Corporate Governance Characteristics of Growth Companies: An Empirical Study

Abstract

ABSTRACT High companies face many challenges, encompassing the numerous demands of new product innovation, market shares and customer satisfaction. This paper studied the hypothesis that, due to time and resource constraints, high companies will find it exigent to formulate and disseminate an elaborate, structured policy of corporate governance. To test this hypothesis, a corporate governance scoring system was developed and computed for 500 firms, based on the guidelines of accountability, responsibility, internal controls, and audit procedures. A life cycle analysis was also performed to identify differences in corporate governance characteristics of growth and firms, since both groups face the same challenges of dealing with increasing sales, customers, products and innovation. The results indicate that initial firms had lower corporate governance scores when compared to other firms. Revival firms showed higher scores, indicating that a well developed system of corporate governance added a much needed synergy for growth. Finally, a regression analysis indicated that certain fundamental characteristics such as Board development and Audit Committee role were equally well -detailed for and revival firms, but other corporate governance features such as ethics policy, shareholder value, reporting transparency and corporate citizenship were much better elaborated for revival firms. INTRODUCTION Within the intricate complexities of the business world, corporate governance is defined as a mechanism to maximize firm value. Empirical research over the past decade has shown a causal relationship between governance and market value. This evidence comes from both single-country studies (Black, 2001 on Russia; Black, Jang and Kim, 2006 on Korea; Gompers, Ishii and Metrick, 2003 on the U.S.) and multi-country studies (Durnev and Kim, 2005; Klapper and Love, 2004). The advantages of corporate governance have been well documented. Good governance systems lead to better access to capital, improved performance, and reduction of risk. However, implementing effective governance systems also comes at a cost. Technology constraints, lack of financial and business understanding of the system, and the cost of implementing and communicating corporate governance policies throughout the organization are crucial barriers which many firms, especially small ones face. In today's high risk, high economy, companies need to set a strong strategic course and have the capability to survive in the fiercely competitive environment. Rapid firms have many challenges to face, starting from cash flows, human resources, product quality, imminent deadlines and customer satisfaction. Once a successful working environment is established, a welloiled system of corporate governance will be highly rewarding. However, in the phase of a company's life cycle, the tendency of management will be to focus resources on revenue increase, and the value chain that links vendors and customers through their organizations. This paper studies the relationship between firm growth, life cycle stages and corporate governance characteristics. The rest of the paper is organized as follows: an explanation of the concepts of and corporate governance, and their interrelationships, development of the hypothesis, description of the methodology for measuring growth, life cycle stage and corporate governance scores, the statistical tests used, and the results. GROWTH COMPANIES AND THEIR STRATEGIES The organization life cycle model suggests that a company moves through a predictable sequence of developmental stages over its life time. These stages are sequential in nature, and are not easily reversible. Each stage can be clearly demarcated and involve a broad range of organizational activities and structures. There are a number of models describing the life cycle of a company, but most models divide the life of a company into the following five stages: Start - up: This is the initial stage where a business organization is formed, funds are raised, and a business plan is written. …

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