Studies of Corporate Governance in New Zealand by MarkA. Fox -:? Thesis submitted for the award of the Ph.D. degree at the University of Canterbury, Christchurch, New Zealand December 1995 1 Acknowledgments It's hard to know where to begin. If ten years ago someone had said I'd be sitting here writing the acknowledgments to a Ph.D., I'd wouldn't have believed them. That I'm here today is, in part, due to the support and encouragement of some rather special people. First and foremost among these people are my parents who - despite not knowing quite what I've been doing over the last few years - have been supportive. I also wish to thank Bob Hamilton (my supervisor) who had faith in my ability to do a Ph.D. in the first instance. Whether or not this was such a good idea is open to debate, but nevertheless I'm sure Bob's intended well, and I appreciate this. There are several people around the Department who I'd like to thank. In particular, I appreciate the support and encouragement of Peter Cammock. Thanks also go to Steve Dakin, V. Nilakant and John George. Irene Edgar, Margaret Mahon, Irene Joseph and Shelley Caines have also made life in the Department eminently more enjoyable than it would otherwise have been. I'd also like to thank several friends - Craig, Isabelle, Mark, and Tracey - who I've neglected somewhat in recent years. Your patience and encouragement have been most welcome. Thanks also go to my friend Maria whose interest in my work, and skill in distracting me from it, is appreciated. Several people from the Department of Accounting, Finance and Information Systems were helpful. In particular Alan Robb was most helpful in permitting me to make use the AFIS annual reports library and in providing some useful materials on corporate failure. The advice of Graeme Purchas with regards interpretation of some of the more bizarre sets of accounts proved invaluable at times. The support of Professor Bevan Clarke and Alan Robb in my supervision of Matt Roy's Master of Commerce project on corporate interlocks in New Zealand is also very much appreciated. I would also like to thank John Austin for providing some rather interesting distractions from my thesis, by way of consultancy assignments. 2 Last, but by no means least, I'd like to thank my office-mates, Geoff Goodhew and Jo Berg. I could tell you that we all sat around for hours on end discussing important stuff to do with strategic management and that this has greatly influenced my thinking and the context of this thesis, but I'd be lying. However, Geoff and Jo have made life in this place less stressful than it could have been, and I greatly appreciate this. I wish them all the best for their respective futures. To date, a total of nine papers and research notes - which are based largely on the material contained in this thesis - have been published. These papers and the chapters of this thesis that they draw upon are shown below: Chapter 4 Fox, M.A. and Walker, G.R (1995) Board structure of New Zealand publicly listed companies. Company and Securities Law Journal, 13,6,400-405. Chapter 8 Fox, M.A., Roy, M.R and Walker, G.R (1995) Corporate control of New Zealand publicly listed companies, 1962 to 1993. Company and Securities Law Journal, 13, 1,73-75. Chapter 9 Fox, M.A., Roy, M.R and Walker, G.R (1994) Interlocking directorships in New Zealand publicly listed companies. Company and Securities Law Journal, 12, 5, 331-335. Roy, M.R, Fox, M.A. and Hamilton, RT. (1994) Board size and potential corporate and director interlocks in Australasia 1984-1993. Australian Journal of Management, 19,2,201-217. Chapter 10 Fox, M.A. and Roy, M.R (1994) Corporate control and foreign ownership of New Zealand listed equities. New Zealand Strategic Management, 1, 2, 24-31. Fox, M.A. and Walker, G.R (1994) Ownership structure of New Zealand Stock exchange Top 40 companies. Company and Securities Law Journal, 12,8,529-530. Walker, G.R. and Fox, M.A. (1994) Securities regulation and New Zealand sharemarket patterns, 1989-1993. Journal of Banking and Finance: Law and Practice, 5, 3, 244-250. 3 Chapter 11 Fox, M.A. and Walker, G.R. (1994) Institutional investment in New Zealand publicly listed companies. Company and Securities Law Journal, 12,7,467-469. Chapters 4, 8, 9, 10 and 11 Fox, M.A. and Walker, G.R. (1995) Evidence on corporate governance in New Zealand listed companies. Otago Law Review, 9, December,forthcoming. The following papers are currently under review: Chapters 4 and 5 Fox, M.A. Board structure of New Zealand public listed companies: an international comparative approach. Corporate Governance - An International Review. Chapters 6 and 7 Fox, M.A. and Cammock, P.e. Leadership of boards of directors and financial performance in New Zealand, 1990-93. New Zealand Journal of Business. In addition to the aforementioned, three manuscripts - which are based on this thesis - are in preparation. These manuscripts, the chapters they draw on and their target . journals are as follows: Chapter 2 Fox, M.A. and Hamilton, R.T. From corporate governance to corporate strategy. Journal of Management Studies. Chapter 3 Fox, M.A. and Hamilton, R.T., Corporate governance and corporate failure. Journal of Business Research. Chapters 6 and 7 Fox, M.A. and Hamilton, R.T. Determinants and performance consequences of board composition. Managerial and Decision Economics. 4 The work reported in this thesis is my own, with the following exceptions: Chapter 8 (Corporate control and financial performance) Matt Roy collected, under my supervision, approximately two-thirds of the corporate control data for the year 1993. Chapter 9 (Potential corporate and director interlocks) This chapter was researched in collaboration with Matt Roy and written in collaboration with Matt Roy and Bob Hamilton. The contributions of Matt and I to this chapter are more-or-Iess equal, with Bob Hamilton playing a comparatively minor role in re-writing the paper, following submission and a subsequent invitation to re-submit the paper to the Australian Journal of Management. An earlier version of this chapter appears in Matt Roy's Master of Commerce research project*, which I supervised. Chapter 10 (Institutional investment) The data for this chapter was collected, under my close supervision, by Sam Mellor, a Master of Laws student at the University of Canterbury. I accept full responsibility for any errors or omissions which may remain in this thesis. Mark Fox Department of Management Christchurch New Zealand December 1995 * Matt Roy (1994) Corporate interlocks in New Zealand. Research Project, Department of Accounting, Finance and Information Systems, University of Canterbury. You aint seen nothing yet 5 CONTENTS Page Abstract 14 1 INTRODUCTION 15 1.1 Objectives of the thesis 15 1.2 Background to the thesis 15 1.3 Key "actors" in corporate governance 20 1.4 Thesis structure 23 Section One 2 FROM CORPORATE GOVERNANCE TO CORPORATE 25 STRATEGY 2.1 Introduction 25 2.2 Background to the research 25 2.3 Research design 27 2.3.1 Sample size 27 2.3.2 Data Sources 29 2.4 Theory building 30 2.4.1 Measuring corporate strategy 30 2.4.2 Motives for divestment 30 2.4.3 Ownership 33 2.4.4 Changes in board composition 35 2.4.5 CEO changes 35 2.5 Theory testing 37 2.5.1 Performance 39 2.5.2 Ownership 40 2.5.3 Board representation 40 2.6 Discussion and conclusion 41 6 3 CORPORATE GOVERNANCE AND CORPORATE FAILURE 43 3.1 Introduction 43 3.2 Literature review 43 3.2.1 Corporate governance and corporate failure 44 3.2.1.1 Board size 44 3.2.1.2 CEO duality 46 3.2.1.3 Outsider directors 49 3.2.1.4 Interaction effects 52 3.2.1.5 Ownership 52 3.2.2 Other factors that may lead to corporate failure 54 3.2.2.1 Company size (the liability of smallness) 54 3.2.2.2 Industry 55 3.2.2.3 Protection 56 3.2.2.4 Strategy 57 3.2.2.5 Structure 58 3.2.2.6 Strategy-structure fit 59 3.3 Sample 60 3.4 Variables 61 3.5 Results and discussion 63 3.5.1 Introduction 63 3.5.2 Majority of outside directors 68 3.5.3 Not having a divisional structure 70 3.5.4 CEO duality 70 3.5.5 Board size 70 3.5.6 Proportion and number of outsiders 71 3.5.7 Interaction effects 72 3.5.8 Ownership 72 3.5.9 Protection 72 3.5.10 Strategy 73 3.5.11 Other variables 73 3.6 Conclusions 73 7 Section Two 4 BOARD STRUCTURE OF NEW ZEALAND PUBLIC LISTED 76 COMPANIES 4.1 Introduction 76 4.2 Changes in Board structure in New Zealand, 1962 to 1993 76 4.2.1 Introduction 76 4.2.2 Board size 79 4.2.3 Number of outside directors 80 4.2.4 Proportion of outside directors 81 4.2.5 Outsider dominance 82 4.2.6 CEO duality/executive board chairs 82 4.3 Implications for corporate governance 83 5 INTERNATIONAL COMPARISONS OF BOARD STRUCTURE 85 5.1 Introduction 85 5.2 Previous international studies 85 5.3 Data and method 86 5.4 Country comparisons 87 5.4.1 Comparisons with Australia 87 5.4.2 Comparisons with the United Kingdom 88 5.4.3 Comparisons with the United States 89 5.4.4 Comparisons with Japan 93 5.5 Conclusion and discussion 95 6 DETERMINANTS AND PERFORMANCE CONSEQUENCES OF 98 BOARD COMPOSITION 6.1 Introduction 98 6.2 Board leadership, board composition and performance 98 6.2.1 CEO Duality 99 6.2.2 Outside directors 100 6.2.3 Board size 109 6.3 Conclusions 109 8 7 DETERMINANTS OF BOARD COMPOSITION 110 7.1 Introduction 110 7.2 Prior corporate performance 111 7.3 Firm size 111 7.4 Leverage 112 7.5 Other factors 113 7.6 Sample and method 115 7.7 Analysis and discussion 116 7.7.1 Cross-sectional analysis 116 7.7.2 Longitudinal analysis 120 7.7.2.1 Board variables and financial performance 120 7.7.2.2 Determinants