Corporate Governance Strategies to Support Financial Performance

Corporate Governance Strategies to Support

Financial Performance

Section 1: Foundation of the Study

Background of the Problem

Corporate governance is at the core of every institution. Corporate governance is

the lifeline that ensures sustained profitability over time. Hsu and Wu (2014) asserted that

companies with a higher percentage of directors were less likely to be embroiled in

corporate scandal and failure. The role of a Board of Directors (BD) is essential. The

other management comprises the executives who set the goals and objectives of a

company. Within the last decade (2000s) there have been several notable financial crises

where key corporate bodies and reputable firms have failed (Lee & Fan, 2014; Othman &

Melville, 2016). Efforts to improve corporate governance by regulatory bodies in the

Austrian listed companies aim at enhancing investor confidence in the Austrian Stock

Exchange (Austrian Bureau of Statistics [ABS], 2015). Examples of improvements in

corporate governance include the introduction of two regulations to the merger and

acquisition markets. In addition, the Austrian legislator, the Austrian Financial Market

Authority (FMA) enacted stronger measures to enhance the responsibility of the

supervisory board and the external auditor (ABS, 2015). The solutions at improving

corporate governance have not curtailed the recurring onslaught of one financial crisis

after another. Instead, financial scandal continues to implicate and mire more companies

with new cases bringing to the forefront an intense, vicious, and higher level of gross

misconduct. Clearly, the instruments established to thwart financial misconduct and poor

governance are inadequate as financial scandals continue to occur.

Problem Statement

Financial scandal mires the insurance business environment as policymakers have

vowed sweeping changes in corporate governance in the insurance industry to safeguard

profits and protect more than a million policyholders (Voinea, 2015). Forty percent of

financial advisers do not comply with the law when selling insurance policy and products

(Miller & Yang, 2015). The general business problem is some business leaders fail to

implement strategies to support sound corporate governance, which could impair

financial performance. The specific business problem is some insurance business leaders

lack corporate governance strategies to support financial performance.

Purpose Statement

The purpose of this qualitative multiple case study was to explore the corporate

governance strategies insurance business leaders use to support financial performance.

The targeted population consisted of business leaders from seven insurance companies in

the corporate sector in Austria who have used successful corporate governance strategies

to support financial performance. Implications for positive social change include the

potential to reduce negative influences from misgovernance that allow companies to

remain profitable which is beneficial for employees and investors and the potential for

continuing or widening access to insurance for residents, which allows investors and the

local community to benefit from improved corporate governance. Implications for

positive social change also include the potential for provision of stable employment

opportunities and the restoration of local community trust in insurance companies’

investment portfolios, which is beneficial to investors and the local community. With my

findings, I may enable positive social change by providing knowledge on the strategies

that businesses may use to avoid financial scandal and support strong insurance

institutions where investors, employees, and the local community have confidence in the

stability and financial performance of the insurance industry.

Nature of the Study

The three broad categories of research methods are quantitative, qualitative, and

mixed (Venkatesh, Brown, & Sullivan, 2016). I used the qualitative method. Qualitative

researchers seek to gain a solid understanding of a particular organization or event (Özer,

Ergun, & Yilmaz, 2015). Researchers that use the quantitative approach rely on statistical

techniques to examine relationships or differences among dependent and independent

variables to determine the relevance of a theory through testing hypotheses (Gergen,

Josselson, & Freeman, 2015). As I was not examining the relationship between variables,

I considered that the quantitative research method was not appropriate for this study of

strategies for ensuring sound corporate governance to support financial performance.

Researchers use qualitative and quantitative data using the mixed or hybrid research

method (Halcomb & Hickman, 2015). My research, which may resolve the strategies

used by companies effective in enhancing corporate financial performance, does not

include a dependent and independent variable that is subject to a hypothesis testing. My

research focus was appropriate for the qualitative research method to explore the

corporate governance Strategies that support financial performance for insurance business

leaders.

Qualitative researchers use designs such as ethnographic, phenomenological,

narrative, and case studies (Yin, 2013). The origin of the ethnographic approach is the

field of anthropology where the focus was the study of groups or organizations' cultures

(Cincotta, 2015). My study had no exploratory intention to understand groups’ cultures;

consequently, the ethnographic design was not suitable for my study. Researchers use the

phenomenological approach to address the meanings of subjective experiences of

different people and their interpretation of the world; the subjectivity rendered the

phenomenological approach inappropriate for my study. The case study is the exploration

of a program, event, or activity (Petty, Thomson, & Stew, 2012). I conducted a multiple

case study of selected companies in Austria to gain an understanding of corporate

governance strategies insurance companies’ leaders use to support corporate financial

performance.

Research Question

What strategies do insurance business leaders use for corporate governance to

support financial performance?

Interview Questions

1. Who is responsible for strategic corporate governance within your

organization?

2. What strategies were used to ensure sound corporate governance of the

organization?

3. What are the strategies used to link strategic corporate governance and the

internal control systems (ICS) within your organization?

4. What, if any, related strategies for human resource management are in place to

curb poor corporate governance?

5. What strategies were used to ensure that sound corporate governance leads to

improved financial performance?

6. What measures are in place to enhance compliance toward corporate

governance?

7. What additional information can you provide regarding strategies you use to

ensure sound corporate governance to support financial performance?

Conceptual Framework

Agency theory is denotative of the principal-agent theory. Ross established the

agency theory in 1973 (Davis, Schoorman, & Donaldson, 1997; L'Huillier, 2014).

Mitnick was responsible for the introduction of today’s prevalent concept that institutions

form around agency (Mitnick, 1975). The two stakeholders are the principal and the agent

with the principal as the shareholder and executives as the agent. The central proposition

of this theory is that shareholders desire a maximization of their interest in a company

when they invest capital, while the executive directs and manages the company with

shareholders hopeful that the actions of executives are in the best interest of shareholders

(Isaac, 2014).

The agency theory links directly to corporate governance. Agency theory is the

dominant and founding paradigm of corporate governance (L'Huillier, 2014). Agency

theory is also central to corporate governance and is an enabler in the exploration of

strategies that business leaders in the insurance industry use to ensure sound corporate

governance to support financial performance.

Operational Definitions

Agency theory: Agency theory is denotative of the classical theory of the

relationship that exists between the principal or shareholder and the agents, or the senior

executives and managers. The agency theory was originally considered an economics

theory (Alchian & Demsetz, 1972; Glinkowska & Kaczmarek, 2015).

Board of Directors (BD): BDs are the external corporate governance mechanism

that business entities use to establish a governing body of individuals responsible for

setting visions and strategic goals (Gebba, 2015).

Chief Executive Officer (CEO): The CEO is the most senior corporate officer

responsible for overseeing operations, policy implementation, and strategy (Chakraborty

& Sheikh, 2015).

Corporate Governance: Corporate governance is the mechanism that determines

the manner in which management carries out its activities. In essence, corporate

governance is the entire system that defines, directs, and controls a company (Abels &

Martelli, 2013; Gebba, 2015).

Corporate Financial Scandals: Corporate scandals are the intentional

manipulation of books of account to falsify accounting information for financial gain

(Jovanovic & Grujic, 2016; McMahon, Pence, Bressler, & Bressler, 2016).

Corporate Social Responsibility (CSR): CSR is the attempt to achieve a balance

between the economic, environmental, and social imperatives without undue harm to the

wealth maximization interests of shareholders (Popa & Salanta, 2014). However, there is

no universally agreed definition of the term CSR as the term includes ethics, sociology,

economics, and management (Richter, 2011).

Stewardship Theory: Stewardship theory is the hypothesis that business leaders

guard the interest of shareholders and display self-sacrificing behavior (Hernandez,

2012). The theory lends support to the view that managers create profitable entities that

enable shareholders to thrive.

Assumptions, Limitations, and Delimitations

Assumptions

An assumption is a realistic expectation about something believed to be accurate

(Gheondea-Eladi, 2014). In research, scholars can develop theories and hypotheses that

originate from initial assumptions. Marshall and Rossman (2016) asserted that

assumptions are statements considered true or taken for granted. I assumed that the

interview participants provided knowledgeable and honest responses to the interview

questions. I sought to meet this assumption by interviewing business leaders that I was

certain had the appropriate experience and qualifications. The other assumption was that

the emergent information derived during data analysis and interpretation was

representative and encapsulated the main theme without any gross omission on crucial

information. I designed and organized the data collection by using open-ended questions

that provided the participants with the chance to openly discuss their responses. Fan

(2013) stated that the correctness and reliability of a test are as much about the method of

data collection and assumption as it is about the validity of a test.

Limitations

Limitations are the potential shortcomings of a study (Marshall & Rossman,

2016). In case study research, limitations are the issues beyond a researcher’s control

which have the potential to affect the trajectory of a study. Theoretical considerations are

guides for data collection in part and explainers of any research limitations (Astroth &

Chung, 2018; Connelly, 2013). The interview participants are from the insurance industry;

as a result, participants were limited to only insurance companies with financial insurance

services. The results were not generalizable to other specialized industrial sectors. The

second limitation was the case study participants’ provision of information captions of

their own perceptions of corporate governance for each case study. To mitigate the

second limitation, I attempted to ask all the participants open-ended questions and

provided a summary of transcriptions for their review to help in identification and

elimination of their perception and biases. I also gathered data by interviewing and

triangulating the data collection from the interviews with publications of company

documents that are publicly available to all.

Delimitations

Delimitations are boundary lines and substances that were beyond the scope of

this study (Marshall & Rossman, 2016). The findings from this study are suitable and

applicable for large corporations. I delimited my research study to large insurance

industries with significant capital outlay. Consequently, it is incorrect to incorporate the

results of this study in evaluating and enhancing the corporate governance structure of

private or small and medium enterprises (SMEs) in the insurance industry or large entities

within the financial and banking sector.

Significance of the Study

The findings from this study may have value to business leaders given the focus

on the fundamental methods used by insurance companies to support corporate

performance. Results from this study could also be of value to the practice of business as

insurance business leaders may use this information to devise corporate governance

strategies to increase profitability. These strategies are fundamental for the enhancement

of organizational financial performance and could ensure that a broad array of procedures

are present to guarantee sound governance, as an effective corporate governance structure

can provide incentives to achieve the objectives and interests of an insurance company

(Mugarura, 2016).

Contribution to Business Practice

The potential contributions to the effective practice of business include improved

awareness by insurance companies of corporate governance strategies that have a direct

bearing on the financial performance of companies. The findings may facilitate the

effective practice of business by identifying strategies and processes for improving

corporate governance. Chang, Yu, and Hung (2015) underscored the essential role of

addressing business leaders’ governance strategies keen on value creation and

demonstrated that companies with sound corporate governance reported higher financial

performance than those companies that paid less attention to governance.

Implications for Social Change

The implications for positive social change for local communities in Austria

include the potential for better access to insurance for residents, stable employment

opportunities for insurance company employees, and the investor restoration of trust in

insurance investment portfolios. The restoration of trust by the local community implies a

good business reputation for the industry, which creates new capital for companies’

investment in the society (Elahi, 2012). Increasing insurance companies’ profits can

benefit policyholders and investors due to the cascading effect of increased profits

(Waweru, 2014).

A Review of the Professional and Academic Literature

This literature review is a comprehensive overview of the literature on the

fundamental methods used by insurance companies to support corporate performance.

The purpose of a literature review is to provide a context for a research study as well as

indicate the place within the existing body of research where a proposed study fits (Yin,

2014). Consequently, I provided a comprehensive analysis of literature from current

knowledge based on the research topic of this study.

The critical analysis of this literature review is indicative of my reliance on the

conceptual framework and its grounding principal-agent theory. Agency theory is a

dominant factor in considerations and discussions regarding corporate governance.

Segrestin and Hatchuel (2011) asserted that the agency theory is essential for companies

and at the fore of strategy by management when considering aspects of corporate

governance. Notable scholars have formulated theories around governance (Abels &

Martelli, 2013; Zitouni, 2016). However, the majority of theories on corporate

governance still hinge around the principal-agent theory.

I organized this review of professional and academic literature in topical structure

by addressing one focus area after another. Researchers and scholars routinely use the

chronological or topical style when conducting and documenting the literature review

segment of a research study (Fassinger & Morrow, 2013). While building on the

conceptual framework, I ensured that this section contained a comprehensive discussion

of the conceptual framework, an exhaustive review of the genesis and evolution of

leading theories, as well as an analysis of the contrasting critical theories on corporate

governance. I relied on the Walden University Library as the primary source for

peerreviewed journals and articles published between 2013 and 2018.

The Strategy for Searching the Literature

The strategy for searching for literature is an essential component of the literature

review that enables researchers to safeguard the appropriate usage of literature for

research studies. Yin (2014) stated that scholars use the literature review to provide

insight into the manner that they may limit the scope of an intended study to a specific

area of inquiry. For this literature view, I used the following databases: ProQuest,

Emerald Insight, Science Direct, and SAGE Journals. I also used the Google search

engine and Google Scholar to obtain information about the code of corporate governance,

publications from governmental bodies, and reports from the banking and insurance

industry.

I explored several keywords and phrases from my area of study and ensured first

that I set the filter of my search to capture peer-reviewed scholarly materials published

after the year 2013. The main key words and phrases that I explored include the code of

corporate governance, the supervisory board, Board of Directors, risk management and

the governance strategies. Consequently, of the 141 articles used in the literature reviews,

93.67% or 132 were peer-reviewed. Ninety-two percent of the articles in the literature

review were published between 2014 and 2018.

Corporate Governance

The term corporate governance has different definitions. Corporate governance is

the established process and systems in place to ensure control and provide direction for

companies (Zitouni, 2016). Researchers continue to seek an optimal balance for

stakeholders by maximizing the interest of shareholders.

The commencement of capitalism is considered as the original base of corporate

governance. However, there is ambiguity within world economies when governments and

other regulatory institutions begun to possess a systematic process and management of

company governance (Zitouni, 2016). The principal-agent theory continues to remain at

the center of corporate governance. Leadership knowledge of the role of the agency

theory is the precursor to understanding the various intricacies and opposing viewpoints

around corporate governance (Glinkowska & Kaczmarek, 2015; Kultys, 2016). Business

leaders and scholars possess a keen awareness on the essential link that agency theory

plays on the corporate governance stage; nonetheless, it is essential to moving beyond

that knowledge base to understand its applicability and dynamic potential when optimally

applied.

Several theories and models are present on the theme of corporate governance.

Examples of theories include the agency theory, stewardship theory, and the stakeholder

theory. The global financial scandals in the past decade (2000s) are evidence that the

existing framework of corporate governance is not sufficient and instead underscore that

the measures and strategies in place fall short and would not guarantee sound governance

(Kultys, 2016). The global financial business leaders have formulated various

propositions and notable theories around corporate governance (Abels & Martelli, 2013;

Zitouni, 2016). Most of the theories on corporate governance essentially hinge around the

agent-principal theory.

Contentions prevail regarding whether the principal-agent theory is the genesis of

poor governance and if leadership and training are the foundations by which sound

governance thrives. Clarke (2015) argued that agency theory was one-dimensional and

had a rigid simplicity as it mainly viewed the position and rights of the shareholder.

Scholars such as Kultys (2016), and Ross and Mitnick (1975) opted to provide alternative

theories. Kultys (2016) maintained that the limitations of the agency theory such as the

assumptions of egoism flaw the agency theory. According to Kultys, business

management reliance on the agency theory will not guarantee sound governance.

A dominant theory. The agency theory remains a dominant factor in global

corporate finance in the considerations and discussions on corporate governance.

Business scholars often regard agency theory as a subtopic of corporate governance.

Agency theory is a broad term. Segrestin and Hatchuel (2011) asserted that the agency

theory is essential for companies and at the forefront for global companies when

considering aspects of corporate governance and underscored that it is the essential link

joining the constituent parts of corporate governance. Agency theory is pivotal in the

discussion by business leaders on corporate governance due to its magnification of the

intricacies and complexities of the principal-agent theory. The intricacies include the role

of management the BD, the compensation of CEO, and the interest of other stakeholders.

The intent of the agency theory was the formulation of strategies that would ensure that

directors act in the best interest of the company. The notion of influencing the action of

directors through alignment of their compensation with shareholder interest led to the

creation of stock options as part of remuneration packages for CEOs and senior

managers.

Seeking solutions. Scholars continue to propose that the best way to safeguard

shareholder interest is by ensuring congruency between the interests of shareholders and

executives. For instance, Segrestin and Hatchuel (2011) contributed to the field of

corporate governance by magnifying the fundamental limitations of lopsidedness of the

principal-agent theory which only considered the interest of the shareholder. Khan (2011)

took the knowledge on corporate governance a step farther by suggesting the steps to

remedy the flaws within the principal-agent theory by clearly distinguishing between the

function of the shareholder and the executives. It is clear that a leader’s use of a scheme

that only maximizes shareholder interest produces numerous scandals, with some senior

executives and stock market analysts colluding or engaging in other forms of malpractice

in the hope of maximizing short-term profits at the expense of a company’s long-term

prospects and profitability. Misconduct can occur when executives doctor quarterly or

short-term performance statistics on which their pay relies to award themselves a high

income. Hence, the executives who incorporate the fundamentals of the principal-agent

theory may not necessarily realize sound corporate governance for their companies.

Business leadership attempts at achieving sound corporate governance may seem

elusive, although it is attainable and the main way to guarantee financial viability and

success. Khan (2011) said that sound governance is realizable only by addressing the

flaws that existed with the principal-agent theory, a view that aligns with that of Clarke

(2015), Christensen (2016), and Kultys (2016) as they also highlighted the necessity to

address the flaws of the agency theory. Clarke noted that agency theory is reliant on the

premise of shareholder primacy that suited the era immediately succeeding the Industrial

Revolution; however, leadership on the notion of shareholder primacy as the sole

objective as proposed by agency theory wrought continual damage to society and

economies. The damage include the global financial scandal, no regard for the interest of

other stakeholders and poor governance for businesses, Khan stressed the need for

businesses to distinguish clearly between the role of the shareholder and the executives.

Khan’s focus was on the distinct separation between the function of the shareholder and

the executives, and not the sole desire to gain congruence between the two roles. .

The law and legal enactments. Financial regulatory institutions recognize the

importance of alignment in the role of the agent and principal and seek to take action to

remedy any mismatch that exists. The mismatch between the two functions is the crux of

global corporate financial scandals. Various governments and the international financial

community have instituted measures to segregate the principal-agent role within

corporate bodies (Enriques & Zetzsche, 2015). For instance, the need to protect

shareholders from misappropriation and poor governance through fraudulent accounting

led the United States Congress to enact the Sarbanes-Oxley Act of 2002. The European

Union, The Organisation for Economic Cooperation and Development (OECD), and the

World Bank have each formulated principles of good governance and CSR. Enriques and

Zetzsche (2015) observed how the Sarbanes-Oxley Act was ineffective in preventing

further corporate scandals and restoring public trust and stated that hasty preparation and

approval with little support from empirical financial literature renders it detrimental to

corporate governance. Hence, although the codes of corporate governance are insightful,

the legislative failings behind their enactment weaken their full effect.

Corporate Governance and CEO Remuneration

Controversies remain regarding CEO compensation and whether it should directly

remain tied to performance. The CEO of Deutsche Bank, John Cryan said that he was

unsure why his pay package included a bonus, yet he would work with the same zeal

regardless of the day or year (Farrell, 2015). The maximization of shareholder interest

occurs when the remuneration of the CEO aligns with firm performance in agency theory

(Dedman, 2016). However, scholars such as Kultys (2016) and Clarke (2015) hold the

belief that performance-tied remuneration, particularly those linked to short-term

measures, is the leading cause of the numerous financial scandals that permeated the

media in the 2000s.

Knowledge of the presence or absence of a significant relationship between CEO

recompense and CSR disclosure is essential. Rashid (2018) stated that corporate

governance practices do not have any influence on corporate social reporting of

companies. Ali Reza and Amir (2018) said that the CEO and senior management

establish the strategic direction and are responsible for securing the policies and strategies

geared toward business success. A business strategy is the manner in which companies

develop a detailed plan of its prerequisite for success (Umar, Sasongko, Aguzman, &

Sugiharto, 2018). It is considered that a connection exists between corporate governance

and social responsibility although few literatures have outlined whether a direct

relationship between CEO compensation and CSR was present. Instead, there are findings

that reveal the link that exists between the types of CEO compensation, whether through

stock or non-stock option, and firm performance. Examples of findings with linkages

between CEO compensation and performance include the study by Boumosleh and Cline

(2015) where the authors found that director option remuneration had an inverse relation

with the distribution of dividends.

It is challenging to create a uniform scale for use to gauge CEO compensation

across different industries, in spite of the existence of linkages between disclosure type

and CEO compensation. As such, Gill (2014) stated that two separate compensation

gauges should be set aside, one for the CEOs of profitable companies and the other for

CEOs of loss-making companies. While corporate governance disclosures are simpler to

construct than social disclosures, it is inaccurate to gauge or score any disclosure solely

on a disclosure basis as other parameters need to also be considered For example, it is

essential to consider the reason for the creation of each company policy, which requires

public disclosure by senior management. Kim, Park, and Wier (2012) said that firms that

behave in a socially responsible manner were more likely to act responsibly toward

earnings management which protects shareholder wealth. A socially responsible company

is more likely to ascribe to the principles of corporate governance without the sole

reliance on appropriate executive compensation to attain sound governance.

Lack of clarity regarding CEO compensation. While there may be a

relationship between CSR and CEO compensation, there is lack of clarity regarding the

provision of a controlled environment that may negate other factors that could play a

central role in enabling the relationship. Empirical study of Guthrie, Kwon, and

Sokolowsky (2017) is denotative of a positive relationship between CEO compensation

on one side and experience, qualification, and organizational type on the other. CEO

compensation is a function of several factors that include corporate performance, CEO

training, record of accomplishment, and the perception of the propensity of his or her

ability to influence and deliver corporate returns.

A discussion on corporate governance and CEO compensation is incomplete

without consideration of the links between firm performance and the remuneration of

CEOs. Laskar and Maji (2016) said stock options are one of the principal ways through

which companies reward CEOs with bonuses for satisfactory performance. Laskar and

Maji were explicitly interested in the effects of corporate governance on CEO

compensation during moments of financial recession and explored the opposing

viewpoint conventionally held that CEO pay directly relates to performance.

Bettergoverned firms that provide marginally high returns to CEOs in the form of stock

options have the predisposition during a recession to outperform those that exaggerate

CEO compensation (Armstrong & Green, 2013; Laskar & Maji, 2016). Hence, the

revelation about the linkages between firm performance and the remuneration of CEOs is

valid as it is reliant on the essential element at the core of every shareholder interest, that

is the CEO compensation, and the manner in which corporate entities attempt to align

CEO and shareholder interest.

Conventionally, corporate governance is heavily reliant on financial performance

measures originating from audited financial statements that portray earning levels and

other means of growth. However, Lau and Roopnarainb (2014) expanded on the

importance of incorporating non-financial performance measures, which are measures,

not expressed in monetary units due to the increasing interest in non-financial

performance measures and supported the idea of the importance of organizational

awareness on the organizational use of specific performance measures to enhance

employee motivation. The dominant use by corporate organizations of financial

performance measures obscures the use of non-financial measures to gauge financial

performance.

Remuneration with Long-Term Stock Options

There is a clear link between corporate governance and executive performance as

corporate governance plays an essential function in the monitoring and control of

operations. Sound governance enhances firm performance (Choi, Jo, Kim, & Moo, 2018;

Wanyama & Olweny, 2013). Zhang and Gimeno (2016) said long-term investors and

managers could work in tandem to reduce quarterly earnings and focus instead on

longterm profitability, sustained growth, and performance. Lau and Roopnarainb (2014)

recommended that financial performance measures entail a financial and non-financial

yardstick, though a focus by corporate organizations on long-term profitability introduces

a new dimension scope, which fails to stipulate whether a measure of performance is

financial or non-financial. Zhang and Gimeno (2016) focused on how various conditions

of corporations affect the strategic direction of executives in the face of the quarterly

earning obsession that permeates the stock markets. Zhang and Gimeno complemented

the findings of Baber, Sok-Hyon, Lihong, and Zinan (2015) and highlighted the

correlation that exists between long-range investor attitude and short-term earning by

evidencing that indeed a negative relationship is present. Corporate directors rely on the

findings by Baber et al. (2015) in establishing optimal compensation and fringe benefits

for C-level staff or high ranking executives in a manner that reduces the propensity for

misconduct and poor governance.

Incentive contracting. Human resource managers rely on incentive contracting as

a tool for performance management to motivate employees to realize a perceived

objective. Geiler and Renneboog (2016) analyzed the executive remuneration by

concentrating their efforts on the pay of the CEO by carrying out a quantitative research

method using the statistical regression approach and the nested logit model and said that

the suitability of corporate governance is reliant upon environmental as well as

organizational imperatives. These findings add to the growing body of knowledge that

links corporate governance and performance with environmental considerations.

The findings by Geiler and Renneboog (2016) indicated that for non-dividend

protected pay, the option of pay had a direct bearing on a CEO's stock options. As most

stock options are not dividend protected, scholars suggest that stock options motivate

managers to opt for the repurchase of stock over a dividend payout (Boumosleh & Cline,

2015). Geiler and Renneboog illustrated the existence of an inverse relationship where

the projected stock prices had a compressing effect on the value of stock and other

equity-related remuneration and advocated that senior managers and human resources

managers should devise strategies that ensure that the compensation for senior managers

was dividend blind or dividend neutral. The recommendation would ensure that the type

and manner of equity payouts would never influence the CEO wealth.

Long-term stock options. An intricate association is present between a business

executive remuneration and performance. This linkage is present whenever human

resource managers document and propose the contractual details for the pay package of

CEO and senior managers. Liu, Padgett, and Varotto (2017) studied the linkage between

bank merger and executive compensation and the manner in which it linked explicitly to

corporate governance and analyzed pre-post-merger on essential components such as the

ROA-Return on Assets, leverage, equity, and risk. Contrary to the position advocated by

Boumosleh and Cline (2015), Geiler, and Renneboog (2016), their results support the

view of absence in the linkage between bonus payment and measures of value creation.

The finding by Liu et al. is essential in the provision of a contrary view than the girding

premise of the agency theory where misalignments often imply that CEO compensation

may not be commensurate with corporate performance. Consequently, Liu et al. observed

that while salary and other long-term compensation were consistent with optimal

contracting arrangements, bonus payments had the potential for manipulation in corporate

entities without sound governance. The knowledge of the flaws in using bonus as a

motivational tool is essential evidence supporting the view that misalignment of the

interest of shareholder and CEO would not necessarily fail in maximizing shareholder

wealth.

Understanding the contribution of scholars to the intricacies of the linkage

between CEO remuneration with long or short-term stock options is necessary for

performance contract management and more importantly for gaining an understanding on

the effects of corporate governance. Notwithstanding, a corroboration of the limitation of

each study is necessary when considering each contribution. For instance, an essential

limitation of the study by Liu et al. (2017) is its primary focus on the banking sector and

its restrictive in scope that center purely on the pre-and post-merger period.

Agency Theory Framework and Governance

Introduction. Agency theory is the relationship that prevails between the

principal who is the shareholder, and the agent who is the company’s management. In the

agency theory or the agent-principal relationship, the overriding assumption is that the

managers are inclined to make decisions that would not maximize shareholder interest

due to non-alignment of goals between the principal and the agent (Abdullah &

Valentine, 2009). Agency theory is ignorant of the works of other theories such as the

indispensable assumptions from traditional management theory. Davis et al. (1997)

differed with the views postulated by the agency theory and asserted that agency theory

assumes that management would always opt for the best alternative that increases their

self-interest when faced with different options. Similarly, Pande and Ansari (2014)

aligned their stance with Davis et al. and observed that the present governance structure

and the blurring of roles between the shareholder, the board, and management work to

make agency theory unproductive at its best.

Agency theory is denotative of the principal-agent theory. Ross and Mitnick

established the agency theory in 1973 (Mitnick, 1973). Mitnick was responsible for the

introduction of today’s conventional concept that institutions use around agency

(Mitnick, 1975). On the other hand, Abels and Martelli (2013) contended that the

economic theory was the origin of the agency theory and that it is near impossible to

discuss corporate governance without reference to the principal-agent theory. Other

scholars such as Ferrero-Ferrero, Fernandez-Izquierdo, and Munoz-Torres (2012) and

Denis (2016) emphasized on other essential aspects in the understanding of corporate

governance structures. Geiler and Renneboog (2016) analyzed the governance structure

through the prism of CEO remuneration and noted that environmental and organizational

imperatives were essential in devising a sound governance structure.

Interest alignment for the principal-agent. The principal-agent theory is a

derivation from the relationship termed as the principal-agent relationship. Given the

nature of corporate entities there are two stakeholders at the heart of each corporate body

in the principle-agent (Anand, 2012). The two stakeholders are the principal and the agent

with the principal as the shareholder and the executives, the agent (L'Huillier,

2014). The central proposition of this theory state that shareholders desire a maximization of their

interest in a company when they invest capital while the executive leads and manage the company

with the shareholders hopeful that the actions of the executives would be in the best interest of the

shareholders (Isaac, 2014). Understanding the necessity of alignment, and the manner of achieving

that alignment of interests is paramount in corporate governance. Dawar (2014) identified the

mismatch in interest between the shareholders and executives as the crux of misconduct. Agency

theory is the leading and founding theory of corporate governance while agency cost is its derivative.

Agency cost is the cost an agent incurs while acting on behalf of a principal (Abels & Martelli,

2013). These costs prevail due to problems, such as conflicts of interest between shareholders and

management (Feil, Rahman, & Sabac, 2018; Manzur Quader, &

Dietrich, 2014). It is in the interest of companies to reduce these costs to every extent

possible in the efforts to align stakeholder interest.

Limitations. Although agency theory holds a central place in the formulation of

corporate governance principles and is one of the fundamental theories that emanate from

economics it is not without limitations. Building upon the agency theory's drawback on

the hypothesis of misaligned interest prompted (Donaldson & Davis, 1991, 1993) to

develop the stewardship theory that provided a new perception to understanding the

relationships between shareholder and management. The authors proposed that while on

their own, managers will act responsibly as stewards of the assets they control. The

stewardship theory addresses the limitations and assumptions of the agency theory

(Balakrishnan, Malhotra, & Falkenberg, 2017). Hence, the stewardship theory counters

the central hypothesis of the agency theory as espoused by Ross and Mitnick (1975) and

supported by researchers, as such Segrestin and Hatchuel (2011). The view advocated by

Donaldson and Davis (1991) in formulating the stewardship theory, and in detailing the

shortcomings of agency theory matches with the views by Clarke (2015) and Kultys

(2016) who were highly critical about the weaknesses of agency theory. As such, the

premise in stewardship theory is contradictory to, and divergent with the premise in the

agency theory.

Alternative theories. Business scholars have candidly taken the option of making

consideration of the two dominant theories around corporate governance. For instance,

Glinkowska and Kaczmarek (2015) studied the two-tier board of a company where they

analyzed both the classical and modern approaches to corporate governance through the

lenses of agency theory and stewardship theory. The authors contended that the heart of

the problem with poor governance lies squarely on the relationship between the

supervisory board and the governance management board, and the role performed by the

supervisory board. In their study, they drew parallels and comparisons between the

agency and the stewardship theory where they underscored that theoretical basis for

agency theory and stewardship theory is the field of economics and organizational

psychology respectively (Glinkowska & Kaczmarek, 2015). The authors’ findings and

conclusion are indicative that attempts at refining and creating a modified and

complementary theory for agency theory signify the lack of an optimal model for

corporate governance. This viewpoint differs with that of Mitnick (1975), Donaldson and

Davis (1993) as well Clarke (2015), and Kultys (2016) who were keen contenders of a

sole holistic theory and not a theory that modified the considerations of agency and

stewardship theory.

The desire to mitigate the limitations of the agency theory that could not

effectively curtail the numerous global scandals led to the propagation of the stewardship

theory and the OECD guidelines. Clarke (2015) criticized agency theory as overly

lopsided and one-dimensional. Donaldson and Davis (1993) also aligned their

recommendations with Clarke by stating that agency theory relies on methodological

individualism and possesses a shallow motivation model. These criticisms intersect with

the opinions of Kultys (2016) who identified the spate of corporate governance and the

unending economic crisis as the key drivers of the ongoing debate on corporate

governance. In the study, Kultys used the descriptive and comparative method in the

presentation of various models of corporate governance and presented a thorough

analysis of the agency theory. Kultys created a model with supporting documentation on

the definition of agency theory with egotism as the dominant limitation of the theory.

Business and economics scholars continue to propagate alternative theories to

mitigate the perceived shortcomings of the agency theory. Kultys (2016) provided

extensive descriptions of other theories that include the stewardship theory and contrasted

its differences with the agency theory. Kini, Kracaw, and Mian (2005) stated that

assumptions that a contractual agreement between the principal and agent are

unreasonable to resolve the agency problem and proposed the market for corporate

control where a well-performing firm takes over an inefficient one and as a result

eliminate poor performing manager. The research by Kultys intersects with that of Kini et

al. as both researchers deliberated on the social agency theory that is an extension of the

classical agency theory, and stated that its creation was due to the unrealistic

underpinnings of the agency theory.

Business scholars have been able to highlight the shortcomings of agency theory

in the proposals of alternative theories. Kultys (2016) contended that the agency theory is

wanting, suggesting a modified version that incorporated a legal framework that gave

preeminence to the director primacy model vide the theory of team production. Panda and

Leepsa (2017) supported the inclusion of an independent board of directors to regulate

the decision and actions of senior managers in aligning them with the interest of the

shareholders. The research by Kultys is in alignment with that of Panda and Leepsa as

Kultys recommended a revision of the corporate law that would confer power to the

board of directors. A recommendation of the accordance of power to the board of

directors is in stark contrast with the current agency theory where shareholders confer

power to the board.

CEO duality. Although CEO duality is rampant and legal, many perceive its

governance structure as feeble. Abels and Martelli (2013) criticized the mechanism of

CEO duality as an optimal governance structure after carrying out a study of large

corporations in the United States listed on the Fortune 500. Abels and Martelli

demonstrated and contrasted the extent of CEO duality that existed in 2008 to 2010, and

showed the manner in which retiring CEO continued to act as company chairperson.

Conversely, Firth, Wong, and Yang (2014) undertook a study in corporatized state-owned firms in

China and noted that in profit-making firms, CEO duality is detrimental to firms’ corporate

governance and performance.

The assumption in the corporate business world is that CEO duality represents a

weak governance structure and hence invariably leads to an increase in agency costs.

Abels and Martelli (2013) commenced their study on the premise that the agency theory

implies that duality in the role of CEO and chairperson increases the chance of agency

costs, as it predisposes management to self-interest. They contended that the duality

permitted CEOs to dominate over the board of directors, which was the main reason that

led the Securities and Exchange Commission (SEC) and other regulatory authorities to

insist that companies divorce the dual CEO and chairperson role. Their findings, although

skewed toward duality in CEO role, are in alignment with the view held in Germany,

Austria, and the Netherlands, where the governmental regulatory authorities had long

instituted a dual-tier system, albeit for the board of directors with the management as

separate from the supervisory board. Bezemer, Peij, de Kruijs, and Maassen (2014)

identified the manner of curtailing the inherent complexities of a two-tier board

consisting of the supervisory and management board and suggested that the two-tiered

board system as an effective tool for attaining sound corporate governance. The research

recommendation by Bezemer et al. intersects with that of Abels and Martelli in

advocating for a dual governance structure. Both studies have potential in offering

support to the recommendation for segregating the dual role of CEO and chairperson

within public corporations with the aim of enhancing sound governance through

independence and transparency.

The Effect of Globalization on Firm Governance

The global business world is complex, dynamic, with a plethora of mergers,

acquisitions, and hostile takeovers, and other structures established to protect against

torrential currents and cut-throat competition. Thanks to globalization, it is increasingly

becoming difficult to speak of a standalone market as the world has become intensely

interconnected. We live in a globalized world where the trading occurs in one

marketplace. Enhancement in the transmittal speed of information, knowledge, goods,

and services is the result of the information era in tandem with technological innovations.

Ahmed and Van Hulten (2014) noted that globalization would likely only benefit

countries that are open to trade and possess sound institutions. While there are several

benefits from globalization, anti-globalization activists suggest the contrary, that

globalization is solely responsible for a plethora of social and economic ills that permeate

today's society. Globalization has created an integrated financial and capital market

development, which creates uncertainty and risk (Aziz, Manab, & Othman, 2015). Hence,

risk management continues to gain prominence in the global financial world.

Financial scandals. There are several definitions for globalization though the

topic of globalization and its related benefits remains deeply contentious. The years

succeeding 1990 were times of massive expansion, growth, and economic development

that saw companies move to establish businesses abroad. Yoder, Visich, and

Rustambekov (2016) indicated that many companies adopted an international expansion

strategy to take advantage of emerging opportunities presented by target markets.

However, Harris (2015) noted that distortions in the rampant growth and success

of companies arose from the notable failures and financial scandals as companies sought

profits. For example, Enron the energy giant became bankrupt in 2002 due to debt-related

fraud and misrepresentation with Anderson following suit in the similar era. Equally, to

eliminate corporate fraud, the USA enacted the Sarbanes Oxley's Act of 2002 while

several nations enacted the codes of corporate governance for similar reasons.

Notwithstanding, it is unfortunate that these regulatory measures are insufficient in the

elimination of financial scandals from the global world. Globalization is impactful to

firms in a myriad ways that produce unprecedented change and challenge to the

robustness of each governance structures. Technological advances have translated to

cheaper transportation costs and faster speed which imply that small and medium

enterprises (SMEs) can access global markets making the world closer and integrating

trade, and global financial markets (Ahmed & Van Hulten, 2014). Globalization has led

to the creation of new markets and the growth of new global players. Some countries in

the southern hemisphere have witnessed sharp economic growth and development. Melo

(2015) conducted a research study with a focus on the emerging markets and presented a

comparative case study that viewed the various elements of corporate governance

systems in the emerging economies of the BRIC (Brazil, Russia, India, and China). The

author contrasted and compared the critical components of corporate governance for the

countries clustered in similar groups and noted that there were stark differences observed

in each group.

Governance structures are different from one jurisdiction to another, as does the

role of the state, which may present a complicated scenario for international organizations

whose regional operations transcend national borders. Duman and

Üsenmez (2016) stated that rapid trade and globalization characterized the period post the

1990s because of technological advancement, and showed how transformation on the role

of the state aligned with the imperatives of a dynamic international market. On the other

hand, Melo (2015) assessed the internationalization patterns of seven major companies

within the BRICs with the composition of board structure and the requisite attributes of

directors and noted that the role of the state should be minimal in guaranteeing an optimal

system of governance. Duman and Üsenmez provided a contrary view detailing how the

state plays a significant and transformative role of bailout to assist companies mired in a

financial crisis.

Monitoring and control are essential links in the realization of an optimal

governance structure. In the research study by Duman and Üsenmez (2016) and Melo

(2015) the government was the subject. However, Roman (2015) emphasized on the role

played by the shareholder in combining a three-pronged approach to corporate

governance by conducting a quantitative study on the banking and finance industry by

analyzing the connection between corporate governance, internationalization, and

government bailouts. Roman mainly addressed the element of monitoring by

exemplifying how shareholder participation is essential and correlates with a company's

risk and performance, and observed how shareholder involvement and activism might

create shareholder value, and act as a destabilizing force. Roman aligned the conclusion

of his study around the shareholder-creditor conflict that often has the potential to lead

high-risk return initiative that could be detrimental to creditors.

Ethical Consideration of Globalization

Business scholars often refer to business ethics as corporate ethics. Berger and

Herstein (2014) defined business ethics as the moral philosophies that monitor the

manner in which company acts. Business ethics is an essential component of

globalization. Corporate leaders need to be prudent and trade ethically with globalization.

Trading ethically ensures that leaders, shareholders, and other stakeholders hold the CEO

accountable for ethically transacting business. Human rights activists have also assisted in

the war against exploitation, as is the case when the human rights watch uncovered

several instances of unethical practices.

The creation of a universal global body is limited and may not guarantee that

globally companies trade ethically and fairly. The production of a universal global body

is undoubtedly impractical. Besides, it is impossible to institute an agency to oversee and

guarantee that all companies will trade responsibly. Ahmed and Van Hulten (2014) said

that globalization would likely only benefit countries that are open to trade and possess

sound institutions. We live in a globalized world with fragmentation in the judicial or

regulatory framework. Laws in one country are not necessarily applicable to another,

besides it is inconceivable to imagine the laws to which such an oversight body would

prosecute.

Each person has a role to play in the global business arena that is increasingly

dynamic and complex. The power and leverage for change rest mainly with consumers to

buy from companies that act ethically and responsibly (Fish & Wood, 2017). Consumers

may choose to boycott individually or collectively the products that do not prescribe to

the dictates of fair trade. Consumers can form movements or inform global activists about

instances of unfair trade. Rodrigues and Borges (2015) stated that consumers play a

central role in every section of the economic activity of a company. The perception of a

company’s CSR potentially affects the attitudes of consumers toward a given.

Accounting Qualification and Accounting Misrepresentation

Many scholars try to establish a correlation between the recognizable accounting

qualifications, or lack thereof, and accounting misrepresentation by firms in attempts to

uncover the cause of scandals that permeated the corporate world. Adewuyi and

Olowookere (2013) argued that corporations must hire aptly qualified managers and

board members to guarantee sound governance and a corresponding reduction in

noncompliance. The hire of skilled managers ensures that a compliance officer is in place

for the proper implementation of the code of corporate governance. Adewuyi and

Olowookere surmised the essential elements of organizational and performance

management that managers and business leaders need to implement to assure sound

governance continually.

Singly, the lack of appropriate accounting qualifications does not directly construe

an instance of accounting misrepresentation. In contrast to the research findings by

Adewuyi and Olowookere (2013), Baber et al. (2015) segmented corporate governance

into two parts and identified an external as well as an internal element toward misconduct

and accounting misstatements. Baber et al. shed light on the apparent

linkages that exist between the misrepresentation of annual financial statements and

corporate governance and identified the factors that provide an incentive for sound

governance. These authors coined the term incentive effect to illustrate the relationship

between the financial misstatement and external governance, by elaborating that

management incentive to misrepresent financial statement and internal control oversight

was a factor that directly determined the propensity of financial misrepresentation. Unlike

the researchers Adewuyi and Olowookere who solely viewed internal factors as the

leading cause of poor governance, Baber et al. contended that external governance plays a

critical role.

Board Appointment, Independence, and the Audit Committee

A board of directors is independent when there is a substantial amount of

independent non-executive directors. Bernard, Godard, and Zouaoui (2018) stressed on

the qualification of the board of Directors. Various national stock exchanges recommend

the appointment, the independence of a board of directors, and the presence of an audit

committee as fundamental in guaranteeing a sound system of corporate governance

(Mulgrew, Lynn, & Rice, 2014). Nonetheless, there are various empirical evidences

regarding the effect of board structure on firm performance.

As with the independence, the qualification and experience of a board is an

essential component in corporate governance literature. Padilla (2015) elaborated on the

manner that disclosure of the knowledge of the board of directors affected the financial

performance of companies. The author's literature review and theoretical framework

addressed the main components of agency theory as well as the resource dependence

theory, and he undertook his research by conducting a quantitative study to assess

whether there was a correlation between disclosures of director experience to firm

performance. Padilla concluded that a relationship existed between the two variables;

specifically, there were seven striking characteristics of the directors with linkages to

good corporate performance.

Qualifications of the Board of Directors. The qualifications of many board of

directors are numerous and diverse as companies preferences differ. Some companies

insist on specific attributes for the board of directors. There is an intersection in the

research study by Padilla (2015) and White, Black, and Schweitzer (2015) as the

researchers highlighted on the experience and qualification of the board of directors.

White et al. undertook a study where they examined the effect of the appointment of an

academic director on corporate governance. They specifically examined the processes

and the procedure around the advertisement, selection, and hire of external directors. The

authors indicated that most small- to medium-sized firms tend to employ foreign

academic directors. Their study yielded comparative statistics that elicited the critical

reasons behind the appointment of academic directors as well as the consequential

reaction by the market on director heterogeneity. The empirical results and findings

provide analysis and the clustering of firms to three broad groups for the types of

academic directors and the related market reaction.

Crespí-Cladera and Pascual-Fuster (2014) carried out a quantitative study and

examined publicly traded companies in Spain. The authors noted the endorsement of

Spanish best practices that the majority of members are independent directors and lead

the audit committee. In the study, Crespí-Cladera and Pascual-Fuster used a dataset

consisting of 752 firms from 2009 to 2014. With this dataset, they compared the firms

against a set of eight relevant statistics of board independence in Spain. Their results

indicated that 14.2% of the firms had exactingly independent directors. Their analysis

using the Pearson correlation coefficient revealed a high linkage between sales and

market capitalization and confirmed that the stronger the control is by a significant

shareholder, the lower the propensity for misrepresentation by independent directors.

Crespí-Cladera and Pascual-Fuster viewed their findings in light of the agency theory,

which premises that the independence of the director implies control and is an essential

element to guard against the wealth confiscation of the shareholder. The authors

supported the view that the independence of directors was more essential for firms with

dispersed ownership structures than for those with concentrated ownership, such as those

commonly found in Spain. The identification of the importance of director independence

by Crespí-Cladera and Pascual-Fuster, especially for firms with dispersed ownership

structures indicate the point of digression with the research by Padilla (2015) and White

et al. (2015) that focused on specific attributes of the directors. These digressions are

evidence from empirical research about the influence of board structure on firm

performance is varied.

The appointment and independence of a board of directors is one prong in the

understanding of the effect of the board of directors on corporate governance with an

audit committee as the other. Mulcahy and Donnelly (2015) highlighted on the effects of

the relationship between an external auditor and the audit committee members and

illustrated how the relationship influences the opinion of audit committee members when

faced with divergent views between the external auditor and an organization's

management. To accomplish this, the authors assessed and concluded that the audit tenure

had no significant effect on the quality of work produced by an external auditor.

Congruently, Brennan and Kirwan (2015), Krenn (2015), and Bhojraj and Sengupta

(2003) criticized the use of an audit committee and stated that it is one-sided, flawed with

similar limitations as that of the Board of Directors, and failed to consider present day

complexities. The use of an audit committee is inadequate in mitigating the shortcoming

of reliance on the external scrutiny by the external auditor or board of directors.

Mulcahy and Donnelly (2015) underpinned the role of an external audit toward

the audit committee whereas Hsu and Wu (2014) undertook a quantitative investigation to

uncover the relationship between board composition and organizational corporate failures

in the United Kingdom. Their sample constituted a broad spectrum of failed firms that

were deregistration from the London Stock Exchange (LSE) from 1997 to 2010. Equally

like Mulcahy and Donnelly, and, Hsu and Wu conducted a quantitative study using

regression as well as a univariate analysis to assess the relationship between corporate

governance and corporate failure and used the definition provided by the U.K. corporate

governance code to distinguish between the independent and non-independent directors.

A grey director is often the terminology that is in use for non-independent directors.

The findings by Hsu and Wu (2014) illustrated through the provision of annual

comparisons of financial performance that companies with a higher percentage of grey

directors were less likely to fail. On the contrary, the researchers indicated the existence

of a significant and positive relationship between independent directors and poor

governance. The findings of the study are contrary to conventional thinking on corporate

governance. For instance, Srivastava (2015) stated that a board composition with an

independent, grey, and inside directors, is essential for sound governance. The findings

are supportive of the propositions of the collaborative board model that underpins the

essential role of the grey directors.

The study by Srivastava (2015), Crespí-Cladera and Pascual-Fuster (2014), and

Mulcahy and Donnelly (2015) have notable intersections and complementary points on

the constituents parts of the Board of director function as an essential link in the quest for

sound governance. Hsu and Wu (2014) gave value and credibility to the role played by

grey directors and in contrary magnified the exaggeration placed on the role of

independent directors after the onslaught of the major corporate scandals. The document

by Hsu and Wu has fundamental leads and implications on past literature on corporate

governance.

Corporate Governance Regulation and Global Scandals

The role of senior executives and accountants is essential in curtailing poor

governance. Their actions, activities, and decision have an essential bearing on

governance and the manner of sustenance of a company's profits over extended periods.

Low, Davey and, Hooper (2008) observed that at the heart of most business scandals

were accountants who knew, aided, or contributed to a corporate scandal.

The recent spate of financial scandals transcends through all regions, as the globe

increasingly becomes a single trading floor. Sebhatu and Pei-lin (2015) focused their

attention on newly industrialized nations with the example of China by conducting a

multiple qualitative case study and highlighted that global scandals have been on the rise

where they cited examples of the recent global scandals that occurred within the

international concerns in China. In the article were reflections of the unfortunate reality

and confounding fact of seeming contractions in the corporate world, where efforts

marked toward global transparency do not align with a decrease in the level of global

scandals. The authors observed that the United Nations Compact indicates that corruption

accounts for about 10% of the total cost of doing business world over. The findings of the

study are significant in the demonstration of the existence of a positive relationship

between good governance and efforts to eradicate corruption. Sebhatu and Pei-lin

elaborated on the linkages between governance and bribery and placed in context, the role

of value-based businesses in working in tandem with governance framework established

by governmental institutions. Corporate governance and misconduct possess linkages

with changes in one factor influencing the other.

Evidence from research of a correlation between governance, regulation, and

global scandals particularly with globalization give possible indication to the existence of

an inverse relation between the establishment of national governance regulation and

global scandals. Mugarura (2016) sought to determine the existence of a linkage between

the establishments of robust corporate governance regulations that is responsible for the

success or failure of corporations. Mugarura stated that regardless of how robust internal

control rules are, the fate of firms is also dependent on factors such as globalization,

which are beyond the control of firms. The intersection point in the research by Sebhatu

and Pei-lin (2015) and Mugarura is in discounting the premise that the presence of

national or corporate governance regulation automatically translate to the achievement of

sound governance for firms.

Financial Performance Linkage with Corporate Governance

There are strong linkages between firm performance and corporate governance.

Undoubtedly the topic of corporate governance has received many a great attention

particularly after the continued spate of corporate scandals (Grove, Patelli, Victoravich, &

Xu, 2011; Lins, 2009). Donker and Zahir (2008) contended that creation of a mechanism

for corporate governance would indisputably eliminate void in corporate governance.

Consequently, attempts to fill the void led to the formulation and suggestion of several

tools that range from the gadgets that enhance more transparency to the proposal by

international institutions of corporate governance for a unified regulatory framework. An

example of a unified framework is the principles of corporate governance, formulated by

the OECD.

Corporate performance and risk. The intermediary role of governance in the

linkage between corporate performance and risk is strong. For instance, Chang et al.

(2015) undertook a study on Taiwanese listed companies to assess the link between firm

performance and risk by relying on empirical evidence from Taiwan to develop a set of

corporate governance assessment indices from the OECD categories. To proceed, Chang

et al. fashioned a mechanism of unique features based upon firm disclosure, shareholder

rights, and the composition of the Board of directors. The authors were able to niche out

the parameters that buckle corporate governance to risk and firm performance. The

results of the studies on correlations between firm performance and corporate governance

are confirmatory of the presence of a positive association with some notable exceptions.

Chang et al. revealed five primary corporate governance variables associated with

performance and risk, as well as highlighted on the mediating effect of corporate

governance in the link between performance and risk. Correctly, the authors observed a

divergence from the positive relationship between risk and return during a financial crisis,

as the effect of corporate governance created a suppression effect, consequently, creating

a negative correlation between risk and performance. Four distinct categorization of

corporate governance variables were in the study results, where Chang et al. indicated

that shareholder rights had a positive effect on firm performance and risk, as did the

chairperson and CEO split. The research finding by Chang et al. are parallel with the

research that Firth et al. (2014) undertook in corporatized state-owned firms in China and

said that CEO duality is detrimental to firms' corporate governance and performance.

The results of the study by Chang et al. (2015) that shareholder rights and the

absence of CEO duality have a positive effect on firm performance and risk, and are

parallel with the findings of the study by Ferrero-Ferrero et al. (2012). Tsai and Tung

(2014) noted that there is a relationship between CEO duality and government

shareholding, and firm performance. The alignment fortifies the view that the

effectiveness of the board of directors is sensitive to economic periods and the capital

base serves to lower the rate of corporate risk-taking during a time of financial crisis.

Similarly, the research by Chang et al. in addition to creating an exception to the rule on

the correlation between firm performance and risk showed that companies with higher

levels of corporate governance reported high performance and low-risk levels.

Consequently, Chang et al. underscored the essential role of addressing governance

strategies by business leaders keen on risk management and value creation. These studies

are essential in illustrating the essential link that exists between sound governance, firm

performance, and risk, and for providing with the instances of the exception to the rule.

The effect of regional and national dimensions. While the formulation of a

specific set of assessment indices for governance is an essential component in assessing

firm performance, there is a continuation in desire to delve farther in the understanding of

corporate governance and risk through the attempt at uncovering the effect of regional

and national dimensions. Waweru (2014) undertook a quantitative regression analysis and

examined the most significant 50 companies in South Africa listed on the stock exchange.

Waweru undertook the study to establish the main factors that drive the quality of

corporate governance in South Africa. Similarly, Şahin (2015) undertook a research study

to understand the legitimacy of the codes of corporate governance from the perspectives

of the developed and emerging economies.

Waweru (2014) described the main factors that shaped the standard of corporate

governance as investment opportunity, firm size, and leverage, and observed that there is

a plethora of studies focusing on the developed world with a limited number on

subSaharan Africa. Şahin (2015) noted that the adoption of the common features of

corporate governance standards is due to globalization though the codes of corporate

governance

are not operational. Samaha, Dahawy, Hussainey, and Stapleton (2012) echoed the

findings and observations of Waweru and stated that study on regional dimensions adds

values to understanding the geographical and regional dynamics of corporate governance

as relatively fewer studies exist on governance in sub-Saharan Africa. Notwithstanding,

developing economies each possess huge disparities amongst themselves (Euromoney,

2007) hence the need to address corporate governance for each country separately.

Consequently, it would be inappropriate to make blind generalizations of findings from a

company to another with unique regional features.

Corporate governance mechanisms and firm performance. Evidence from the

European context on the linkages between corporate governance and firm performance

are numerous. Felício, Ivashkovskaya, Rodrigues, and Stepanova (2014) embarked on a

study to examine the effect of corporate governance mechanisms on firm performance by

reviewing the significant banks listed on the European stock exchange. Their assessment

led to the findings that specific corporate governance variables had a direct effect on firm

performance. The variables include the appointment age and meeting frequency of the

board of directors. The authors' study has a direct contribution, in the development of

substantial performance drivers amongst corporate governance indicators within the

European banks and synchronizes with the research by Ferrero-Ferrero et al. (2012) and

Waweru (2014). These authors noted that a correlation exists between corporate

governance mechanisms and the financial performance of firms. The research study by

Felício et al. provided unique lenses of a highly volatile capital market through which the

effect of corporate governance on firm performance are observable.

The considerations of factors external to a firm are equally essential to the

understanding of the linkage between governance mechanism and firm performance.

Cheng, Liu, McConnell, and Rosenblum (2017) carried out a quantitative research study

to ascertain causality by focusing their attention primarily on the fortune ranking of

America's most outstanding company to establish the effect that this rating when

published in the media, would have on corporate governance. The authors indicated that

the ranking has a direct relationship and influence on CEO decisions on investment in

firm capital. To underscore the linkage between governance and firm performance the

report uses reputational risk.

Reputational risk is not the sole external element in comprehending the linkage

between governance mechanism and firm performance. The empirical results from the

research study by Cheng et al. (2017) are parallel with the view of Dyck, Volchkova, and

Zingales (2008) that exogenous favorable results may serve the purpose of heightening

CEO reputational capital. Cheng et al. elaborated on the manner in which factors external

to a firm may have a bearing and direct influence on CEO activity and influence on

corporate governance. The findings on external factors that influence CEO activity are

significant and potentially valuable to the body of knowledge in governance.

Empirical research indicates the existence of a correlation between financial

performance and governance mechanism. Habbash (2016) undertook a quantitative

correlational research study to examine whether a positive relationship existed between

corporate governance and financial performance by reviewing the market value and

earnings on assets as well as the ROI-the return on investment of companies in the

Kingdom of Saudi Arabia in 2010 to 2014. The findings provide evidence to the presence

of a statistically significant relationship between corporate governance and financial

performance. The findings of the study are in alignment with the recommendations of

Felício et al. (2014) who noted that there is a correlation between governance structures

and firm performance such. The findings by Habbash give credence to initiatives by

regulatory authorities to encourage the full enactments of mechanism that enhance sound

corporate governance.

Governance and Corporate Social Responsibility

The manner of orientation of a firm’s corporate strategy has a direct bearing on its

relationship with its stakeholders and its perceived societal responsibility. Consequently,

the means and strategic aim of CSR and corporate governance are in close alignment.

Devinney, Schwalbach, and Williams (2013) stated that a firm's CSR solidly anchors in

its value proposition statement. A consideration of one without the full comprehension of

the effect of the other is inadequate. O’Dwyer (2003) defined CSR as the means by which

companies create and distribute wealth to all stakeholders with a high consideration for

ethical implications.

Firm ownership has a direct bearing on governance and the strategy on CSR.

Choi, Lee, and Park (2013) undertook an assessment study by formulating five

hypotheses, which resulted in findings of a negative correlation between CSR and the

categories of earnings management. The result of the study by Choi et al., however,

discounted their hypothesis by indicating that while a negative correlation existed, it was

weak for firms that have a highly focused leadership structure.

Empirical evidence is demonstrative of the strong linkages that permeate

corporate governance strategies on financial disclosure and transparency, particularly the

manner in which they interweave with earning potential and ultimately corporate

responsibility. Choi et al. (2013) provided insight on the linkages between CSR, earning

and financial disclosure. The authors noted that there was a propensity for some firms to

abuse CSR measures to cover up poor performance accordingly the authors discouraged

the utilization of extreme CSR measures where firm ownership is highly skews toward

institutional investors.

Business literature on corporate performance incorporates the main considerations

of the effect of corporate governance mechanism on firm performance during periods of

financial crisis. Essen, Engelen, and Carney (2013) researched firms within the European

Union prior and post a financial crisis to gauge the effect of sound corporate governance

on corporate performance. Their findings are demonstrative that the establishment of

proper measures of governance by firms was inadequate in a financial crisis. In essence,

in a crisis moment, good governance policies would be counterproductive, as they would

limit the highly desired broad decision-making platform necessary during crisis

management. The study has significance in countering the conventionally held viewpoint

that good governance had a direct effect on corporate performance consequently

contradicting the research by scholars such as Felício et al. (2014). Notwithstanding, the

research finding by Choi et al. (2013) is in alignment with the study by Ferrero-Ferrero et

al. (2012) in the reinforcement of the view that the effectiveness of governance

mechanisms is sensitive to economic periods. Hence, with these studies their authors

outlined an illustration of the scope where good governance is unsuitable and

demarcations of the boundaries and the value of good governance.

Although wealth maximization is the overriding aim for firms, a corporate

strategy that aims at establishing socially responsible firms have a direct bearing on the

sound governance. Denis (2016) researched corporate governance and provided contrary

evidence on the established business process of wealth maximization. Denis argued that

the traditional norms that corporate entities use to maximize shareholder wealth were

detrimental to businesses and other stakeholders. The author advocated for an

allencompassing analysis and strategy that would adequately maximize and create wealth

for shareholders, by generating higher net earnings as a result, high EVA-Economic

Value added while minimizing the opportunity cost of doing business. Denis elaborated

extensively on the potential detriments of deviating from shareholder wealth

maximization. The study by Denis is indicative of how governance directly correlates to

media pronouncement and engagement and how the efforts of government enhance good

corporate governance. The research findings by Denis are in alignment with the

investigation by Cheng et al. (2017) as both authors offered a revelation of the effect of

public publication of company ratings on corporate governance. Denis demonstrated the

essential linkages between corporate governance and CSR by emphasizing that sound

corporate closely enshrines to wealth maximization for the shareholder and other

stakeholders.

Boosting CSR. Employees are an essential stakeholder group that is indispensable

for any firm as employees have a significant role to play in the attainment of a sound

system of governance. Flammer and Luo (2017) undertook a research study on the

employment of CSR as a tool to enhance employee engagement and found a positive

correlation in companies' reaction to adverse employee behavior by heightened CSR

endeavors. The benefits of using an effective CSR as a motivational tool is evident in the

study. The authors provided substantial evidence of a relational link between CSR and

employee engagement

Business scholars strive to find a solid understanding of the effect that CSR and

governance tangibly has on the profit margin of corporates. Fish and Wood (2017)

underscored the importance of maintaining congruence between corporate governance

and CSR. The author commenced by demonstrating how it was valuable for management

to recognize and instill sound measures for corporate governance and CSR. Like Kultys

(2016), Fish and Wood expanded upon agency theory and economic theory by

underpinning on the insufficiencies of these theories. Fish and Wood illustrated the

complete effect of CSR on corporate performance and hence added value to the body of

knowledge on governance. The authors underscored the importance of maintaining an

optimal balance between CSR and corporate governance as a key in providing assurance

and positive perception to creditors and investors, which in turn translates to high firm

value and credit rating.

Corporate Governance and Stewardship Theory

Business scholars refer to agency theory as the classical theory and stewardship

theory the modern. These two theories are pivotal to understanding the central tenets as

well as assumptions on which corporate governance is founded (Glinkowska &

Kaczmarek, 2015). The hypotheses of the stewardship theory are contrary to those of the

agency theory. Several scholars contend that agency theory is limited in its effectiveness

at enhancing sound governance, due to its flawed assumption that business leaders will

always exhibit self-serving behavior while managing a company (Abels & Martelli, 2013;

O'Connell, 2007). Hernandez (2012) stated that stewardship theory originated from the

notion that business leaders guard the interest of shareholders and display self-sacrificing

behavior. The stewardship theory further lends support to the view that managers would

create profitable entities that enable shareholders to thrive.

Although agency theory is essential in illustrating the conflict of self-interest, it

suffers several drawbacks. Farias and Jones (2015) undertook a study to demonstrate the

insufficiency of the classical and modern theories in maximizing shareholder wealth by

commenting that agency theory as the girding theory of executive remuneration is faulty

and created a ground for mistrust and manipulation. As with Donaldson and Davis (1991)

Farias and Jones (2015) noted that, the underlying assumptions of agency theory were

deficient with incorrect assumptions that humans would innately ever opt for self-serving

behavior. The authors contended that stewardship theory, which originates from

psychology and other behavioral sciences, offered an alternative explanation for

motivation and behavior.

Limitations of agency theory. Several scholars provide empirical evidence that

highlight the drawback of agency theory. The research study by Das and Dey (2016)

noted a contrary viewpoint than that of the agency theory on aligning shareholder and

management interest to safeguard wealth maximization, with measures such as executive

remuneration. Precisely, Das and Dey stated that there was no evidence that CEO

remuneration and duality have a direct influence on firm performance as a result the

research study intersects well with the investigation by Farias and Jones (2015).

Agency theory is continually criticism for its unique dimensional outlook. Farias

and Jones (2015) stressed that in the classical model for CEO pay the financial outcomes

was prone to manipulation, while the stewardship theory was pro-organizational.

Stewardship theory is supportive of aligning the CEO remuneration with transformational

leadership and a closely associated remuneration system that intertwine with

transformation and sustainability principles.

The alternative theory. Stewardship theory is an alternative model to the

classical agency theory through its heightened emphasis on transformational leadership

and dynamic teams. Charas (2015) explored the dynamics of teams within the board of

directors as a means to enhance corporate performance and illustrated that corporate

performance improves when the board functions as a team. Charas supported the premise

of stewardship theory and illustrated how directors failed to act in a self-serving manner,

but instead, fostered team dynamics and value-creating activities, which positively

influenced profitability. The research aligned with that of Farias and Jones (2015) that

was supportive of stewardship theory and illustrating a CEO leadership that is purpose

driven, responsible, and with attributes that align CEO and shareholder interest. Hence,

these researches are illustrative that business leaders would inherently enhance team

dynamics and optimize value-creating activities. The evidence from empirical literature

illustrates that the action of shareholders influence business executives.

Business leaders have provided evidence on the manner in which the action of

shareholders influence business executive. Hiebl (2015) stated that longevity of

appointments of CFO and executives enhanced stewardship behaviors that were similar to

the notions in stewardship theory.

CFOs face agency conflicts in their dual role as stewards of company finances,

and benefactors of incentive compensation that derive from books of accounts under their

purview. Hiebl were keen to establish other theories to substitute the agency theory with

the intention of providing a robust and an all-encompassing theory to curtail the

onslaught of the global financial scandals. Habbash (2016) contributed to the field of

corporate governance with the formulation of a new theory, the institutional theory by

using parameters that included board size and executive compensation packages. The

study by Hiebl has a distinct contribution to the girding theories of corporate governance,

as it was the first to analyze both the stewardship and the agency attitude of the CFO.

The attitude of the principal toward the agent is essential in understanding the

shortcomings of agency theory, as is an understanding of corporate governance measures.

Hiebl (2015) provided a body of knowledge that emphasized on the attitude of the

principal and detailed how it was a strong determinant in the agents’ perception of

management and control. On the other hand, Fish and Wood (2017) used the corporate

governance index created by Gompers, Ishii, and Metrick (2003) to gauge the extent of

corporate governance in business entities. In spite of the potential contribution to the

study on governance, by Habbash (2016), Fish, and Wood stated that the key reliance on

secondary than primary data was a notable limitation in their study. Non-uniformity in

accounting practices continues to be a limiting factor in the comparability of information

across business entities.

Codes of Corporate Governance

The code of corporate governance are the laws, frameworks, regulations, policies

that determine how a company is directed (ElKelish, 2018; Schuchter & Levi, 2016). The

high incidence of corporate scandals that have permeated the global business arena within

the current and past decade has in part orchestrated the growing significance of corporate

governance. Ongore and K’Obonyo (2011) stated that there is increased focus on

corporate governance structures to assess their effect on accountability, transparency, and

responsibility. For example, the UK code of corporate governance in 2016 is an

amendment to enhance the guidance in the composition of the Audit Committee and the

international standards of Auditing (Kultys, 2016). Consequently, the various regulatory

authorities and arms of national institutes for enforcing sound governance establish or

amend the codes of corporate governance to curb corporate misconduct and boost sound

governance.

Geographical dimensions of governance. Several countries make concerted

efforts at promoting a high quality of corporate governance and reporting by enacting

codes of governance to foster investment. Prokhorova and Zakharova (2016) conducted a

study whose focus was the adoption of the new codes of governance in Russia in 2014 to

examine the quality of corporate governance that enhance transparency and boost

investor confidence. Prokhorova and Zakharova illustrated by using the country context

of Russia the essential role of corporate governance and noted that it is an essential

determinant for institutional investors' in their choice to invest in Russia, and established

the direct link between the inception of corporate governance in a country and an increase

in national economic performance. Similarly, Yeoh (2016) undertook a study to assess

the corporate governance failure that resulted in the financial crisis of major banks in the

United States of America - USA and the United Kingdom-UK, by utilizing case study to

assess the significant scandals and to determine the extent of investigation of all

employees responsible for wrongdoing. Both research studies intersect at the point of

determination that the codes of corporate governance are inadequate as the sole

instrument for achieving sound governance.

The inadequacy of the codes of corporate governance is a main topic in business

literature on corporate governance. Nakpodia, Adegbite, Amaeshi, and Owolabi, 2018

stated that neither the codes nor the rule of governance alone is effective for sound

governance. Yeoh (2016) highlighted the perceived shortcomings of the corporate

governance practices by key business leaders by outlining the limitations and persistent

deficiencies of regulatory authorities such as the Sarbanes Oxley Act (SOX) and the

Dodd-Frank Act. Stanciu and Bran (2018) described the codes of corporate governance as

the explain-or-comply principle which offers essential information as to the genuineness

of board members’ commitment. Yeoh underscored that the corporate governance

framework and structures had made it difficult for the laws and regulations to detect the

symptoms of an impending financial scandal. Similarly, Prokhorova and Zakharova

(2016) detailed that corporate governance codes serve as an investment incentive and its

enactment and implementation leads to increased responsibility for shareholders in

strategic management and decision making. However, an absence of a directly variable

relationship between the implementation of the codes of corporate governance and

national economic performance imply that there is an exception to the rule. Hence, the

findings are significant in magnifying the financial situation in Russia where commercial

performance fails to maintain a sturdy pace with the efforts on the enforcement of the

codes of corporate governance. The research studies are congruent and supportive of the

premise that the codes alone would not achieve sound corporate governance as there are

unique components within the codes of governance that lure investors to invest capital or

discourage employees from engaging in financial misconduct.

Empirical research provides evidence of linkages between the establishment of the

codes of corporate governance and firm performance. Owusu (2016) undertook a study to

examine the effect that compliance with the Ghanaian codes of corporate governance of

2003 had on governance quality and performance. The author used the Return on Asset

(ROA) as the measure for firm performance to demonstrate the importance of the codes

of corporate governance in enhancing good governance. The separation of the role of the

CEO and chairperson of a board and an assurance that a third of the board of director is

composed of independent directors enhances governance. Hence, the findings of the

study are evident that a positive relationship exists between compliance with the codes of

corporate governance and firm performance. Buallay, Hamdan, and Zureigat (2017)

stated that corporate governance and firm performance are integral and closely aligned

with risk management. Hence, the study by Owusu is in alignment with the research by

Yeoh (2016), Prokhorova and Zakharova (2016) but divergent on the determination of the

end of the correlation between compliance with the codes of corporate governance and

firm performance. Elshandidy, Shrives, Bamber, and Abraham (2018) stated that the

principles and the mandatory corporate compliance measures possess the potential to

complement each other. It is evident that the codes of corporate governance are essential

but not reliable in assuring a robust system of sound governance.

Corporate Governance within the Insurance Industry

The insurance industry is an essential player in the global financial sector.

Insurance premium for life and health, and the property, and casualty industry reported

$7.3 trillion portfolio assets, which represent about half of the total portfolio assets of the

insurance industry (U.S. Department of the Treasury, 2013, p. 5). Evidence of an

interconnection between the insurance industry and the financial system is apparent in the

majority of the past global financial crisis. The presumption is that the non-financial

sector, such as the insurance industry, has a more lenient framework for corporate

governance than the banking industry (Woo, Rhee, & Woo, 2015). Through the

DoddFrank Act, the Federal Insurance Office (FIO) was establishment in 2012 to provide

oversight and enhance financial stability in the insurance industry.

CEO duality. The general perception is that CEO duality has a positive influence

on the quality of corporate earnings. Miller and Yang (2015) conducted a quantitative

research study on corporate governance with a focus on the insurance industry by

investigating the economic factors that determined the structural change for either a

combination or split in CEO role. In highlighting the unique position of the insurance

industry, Miller and Yang (2015) indicated the firm size as the exclusive determinant in

assessing the costs and benefit of splitting the CEO and board chair role with large

insurance firm supporting a CEO duality leadership structure. Miller and Yang

contributed a new dimension to the debates on the segregation of the function of the CEO

and chair to the board. In spite the insistence by regulators on a split in CEO duality, the

authors provided evidence from the publicly listed companies that supported a contrary

viewpoint that support CEO duality. Hence, the study is contrary to the finding by Abels

and Martelli (2013) and Chang et al. (2015) and scholars who do not support CEO

duality. The finding by Miller and Yang are unique in the discussion of CEO duality in its

provision of evidence that companies with a high percentage of independent directors

were more pre-disposed to exploiting the advantages of CEO duality.

Many member states within the European Union possess a two-tier company

board structure with the supervisory and executive board. Rabóczki (2018) highlighted on

the function of the supervisory as essential in providing oversight to the decisions of the

management board. Bester (2015) undertook an exploratory case study to assess the rate

of acceptance by the insurance companies in Slovenia to the newly established secondtier

corporate governance structure whose purpose was enhancing enterprise risk

management. Regulators within the European insurance industry developed a mechanism,

solvency II in 2016, to create an effective supervisory system and aid in anticipating and

curtailing financial crisis prior to their occurrence (Cardone-Riportella & García-

Mandaloniz, 2017). Solvency II, is made up of three primary pillars and uses a risk-based

methodology (E-Vahdati, Zulkifli, & Zakaria, 2018). Still, empirical research provides

evidence that no single governance structure is sturdy enough to offer sound corporate

governance. The study by Prokhorova and Zakharova (2016) and Yeoh (2016) are

supportive of this view, and their findings are congruent with the research findings by

Bester, who emphasized that no single standalone system would guarantee an efficient

risk management system within the insurance industry. Bester instead stated that

enterprise risk management, is itself, a blend of numerous, skills, principles and theories,

which included items such as general management, planning, and risk modeling.

Notwithstanding, the two pillar system continue to provide insurance companies with a

well-integrated risk management platform.

An initial pillar with quantitative indices for guidelines and a second pillar with

qualitative constitutes a two-pillar system. Bester (2015) provided an essential knowledge

and insights on the notable advantages and disadvantages of executing the second pillar

to enhance corporate governance. Specifically, Bester stated that insurance companies

perceived the second pillar as laborious, cumbersome, and ambiguous, even though its

stipulations and guidelines, unlike pillar I, were qualitative hence less desirous of

numerical tabulation. On the other hand, Mayes (2015) undertook a study on the

regulations of the non-bank financial sector that were embroiled in major financial

scandals in New Zealand during the period 2006 to 2010. The purpose of the study by

Mayer was to determine whether the operational corporate governance stipulations and its

guidelines were wanting.

The segregation of banks and non-financial institutions. The main contributing

factor to the financial crisis within the insurance industry was the categorization of the

banking and the non-financial institution, where the former, operated with a highly

regulated and supervised environment than the latter. The insurance industry falls within

the non-financial institutional category. Mayes (2015) provided extensive information

and finite details on the treatment accorded to banking and non-financial and showed how

providing institutions with the decision of an option of institution type of financial or

non-financial, led to a weakening in the corporate governance structures. The weakening

in governance structure was due to company preference for classification as some

company executives preferred to opt for the non-financial designation for its presumed

lenient governance stipulations.

A system of sound corporate governance requires that a comprehensive and

elaborate system is in place to assure governance whether in the banking or non-financial

institution. Such a system is often the product of a skillfully woven strategy that

encompasses all the essential component of a company operation for both the banking

and non-financial institutions. Adams and Mehran (2012) observed that the focus on

board effectiveness and governance of financial institutions with the omission of the

nonfinancial sector had led less scrutiny and weak governance in the financial industry.

The presence of a robust governance system for the banking and non-financial sector is

fundamental. Empirical research is in alignment with the perspective that accords a

uniform governance principle to banking and non-financial as is evident from the survey

by Prokhorova and Zakharova (2016), Yeoh (2016), and Bester (2015). This perspective

is congruent with the study of Mayes (2015) who created new knowledge that illustrated

management failure and poor governance prior to a major global financial crisis. Mayes

demonstrated to regulators of the banking and non-financial institutions that sound

governance is the byproduct of widespread public disclosure and sound management, and

not necessarily of the meddling supervision by the supervisory board.

Corporate Governance: One or Several Theories?

The agency theory is the dominant theory that girds the founding principles of

corporate governance (Tomsic, 2013). In the aftermath of the global financial crisis,

several scholars have voiced the urgent need to develop a new corporate governance

theory based on a holistic approach (Othman & Melville, 2016). Lattemann (2014) noted

that corporate governance reforms in emerging countries shifted from a closed to a more

open and transparent system. As such, several theories have been proposed and

established to supplement or out rightly replace the agency theory.

The propagation of several theories in attempts to create a best-fit framework

theory of corporate governance continues. Borlea and Achim (2013) viewed corporate

governance through time to chart the different theories formulated to enhance corporate

governance. Although corporate governance is deeply rooted in the agency theory that

developed in the early 70s to address the conflict from the divergence between ownership

and control, it did not suffice in achieving sound governance (Borlea & Achim, 2013).

Similarly, Clarke studied corporate governance through time by analyzing the different

eras of corporate governance to chart the evolution of corporate governance over time.

Clarke's research establishes from the proposition that the agency theory, seen as, the

dominant theory in corporate governance, was inadequate to satisfy the demands of

governance and environmental sustainability (Clarke, 2015). These findings align with

research by Bell and David (2015) who argued that agency theory destroyed the dignity

of executives. Besides, Clarke noted that the premise of shareholder primacy that suited

the era immediately succeeding the industrial revolution was the girding premise of

agency theory, however having the notion of shareholder primacy as the sole objective

has wrought continual damage to society and economies (Clarke). Other scholars who

maintain that agency theory has flaws from its inception echo these criticisms.

Complementarity of the theories. Business researchers prescribe a

complementary while others, supplementary theory for the agency theory. The theories

proposed are the stewardship theory, the stakeholder theory, resource dependence theory,

the transaction cost theory, the political theory, the ethics theory and the theory of

efficient markets respectively (Borlea & Achim, 2013). All theories are diverse in nature.

The stakeholder theory esteems the interest of other stakeholders (Hussain, Rigoni, &

Orij, 2018; Ribe, Ortiz-Marcos, & Uruburu, 2018). Barker and Chiu (2018)

recommended stakeholder value creation as an ideal requirement for corporate success.

Unlike the agency theory that is primarily about the maximization of shareholder interest,

with the stakeholder theory business leaders are focused on the creation of value for all

stakeholders.

Bernard et al. (2018) highlighted on the effect of CEO performance and company

performance with specific emphasis on corporate sustainability and recommended an

internal control framework that considered the essential role played by external

stakeholders. While there are several instances that link corporate governance with

corporate social responsibility which in turn promote a positive corporate image and

confidence within the general population, Crifo, Escrig-Olmedo, and Mottis (2018)

undertook a study that indicated that corporate governance might possess an ambiguous

role in corporate sustainability depending on the composition and type of the Board of

Directors. The fashion in which a company positions its corporate strategy has a direct

bearing on its relationship with its stakeholders and often demarcates the extent to which

its corporate social responsibility can transcend. Additionally, in alignment with theme 1,

it is essential for business leaders to consider the qualification and composition of the

board as it would have a significant bearing on a company's internal control framework as

regards corporate sustainability.

To improve business performance in the insurance industry and thereby support

financial performance, business leaders must make every effort to design an

organizational architecture with an overarching strategy that would implement a robust

internal control system and governance mechanismThe essence that each theory had a

specific focus on an element of governance signifies that a combination of several

corporate governance theories is the only possibilities foe sound governance.

CSR and responsible business are essential elements in ascribing levels of

robustness to corporate governance structures. Clarke (2015) stated that the objective of

business for wealth creation must adjust to align with the paradigm of sustainability,

which implies a higher consideration for corporate social and environmental

responsibility. The findings align with the proposal by Devinney et al. (2013) who said

that a firm's CSR solidly anchors in its value proposition statement. Equally, O’Dwyer

(2003) in defining CSR linked corporate wealth creation and distribution with ethical

implications.

The studies highlighting the drawbacks on agency and the associated preeminence

with shareholder value also contain alternative proposals of other organizational

dimensions whose consideration may assist in bolstering a sound system of governance.

Htay, Salman, and Meera (2013) undertook a conceptual analysis study on the main

conventional corporate governance theories of agency, stewardship, and stakeholder

theory, highlighted on their deficiencies, and proposed the universal corporate

governance theory in a bid to fill the void in corporate governance theory. The findings of

the study by Htay, Salman, and Meera is in alignment with the study Clarke (2015) who

provided insight on team production theory with a focus shift away from agency theory

and related shareholder value.

The Drawback of agency theory. Corporate governance parameters are dynamic

and continually evolving consequently, overtime a static system would be inadequate to

assure governance. Clarke (2015) highlighted the essential need to reformulate the

considerations of corporate governance continually in response to economic,

environmental, and social changes. Equally, this study is in alignment with the survey by

Htay et al. (2013) who established the ethical approach theory as a holistic approach to

fill the gap in corporate governance theory. The study is beneficial to the body of

knowledge in corporate governance through its role in amplifying the absence of a

comprehensive theory for sound governance. In addition, Htay et al. illuminated the

factors for consideration in establishing corporate governance guidelines by regulatory

bodies and maintained that a myriad of factors that include culture, politics, and

regulations, in addition to the stakeholders, shape corporate governance. Hence, any

theory about governance must encapsulate those factors and maintain cognizance that

agency theory, stewardship theory, and stakeholder theory were inadequate in grasping

the totality of corporate governance practices as no one theory provided an

allencompassing solution.

Ethics and Governance

There is a close relationship between ethics and corporate governance. Mees

(2015) indicated that it is difficult to comprehend wholly corporate governance statutes

without delving into a topic on business ethics. The codes of corporate governance of

many nations rarely include ethical provisions, yet most financial scandals entail ethical

issues (Mallin, 2015). Ethics pertains to moral judgments and is essential as decisions

made by employees often sway the culture of an organization, which could have

significant ramification on organizational reputation.

Considerable evidence is present that the principles that discredit senior executive

behavior are in agency theory. Bell and David (2015) carried out a study on corporate

governance with a focus on executive compensation and proposed an alternative theory to

model the appropriate executive behavior. The authors posited that corporate governance

is reliant on the agency theory, which fails to portray the action of executives

appropriately. There are intersections in the study findings by Zaharia and Zaharia (2015)

and the study by Bell and David as the former authors undertook studies that assessed

international business ethics as an essential factor of organizational culture. The authors

posited that overreliance on rigid guidelines of a governance framework had the potential

to erode salient features of legal and moral human conduct. The researchers are

encouraged by the limitations, of agency theory and the code of corporate governance to

formulate alternative theories in the comprehension of corporate governance.

A complex world and complexity in theory. The virtue theory has four cardinal

virtues, which aim to provide positive corporate governance outcome. Bell and David

(2015) contrasted agency theory and virtue theory as it related to governance and

provided an executive remuneration model for performance, evaluation, and

compensation. Equally, in criticizing agency theory, Zaharia and Zaharia (2015) stressed

that businesses are not in existence purely for short-term profits that benefit the

shareholder, but for a multitude of functions and goals that would ensure sustainability.

The societies in which today's global businesses operate provide an assumed

authorization that companies will operate honestly and responsibly (Zaharia & Zaharia,

2015). Hence, the findings by these authors are significant in magnifying the reality that

attainment of a system of sound governance is complex and requires the corroboration of

numerous factors.

The code of ethics is the set of procedures formulated by firms to act as a conduct

guide for staff adherence to ethical standards. Garegnani, Merlotti, and Russo (2015)

carried out a quantitative research to assess the effect of specific corporate governance

structures on the quality of the code of ethics in Italy. The authors identified the relation

between corporate governance structures and effective ethics by assessing the governance

structures of executive compensation, the independence of auditors, the primary

shareholders, and the age and diversity of the CEO. Their findings are essential in the

understanding of the importance of ethics in the study of governance and align with the

results by Bell and David (2015) who argued that agency theory trampled and destroyed

the dignity of executives. Hence, the authors supported the virtue theory of governance,

which they used to create a remuneration model for the executive theory that provided a

more favorable image of executive behavior by emphasizing on ethics, integrity, and

excellence. Garegnani et al. were supportive of the codes of ethics and stated that the

codes of ethics are pivotal in ensuring CSR, which also facilitates a climate of trust with

other stakeholders. Hence, ethics in business is essential in adequately handling the

competing demands of the modern business world.

High numbers of independent directors often imply a higher propensity toward

sound governance. Garegnani et al. Russo (2015) negated the conventionally held notion

in governance literature that a high number of independent directors is synonymous with

sound corporate governance and provided findings that supported the view that

companies with key strategic objectives such as sustainable strategic orientation and high

regard for business ethics required fewer independent directors. Hence, the increasing

utilization of the codes of ethics could bring about reform to companies, which are

necessary for ensuring the protection of stakeholder interests.

Corporate Governance Structures

Governance is multifaceted, and the corporate governance structures that combine

to form a governance system is increasingly becoming complex in a dynamic and

fastpaced world. Corporate governance structures incorporate controls, policies,

procedures, and guidelines that aid companies in attaining their objectives while also

satisfying stakeholder needs (Prokhorova & Zakharova, 2016). A corporate governance

mechanism consists of internal and external techniques. Yasser and Mamun (2015)

outlined the use of the CEO role and chair of the board of directors as techniques for

governance. Shehata (2015) expounded on the significance of the codes of corporate

governance and described its development, and benefits within the Gulf Cooperation

Council (GCC). The findings of these researchers are indicative that corporate

governance may involve the use of large array structures that are very divergent and still

manage to attain the goal of sound governance.

Governance structure and best practice. Researchers continually provide

rankings to governance structures in a bid to ascertain a set of dominant governance

structures. Salami, Johl, and Ibrahim (2014) carried out a study to assess the current

governance structures and their related framework and proposed a new framework for

corporate governance. The research finding are in alignment with the results by

Zuckweiler, Rosacker, and Hayes (2016) who undertook a comparative study to assess

the rank of corporate governance best practices for businesses. Salami et al. proposed a

governance framework with the following components, ethical behavior, economics, and

the environmental and social imperatives and integrated the interests of the principal

stakeholders of a company. Salami et al. contended that the current structures for

governance were defective as they only served the interest of shareholders. Similarly, in

highlighting the drawbacks of the current governance structure, which originates from

agency theory, Zuckweiler et al. underscored the essential and leading role of strategic

human resource management and observed that it was in stark contrast with the

traditional attention placed on the board of directors as the central factor in corporate

governance. Consequently, the efforts to seek a dominant governance structure are

essential at indicating the lack of a single central governance structure.

A robust structure of governance is complex and consists of well-orchestrated and

coordinated components. Salami et al. (2014) said that the arrangements in place for

corporate governance had been reactive and not at all holistic and identified the control

mechanisms conventionally used to safeguard and maximize the wealth of the

shareholder. The recommendations from the study by Salami et al. are in alignment with

the survey by Wahba (2015) who stated that no governance structure operated in a

vacuum and that there are strong interconnections amongst all structures. These

perspectives are in alignment with the study by Prokhorova and Zakharova (2016), and

Yeoh (2016) as well as Bester (2015) who emphasized that no single standalone system

would guarantee an efficient risk management system. Corporate governance is a

multifaceted, dynamic, and ever evolving.

Business leaders continually attempt to arrange the structures of governance in a

sequential order of preeminence. Zuckweiler et al. (2016) identified strategic human

resource management as the most significant corporate governance structure. The other

governance structures, in order of priority, are information technology, the board of

directors, corporate risk management, and internal and external audits together with the

associated internal control system. In contrast, Wahba (2015) undertook a study that

investigated the structures of corporate governance with board characteristics and

leadership and stated that there was no direct correlation between board characteristics

and firm performance. There are intersections in the study by Wahba and Zuckweiler et

al. as Wahba supported the perspective that a duality in corporate governance structure

with a split in the CEO and chairperson role enhanced firm performance. Hence, although

there is a lack in the provision of a definitive order of dominance for in the compositions

of corporate governance, they concur on numerous essential dimensions.

Corporate Governance in an Integrated Financial Market

Globalization has a myriad effect on the system and structures of nations. The

effect of economic globalization is highly reliant a nation’s level of income (Samimi &

Jenatabadi, 2014). Some business leaders have supported this viewpoint. In contrast, in

developed and high-income countries, the highlight is on the political and social

dimensions of globalization (Asongu, 2014). While there are proponents and opponents

of globalization, many scholars believe that it is not possible for all global citizens to

benefit equitably in the absence of a mechanism of corporate governance that guarantees

sound governance.

Diversity in governance structure. The use of corporate governance structures

can curtail the issues around tax havens and tax evasion. Gajevszky and Geamanu (2014)

undertook a descriptive research study that assessed the codes of corporate governance of

Cyprus and Malta, two countries in Europe considered as tax havens. The authors were

supportive of the codes of the two nations with the principles and recommendations of

corporate governance of the OECD. Likewise, Chhillar and Lellapalli (2015) undertook a

study that compared and contrasted two corporate governance models, with the

stockholder model that is predominant in the Anglo-Saxon countries as one, and the

stakeholder model prevalent in Germany and continental Europe. Chhillar and Lellapalli

highlighted on the challenges of the agency problem to support the call for a review in

corporate governance structures and segmented the dimensions of the governance models

into two categories with an internal and external model. Similarly, Mugarura (2016)

undertook a correlational research to explore the different corporate governance

structures from notable emerging nations to determine the critical component for

financial sustainability for companies operating in a globalized economy. Mugarura

outlined the set of procedures and rules that define corporate success or failure and

theorized that in spite of the laws that guarantee success there are extraneous factors most

notably globalization that play a pivotal role in the success of companies. Mugarura

posited that corporate governance mechanisms are essential in aligning the several

constituents parties in and within organizations in a globalized world. The findings in

these studies synchronize as the researchers were supportive of the codes of governance

and the national governance structures, and also provided additional dimensions besides

the codes that must be in place to assure sound governance from the national viewpoint.

Tax haven. Taxation has a critical role in globalization given the ability that

individuals and companies possess to potentially distort and erode the tax base of nations

as investors continually seek jurisdiction with the lowest tax rate. Gajevszky and

Geamanu (2014) highlighted the manner in which the OECD carried out an exercise to

integrate the tax havens to create transparency and allow financial disclosure. The authors

noted that globalization created several opportunities for economic development and

growth for businesses and individuals through competitive trade, innovative technology

and the creation of new markets. The findings and recommendations of this study overlap

with those of Mugarura (2016) who stated that in a globalized world, corporate

governance was particularly essential in enhancing the stability of financial markets and

supporting the profit objectives of companies. Hence, one can construe that success or

failure may effortlessly result within a globalized integrated market with lax governance

structures that precipitate exploitation including ills such money laundering.

Corporate governance systems of a majority of countries typify a blend of two

models within the governance continuum with the two governance models on either end

of the continuum. Chhillar and Lellapalli (2015) indicated that while it would be

advantageous to seek convergence in the code of governance and enable companies to

operate within a unified framework in the globalized world, it was not feasible to gain

convergence within the different corporate governance codes. Indeed, globalization has

deepened the tax race where the country with the lowest tax rate attracts the foreign

investment. Gajevszky and Geamanu (2014) stated that the tax haven in Malta and Cyrus

currently operate under a regulated framework that conforms to international standards

thereby they qualify as whitelisted jurisdictions and that globalization has given

prominence to tax haven as many multinationals seek ways to take advantage of

jurisdictions with lower taxes. While Gajevszky and Geamanu were supportive of the

OECD’s and the European Union’s effort in assuring sound governance, Chhillar and

Lellapalli advocated for the stakeholder model which does not merely consider the

shareholder wealth maximization but also makes considerations for the welfare of other

stakeholders. Unlike the shareholder model, in the stakeholder model control is mainly

with the mega institutions. A merger and hostile takeovers such as those within

shareholder model were highly improbable in the stakeholder model (Chhillar &

Lellapalli, 2015). The stakeholder model is advantageous, as it possesses a two-tier

system of governance with the management board and the supervisory board with no dual

membership to either board. Hence, the initiative of the European Union and the OECD

in addressing the tax haven has brought a marked change in the way that tax havens

function.

Risk Management and Corporate Governance

Risk management continues to gain prominence in the global financial world.

Globalization has created an integrated financial and capital market development, which

creates uncertainty and risk (Aziz et al., 2015). Risk management describes the

procedures used by companies to identify, control, and mitigate risk (Zuckweiler et al.,

2016). Thomas and Xu (2018) defined risk management as the arrangement that involves

the comprehensive analysis and management of organizational risk. Sinha and Arena

(2018) viewed risk composition as an integral feature of an internal control system of any

entity. Strategic risk management is essential as it continually enables firms to define

current and long-term objectives for the future. Kim and Yoo (2017) and Timothy and

Ard-Pieter (2018) highlighted risk management as central to strategic planning and

objective setting. Zungu, Sibanda, and Rajaram (2018) stated that firms that aligned risk

formulation with strategy setting were more successful in mitigating corporate risk.

Equally, risk management is essential in its provision of insights to management how to

reduce and possibly eliminate risk as well as inform about any existing potential

opportunities. Calandro (2015) stated that the challenge for most business leaders and

CEO is not mainly in the risk management of known risks but is in the identification,

assessment, and control of risk and uncertainty that present feeble signals. Today, more

than ever, executives are cognizant that they continually have to gird, confront, and deal

with the increasingly higher levels of risk and uncertainty.

The essence of risk governance. Managerial accountability plays an essential

role and is the leading cause of the rise in corporate governance establishments in

corporate America. Annamalah, Raman, Marthandan, and Logeswaran (2018) revealed

the link between risk management and firm performance. Cheffins (2015) undertook a

study to identify the trends that gave prominence to corporate governance and determined

the circumstances that were prevalent which thrust discussions on corporate governance

to the forefront and said that a lack of enterprise risk management created room for

misconduct to thrive. The finding of the study are in alignment with the study by Nahar,

Jubb, and Azim (2016) who undertook an investigative study to assess the correlation

between risk management and the performance of the financial institutions. The authors

argued that the increase in the number of the global financial crisis has created an

emphasis on governance performance and risk. Increased governance is in alignment with

the views of Maxfield, Wang, and Mariana Magaldi (2018) who observed that there was

an increasing awareness to governance structures after the financial crisis. Still, there are

notable deviations in the finding by Cheffins (2015) and by Nahar et al. as Cheffins

highlighted on corporate governance as fundamental for structuring and controlling

companies. The authors noted that a lack of a significant shareholder in most publicly

listed companies resulted in the absence of a dominant shareholder. A shortage of a

principal shareholder, who would generate an internal influence and control,

inadvertently creates a risky situation or governance risk. On the other hand, Nahar et al.

stated that in the past, the understanding was merely that risk identification, control, and

disclosure led to reductions in the conflict in interest between the principal and the agent,

while simultaneously improving company performance. The findings in both studies are

indicative of the essential role that risk governance plays in the modern complex and

globalized business arena. The role of risk governance subsequent to the onslaught of the

numerous global financial crises is impossible to overstate.

A simple goal of profit maximization with unbridled risk is detrimental to

companies, the financial systems, and any local communities. There are notable

intersections in the studies by Nahar et al. (2016), Cheffins (2015), and Lenssen,

Dentchev, and Roger (2014) as Nahar et al. presented an integrative approach of risk

management and governance as the solution to sustainable businesses as well as

identified the governance mechanisms that would reduce risks in the global business

environment. The recommendations by Lenssen et al. are in alignment with those

advocated by Schneider and Scherer (2015) and Saggar and Singh (2017) as they all lay

emphasis on the role of sustainable business and CSR in the attainment of a system of

sound governance. Schneider and Scherer stated that several international companies

discover that maintaining a global business may imply a thrust to business locations

lacking a democratic state and with a weakened regulatory framework. The authors

contended that these challenges which result from globalization test the leading

governance approach that places the shareholder as the critical player in corporate

governance and also magnifies the core deficiency of the agency theory. These findings

are in alignment with the perspective espoused by Clarke (2015) and Kultys (2016) as

they all highloghted on the main limitations of the agency theory. Schneider and Scherer

supported the notion of democratization of corporate governance as the solution to

challenges of increased risk in integrated global markets. Hence, the complexities of

today's globalized business environment project a bright light at the glaring weakness of

the agency theory as the complex and dynamic financial institutions of the modern age

requires a well-formulated and an integrative system of governance where risk

management at its core.

Corporate governance and corporate responsibility possess key linkages that

weave core elements of their themes together. Lenssen et al. (2014) identified five levels

to governance for sustainability and provided the example of the global financial crisis

that ensued from the sub-prime mortgage to illustrate the systemic effect that this type of

misconduct had on the economy. The authors demonstrated that corporate responsibility

and governance together were inadequate in addressing risk management and its effect on

a company. The finding by Lenssen et al. is in alignment with those of Schneider and

Scherer (2015) who undertook a study to explore the effect of risk on corporate

governance. Their study assessed the role an integrated market had on the incidences of

risk. The authors highlighted the manner in which risks posed a threat to corporate

legitimacy where continually companies find that the globalized business environment

may imply operating under conditions of weak rules and political governance failure.

Their findings are significant in the provision of evidence that no single solution suffices

to guarantee a robust risk management solution and governance in an integrated global

financial market.

Transition

In Section 1, I commenced with setting the background of the problem, the

problem, and purpose statement, the nature of the study, the research, and interview

questions. I outlined the agency theory within the conceptual framework. Agency theory

is theory that best aligns with the research question of this study. I made provision for the

meaning of the operating definitions followed by a listing of the assumptions, limitation,

and delimitations of this study.

I completed section 1 with a review of current literature on the fundamental

aspects pivotal to the discussion and study on corporate governance and provided an

analysis of the perspective on the framework and structures formulated to enhance

corporate governance. In the section of the literature review, I underscored the attempts

by various scholars and business leaders to find a lasting solution that result in sound

corporate governance for companies.

In Section 2, I detailed a depiction of this research project. The descriptions

included the role of the researcher, participant, and the research method and design for

this study. Documentation comprises the data collection instruments, techniques, and data

analysis methods. Lastly, in this section, I outlined the role of the researcher and finally

provided the methods used to guarantee the validity and the reliability of this study. In

Section 3, I described the findings, implications, and application for professional practice

and the recommendations for action and further research.

Section 2: The Project

In this section, I elaborated on the research method and design used to address the

problem and purpose of this study. To do this, I expanded on the appropriateness of the

selected research methodology and design. I also detailed the role of the researcher, the

technique used to select participants, and the methods for data collection and analysis.