Charlie Weir

Internal and External Governance Mechanisms: Their Impact on the Performance of Large UK Public Companies

This paper analyses the relationship between internal and external corporate governance mechanisms and the performance of UK companies within the context of the Cadbury Committees Code of Best Practice. The results show, first, that the market for corporate control is an effective governance mechanism that may be regarded as a substitute for the other mechanisms. Second, there is a weak relationship between the internal governance mechanisms and performance. Third, there is also little evidence that with firms in the top and bottom performance deciles have different internal governance characteristics. The results therefore raise questions about the efficacy of imposing prescriptive internal governance mechanisms on companies, particularly given that the market for corporate control has been shown to be an effective means of reducing agency costs.

The performance-governance relationship: the effects of Cadbury compliance on UK quoted companies.

This paper investigates the extent to which recommendations madeby the Cadbury Committee have affected UK company performance.The Committee recommended that certain internal monitoringmechanisms should be adopted by quoted firms because they weremore effective than others as a means of promoting shareholderinterests. The mechanisms analysed are duality, the number ofoutside directors on the board and the presence of a remunerationcommittee. We analyse the relationship between governancestructures and performance for two years, 1992 and 1995. Usingsamples of 200 companies for each of the years, we find that theproportion of firms adopting the governance structuresrecommended by Cadbury has increased. However there is mixedevidence that the structures are associated with betterperformance. Depending on the choice of dependent variable, thepresence of a remuneration committee has a positive effect onperformance and outside director representation has a negativeeffect. However, there is evidence of a simultaneous relationshipbetween outside director representation and performance, a resultconsistent with additional outside directors being appointedafter a period of poor performance. Complete compliance with themodel of governance proposed by the Cadbury Committee does not,however, appear to be associated with performance which is betterthan that achieved by either partial or non compliance.

Governance structures, director independence and corporate performance in the UK

A number of Committees have been set up in recent years to investigate the governance of UK quoted companies. The key one was the Cadbury Committee, which recommended a number of governance structures as examples of best practice. These included the separation of the posts of CEO and chairman, a significant representation of non‐executive directors, the importance of non‐executive director independence and the setting up of board subcommittees. This study finds that there has been widespread adoption of the recommended governance structures. However, there is no clear relationship between governance structures and corporate performance. This raises questions about the most effective type of governance mechanism and whether or not the prescriptive recommendations of Cadbury should be replaced with a more flexible approach.

Incentive Effects, Monitoring Mechanisms and the Market for Corporate Control: An Analysis of the Factors Affecting Public to Private Transactions in the UK

This paper investigates the factors that influence the decision to change the status of a publicly quoted company to that of a private company. We find that firms that go private are more likely to have higher CEO ownership and higher institutional ownership. In relation to their board structures, firms going private tend to have more duality but there is no statistical difference in the proportion of non-executive directors. They do not show signs of having excess free cash flows but there is some evidence of lower growth opportunities. We do not find that firms going private experience a greater threat of hostile acquisition. The results are therefore consistent with incentive and monitoring explanations of going private. Calculation of the probability of going private shows that incentive effects are stronger than the monitoring effects.

Undervaluation, private information, agency costs and the decision to go private

There is widespread anecdotal evidence that poor stock market performance is an important reason for taking a company private. The results support the perceived undervaluation hypothesis. The finding also applies to management buy-outs, which indicates that the management of these firms had private information. It is also found that firms going private had non-optimal governance structures, higher board and institutional ownership. The last finding is consistent with going private transactions providing institutions with a means of existing firms with poor market valuation, particularly during a time of very limited pressure from the market for corporate control.

Corporate governance, performance and take-overs: an empirical analysis of UK mergers

This paper analyses the relationship between the probability of being acquired, firm performance and governance structures. The acquired firms were all fully quoted on the London Stock Exchange and the acquisitions took place between 1990 and 1993. They were matched by a sample of non-acquired quoted companies. The sample was also analysed in terms of hostile and non-hostile acquisitions. It was found that the key governance characteristics which differentiated between acquired and nonacquired corporations related to the proportion of non-executive directors on the board and to whether or not the roles of chief executive officer and chairman were combined. It was also found that acquired firms were poor performers, which suggests that the internal governance structures had been ineffective. These results applied to hostile and non-hostile targets. The findings support the view that hostile acquisitions are disciplinary but cast doubt on the claim that non-hostile acquisitions are purely synergistic. The results also support the view that certain governance characteristics are effective substitutes for the take-over mechanism as a means of minimizing discretionary behaviour.

Ownership structure, board composition and the market for corporate control in the UK: an empirical analysis

This paper analyses the board composition and ownership structures of a sample of companies that have been acquired and those of a matching control sample that have not. We find significant governance differences between acquired firms and the control sample. Firms with the following characteristics were more likely to be acquired: they had the same person acting as CEO and chair, a higher proportion of non-executive directors, larger institutional shareholdings and higher director shareholdings. An analysis of small firms also found evidence of higher CEO shareholdings. We also find that treating all take-overs as a single group leads to a model mis-specification which does not identify the incentive effects of board and CEO shareholdings present in non-hostile acquisitions. These results are consistent with two agency-derived hypotheses, financial incentives and effective monitoring. We also find that targets exhibit lower growth potential but do not have worse accounting performance.

Public to Private Transactions, Private Equity and Performance in the UK: An Empirical Analysis of the Impact of Going Private

Using a hand collected data set of 122 buy-outs, this paper presents the first analysis of the impact effects of public to private transactions in the UK during a period (1998-2004) in which PTPs have become a significant part of the market for corporate control. We find that performance deteriorates relative to the pre-buyout situation but firms do not perform worse than firms that remain public and there some evidence that performance improves. A similar outcome applies to deals backed by PEPs, however there is no evidence that non-PEPs perform better than the industry average. We find that contrary to expectations, PEP involvement appears to have a negative effect on the change in profitability relative to the situation prior to the deal but this was explained by the fact that PEPs were involved in the largest deals and these had the poorest performance. PEPs performed better than the industry average and no worse than non-PEP deals. PTPs experienced job losses in the years immediately after going private but employment increased subsequently. PEP deals incurred job losses each year while non-PEP deals increased employment increases after the first year post-deal. PTP tax liability falls but this is at least partly caused by the fall in profitability relative to the year before going private. Expenses were also found to be lower after going private and profit per employee higher, indicating increased efficiency. We also find improvements in the z-scores of firms going private with deals involving PEPs achieving significant improvements in their financial health. These results are driven by improvements in efficiency (lower expenses) and an increase in liquidity. The overall impression is one in which PTPs create value by improvements in efficiency and divestment but that this is not being picked up by the traditional accounting based measures of profitability.

Decision processes, monitoring, incentives and large firm performance in the UK

In large firms the managers who run the business tend not to be large shareholders. In addition, managers are said to have objectives which differ from those of the owners. Aligning these conflicting interests is the basis of the agency problem. Various corporate governance schemes have been introduced to ensure that managers follow profit‐driven policies. Looks at the separation of decision management from decision control, the frequency of meetings between divisional managers and their superiors, performance‐related pay and performance‐related incentives. Examines their impact on firm profitability. Finds that the level of monitoring of divisional managers and the use of divisional performance‐related pay has a significant effect on performance. Finds incentives in general do not affect performance. Finds on average that performance is unaffected by the separation of decision processes, although it does help to achieve very good profitability.

Governance and takeovers: are public-to-private transactions different from traditional acquisitions of listed corporations?

Abstract Using a unique hand-collected dataset comprising 96 public-to-private (PTP) transactions and 258 acquisitions of listed corporations by existing corporate groups completed during the period 1998 to 2000, this paper investigates the extent to which PTPs have different internal and external governance and other characteristics from traditional acquisitions of listed corporations by existing corporate groups. The paper analyses acquisition activity during a period in which three new features were present: the decline in hostile takeovers, the increase in the adoption of governance Codes of Best Practice and the growth in PTP activity. PTPs are usually a response to takeover threat (Lehn and Poulsen, 1989) and so the paper analyses the acquisition decision from two perspectives: first, takeovers as a disciplinary mechanism which substitute for weak internal governance and second, as part of a non-disciplinary perspective where takeovers are complementary to internal governance mechanisms. We find support for the argument that improved internal governance and non-disciplinary takeovers, that is takeovers where the motive is not as a response to under-performing management, are complementary. PTPs are more likely to have higher board ownership and are likely to have duality of CEO and chairman. They are also more likely to have lower growth prospects and lower valuations. However, they do not have sub-optimal internal corporate governance structures in terms of lower proportions of outside directors. With respect to external governance, they are not more likely to experience pressure from the market for corporate control in the form of greater takeover speculation and are also not more likely to suffer hostile threats. We find that PTPs involving management buy-outs (MBIs) have fewer non-executive directors and a greater incidence of duality. MBO also have higher board shareholdings. We find no evidence that management buy-ins (MBIs) have different characteristics. Our results suggest that going private by MBO may result from managements knowledge of private information that leads them to believe that the market has an incorrect perspective of the companys prospects.