Corporate governance is essentially a set of mechanisms that afford protection to outside investors against appropriation by the insiders. In other words, corporate governance results in responsible business management leading to long-term value creation. This obviously calls for a high level of disclosure by businesses to eliminate information asymmetries among stakeholders. Earlier, it was believed that firm size, assets size, profitability, etc. are positively associated with disclosure levels of firms. So long as the businesses considered physical assets as the main factor of production and profitability this kind of disclosure was found meeting the requirements under corporate governance disclosures.

This scene has completely changed in the 21st Century where intangible assets—non-monetary economic goods without physical substance such as intellectual capital—replaced the physical assets as value creators of the businesses. Indeed intangible assets have become prime creators of business wealth. That aside, intangible assets being of unique nature—high levels of risk, firm-specificity, human capital intensity and low observeability—tend to have substantial impact on the agency costs of equity and debt, levels of information asymmetry between managers and investors and transaction costs of equity and debt. And over it, there is an argument that current accounting models do not capture these intangible resources to the extent required/desired.

Against this backdrop, the first paper of the issue, “A Study on the Corporate Governance and Disclosure Practices of Tangible Assets- and Intangible Assets-Dominated Firms and Their Relationship”, by Pankaj M Madhani, attempts to assess the impact of intangible assets and their disclosure practices on corporate governance of sample firms selected from nine different sectors—metal, oil and gas, power, IT, FMCG, capital goods, auto, consumer durables and health—listed on Bombay Stock Exchange. The firms with the dominance of intangible assets are identified by calculating the ratio of market value to book value and capital intensity of the sample firms. The author then measured the extent of corporate governance and disclosure practices of these select firms with the help of the index developed by Subramanian and Reddy and found that there is no statistically significant difference in the corporate governance and disclosure practices between firms with and without the dominance of intangible assets. The author however cited various reasons for this phenomenon of the Indian market. The study however suffers from a shortcoming: firms listed on BSE alone are considered and the data pertains to one financial year (2011-12) only.

Moving on to the next paper, “Investigating the Impact of Corporate Governance on Capital Structure: A Case of KSE-Listed Companies”, we have its authors, Aamer Shahzad, Muhammad Ali Shahid, Amer Sohail and Muhammad Azeem, investigating the impact of corporate governance on capital structure of manufacturing firms listed on the Karachi Stock Exchange, Pakistan. The authors have taken the manufacturing firms numbering 67 that are included in the KSE 100 index and analyzed the data pertaining to 2007-2012 to examine the impact of multidimensional aspects of corporate governance on capital structure employing a panel data methodology. The results indicate that the corporate governance index is statistically significant and negatively related to both the measures of capital structure—total debt ratio and long-term debt ratio—from which the authors infer that sound corporate governance supports lower leverage to avoid risk. This inference is, however, not that convincing, for it is not clear if this low leverage is more out of high internal accruals that these companies enjoyed with no matching investment opportunities. Secondly, the existing literature reveals that companies with better governance practices are known to obtain capital at a much lower price, which fact tends to increase leverage, for it increases earnings per share. Nevertheless, these findings, as the authors have observed, may help the managers of the businesses and the regulatory authorities in making observance of corporate governance more effective.

The last paper of the issue, “Corporate Governance Practices of State-Owned Enterprises in Ghana: An Analysis”, by the authors, George Kofi Amoako and Mawusi Kofi Goh, presents a review of the current corporate governance practices of the State-Owned Enterprises (SOEs) of Ghana. The authors have simultaneously listed the challenges being faced by the SOEs and also suggested ways and means for overcoming these challenges. In the process, they have also recommended certain reforms that the government should launch for improving the overall corporate governance practices among the business organizations in Ghana.

-- GRK Murty
Consulting Editor