Governance-Performance Relationshiop in Publicly Traded Companies: Does Shareholders' Proximity Matter?

Abstract

The objective of this paper is to revisit the governance-performance relationship while taking into account shareholders’ proximity to the locus of management. Shareholders’ proximity is defined based on ownership concentration and whether or not the dominant/controlling shareholder holds top executive positions in the firm. The lowest level of proximity is evidenced in firms with dispersed ownership, the highest level, in controlled entities where the controlling shareholder holds the CEO and/or Chair positions. Governance is measured on a global scale using the ROB index. The study is conducted over a four-year period (2002-2005) using panel regressions on a sample of Canadian publicly traded companies (470 firm-year observations).

The results of the study show a positive relationship between the ROB global index (and sub-indexes) and Tobin’s Q whether ownership is dispersed or is concentrated in the hands of a dominant or controlling shareholder. Shareholders’ proximity to management has no impact on the governance-performance relationship. Overall, the results support a one-size-fits-all approach to governance for publicly traded corporations despite growing concerns about the validity of such an approach in the aftermath of the 2008 US debt crisis.

Keywords: Governance indexes, Performance, Ownership concentration, Shareholders’ proximity, Insiders.