Corporate Governance Characteristics and Firm Performance: Evidence from UK

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TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION1

1.1 The Impact of Corporate Governance Mechanisms on Firm Performance2

1.2 The Principles of Good Governance4

1.2.1 Good Governance and Corporate Governance5

CHAPTER 2: LITERATURE REVIEW7

2.1 Theories of Corporate Governance8

2.1.1 Agency Theory8

2.1.2 Stewardship Theory8

2.1.3 Stakeholder Theory9

2.2 Theoretical Framework10

2.3 Corporate Governance in the UK11

2.4 Corporate Governance and Firm Performance15

2.5 Development of UK Corporate Governance16

2.5.1 Cadbury Report (1992)17

2.5.2 Greenbury Report (1995)18

2.5.3 Hampel Report (1998)18

2.5.4 Combined Code (1998)19

2.5.5 Turnbull (1999)19

2.5.6 Myners (2001)20

2.5.7 Higgs (2003)20

2.5.8 Smith (2003)21

2.5.9 Combined Code (2003)22

2.6 Philosophical Framework22

REFERENCES26

CHAPTER 1: INTRODUCTION

Corporate governance has only relatively recently come to prominence in the business world; the term “corporate governance” and its everyday usage in the financial press is a new phenomenon of the last fifteen years or so. However, the theories underlying the development of corporate governance, and the areas it encompasses, date from much earlier and are drawn from a variety of disciplines including finance, economics, accounting, law, management and organizational behaviour (Mallin, 2010).

In the last 10 to 15 years in corporate finance academic literature has produced a long list of articles analyzing, both theoretically and empirically, the relationship between different aspects that constitute the government of the corporation. This literature has also analyzed the relationship between these aspects of corporate governance and company performance and economy. The impetus behind this literature has developed due for two reasons. On the one hand, responds to the relative consensus that economists have reached on the idea that the theory of the firm is actually quite complex and can not be understood fully by using traditional models under competition and perfect information (Agrawal, 1996, 377). Moreover, this momentum has been retrofitted with the empirical evidence has accumulated to support some of the main hypotheses regarding the governance of the corporation.

In simple terms, corporate governance is the set of relations established between the different participants in the company to ensure that each one may receive what is fair. This is crucial to providing appropriate incentives in order to make the investments necessary for the development of the company. The reason for this does not happen automatically is the existence of information asymmetries and the impossibility of implementing contracts against each of the possible future eventualities.

There are many aspects that make up corporate governance and conditions in one way or another, the performance of the company. Among the specific aspects of the company include the system of decision making, capital structure, mechanisms of executive compensation and monitoring systems. Among the company are exogenous to the fundamental legal system, the market for corporate control, the market for managerial services and the degree of competition in the market for goods and inputs that the firm faces (Baglia, 1996, 41).

1.1 The Impact of Corporate Governance Mechanisms on Firm Performance

Corporate governance was developed in a global occurrence, thus, is a complicated sector including ownership, cultural, legal and other structural differences. Therefore, some theories may be more important to other countries than others, at different times depending on what stage each country is ...