and 2
financial indices, and ownership structure; secondly we aim at ascertaining if some peculiar characteristics might drive firms to prefer a one tier or a two tier board system instead of the traditional one. Therefore, we implement both binary logistic and multinomial response regressions in order to discover the determinants of the choice of one among alternative systems instead of a traditional one. The paper is organized as follow: after the introduction, paragraph 2 presents a brief review of the existing literature on corporate governance mechanisms, giving some details about the analyzed corporate governance systems. In the third paragraph, after the sample description, we illustrate key economic and financial features of companies with both alternative and traditional CGSs in the Italian context emphasizing the board characteristics and ownership concentration. We develop our hypotheses and the regression models in section 4. Empirical results and concluding remarks are provided in paragraphs 5 and 6.
2. Corporate Governance Models: a brief survey of literature During the last years theoretical and empirical literature has focused its attention on the sources and the consequences of the corporate governance problem, providing some guidance on the major points of consensus and dissent among research on this relevant issue. Particular emphases are given to agency costs arising the relationship between managers and shareholders in companies and the link between firm value and corporate governance. The current scientific debate has raised more awareness about corporate governance issues and suggested that the investment community needs to be more critical on the way companies are managed (Horwath 2002). Recent financial scandals involving advanced economic systems around the world, led academic and institutional attention to focus their attention on corporate governance issues. Many researcher and economists during the last decades tried to give a definition about the meaning of “corporate governance” without the possibility to identify a unique vision (Garvey and Swan, 1994; Blair, 1995, and also Monks and Minow, 1995). Zingales (1998) defines “corporate governance” as “the complex set of constraints that shape the ex-post bargaining over the quasi-rent generated by a firm”, with some affinity to Williamson definition (1985). Other recent definitions are given by Macey (2010). Therefore, according to academic literature, corporate governance can also be identified as the mechanism by which investors attempt to minimize the transactions costs (Coase, 1937) and agency costs (Jensen and Meckling, 1976) associated with the separation between “ownership and
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control”, related to agency problem (Shleifer and Vishny, 1995, 1997)1. It is likely to come out the incompleteness of corporate contracts and the essential role of corporate governance principles to fill the gaps in these incomplete, contingent contracts and the relevance of a control managerial shrinking, in order to control agency costs2. There are several basic reasons for the growing interest in corporate governance. At first, the efficiency of the prevailing governance mechanism has been questioned (Jensen, 1993). Secondly, this debate has intensified, following reports about impressive, high-profile financial scandals, business failures and recent financial crises that affected economic systems all over the world till nowadays. Finally, there has been an increasing attention in the debate about comparative corporate governance structures around the world. In this paper we focus our attention on the Italian context, highlighting some peculiarities of its corporate governance structure. The possibility to choose between two alternative corporate governance systems (i. e. onetier and two-tier board) instead of the traditional one has been introduced in Italy by the Corporate Law Reform at the beginning of 2004. This reform, which allows for the adoption of a one - or a two-tier board for both listed and unlisted joint stock companies, has modified the traditional model of corporate governance, that is characterized by three different corporate bodies which govern firms: the shareholders’ meeting, the board of directors and the board of auditors. The introduction of two-alternative (one tier and two tier) corporate governance models in a single legal system, and the chance to choose among them and the traditional model represents an innovative approach to the problem of corporate governance and must be considered in the light of academic literature on global convergence of corporate law (Bebchuck and Roe, 1999; Coffee, 1999 – see also Hopt and Leyens, 2004). The one-tier model derives from the Anglo-American tradition and looks like to be simpler and more flexible model than the other two3. Similarly to both the traditional and the two-tier model, we observe the presence of an external auditor who checks compliance with accounting procedures4. Examining the powers granted to each corporate body, we remark that the functions of the shareholders’ meeting and the functions of the board of directors are partially overlapping to the functions already seen for the same bodies in the traditional model. Nevertheless, we remark some differences between the traditional system and the one-tier model, in particular the slightly weaker 1
See Manne (1965).
2
Corporate law seems to provide a set of standard terms that allow optimization on contracting costs.
3
In this system the shareholders’ meeting appoints the board of directors that then appoints some of its members to an audit committee delegated with monitoring functions. 4
The most important feature of this CGS type is the unification of the monitoring and the managing bodies of the firm.
4
monitoring powers of the management control committee compared to the powers of the board of auditors in the traditional one5. In contrast, the two-tier model could be defined as the most composite one. This model, dating back to the and of XIX century and deriving from German tradition, is characterized by a shareholders’ meeting that appoints a supervisory board - characterized by monitoring functions on managing body of the firms - which then appoints a management board whose main function is to manage the company. The alternative and the traditional CGSs and show significant differences. In particular, beginning with the functions defined for the shareholders’ meeting in the traditional model, the supervisory board is granted two powers: to approve the balance sheet and to appoint members of the management board realising in that way a cleaner separation between ownership and control. Finally, the two-tier model provides an important role for the supervisory board, with new controlling functions and the power to perform duties entrusted to the board of directors or to the shareholders’ meeting in the traditional model. Although many empirical studies mainly address three specific issues about corporate governance like the board size (Jensen, 1993; Yermack, 1996; Huther, 1997; Eisenberg et al., 1998), its composition and independence (Baysinger and Butler, 1985; Hermalin and Weisbach, 1988; Rosenstein and Wyatt, 1997; Bhagat and Black, 1999), and its internal structure and functioning (Klein, 1998; Vafeas, 1999) and most of them claim to have found empirical ties between some features of a unitary board of directors and firm performance, the empirical results are frequently dubious. From a theoretical point of view, few studies have considered endogenous board structure criteria in order to achieve the optimal corporate governance system by which companies are directed and controlled (Warther, 1998; Hermalin and Weisbach, 2003). In particular, little empirical evidence is available on board categories (one-tier versus two-tier), because most countries allow only one type of board structure. The most recent studies on board characteristics usually report that large boards are more likely to suffer from communication and agency problems, which affect corporate performance in a negative way (Cheng, 2008). In the highlights of the above consideration, corporate governance relies on a variety of institutional factors, such as ownership characteristics and board structure, aimed at aligning the interest of stakeholders. Most countries have adopted only one the following alternative board structures: the one-tier and the two-tier model. Focusing on European framework, during the last decade some empirical studies about this topic are relevant. 5
This model is likely to lead to a better distribution of information and data between the managing and controlling bodies, allowing improvements in transparency, with considerable reductions in terms of costs and time.
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Weir and Laing (1999) propose a study about UK context. Following the agency model that provides different suggestions to address the problems raised by the separation of ownership and control in public limited liability companies, they analyze how the corporate governance structure can influence performances. In addition, they investigate the structure and power of audit committee membership and its effect on the performance of 312 large UK listed companies. The results show that neither the independence of the committee membership nor the quality of the committee members has an effect on performance. However, they find that take-over intensity is negatively related to performance. On the other hand, Jungmann (2006) analyzes the German and UK context in a comparative perspective: Germany and UK are paradigms of systems where the control of managing directors of companies either lies in the hand of a separate supervisory board (two-tier system) or is an additional task of the board itself (one-tier system). The study analyzes the financial performance and board turnover of the largest companies listed on the stock exchanges in Frankfurt and London over a total of 400 financial years finding that both systems are effective means of control. The results also underline that it is not possible to assign superiority to either of them. Another relevant and recent study is the work by Miller-Reyes, Zao (2010). This study investigate French context analysing if the possibility for French firms to choose between a one-tier or a twotier board structure could affect the firm’s operating and stock performances. The results provide strong evidence that ownership and board structures are used together as corporate governance tools. The operating and stock performances of French firms is affected by agency conflicts among various stakeholders, such as insiders versus minority shareholders, equity owners versus debt holders and family versus institutional block-holders. Furthermore, a comparison between one-tier and two-tier board structures and some performance measures (e.g. ROA and Tobin’s Q) identifies areas in which agency conflicts are more likely to exist. In particular they found that while family dominance usually has a negative correlation with corporate governance, French institutional blockholding also play a negative role when associated with a less transparent two-tier structure, revealing also that foreign institutional investors do not have any impact on firm performance, regardless of board structure and they do not find any inverse relationship between board size and efficiency in France.
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3. The Italian Context Corporate governance research has focused on empirical studies which attempt to link financial performances to the degree of corporate governance compliance. Researchers have attempted to measure board performances and effectiveness by using indicators such as share values and shareholder returns. Nevertheless, these studies have produced only partial results. Considering the Italian context (Ghezzi 2003, Ventoruzzo 2005), there has been in recent years an increased interest in topics relating to corporate governance systems, overall in the highlight of Company Law’s Reform (2003), but without finding out which corporate governance system is the best. This lack could be due to the presence of no generally accepted criteria for the appropriate means to measure alternative systems of corporate governance. Generally speaking, it’s possible to identify three ways to measure empirically the performance of CGSs. At first, according to Shleifer and Vishny (1995, 1997) and relevant work of Zingales (1994), it is possible to categorize the performance of corporate governance systems on the basis of the capacity to hold up manager’s ability to divert firm resources to their own private benefits. The second empirical measure is related to the compliance of entrepreneurs to make IPO6 and finally, a third measure of the performance could be identified in the functioning of internal and external markets for corporate control. In the consideration here above mentioned, trying to identify which CGS is the best one is not an easy issue. Moreover, the incompleteness of the regulation of the one-tier and the two-tier models7 combined with the uncertainty about the final shape of these systems in the Italian legal system, define a more complex framework (Ghezzi and Malberti, 2008). This study tries to highlight the features and the identification of the determinants of the adoption of alternative corporate governance systems in Italy. Bellavite Pellegrini (2006, 2009 and 2010) described summary statistics reporting Italian joint stock companies that adopted alternative CGSs. Before analyzing the data, we mention some issues. Firstly, we underline the problems related to the path dependence of Italian firms under the traditional model, which is still the most influential and most commonly used in Italy and has been continued by the Italian legislator of corporate governance; secondly, many firms might have stopped from adopting an alternative models in order to understand the final shape of the provisions of these new CGSs. Another 6
I.e. investors who are confident that a particular system of CGs adequately protects them from inappropriate manager’ actions will be more inclined to make investment. Moreover, firms operate with an appropriate and functioning CGs will be able to sell their shares to the public, otherwise, will not. 7
In fact the Italian Legislature ha not yet completed all the necessary adjustment.
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problem could derive from the system used by the Italian Company Register to collect information often characterized by opacity - that might alter the perception of the economic conditions and legal status of Italian companies8.
3.1 Sample definition This paper studies a sample of 776 companies for the year 2008 drawn out from the population of all unlisted Italian joint stock operating companies, enrolled in “Register of Companies”9, with their headquarter located in Italy, characterized by the adoption of one among the three CGSs illustrated above. All data are obtained from the Stock View Infocamere Archive10 and Aida Database. The total sample is divided in two main sub-samples. The first one includes companies adopting one of the alternative models before specified and is composed by 276 unlisted Italian joint stock operating companies11. In order to investigate the presence of some differences between companies with different corporate governance systems that could represent the determinants of the adoption of alternative corporate governance systems, we decided to compare all the unlisted Italian joint stock operating companies that adopted an alternative system to a control sample of those maintaining a traditional model. Therefore, we considerd a second subsample composed by 500 firms drawn out from the population of all unlisted Italian joint stock operating companies12 with their legal headquarter located in Italy characterized by a traditional corporate governance system at the end of 200813, with a random selection procedure that will be described below. 8
Because, for example, by-laws frequently grant powers not used by the board of directors during its terms of office.
9
As reported by Chamber of Commerce (UnionCamere) classification, as joint stock operating companies, enrolled in “Register of Companies” we consider only working firms, leaving out consideration firms with outage firms, pending firms, liquidated firms and firms in bankruptcy. 10
This database, built by Infocamere (Chamber of Commerce), contains all financial statements and official documents of all Italian companies, recorded by region and province. The authors would like to thank the Osservatorio sulla Riforma del Diritto Societario (Chamber of Commerce) in Milan for providing the data and for institutional and economic support in their research activity. The authors wish to thank CeMaFiR and Foundation Arnone Bellavite Pellegrini to joint in financing this research. Responsibility for opinion expressed and remaining mistakes rest exclusively with the authors. 11
Our sample of analysis is composed by 276 companies, which represents 81.9% of the total amount of all unlisted Italian joint stock companies adopting an alternative corporate governance system at the end of 2008 (for a total amount of 337 companies, respectively 187 unlisted joint stock companies who adopted a one-tier model and 150 who decided to adopt a two-tier one). We do not consider 61 firms because of some missing or biased data and because we decided to exclude firms with outage firms, pending firms, liquidated firms and firms in bankruptcy. 12
Aida Database.
13
It represents about 1.5% of the total amount of unlisted Italian joint stock companies with a traditional corporate governance model.
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Considering the 276 firms adopting an alternative CGS, we propose the following classification: Table 1: Unlisted Italian joint stock operating companies adopting an alternative CGS (one- and two-tier models) Description Dimension % over the population – by each type – Joint stock companies with 147 53.26% One-tier model of corporate governance system (one-tier board with an inside Audit Committee) Joint stock companies with 129 46.74% Two- tier model of corporate governance system (Two board) Total 276 100% Source: Our elaborations from data of the “Stock View” Archive.
Table 1 shows the distribution of firms with an alternative CGS divided in two sub-samples. Firstly, we considered all unlisted joint stock companies enrolled in “Register of Companies” with their legal headquarter in Italy that have decided to adopt a one-tier (board) model of CGS. This sub-sample consists of 147 firms (about the 0.42% of the population of unlisted joint stock operating companies, with legal headquarter in Italy at the same time). Then, we considered all unlisted joint stock operating companies which have decided to adopt a two-tier (board) model of CGS. The last sun-sample is composed by 129 firms (about the 0.37% of the whole population of all unlisted joint stock operating companies enrolled in “Register of Companies”). We underline light market preferences for adopting one tier model (about 53.3%) in comparison to a two-tier one (about 46.7%). The data indicates that the strategy followed by Italian authorities has had a limited impact in attracting national and foreign firms to the new models (Bellavite Pellegrini, 2009 and 2010). The control sample of 500 companies with a traditional model has been selected from all the 34,440 unlisted Italian joint stock operating companies and classified in four geographic area: North-East; North-West, Centre and South-Isles. The regional distribution is reported in table 2:
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Table 2: Italy: Regional distribution by area REGIONAL DISTRIBUTION BY ITALIAN AREA North-East
North-West
Friuli Venezia Giulia Liguria Trentino Alto Adige Lombardia Veneto Piemonte Valle D’Aosta
Centre Abruzzo Emilia Romagna Lazio Marche Toscana Umbria
South-Isles Basilicata Calabria Campania Molise Puglia Sardegna Sicilia
Source: Our elaborations from Aida Database.
Hence, we found 34,440 unlisted Italian joint stock operating companies that adopted a traditional corporate governance system in 2008. Here below their distribution by area: Table 3: Unlisted Italian joint stock operating companies with traditional model - by area N. Companies with traditional model, by area North-East North-West Centre South-Isles 5.426
14.738
10.496
3.780
Total 34.440
Source: Our elaborations from Aida Database.
Then, we proceeded verifying the percentage of companies focused by area: Graph. 1: Companies with Traditional Model: the whole sample – by area Companies with Traditional Corporate Governance System: all - classification by area
South-Isle 11%
Centre 30%
North-West 43%
North-East 16%
Source: Our elaborations from Aida Database.
Due to the large difference between the population size of companies adopting an alternative system (276) with respect to those maintaining a traditional one (33.440), we decide to compare all 10
the alternatives against a sample of 500 firms that maintained the traditional system through a stratified sampling procedure based on the total sales of the firms included in the sample and on their geographical localization. Table 4 shows the partition of the sample on geographical basis: Table 4: Number of unlisted Italian joint stock operating companies adopting Traditional CGS – Sample of 500 companies selected N. Companies with traditional model, by area 500 companies selected North-East North-West Centre South-Isle Total 5.426 80 16
14.738 215 43
10.496 150 30
3.780 55 11
34.440 500 by quintile
Source: Our elaborations from Aida Database.
After the identification of 500 companies with a traditional corporate governance system the whole sample consists of 776 unlisted Italian joint stock companies adopting one of the three models of corporate governance in 2008, four years after the introduction of the Reform Law. The number of the joint stock companies adopting traditional or alternative CGSs of our sample is presented in Table 5.
Table 5: Number of unlisted Italian joint stock operating companies adopting traditional or alternative CGSs Description Dimension Companies with Traditional corporate 500 governance system Companies with an Alternative corporate 276 governance system TOTAL SAMPLE 776 Source: Our elaborations from data of the “Stock View” Archive.
As reported in Table 5, the total sample is composed by 776 firms: 64.43% of companies adopted a traditional CGS, and 35.57% of them implemented alternative ones.
3.2 Geographic location and economic activity From Table 6, we can define the distribution of the sample across the different areas in Italy. Firms with different corporate governance systems look like to distribute quite similarly among the sample in 2008.
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Table 6: Geographic distribution of joint stock companies with alternative or traditional CGSs14 Alternative Corporate Governance Systems Geographical distribution
North-West North-East Centre South-Isle TOTAL
One-Tier Model
Two-Tier Model
Traditional Corporate Governance system
dimension
dimension
dimension
dimension
216 (43%) 80 (16%) 149 (30%) 55 (11%) 500 (100%)
352 (45%) 124 (16%) 214 (28%) 86 (11%) 776 (100%)
71 26 36 14 147
(48%) (18%) (24%) (10%) (100%)
65 18 29 17 129
(50%) (14%) (23%) (13%) (100%)
Whole Sample
Source: Our elaborations from data of the “Stock View” Archive and Aida Database.
Observing firms with the alternative systems, we state more concentration in the North (with a cumulative percentage of North-West and North-East over the 50%). Traditional firms show a relevant presence in the North-West (43%) and in the Centre (30%). Focusing on the whole sample of 776 companies we observe a great prevalence of companies located in the North-West (about 45%) and in the Centre (28%). The majority of firms (all together considered) are located in the North (with a percentage of 61%). With regard to economic activity, it is possible to draw some general considerations. Regarding the whole sample of 776 unlisted Italian firms, the sectoral distribution is given in Table 7: Table 7: Economic activity classification - whole sample joint stock companies adopting alternative or traditional CGSs Alternative Corporate Governance
Traditional Corporate Whole Sample Systems One-Tier Model Two-Tier Model Governance Sytem dimension dimension (3%) 5 2 (2%) 6 (1%) 13 (2%) Oil and Gas 11 (8%) 4 (3%) 39 (8%) 54 (7%) Basic Materials 34 (23%) 53 (41%) 142 (28%) 229 (30%) Industrials 25 (17%) 13 (10%) 138 (28%) 176 (23%) Consumer Goods 6 (4%) 3 (2%) 17 (3%) 26 (3%) Healt Care 20 (14%) 7 (5%) 70 (14%) 97 (13%) Consumer Services 2 (1%) 2 (2%) 3 (1%) 7 (1%) Telecommunications 0 (0%) 5 (4%) 5 (1%) 10 (1%) Utilities 38 (26%) 35 (27%) 63 (13%) 136 (18%) Financial 6 (4%) 5 (4%) 17 (3%) 28 (4%) Technology 147 (100%) 129 (100%) 500 (100%) 776 (100%) Total Source: Our elaborations from data of the “Stock View” Archive and Aida Database; ICB Classification. Economic Activity (ICB classification)
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In parentheses the percentage over the total sample or sub-sample.
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Considering the full sample, we underline the prominence of industrial and consumer goods sectors (respectively about 30% and 23%), a remarkable presence of financial services (18%), and consumer services (13%). Even if the alternative models are not yet particularly successful, it is possible to recognize some characteristics of the legal entities that have decided to adopt them. According to Bellavite Pellegrini (2009 and 2010), a large percentage of the legal entities that have adopted a one-tier or a two-tier model are involved in manufacturing activity (industrial sector). Focusing our attention on firms with alternative CGSs, we observe that industrial and financial companies represent the most prevalent part of firms who adopted, respectively, a one-tier (board) model (49%) and a two-tier (board) model (68%). Consumer goods and Consumer service activity do show a clear interest in adopting alternative CGSs as well. Considering only companies with a traditional CGS, we remark a similar distribution across the economic activity: a high concentration in Industrial and Consumer goods activity (56%) and a relevance of Consumer Services and Financial companies (respectively about 14% and 13%). 3.3 Descriptive statistics: economic indices, income and financial size, ownership structure data – Sample of statistical model Using data covering economic and financial features, board structure, audit committee structure, ownership structure and calibrate the analysis by geographical and sectoral distribution, we analyze the whole samples of 776 firms. Table 8 presents some accounting indexes to point up differences between the above samples described.
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Table 8: Descriptive statistics Accounting indices – Sample of statistical model and econometric analysis (in Euro) Balance sheet items
Total sales Net Profit Net Worth Total Assets Total Debt Number of total employees
Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median
Traditional Corporate Governance System
One-Tier Model
Two-Tier Model
29,344,996 8,595,310 271,513 45,483 13,628,769 3,681,669 42,317,548 11,584,440 22,688,340 5,708,481 109 29
23,261,364 7,919,098 4,049,672 51,773 12,915,885 3,808,612 28,245,733 11,638,371 14,134,899 6,333,508 62 26
30,687,401 3,422,104 -3,996,873 3,472 34,255,608 3,104,419 81,342,367 11,480,419 27,543,638 6,038,503 183 23
Alternative Corporate Governance Whole Sample Systems (aggregate data) 26,732,229 6,136,274 288,787 28,229 22,889,886 3,397,443 53,062,638 11,582,989 20,402,027 6,090,255 71 23
28,415,713 7,982,216 277,657 42,378 16,922,671 3,610,210 46,139,255 11,582,989 21,875,167 5,965,330 96 27
Source: Elaborations from data of the “Stock View” Archive (Infocamere), financial statement and stock ledger; Aida Database.
As we can see in Table 8 and considering the median values15, we highlight some slightly differences in economic and financial size related to different CGSs. We remark larger values in terms of total sales, net profit, net worth and number of employees for those adopting a traditional model. Splitting alternative models among one and two-tier board, we notice that companies adopting a two-tier board are likely to be smaller than firms with one-tier board, in terms of total sales and net profit, but similar in terms of total assets, total debt and number of employees16. These results could be due to the evidence about the adoption of two-tier model for holdings without a real production, but that control working companies. The data reported verify the idea that companies adopting an alternative CGS are likely to be smaller compared to firms with a traditional one. These results confirm what found out in Bellavite Pellegrini et al. (2009), even if with less strong position. We state that the financial and economic crises who affected Italy started in 2007 and continuing nowadays, play a relevant role to explain these biased evidences. 15
We consider median values instead of mean values because of some statistical reasons. According to the mean and median definitions (the mean is calculated by adding together all the values, and then dividing them by the number of values you have, while the median is the middle value in a sample sorted into ascending order), we consider median values because of the type of the distribution. On the other hand, as long as the data is symmetrically distributed we can consider the mean values - but the mean can still be thrown right out by a few extreme values, and if the data is not symmetrical (ie. skewed) it can be downright misleading. Therefore, as in this case, when the data are not symmetrically distributed, the median is the form of 'average' that gives a better idea of any general tendency in the data. 16
Although companies with a one-tier board corporate governance system show a slightly bigger size compared to twotier board ones.
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Table 9 shows the legal status of shareholders in our sample.
Table 9: Descriptive statistics Ownership structure data: shareholders by type Sample of statistical model and econometric analysis
Ownership Structure data
Shareholders by type Individual (%) Mean Median Legal entity (%) Mean Median How many firms are under control and coordination"? Yes No Total
Two-Tier Model
Alternative Corporate Governance Systems (aggregate data)
Whole Sample
54.6% 66.7%
32.3% 0%
44.4% 50%
52.8% 66.7%
42% 25%
44.7% 33.3%
66.7% 100%
54.8% 50%
46.6% 33.3%
119 381 500
43 104 147
44 85 129
87 189 276
206 570 776
Traditional Corporate Governance System
One-Tier Model
57.6% 75%
Source: Elaborations from data of the “Stock View” Archive (Infocamere), financial statement and stock ledger; Aida Database.
Firms with a traditional CGS are likely to be owned mostly by individuals (with a percentage, in median terms, of 75%). Considering the sample of alternative models, we remark that companies adopting a one-tier model show similarity to companies with traditional corporate governance system (with a 66.7% owned by individual, in median terms). Differently from “traditional” companies and one-tier ones, firms with two-tier board display a strong prevalence of legal entities among the shareholders. Finally, the sample of companies that adopted a traditional CGS is characterized by a weak presence of firms under control and coordination (about 23.8%), and the same occur for firms with alternative systems (with a percentage of 31.5%).
4.
Statistical methodology
The empirical analysis divides in two stages. In the first stage we address the determinants of the choice of an alternative system instead of the traditional one. In order to analyze the probability of adopting an alternative CGS, we use a binary logistic model. We start defining the response variable that is: 0 yi = 1
if a firm adopts a traditional system if a firm adopts an alternative system
(1)
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Using a logistic specification for the model, the equation is specified as follows:
P( y i = 1) ' ln = α + xiβ P ( y = 0 ) i
(2)
where y i is the outcome variable, which assumes conventionally value 1 if a firm adopts a one-tier board with an inside audit committee or a two-tier board and 0 otherwise; x i' is the vector of covariates that are supposed to be related to the choice of the corporate governance system for each firm. β is the vector of parameters that measure the impact of any explanatory variable on the logarithm of the ratio between the probability of observing an alternative system and the probability of maintaining a traditional one: if β j is positive, firms with a higher value of the relative explanatory variable are more likely to implement an alternative system; on the other hand, if β j < 0 , a higher value of the explanatory variable is related to a lower probability of observing yi = 1 in relative terms. In the second stage of the analysis we consider the choice of one specific alternative system (one tier or two tier) in opposition of a traditional system; because of a logistic regression addresses only binary outcomes, we use a multinomial logit in presence of three disjoint response categories: one tier model, two tier model and traditional one. In this framework the response variable is specified as follows: 0 y i = 1 2
if a firm adopts a traditional system if a firm adopts a one tier board system if a firm adopts a two tier board system
(3)
Here, the multinomial logit model can be thought of as simultaneously estimating binary logits for the comparison of two response categories (one tier and two tier) in comparison with the reference category that is set as the persistence of a traditional system. P( y i = 2) ' ln = α 2 + xiβ 2 P( y i = 0)
(4)
P( y i = 1) ' ln = α 1 + x i β1 P ( y = 0 ) i
(5)
β 2 is the vector of parameters, measuring the impact of the explanatory variables on the relative
likelihood of adopting a two-tier board expressed as a fraction of the likelihood that a company will maintain a traditional system. Similarly, β1 measure the impact of x i' on the likelihood of abandoning a traditional system in favour of a one-tier one. 16
The list of the explanatory variables x i' , for all the models, includes both accounting indices (the total sales, the net worth and the return on assets), and corporate governance variables as the percentage of the ownership of the first and the second shareholder (who own most of the stocks). Finally we add a categorical variable that indicates whether a firm is under control and coordination.
5. Empirical results This section illustrates the results of the empirical analysis. Firstly, we consider the logit model comparing traditional vs. alternative systems. In the output tables, relative risk ratios with standard errors in parentheses are reported. Table 10 presents two different models for the whole sample that includes companies adopting an alternative or a traditional system. In each model the outcome variable is the type of Corporate Governance system implemented by the sampled corporations, while the explanatory variables change over the two tested models. Looking in more details, Model 1 includes only accounting and financial indices reported in the previous sections; Model 2 adds variables related to ownership structure and type of governance for each firm. All the model illustrated in the section include regional and sector dummies in order to capture not observable heterogeneity. As usual in econometric practice, dummy coefficients are omitted in the tables.
Table 10: Relative risks for binary logit estimates (Alternative systems vs. Traditional)
Explanatory Variables Ln(Total Sales)
Model 1 relative risk s.e. ratios 0.793*** (0.045)
Model 2 relative risk s.e. ratios 0.846** (0.063)
Ln(Net Worth)
1.172**
(0.079)
1.054
(0.088)
ROA
0.246*
(0.177)
0.228*
(0.187)
Leverage 1 and 2nd shareholders ownership Individual shareholders
1.757
(0.756)
1.279
(0.652)
st
Control and coordination
0.273***
0.128
0.437***
0.129
1.406
0.383
Observations
752
614
Wald Statistic
29.92***
78.77***
Pseudo R2
0.0309
0.0995
*** p
