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Aug 17, 2020

Scientists discover new governance mechanism

A roundup of GRC research from the academic world, as seen by Jeff Cossette

Despite decades of academic research, little consensus has emerged as to what factors – and which configuration thereof – lead to an effective corporate governance framework. Now Canadian investigators may have discovered a missing piece of the puzzle.

‘A company’s communications culture has a profound influence on corporate governance,’ says Azadeh Babaghaderi, a PhD candidate at Concordia University and co-author – with Sam Kolahgar and Harjeet Bhabra – of a recent study that presents diverse and far-reaching implications for academics and business leaders alike. ‘Our findings show that communication is an effective, stand-alone governance mechanism.’

To test corporate communications’ governing power, Babaghaderi and her colleagues analyzed more than 150,000 disclosures published by a sample of 98 TSX/S&P Composite Index companies. They find strong evidence for a ‘substitution-complementary’ relationship with other governance mechanisms. Moreover, their results consistently show a U-shaped association between communication levels and a company’s risk, and an inverted U-shaped correlation between communication and company value.

‘This points to an optimal level of communication beyond which the cost of disclosure outweighs its benefits,’ says Babaghaderi, adding that too much information dissemination can both erode a company's competitive advantage and add ‘noise’ to valuation efforts.

Babaghaderi says ascertaining where that ‘Goldilocks’ level falls depends on each company. ‘Communications specialists can do a cost-benefit analysis that takes into account an individual firm’s other governance mechanisms as well as peer company governance characteristics,’ she says. ‘Companies with relatively weak governance aspects may consider added communications. Those with stronger governance may be able to devote less money and effort to it.’

Canvassing shareholder opinion isn’t top of mind for most directors looking to hire a new CEO, but new research suggests it should be. An analysis of 700 CEO appointments during hedge fund activist campaigns reveals shareholder input leads to better stock market reactions followed by stronger, more sustained profitability improvements than without.

‘You seem to get a better CEO with shareholder involvement,’ observes study author Thomas Keusch, assistant professor of accounting and control at INSEAD. Keusch traces the positive outcome to the fruits of a more diligent and robust search process. His investigation shows, for instance, that activist-influenced boards are about 10 percent more likely to form a search committee or hire an executive search firm. Meanwhile, 75 percent of CEO appointments made with activist assistance – typically in the form of an activist presence on the board – are outsiders, compared with a rate of just over 50 percent otherwise.

‘Activist investors can prompt boards to look beyond internal successors,’ posits Keusch. ‘Then they often offer access to a network of experienced candidates who can broaden and complement what professional recruiting firms [discouraged from ‘poaching’ past clients] can do alone.’

Despite being a sensitive topic, Keusch advises that ‘succession planning shouldn’t be shied away from as a component of a company’s larger shareholder engagement conversation.’


  • Firms with the highest number of executives having financial backgrounds are those least likely to be innovative. Researchers say such companies tend to have more financial assets, fewer fixed assets and spend less on R&D. Strong corporate governance minimizes the negative effect.
  • The introduction of major corporate board reforms worldwide between 1990 and 2012 has led to an overall 13 percent reduction in company stock price crash risk. Investigators say better financial transparency and investment efficiency account for the decrease.


Jeff Cossette

A graduate of Carleton University's School of Journalism, Jeff Cossette is a freelance writer who lives in Prince Edward Island with Susie