Codigos de Gobierno en Colombia: ?realidad o ficcion?
| Autor | Benavides Franco, Julián |
| Cargo | Report |
Governance codes: facts or fictions? A study of governance codes in Colombia
Códigos de Governança na Colômbia: fatos ou ficção?
INTRODUCTION
Firm governance codes are devices pushed by regulators in order to induce good behavior by firm controlling parties: by committing to reduce their private benefits, or the expropriation of fund suppliers, the controlling parties create a trusty environment that eases outside financing, reducing the cost of capital and generating higher returns for all involved parties. The trend began with the Cadbury Report in 1992; their issuance followed a series of company failures in the U.K., likely by poor governance practices. The report was produced by an ad hoc committee chaired by Sir Adrian Cadbury, an influential executive in the UK; the result was governance guidelines for for-profit public firms. After this effort different countries and organizations have been following the trend, with exchanges and regulators around the world issuing analogous requirements or guidelines, product of the consensus of experts' panels. By 2008 the European Corporate Governance Institute (ECGI) listed 234 different codes, guidelines and comparative studies from 63 countries and 6 multi-country organizations. After the Cadbury Report, Canada issued The Toronto Report and South Africa issued the King Report in 1994. In 1995 Australia disclosed the Bosch Report, France disclosed the Vienot Report, and the United Kingdom the Greenbury Report, this time on directors' remuneration. The highest peak came in 2002, with 33 studies and recommendations.
Clearly the idea of self regulation has some appeal for the business community and regulators. Colombia is not different in this sense, and the association of Chambers of Commerce (Confecamaras) produced in 2001 the firs best practice code for public firms. The Colombian regulator, Superintendencia de Valores (today Superintendencia Financiera), with the resolution 275/2001 required that all firms with listed securities and that intended to receive funds from pension funds produced a Governance Code. By November of 2003, ninety one issuers had adopted governance codes. In 2005, the Congress enacted the Law of the Securities Market. (3) which established board guidelines for public firms and the conditions to be met by independent board members. Finally, in 2007 the Superintendencia adopted a Country Governance Code, and demanded that issuers answered a Governance Survey about their compliance of the guidelines included in the Code. As many current requirements around the world, a particular firm should comply or explain why does not meet what the Code demands.
There is, however, little effort in these Guidelines or Codes to link theoretical justifications to actual recommendations. A broad picture of the reasons behind the Codes begins with the Agency Theory. Under the premises of this theory, opportunistic agents can take advantage of principals, if their behavior is not completely verifiable or their results are affected by uncertainty. Three different parties can be identified at the top of any organization: 1) management, who should act in behalf of all owners and respond to the board; but they can act opportunistically, expropriating shareholders; 2) large, sometimes controlling, shareholders, who should act in behalf of themselves, but can expropriate minority shareholders; and 3) minority shareholders. An additional party is the product of a key mechanism of governance: the board of directors; board members are agents who act in behalf of all owners, and whose job is almost exclusively to deal with management, but their function is affected by the relationship with management, their private interests, and time constrains. Considerable research has been carried out to find what characteristics make an efficient board. Under the premise that firm charters and the rule of law (legal system and judiciary) are not enough to avoid non optimal behavior by agents, business associations and regulators alike have encouraged the adoption of governance guidelines. In order to induce good behavior by agents (managers, board members, and controlling shareholders), contracts, implicit and explicit, should be well designed and controlled, especially because management can expropriate shareholders due to their advantage in information and their control of daily and major decisions. Fama and Jensen (1983) analyze the problem and posit that in complex organizations is optimal to allocate the different steps involved in decision making between management and the board of directors.
Management should be in charge of proposing and implementing decisions, while the board of directors should be in charge of the approval and monitoring of decisions. Board's effectiveness can suffer if management forces. Not surprisingly, all governance guidelines include rules related to the operation and structure of the board of directors.
The efficient operation of the board addresses the three agency conflicts mentioned above, but outsiders, funds providers, also might be hurt by informational disadvantages. To alleviate asymmetric information problems, the codes usually require enough disclosure of financial and operational data to give to stakeholders, and to the market in general, a precise idea of the current and prospective situation of the firm. Additionally, dealings and contracts involving senior management and directors regarding payment (at least the structure of the incentive packages), share purchases/sales, operations with the firm and other potential conflict of interests are commonly required to disclose. The self regulation of firms is based on the idea that transparent management and arm's length relationships with controlling groups induce the trust of outside investors in the firm. As a consequence, outside investors, shareholders and creditors are willing to provide more funds at lower costs. Additionally, trust reduces monitoring costs making the firm's operations more efficient. If the benefits of a larger size, lower cost of capital, better risk allocation and reduced monitoring outweighs the reduction in private benefits by the controlling parties, then governance codes are effective.
The tests in this research document an increase in accounting performance for the Colombian firms that issue a governance code, which also sheds light about the causality between governance and financial results. Given that a positive association between performance and governance levels, does not answer if good governance produces better results or if good results induce better governance; the approach we use permit us to tackle this important issue. The coefficients in our equations show that improvements in performance and increased leverage occur after an event associated to better practices. We document an increase of 1,53% in return on assets, after the firms issue their governance code and controlling per the country's GDP. The effect is also associated to the code quality, firms issuing better written codes have higher increments in return on assets. Our results show that return on performance increases by 3,52% for firms with good codes. As stated before an additional positive consequence of the governance codes is debt access. After issuing a well written governance code a firm is able to increase its leverage; an increase of 7,03% in financial leverage is found for firms with good codes. The results seem to support the effectiveness of self regulation as a mean to induce optimal behavior by controlling parties. The outcome is, hopefully, an improved equilibrium where firms grow faster, because funds providers, perceiving less risk, are willing to reduce their required returns and/or increase their supply of funds to the firms.
The article is organized as follows: after this introductory section; section one surveys related papers; section two analyzes the structure of governance codes, following the guidelines developed by the OECD; section three presents the data and the relevant tests; and section four concludes.
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LITERATURE REVIEW
A large body of research explores the links between governance and performance. Klapper and Love (2004) use a governance score for emerging markets firms and report that firms with higher scores have better operating performance and market valuation for the year 2002. Brown and Caylor (2004) built a governance index and find that in 2002 US firms with high scores were more profitable, more valuable and paid more dividends. Garay, González, González, and Hernández (2006) also built a governance index and find that Venezuelan firms with high scores were more valuable and paid more dividends in 2002. Gruszczynski (2006) reports that independent...
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