Corporate Governance in the Alternative Investment Market of the London Stock Exchange Neeta Shirish Shah Thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Management at Royal Holloway, University of London October 2014 1 DECLARATION OF AUTHORSHIP I, Neeta Shirish Shah, hereby declare that this thesis and the work presented in it is entirely my own. Where I have consulted the work of others, this is always clearly stated. Signed: Neeta Shah Date: 14 October 2014 2 ACKNOWLEDGEMENTS This thesis is the result of my work at the School of Management, Royal Holloway, University of London. I acknowledge Westminster Business School for the financial support that I have received towards the funding of the PhD programme. My special thanks go to my supervisors Professor Christopher Napier, Dr Stavroula Iliopoulou and advisor Professor Jane Davison at the Royal Holloway, University of London. I am deeply honoured that Professor Napier has remained as my supervisor, since he has given me outstanding academic support, and has been a source of inspiration and encouragement. I am particularly indebted to him for helping me develop as an academic researcher and showing me support over the past years. I would like to thank Professor Orla Gough, Professor Ben Nowman and all the members of the University of Westminster Department of Accounting, Finance and Governance, since, without their support; the completion of this thesis would not have been possible. In addition, I would like to express my appreciation to Dr Stewart Brodie who helped in the final days of my thesis. I would like to thank my two daughters, Dimple and Aarti, who have given me tremendous motivation in life. I am eternally indebted to them, as they had to endure long periods of not going out on trips and eating out. To see them proud of me has been the best reward for my work. I hope my research will be an inspiration to them both that anything is achievable at any age. Lastly, I dedicate this thesis to my husband, Shirish, his unrestricted support and staying awake with me until late at night, whilst I was working on my thesis. Neeta Shah 2014 3 ABSTRACT This thesis examines corporate governance in the Alternative Investment Market (AIM) during the period 2008 to 2010. The thesis considers how corporate governance should be defined, key theories in corporate governance, development of corporate governance in the United Kingdom, factors that explain ownership structure and the development of AIM since 1995. The empirical research explores three themes. First, using hand-collected data, involves the construction of corporate governance score covering corporate governance disclosures such as board committees, board independence, board power, board transparency, related party transactions and remuneration types. The main objective, here, is to evaluate the commitment to minimal requirements for good corporate governance. Corporate governance score is regressed against performance variables such as Tobin‘s Q (TQ) and return on assets (ROA). The regressions show that the corporate governance score is positively associated with company performance but that the relationship is not statistically significant. Second, involves the investigation of the relationship between ownership type and company performance. The findings show that levels of ownership and performance are negatively associated. The relationship was influenced by company variables such as size, cash, debt, and corporate governance variables such as duality of the chief executive officer (CEO) and the chairman roles and the percentage of independent directors. The statistical significance of the relationship varies according to ownership type. The results demonstrate the presence of monitoring and expropriation effects. Third, involves the examination of the determinants of CEO pay. Company size consistently shows association with CEO pay. The relationship between CEO pay and company performance depends on the proxy used to measure performance: TQ gives a positive and statistically significant result, whereas ROA gives a negative coefficient and not statistically significant. The impact of institutional shareholdings also differs depending on which proxy is used to measure performance. 4 TABLE OF CONTENTS DECLARATION OF AUTHORSHIP ........................................................... 2 ACKNOWLEDGEMENTS ............................................................................ 3 ABSTRACT ................................................................................................ 4 TABLE OF CONTENTS ................................................................................ 5 LIST OF FIGURES ....................................................................................... 11 LIST OF TABLES ......................................................................................... 12 LIST OF APPENDIX .................................................................................... 14 ABBREVIATIONS ........................................................................................ 15 CHAPTER 1 INTRODUCTION .................................................................. 17 1.1 : Introduction ............................................................................................ 17 1.2 : Motivation for the Study ........................................................................ 20 1.3 : Objectives of the Study .......................................................................... 21 1.4 : Research Questions ................................................................................ 24 1.5 : The Scope of this Study ......................................................................... 25 1.6 : Research Study Limitations ................................................................... 25 1.7 : Organisation of the Thesis ..................................................................... 26 1.8 : Main Structure of the Thesis .................................................................. 27 5 CHAPTER 2 DEFINITIONS OF CORPORATE GOVERNANCE ........ 34 2.1 : Introduction ............................................................................................ 34 2.2 : What is Corporate Governance? ............................................................ 35 2.3 : Review of Various Definitions of Corporate Governance ..................... 37 2.4 : Conclusion ............................................................................................. 45 CHAPTER 3 CORPORATE GOVERNANCE THEORIES .................... 47 3.1 : Introduction ............................................................................................ 47 3.2 : Theory of the Firm ................................................................................. 48 3.3 : Agency Theory ....................................................................................... 53 3.4 : Transactional Cost Economics ............................................................... 58 3.5 : Stewardship Theory ............................................................................... 59 3.6 : Stakeholder Theory ................................................................................ 62 3.7 : Legitimacy Theory ................................................................................. 66 3.8 : Institutional Theory ................................................................................ 69 3.9 : Managerial Hegemony Theory .............................................................. 72 3.10 : Class Hegemony Theory ........................................................................ 73 3.11 : Conclusion ............................................................................................. 73 CHAPTER 4 CORPORATE GOVERNANCE IN THEUNITED KINGDOM .......................................................................... 75 4.1 : Introduction ............................................................................................ 75 4.2 : Cadbury Report (1992) .......................................................................... 79 4.3 : Greenbury Report (1995) ....................................................................... 83 4.4 : Hampel Report (1998)............................................................................ 85 4.5 : Combined Code of Corporate Governance (1998) ................................ 86 4.6 : Turnbull Report (1999, 2006) ................................................................ 87 4.7 : Myners Report (2001) ............................................................................ 88 4.8 : Sarbanes-Oxley Act 2002 (US) .............................................................. 88 6 4.9 : Higgs Report (2003) ............................................................................... 88 4.10 : Smith Report (2003) ............................................................................... 89 4.11 : The Tyson Report (2003) ....................................................................... 90 4.12 : UK Companies Act (2006) ..................................................................... 90 4.13 : EU Directive .......................................................................................... 91 4.14 : The Walker Review (2009) .................................................................... 92 4.15 : The UK Stewardship Code (2010, 2012) ............................................... 93 4.16 : The UK Corporate Governance Code (2010, 2012)