Corporate Governance and Voluntary Disclosure

INTRODUCTION
The importance of corporate governance in voluntary disclosure of information by companies has become more vital. This literature review section will begin by providing an overview of corporate governance and voluntary disclosure followed by listing the reasons for the increasing importance of corporate governance in the voluntary disclosure of information published by organisations. This will explain the importance of the problem. The next section will list the findings of various research studies on the relation between the dimensions of corporate governance and voluntarily disclosed information released by organisations. The methods used by the research studies will be looked into and so will their findings with previous research on similar topics. The last part will conclude the literature review by highlighting the main findings of the overall research.

The key objectives of the literature review are to:

• Provide an overview on corporate governance and voluntary disclosure and discuss the benefits of voluntary disclosure;
• Understand the importance of corporate governance in voluntary disclosure of company information;
• Evaluate the findings of various academic research studies on the same topic which have been conducted in the past, look at their limitations and discuss my views;
• Identify the similarities and differences in the research study methodologies; and
• List the findings of the literature review.

Overview
Corporate governance in organisations is defined as “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations”. It has the ability to influence the various objectives of the organisation, the way it operates, its performance optimisation and measurement process. Corporate governance also controls and can influence the information which is voluntarily provided to its shareholders and the market in which it operates (Jacques du Plessis, 2010). Voluntary disclosure of information is basically the process of information publication or distribution initiated by the organisation to its shareholders and the external market it operates in. The key benefit of voluntary disclosure is the increase the transparency between the organisation’s management, the investors and shareholders. This in turn ensures higher investment from investors and thus higher liquidity for the company. Adequate voluntary disclosure of information reduces the possibility for improper investment being made by management or the risk of lower average cost of capital since the management and the board is under the scrutiny of the investors (Bhattacharya, 2006). It can also reduce the potential for financial crisis in a market environment due to the increased availability of shared information with investors and other companies operating in the same market (Gul & Leung, 2004).

Significance of the issue
The recent changes which have come into effect since 1 December 2001 has brought to light the various concerns of regulators about companies providing only selective information as part of their voluntarily disclosed information, thus reducing the possible usability and credibility of the information provided to shareholders. Previous literature has proved that the corporate governance of an organisation and the time delay in publicising information in the market play a key role in the voluntary disclosure of information. The time delay caused during sending this information to all the relevant shareholders allows private briefings among specific shareholders, thus encouraging private briefings. The UK government’s and the EU governments’ aim is to ensure that their financial market regulations are accurate and the most credible across the planet has given rise to these changes. These changes require companies to provide their regulators with the ‘scope, nature and method’ used to publish information for external shareholders and the market. The uses of methods which reduce any delay in distributing information such as corporate internet reporting have also been encouraged so that the possibility of selective disclosures and private briefing is removed. These changes have managed to reduce the issue of time delays in publishing information. However, the corporate governance effects, especially in terms of ownership diffusion and other dimensions of governance, have still not been regulated such that their potential effects are reduced making it the crucial determinant of voluntary disclosure of an organisation (Abdelsalam, 2007).

Research
In the research conducted by Abdelsalam et al (2007), the evaluation of ownership diffusion and the voluntary disclosure of information especially on corporate sites was measured using the factors of comprehensiveness, content, credibility and usability and revealed some surprising results. The companies with director holding as their ownership structure were identified to have a lower level of voluntary disclosure especially in terms of the comprehensiveness, content and potential use of the information published. The research also identified that companies where the corporate governance dimension involved director independence were more inclined towards publishing financial information which was comprehensive and included general content about the organisation voluntarily since the boards of directors in these companies were monitored by independent executives. There was also a revelation that in companies where the CEO played a dual role and acted as the chair for the board of directors, the credibility of the information published voluntarily was not very high (Abdelsalam et al, 2007). This goes hand in hand with the first finding where director independence was negatively associated with the credibility of voluntarily disclosed information.

Andelsalam et al’s (2007) research does not have a very diverse sample of companies since the time available to gather data was limited. Thus it cannot be stated that the research findings can be generalised across all sectors. However, the findings are similar to those of previous researchers such as Adam and Hossain (1998) and Chen and Jaggi (2000), who also indicated that the external independent directors are associated with better voluntary information disclosure, and Gul and Leung (2004), who associated dual roles negatively with the voluntary disclosure of information. The research, however, is only specific to the developed economies and it is crucial to research in emerging economies too in order to generalise the findings across all markets. The study also lacks analysis of smaller companies and also organisations which are in the manufacturing sector; the manufacturing sector is not a dominant industry in the UK.

Another research study which was conducted to understand the financial crisis caused in Asia in 1997– 1998 and also to determine the reasons for the slow recovery of the market afterwards, was done by Gul and Leung (2004). It was evident from their study that the need for increased transparency was necessary to reduce the information gap in the markets and improve the communication between the external investors and the internal board of organisations, if the development of the overall market was the aim. Whilst previous research studies have been conducted in a developed economy such as the UK, this study looked into the emerging markets such as Hong Kong. The research looked into one particular section of corporate governance, which is the CEO duality dimension where the CEO acts as the c hair of the board too thus gaining very high control of the organisation’s governance. The research compared voluntary disclosure of companies which were CEO dominated and non-CEO dominated and identified that CEO- dominated company’s shared little information about their various business processes and corporate strategies voluntarily when compared to non-CEO dominated companies. Again, as with the previous research study findings, this study also indicated that the among CEO duality companies, the disclosure was higher among those companies which had either one or more than one independent director. The independent directors were able to influence and affect the board of directors of the organisation especially if they were highly experienced independent directors and acted in this role in multiple companies. There was also another interesting find from this study. It showed that among companies with a high degree of CEO duality and a high number of independent directors, the voluntary information disclosure was again not adequate. Thus, if the companies aim to have an adequate amount of voluntarily disclosed information published to its investors and external shareholders so that they can benefit from the advantages, companies should prohibit one person from having the dual responsibility of being the CEO and the chairman of the board, especially in emerging markets. Also, the companies should include independent directors to keep their management in check, but this number should be balanced well and the independent directors also should not exceed the limit as too many can reduce the potential benefit of having them there (Gul & Leung, 2004). The limitation of this study is the same as the previous research in that the sample population was restricted to only region. However, the findings have been validated by Abdelsalam et al ( 2007) and are also consistent with the findings of Dalton and Kenser (1987) who said that if the CEO also acts as the chairman of the board, then the CEO can actually influence the independent board members and the local board towards his decision (Dalton & Kesner, 1987). The study conducted in Hong Kong ignored one of the key aspects of the nation’s business culture which is the existence of family- owned businesses. This key type of business was not considered by the researchers.

Corporate governance especially in companies which are owned by families is influenced by the culture of the region the companies operate in. The research conducted by Chau and Gray (2008) identified that a wide range of companies in Asian countries are family oriented and highly influenced by the local culture which does not promote voluntary disclosure of information. The study was conducted in two regions: Hong Kong and Singapore, and it was identified that the voluntary disclosure of financial information was 9.77% and 20.68%, non-financial information disclosed was 10.45% and 16.76% and strategic information disclosed was 18.49% and 16.00%, respectively. The results showed that Hong Kong companies were inclined towards voluntarily discussing the company’s strategies while Singapore companies were more interested in voluntarily discussing the company’s non-financial information. It was also identified that most companies in Hong Kong which have family control do not disclose adequate company information voluntarily since they are influenced highly by the local culture. This aligns with the findings of previous relevant studies which indicated that companies which are family owned are more secretive and consider sharing confidential information only with those who are directly involved with its management and finances. The findings about companies in Singapore were not as valid since most companies in Singapore do not disclose whether they are family businesses or there are internal relationships between organisations. However, the finding still showed that wider control of ownership in the organisations indicated that the information voluntarily disclosed was higher and vice versa (Chau & Gray, 2008). This study again validated that corporate governance does play a crucial role in the voluntary disclosure of corporate information provided to investors and external stakeholders.

All of the above research studies have only researched companies which were privately owned and did not have any part owned or were influenced by the government. This is another key factor which can affect the voluntary disclosure of information in companies since it is the government which actually promotes transparency of information. So, we will now evaluate a research study which was conducted on corporate governance in companies which have government ownership. The study conducted by Eng and Mak (2003) looked into the ownership structure of companies from the perspective of managerial, block holder and government ownership. They also looked into the size and the level of debt taken by companies in their findings. The findings of the study consisted of information from 158 companies in Singapore and indicated that companies which had lower managerial ownership and a large amount of government management provided an adequate amount of company information voluntarily. In the case of companies which were under block holder ownership it was actually hard to determine if their governance structure actually affected their voluntary disclosure. However, it was validated in this study that companies with overall managerial ownership do not disclose adequate credible and useful company information voluntarily. The presence of independent directors was again encouraged in managerial ownership companies to promote voluntary disclosure. Also, the number of independent directors needs to be limited in companies as too many independent directors can again reduce the amount of voluntary disclosure undertaken by the company. The companies which were very large in size disclosed more information voluntarily and the companies which had lower debt were willing to disclose higher information about their financials, non-financial information and organisational strategies willingly (Eng & Mak, 2003). This study was also validated by many other relevant studies and used primary data from an emerging economy to conduct the research. However, this research study did take into consideration the government ownership, the size and the level of debt in companies.

If we review the three research studies discussed above, the methodologies chosen by Abdelsalam et al (2007), Eng and Mak (2003) and Chau and Gray (2008) all used hypothesis and then conducted a regression analysis to determine the relationships between various variables and confirm whether the hypothesis was proved or not and in scenarios where it was proved it was true or not, whereas Gul and Leung (2004) used the empirical method and measured the relationships between dependent and experimental variables to understand how the relationship is altered when new variables are introduced in the study. The sensitivity analysis was also used by Abdelsalam et al (2007), Eng and Mak (2003) and Gul and Leung (2004) in order to determine if their findings would be altered when if there was a change in circumstances so that they could validate the accuracy of their findings (Saltelli, 2004). While the research conducted by Abdelsalam et al (2007) was based on companies in a developed economy such as the UK, the rest of the studies were based in the emerging economies of Asian countries, principally Hong Kong and Singapore.

Conclusion
From the findings from the above research studies, it can be stated in brief that corporate governance plays a critical role in the voluntary disclosure of financial, non-financial or any strategic information of companies both in developed and developing economies. Companies which have higher managerial ownership disclose less information voluntarily and among these the companies those with a CEO with a dual role have even lower voluntary disclosure. The organisations which have at least one or more independent directors have adequate voluntary disclosure of company information, but if the number of independent directors is too many, the voluntary disclosure level reduces. The research also indicated that companies with government ownership disclose the highest amount of information voluntarily. It was also identified that companies which are owned by families are more secretive in nature and do not feel comfortable disclosing any information about their companies voluntarily. All the above findings indicate that it is crucial for the governments of both developed and developing countries to make company information disclosure mandatory while placing an emphasis not just on the process by which this information is gathered, processed or maintained, but also on ensuring that the information that is provided is credible and useful to the investors.

REFERENCES
Abdelsalam, O.H.,Bryant,S.M. and Street,D.L. (2007), An Examination of the Comprehensiveness of Corporate Internet Reporting Provided by London-Listed Companies, Journal of International Accounting Research 6, 1.

Adams M., Hossain M. (1998), Managerial discretion and voluntary disclosure: Empirical evidence from the New Zealand life insurance industry, Journal of Accounting and Public Policy, 17 (3), pp. 245-281.

Bhattacharya, A.K. (2006), Financial Accounting For Business Managers 3Rd Ed, PHI Learning Pvt. Ltd.

Chau G.K., Gray S.J. (2002), Ownership structure and corporate voluntary disclosure in Hong Kong and Singapore, International Journal of Accounting, 37 (2), pp. 247-265.

Chen C.J.P., Jaggi B. (2000), Association between independent non-executive directors, family control and financial disclosures in Hong Kong, Journal of Accounting and Public Policy, 19 (4-5), pp. 285-310.

Dalton, D.R. and Kesner, I. F. (1987), Composition and CEO Duality in Boards of Directors: An International Perspective, Journal of International Business Studies, Vol. 18, No. 3 (Autumn, 1987), pp. 33-42.

Eng L.L., Mak Y.T. (2003), Corporate governance and voluntary disclosure, Journal of Accounting and Public Policy, 22 (4), pp. 325-345.

Gul F.A., Leung S. (2004), Board leadership, outside directors’ expertise and voluntary corporate disclosures, Journal of Accounting and Public Policy, 23 (5), pp. 351-379.

Jacques Du Plessis, J., Hargovan, A., Jean Du Plessis, J. & Bagaric, M. (2010), Principles of Contemporary Corporate Governance (2nd ed.), Cambridge University Press.

Saltelli, A. (2004), Sensitivity analysis in practice: a guide to assessing scientific models, John Wiley and Sons.