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CORPORATE GOVERNANCE AND BUSINESS PERFORMANCES.

MODERN APPROACHES IN THE NEW ECONOMY

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 MONICA VIOLETA ACHIM
SORIN NICOLAE BORLEA

CORPORATE GOVERNANCE AND

BUSINESS PERFORMANCES

Modern approaches in the new economy

2013
 CONTENTS

ABSTRACT .............................................................................................. 4
KEYWORDS............................................................................................. 6
INTRODUCTION..................................................................................... 6

CHAPTER 1 STAGES OF SOCIO-ECONOMIC DEVELOPMENT

AND THE TRANSITION TO THE NEW ECONOMY -
MICROECONOMIC IMPLICATIONS................................................ 12
1.1 The main features of the socio-economic development stages ........ 12
1.2 General characteristics of the new economy .................................... 13
1.2.1 The new economy – the sustainable development economy..... 14
1.2.2 The new economy – the information economy ......................... 16
1.2.3 The new economy – the knowledge economy............................ 19
1.2.4 The new economy – the innovation-based economy................. 22
1.2.5 The new economy – the corporate governance economy ......... 22

CHAPTER 2 THEORIES OF THE FIRM AND CORPORATE

GOVERNANCE - THE MICROECONOMIC FRAMEWORK OF
THE NEW ECONOMY.......................................................................... 25
2.1 Defining the corporate governance concept ..................................... 25
2.2 Theories of corporate governance .................................................... 28
2.2.1 Agent Theory ............................................................................. 28
2.2.2 Hazard Moral Theory ............................................................... 32
2.2.3 Stewardship Theory .................................................................. 35
2.2.4 Stakeholder Theory ................................................................... 38
2.2.5 Transaction Cost Theory........................................................... 41
2.2.6 Resource Dependency Theory................................................... 43
2.2.7 Political Theory.......................................................................... 44
2.2.8 Ethics Theories .......................................................................... 45
2.2.9 Theory of Information Asymmetry........................................... 48
2.2.10 Efficient Markets Theory ........................................................ 49
2.3 Adopting the corporate governance codes ....................................... 50
2.3.1 The evolution of corporate governance codes on the world
economy .................................................................................... 50
2.3.2 The evolution of corporate governance codes in European
Union and Romania .......................................................................... 53
2.3.3 Respecting the transparency principle – a component which
defines the quality of corporate governance..................................... 58

2
2.4 The methodology for assessing the quality of corporate
governance... ...................................................................................... 61
2.5 Study on developing a methodology for assessing the quality of a
corporate governance system for companies on the Romanian
market............................................................................................. 67
2.6 Empirical study – assessing the quality of corporate governance
system for the Romanian market companies ................................... 70

CHAPTER 3 IMPLICATIONS OF ADOPTING THE BEST

CORPORATE PRACTICES ON REASSESING THE THEORIES
ABOUT THE BUSINESS PERFORMANCE........................................ 83
3.1 Financial dimension of business performances ................................ 83
3.2 From financial performance to global performance – the goal of the
new economy..................................................................................... 86
3.3 The benefits of adopting CSR upon the company performance...... 92
3.4 The benefits of adopting good corporate governance practices for
the company performance ................................................................ 96
3.5 Empirical research regarding the evaluation of the company
global performances......... ............................................................... 100

CONTRIBUTIONS............................................................................... 110
BIBLIOGRAPHY ................................................................................. 111
APPENDIX............................................................................................ 121

3
 Abstract

This work entitled Corporate governance and business performances.

Modern approaches in the new economy represents a display of the
theories which are at the basis of modern mechanisms at the level of the
organization management as well as of the concrete way in which these
theories are applied in the general effects that the organization produces and
in its global performances, respectively.
The investigations made in order to outline the world economic
framework and the development stages of the economy allowed us to
emphasize the characteristics of the „new economy” and its impact on
organizational theories (Chap. 1 and Chap. 2 (2.1., 2.2 and 2.3)) from the
present book. In the new framework of economy development, especially in
the organizational one, there is a change of the approach to the management
mechanisms of the organization in its new form and that is corporate
governance. Effective corporate governance enables the shareholders to
make sure that the enterprises where they own social parts are managed
according to their interests. At the same time, corporate governance
represents an answer to the mutations produced in the mechanisms for
assessing the company performance.
Thus, the globalization of capital markets, the competition for attracting
funds impose more and more the adoption of corporate governance and
procedures which are internationally acknowledged, as this aspect is very
important for growing and transition economies which usually have to gain
credibility in the investors’ view. In this context, the research actions lead us
to resizing the approaches to organizational management and control
structures and to emphasizing the role of corporate governance in an
efficient enterprise economy.
This is why, in the context of the new economy, the role of an efficient
corporate governance is essential in ensuring the sustainability of the
organization, which is to be seen in the preoccupations for the elaboration
and adoption of corporate governance codes by the economies of the world
countries. Thus, the investigation of the importance and the components
which define the quality of the corporate governance system, allowed us to
elaborate a methodology for the assessment a corporate governance score,
adapted to the national framework for the development of Romanian
economy (chap. 2.4 and 2.5 from the present work).
As a result of the empirical study having for objective the evaluation of
the performance of the corporate governance system at the level of
Romanian stock market (chap. 2.6 from the book), we applied the
4
methodology for assessing a corporate governance score at the level of the
companies which are active on the stock market from Romania. Our
research emphasized the extend to which the companies listed at Bucharest
Stock Exchange (BSE) adhere to the corporate governance principles which
are internationally acknowledged and integrated in the Corporate
Governance Code of the Bucharest Stock Exchange. The general results
reflect a degree of adopting the good practices principles in a percentage of
60% corresponding to the information which was available at the end of
2012. The results improved starting with 2008, as Bucharest Stock
Exchange adopted The Governance Code and asked voluntarily for the
adoption of corporate governance good practices for the companies traded at
Bucharest Stock Exchange (but it doesn’t exclude the possibility of
extending it voluntarily to any enterprise in Romania).
Despite all the progress made in this direction, many of the corporate
governance good practices of the Romanian companies are situated a lot
below the level of the European average or even below the average of other
emerging countries.
The mutations occurred in the approaches to corporate governance are
placed then in mutations concerning the approach to organizational
performances (Chap. 3 respectively Chap. 3.1, 3.2 and 3.3). From profit-
based performances and return-based ones, the beginning of the XXIth
century brought new approaches to organizational performance so that
performance starts to be defined according to value creation for all
stakeholders.
Sustainable development and globalization implicitly impose new
performance standards which exceed the economic sphere both for national
and international companies. In the new context of sustainable development
new corporate governance standards are necessary, as well as new social
and environmental ones, non-financial aspects which complete the general
performances of the company which are reflected through financial
indicators.
Effective corporate governance is reflected in the global performances
achieved by the organization and the research approaches allowed us to
emphasize the new dimensions which must be achieved by the objective of
maximizing the company performances, respectively: the dimension of the
corporate governance performance, the dimension of social performance
and the dimension of the environment performance.
Next, the empirical research about the corporate performances of the
company and their impact on the financial performance of the Romanian
stock market (chap.3.4) has for a purpose, the testing, at the level of
5
Romanian economy, of the way in which different hypotheses of the new
economy are applied. We refer mainly to the concepts of corporate
governance and social responsibility. In this respect we will take into
consideration multiple statistical hypotheses which are characteristic to the
„new economy” and are already validated in the specialized literature and
practice. The results obtained were seen in the validation at the level of
Romanian economy of five out of seven important statistical hypotheses,
acknowledged by the specialized literature and practice, regarding the
impact of governance good practices on organizational performance.
Also, starting from the correlations which are verified and tested on the
Romanian market, we elaborated an econometric model for the evaluation
of the global performances of the company, which will emphasize
correlations at the level of different dimensions of corporate performance
(financial, corporate governance, social and environment), a model to be
applied at the level of the Romanian stock market..

Keywords
new economy, corporate governance, theories of the firm, business
performance, corporate social responsibility, overall performance

Introduction
In the context of the emergence and the development of the new
economy the organization as a central pawn undergoes structural evolutions
at all the levels of the organizational process. The characteristics of the new
economy are taken at the microeconomic level under the form of re-
evaluating the old economic and organizational theories but also under the
form of new emerging theories which are adapted to the new development
framework.
In Chapter 1 we presented the characteristics of the socio-economic
development stages which culminate with the new economy. We also
emphasized the implications of the characteristics of the new economy on
the economic organization.
The new economy – the sustainable development economy implies at
organizational level the idea of making the sustainable development notion
operational through the global performance concept. The approach to
performance under a triple aspect - Triple Bottom Line – or triple balance
sheet can be defined as an approach to measure the global performance of
an organization according to its triple contribution to economic prosperity,
6
environment protect and social cohesion amelioration and placing great
emphasis on corporate social responsibility.
The new economy – the information economy implies at organizational
level organizational paradigms changes at different activity levels: the
change of paradigms for organizing processes through the development of
multinational and transnational companies, as well as through the passage
from „quantity production” to „flexible and diversified production”
(according to the demands of individual clients); the change of market
paradigms which is characterized by: the change of potential consumers’
profile (the consumer-client becomes in the new economy a consumer-
citizen who wants to know the social costs of the products/services he
consumes; the increase in demand for IT products and services and the
relative decrease of the demand for the products and services of traditional
industries; the change of work paradigms characterized by work flexibility,
the disappearance of work and certain professions in industrial sectors with
an emphasis on IT role for the qualifications which matter.
The new economy – the knowledge economy which determines life-long
learning and initiative as vital elements and which contributes to a great
extend to the increase of efficiency in organizational activities and
performances.
The new economy- the economy based on innovation implies, at
organizational level, the adaptation of the goods and services to the
increasing demands of the consumers, a process which can be achieved only
through a continuous concern for innovation, esthetics and unique
experiences. In this context the intellectual capital becomes the main
competitive and economic survival lever.
The new economy – the corporate governance economy generates
modifications at the level of organization management which now becomes
one which is based on several components that form the corporate
governance, determining a synergy effect, where an important role have the
following: the transparency of ownership structures, the protection of the
shareholders; the transparency of information; the separation of the
executive management function from that of president of the board; the
increase of the role of audit committees, internal control, remuneration or
nomination committees.

In Chapter 2 the assertions are placed in the area of corporate

governance, which represents the engine of the organization functioning in
the new economic framework. Special attention in the context of the present
work topic is granted to the description of the fundamental theories which
7
define the corporate governance framework of the organization. The
fundamental theories of corporate governance have their roots in the Agency
Theory, with implications at th level of Moral Hazard, which was also
developed in the Steward’s Theory and the Stakeholders’ Theory and
evolved into the Resource Dependence Theory, the Transaction Costs
Theory or the Political Theory. Later the Ethics Theory, the Informational
Asymmetry Theory and the Efficient Market Theory were added. These
theories are delimited starting from the causes and the effects of certain
variables such as: the configuration of the Board, of the audit committee, the
independence of the managers, the role of the top management and their
social relations, beyond the legal framework.
An efficient corporate governance means the application in practice of
the existing corporate governance theories more than the application of an
individual theory.
After the conceptual delimitations and the thorough analysis of the
theories which are at the basis of corporate governance, we analyzed the
evolution in adopting the good practices codes at international and European
level with reference to Romanian practice as well.
An important role in our approach to quantify the performances of the
corporate governance system belongs to the transparency and corporate
information dissemination principle (Transparence & Disclosure practices),
a principle which has become vital in the new economy, under the
circumstances of increasing the informational needs of all stakeholders. A
great number of studies emphasized the importance of transparence
practices as the main pillar of successful corporate governance.
Starting from the transparence practices as the central element of
successful corporate governance, we made a review of the methodology for
evaluating the quality of corporate governance and we noticed that this is
based on three main components: A. Drawing up and reporting „The
Comply or Explain Statement”; B. The assessment of the corporate
governance score; and C. The corporate social responsibility practices
adopted by the company.
Starting from the general methodology for the evaluation of the quality
of corporate governance used by international rating agencies, we tried to
elaborate a methodology which is typical for the Romanian market and for
the general framework offered by the Corporate Governance Code issued by
the Bucharest Stock Exchange, by using the structure and the component of
the “Comply or Explain Statement”.
The methodology we elaborated is useful for any interested subjects
when trying to make a quantification of corporate governance quality, non-
8
financial information which has a special impact on completing the image
about the level of the company global performances.
In addition to the theoretical-methodological study, we analyzed the way
in which this transparence principle is applied by the Romanian companies
listed at Bucharest Stock Exchange, emphasizing the quality of the
corporate governance system of the companies which are active on the stock
market from Romania. Moreover, to have a comparative approach between
good corporate practices and the way in which the transparence principle is
observed, we made comparisons with the average score registered at the
level of the European Union and different EU countries.
In Chapter 3 we emphasized the benefits of adopting corporate social
responsibility as well as those of the good corporate governance practices
for the global performances of the company.
The global performance concept is present in literature to evaluate the
application of the company strategies in the context of sustainable
development. The Triple Bottom Line (TBL) concentrates the entities not
only on the economic value added, but mainly on the social and
environmental values they create or, on the contrary, destroy. The TBL
concept means „economic prosperity, respecting the environment,
respecting and improving social cohesion” (Pesqueux, 2002, pp.157).
In parallel, the fourth dimension of global performance, the one
connected to corporate governance has developed. Maximizing the
economic, social and environmental performances can be achieved only in
the context of a good collaboration at the level of corporate governance
structures through which interest conflicts are diminished. Efficient
corporate governance enables the shareholders to ensure that the enterprises
where they own social parts are managed according to their own interests. In
this respect, some of the following aspects are in view: the competence and
the structure of the Board, the independence of the Board members, the
remuneration of the managers, respecting the rights of the shareholders and
the principle „a share equals a vote equals a dividend”, respecting the minor
shareholders, the transparency of information, guaranteeing the reality of the
published information, the quality of internal control.
The approach to elaborate an econometric model for evaluating the
global performances of the companies is extremely motivating and useful to
all categories of financial information users, for investors or for the
corporate management system as well. Corporate governance is interested in
knowing the impact of good corporate practices on the global performances
of the companies using both classical financial indicators concerning the
evaluation of financial performances of a sustainable enterprise. On the
9
other hand, the investors will evaluate the performances of the company
using both classical financial indicators for assessing the financial
performance and non-financial indicators which refer to the performances of
the corporate governance system‚ the social performances and the
environment performances.
The subject of the present book is motivated by the fact that the research
of the corporate structure mechanisms has implications upon the new
instruments for measuring performance in order to better reflect the role of
the organization in the context of the new economy. In the new economy the
organization performs well if it succeeds in maximizing its four dimensions:
the financial dimension, the corporate governance dimension, the social
dimension and the environment dimension.

The purpose and the objectives of the research

The general objective of our research consists in showing the extent to
which the organization theories were re-evaluated at the level of the
corporate governance concept and the way in which new dimensions of the
corporate performance concept were re-established. We also want to
investigate in this research the prospective dimension which refers to the
future manifestations of the new economy at the organizational level as well
as the impact of these tendencies of economic development in the area of
organizational theories.
The secondary objectives of the research are multiple. One secondary
objective consists in outlining the worldwide economic framework and the
economy development stages, emphasizing the characteristics of the new
economy and its impact upon the organization.
Another secondary objective of the research consists in understanding
the mechanisms and the theories which were at the basis of the corporate
governance concept, in the context of the financial scandals at the beginning
of the XXIth century, as well as the role of efficient governance in a
sustainable, informational economy, based on knowledge and innovation.
Another secondary objective of our research consists in investigating the
methodologies for evaluating the quality of the corporate governance
system, and elaborating a methodology for setting a corporate governance
score, adapted to the national development framework of the Romanian
economy.
Moreover, the investigation of the dimensions of global performances of
a sustainable company represents an attainable objective in our approach to
elaborate an econometric model which will incorporate several variables
(dimensions) of the global performance of the company.
10
 This is why a subsidiary objective consists in testing at the level of
Romanian economy the way in which various hypotheses which are
characteristic to the new economy are applied, regarding the level of the
company global performance and the way in which these performances are
determined by factors which are specific to the new economy. We mainly
refer to the corporate governance and corporate social responsibility
concepts and the impact of these factors upon the global performances of the
company for Romanian enterprises. In this respect we will consider testing
several statistical hypotheses which are already validated in the specialized
literature and practice which are typical to the new economy. Starting from
verified and tested correlations on the Romanian market we will also try to
elaborate an econometric model for the evaluation of the global
performances of the company, which will emphasize correlations at the level
of different dimensions of corporate performance, a model which can be
applied on the Romanian stock market.

11
 CHAPTER 1
STAGES OF SOCIO-ECONOMIC
DEVELOPMENT AND THE TRANSITION TO
THE NEW ECONOMY - MICROECONOMIC
IMPLICATIONS

Motto: The new economy is built on the old

virtues: thrift, investment and allowing market
forces to operate. (L. Summers)

1.1 The main features of the socio-economic development stages

The new economy (also so called as "post-modern”, “post-industrial”,

“capitalist", "post-traditional" economy) reflects the current transition from
industrial society to a new "information" or “knowledge" society which is
marked by complex and profound changes in all areas of activity, with
major implications for economic, social and environmental process and has
a scale and speed unprecedented in world history.
Peter Drucker (1999) considers that: „We can be sure that the world will
result from this rearrangement of values, beliefs, economic and social
structures, political systems and concepts, in other words the conception of
the world will be different from what anyone could imagine today. In some
areas - especially in the company and its structure - the basic
transformations have already taken place. The fact that the new company
will be a non-socialist and post-capitalist one is practically a certainty. And
it is also certain that her primary resource will be knowledge.
Human society has changed a lot and changes now increasingly faster.
Human society has gradually shifted emphasis from manufacturing to the
production of automatic type, from individual knowledge to the group, thus
emphasizing the importance of communication.
In summary, we present below the specific characteristics and socio-
economic development steps:

12
 Figure 1.1 1: Characteristics of socio-economic development steps

1.2 General characteristics of the new economy

The specifics of these stages of socio-economic development have

created the foundations for the development of the new economy.
The definitions of the new economy are apparently simple, but they
become complex when clear and defining characteristics must be traced. As
Drucker mentioned (2001), "If there is one thing which can be forecasted in
full trust, that thing is the fact that the future will manifest in unexpected
ways. Let’s take, for example, the informational revolution. Almost
everyone is sure of two things: the first, that it takes place with an
unprecedented speed; the second, which its effects will more radical than
anything that’s happened before”. Isan (2002) also surprises the simple-
complex character of the new economy, considering that „as original the
phenomenon in itself, as disarming is the variety of terms, so that any
analytical attempt is meant to fail”.
The speed of changes in the era we live in and perform our activities has
produced mutations in the way we see things, which do not correspond
13
anymore to the present moments, and the shocking rapidity of these
mutations determines us to change the way of thinking in close or father
perspective. (Holt, 2005)
The term New Economy is used and understood by most people as an
equivalent for „internet economy” or „digital economy”.
The rapidity with which the informational society turns into an
information and knowledge society determines a perspective upon the new
economy which will take into account the internet market and the effect of
the information on the internet upon all economic agents, the effect of
knowledge as economic factor which imposes the acknowledgement of
intangible goods in creating economic value”.(Radu,2004)
For some analysts, the „new age” (the golden age, illustrated by the
American model) is characterized by strong and long term economic
increase as a consequence of the benefits of new technologies and of the
market economy. In the 90’s the idea of a new type of capitalist economy
was imposed (The New American Economy) as a consequence of feeing the
market from excessive governmental regulations, decreasing and
restructuring the American corporations and the rapid technological
progress. (Gilpin, 2004)
As a rule, the syntagma “new economy” is used to designate the
economic mutations which occur at the end of the 90’s as a result of new
technologies and the considerable expansion of finance. (Bucur, 2006)
Next we will try to make a synthesis of the characteristics of the new
economy emphasizing modern theories which govern the new economy
with direct references to organizational structures.

1.2.1 The new economy – the sustainable development economy

The theme of sustainable development was initiated in 1970 when the

first report of the Rome Club entitled ”The Limits of Growth” was
published. The most known definition of this concept is mentioned in Our
Common Future (or the „Bruntland Report ”) made by the World Council
for Environment and development in 1987 which gives the following
definition of the concept: „Sustainable development represents the
development which fulfills the needs of the present without compromising
the capacity of future generations to fulfill their own needs”
(WCED1,1987). In this way the purpose is not to compromise the capacity
of the environment to produce for future generations and this characteristic

1
World Commission on Environment and Development
14
is surprised very well in what we call sustainability which has the
following weaknesses: population, climate changes and energy
consumption. In 1992 at the World Summit from Rio de Janeiro, Agenda 21
was elaborated and adopted as an instrument for promoting the concept of
sustainable development. According to this, sustainable development is the
development which doesn’t destroy and doesn’t compromise the
environmental, economic and social basis, which sustainable development
depends on (WCED,1995).
At European level The Council of Europe adopted at Goteburg (2001)
the first EU Sustainable Development Strategy. This was completed with an
external dimension in 2002 at the European Council from Barcelona, taking
into account the World Summit for Sustainable Development from
Johannesburg (2002). In 2006 The Council of Europe adopted the revised
EU Sustainable Development Strategy which establishes a unique, coherent
strategy about the way in which the European Union will respect more
effectively its long-term engagement to respond to the challenges of
sustainable development. This reasserts the need for world solidarity and
acknowledges the importance of consolidating our work with partners
outside EU, including those countries which are in fast development and
which will have an important impact upon global sustainable development.
In The EU Sustainable Development Strategy, sustainable development
translates into satisfying the needs of the present generations without
compromising the capacity of future generations to satisfy their own needs.

We are witnessing at present the passage from uncontrolled

development which was accompanied by irrational and inadequate
exploitation of resources and raw materials, supported by the size of profit,
to sustainable development which has three main dimensions: economic,
social and environmental, respectively sustainable economic development,
ensuring life quality for the population and environment protection. The
enterprises understood that for their business to succeed, they must offer and
ensure the protection of the environment and corresponding working
conditions, to grant collective rights, to cooperate with local authorities for
this purpose, with the unions, the NGO-s and the government institutions
(Pintea, 2011).
In the context of sustainable development, the concept of corporate
social responsibility gradually appears. This concept defines the orientation
and the attitude of a company for the voluntary integration in its current
strategy and practice of social and environmental concerns under the
circumstances of ensuring the economic success of the business.
15
 At the level of organizations, making sustainable development
operational is achieved through the concept of global performance which is
connected by with the introduction of the Triple Bottom Line concept,
which means economic prosperity, respecting the environment and
improving social cohesion. (Pesqueux, 2002) Triple bottom line or triple
trial balance can be defined as an approach to measure the global
performance of a company according to its triple contribution to the three
aspects mentioned above. It is an approach which has in view both the
financial result and the social and environmental balance of an organization.

1.2.2 The new economy – the information economy

The new economy aims at exploiting at maximum the potential of the

products and services which are based on information. The main
consequence is that the principles which govern the information world (the
world of intangible products and services) will soon dominate the world of
hard (the world of reality, atoms, objects, iron, oil and hard work), the
consequence being the creation of a new category of business and the
transformation of the existing businesses.
Talking about the new economy as informational economy, Marin Dinu
considers that „information is not only primordial, but also prioritary, while
it manifests itself as ineffable and substantial, essential and concrete,
functional and efficient”. (Dinu, 2006, p. 11)
At organizational level, the new informational economy implies changes
of organizational paradigm at different activity levels.

a) The change of the paradigms in organization processes through the

apparition and development of multinational and transnational companies,
as well as the passage from mass production to flexible and diversified
production (according to the demands of individual clients). A more radical
approach about this perspective is that in the new economy all companies
will be INTERNET companies or they will cease to exist; a great part of the
old economy („ the industrial dinosaurs”) are “cannon fodder” together with
their hierarchical structures and the history of attitudes. (Isan, 2002)

b) The change of market paradigms

The evolution of IT technologies, respectively the possibility to
exchange information in real time, at low cost, allowed more people to have
access to information and to ask more transparency in the enterprise

16
behavior. This contributed to the change of potential consumers’ profile
(Mironiuc, 2009).
The environment where companies are developing at present has
changed radically lately through:
(i) The client takes control, he accepts less and less to be perceived as a
member of the collectivity and more as an individual;
(ii)The change of the clients’ attitude towards products and services in the
following way:
 The increase of the demand for IT products and services and the relative
decrease of the demand for the products and services of traditional
industries.
 The increase of the range of choices and convenience for consumers
(Litan & Rivlin, 2000).
 The passive recipient consumer of the enterprises offers (the consumer-
client) gives his place to an active subject who wants to consume
critically (the consumer-citizen), who wants to know the social costs of
the products he consumes (Bianchini, 2004, pp. 1-7). This active attitude
is presented in several studies. Thus, according to the studies made by
McKinsey & Company (2008) on a sample of 7.751 consumers from 8
big economies, it was noticed that 87 % of the consumers are concerned
about the social and environmental impact of the products they
consume. According to the studies made by Gunn E.P (2008) it results
that 83% of the respondents modified their buying and living habits in
order to protect the environment. Similar conclusions were drawn by the
studies of Reuters Agency (2008) which were made on USA
respondents, a study which noticed that four out of five people continue
to buy ecological products and services, which are usually more
expensive than the regular ones, even during the world economic crisis.
 (iii) The rules of the comparative game have radically changed, and the
only comparative advantage is based on IT – internet (Isan, 2002). On
the other hand, there are opponents to this approach, who, starting from
business diversity and their economic weight, appreciate the fact that
“the idea that the Internet is the only key to competitive advantage is
merely nonsense” (Turner, 2001).
All these changes in market paradigms motivate the focus of
business on the client.

c) The change of work paradigms

At present we witness the change of the traditional work paradigm from
routine work to „work changes continuously”; „the office (the workplace)
17
above all” to „work above all”, „fixed work schedule” to „flexible working
hours”; life-long workplace (career) to „career portfolio” which expresses
the diversification of the activities and the professional flexibility and
mobility; the fixed workplace to the mobile workplace; from the worker
who goes to work to „the work coming to the worker”; choosing the work
place according to your residence to „live somewhere – work anywhere” or
distance working.
In the context of the new economy, the companies are looking for
flexible working forms, more variety in styles even if they are just
experimental, the ability to achieve new works, greater customer orientation
and using new informational and communication technologies. The only
qualifications that matter are in IT (Isan, 2002).
It is also talks a lot about the disappearance of work in industrial sectors
and the disappearance of certain professions which are no more needed in
industry in a time when industrial production increased. The work
performed by people is systematically replaced in more and more economic
sectors and processes. IT is the root for the disappearance of certain
workplaces (Toia, 2011). „The disappearance of work” as the main factor of
the production process was however announced many years ago by Alvin
Toffler, John Nasbitt or Peter Drucker.
Other authors (Jeremy Rifkin) talked even about „the end of work”
performed by people under the circumstances of introducing IT and Arthur
Clarke predicted that this would happen in 2040... (Toia, 2011).

d) The change of the investors’ paradigms

The big financial scandals at the end of the XIXth century generate a
deterioration of the investors’ trust in the processes of managing the
company. The investors need now, more than ever, a correct and complete
information and transparency in the leading processes of the company,
concerning the corporate governance structures and the transparent way of
reflecting these structures. They want to know if the governance of the
company has also a social character respectively if they are concerned about
adopting responsible practices under the circumstances of a multi-stakers
economy. Only in this way their investments will have a sustainable
character.
In this context, OECD got involved by elaborating principles about
company administration which will protect the interest of the shareholders/
investors (1999), principles which are then largely adopted by almost all
countries. Among these principles there is the transparent character of the

18
corporate governance activity with its financial sides but also the social and
environmental responsibility.
Information is the key point of the new economy which further
develops new economic characteristics: knowledge and then its
development through innovation.

1.2.3 The new economy – the knowledge economy

Information in itself has no role unless it is accumulated at the level of

the organization through „knowledge”. Winston Churchill remarked in a
speech at Harvard University in 1943 the fact that „the empires of the future
will be real empires of the mind” (in The Economist, 2006).
The new economy or knowledge economy reflects that economy which
exceeded the development threshold beyond which knowledge represents
the key resource. What makes this knowledge become such an important
resource? There are many factors which have this thing for a consequence,
and the most important are: the IT progress, the increase of the development
speed of the new technologies, competition at global level, market
liberalization, the continuous change of the demand determined by the
increase of the number of people with average and big incomes (which
develops a sophisticated demand for good quality products), the increase of
life quality.
The phrase TIME IS MONEY (typical for the capitalist society) was
replaced with KNOWLEDGE IS POWER (typical for the informational
society, the knowledge society). Power is owned by knowledge and the
fights are transferred from the tangible area (the fights of the people for
natural resources) in the intangible area (the fight for exploiting „the power
of the brains”) and this last one could be crucial in order to see the direction
of the „balance power” (Suciu, 2008).
At organizational level, we can notice and analyze the entrepreneurs
fight in order to attract in their own team, staff with a high level of
qualification and education, which will be able to answer to the future
requirements and exigencies of the economy and of the society.
The world is dominated by the power of the mind and of the brain.
Fields such as microelectronics, biotechnologies do not have anymore a
geographical placement which depends on resources; they can be placed
wherever you can capture and capacitate the intelligence and the huge mind
power which is incorporated in these fields (Krugman, 1994, p. 24). This is

19
why many international organizations put on the first place the people and
their competencies (Suciu, 2008).
An important role in knowledge is represented by life-long learning and
education, the speed in technological updating and the demands of
competitiveness need permanent updating of knowledge and revolutionizes
the educational and training system, by adopting the concept of life-long
learning.
The Barcelona Summit in 2002 established common objectives for
education and training in Europe. In May 2003 The European Council
agreed on five targets which have to be attained in education until 2010:
a. The weight of those who leave school early will have to represent on
average at European level, no more than 10%.
b. At least 85% of the young people aged 22 from the European Union will
have to complete the superior secondary cycle or higher education.
c. The percentage of demi-illiterates who reached the age of 15 will have to
decrease at the level of the European Union by at least 20% compared to
2000.
d. The average level of participation to life-long learning in EU will have to
be of at least 12,5 % of the adult population aged 25-64..
e. The total number of graduates with preparation in Maths, science and
technology at the level of the European Union will have to increase by at
least 15% ensuring, at the same time, a decrease of the discrepancies and
gaps which exist between the two sexes.

European Commission also established at Barcelona in 2002 the

objective for the education and training systems of the EU to become until
2010 a quality model at world level and asked for actions which will
improve the mastery of basic aptitudes, especially by learning at least two
foreign languages from a very early age.2
In May 2009, European Commission has created a new strategic
framework for European cooperation in education and training domain, for
the next stage 2010-2020, called „ Education and training 2020” (ET 2020),
continuing the precedent framework „Education and training 2010”(ET
2010). The new framework ET 2012 contains four strategic objectives for

2
Decision No 1720/2006/EC of the European Parliament and of the Council of 15 November 2006
establishing an action programme in the field of lifelong learning
http://europa.eu/legislation_summaries/education_training_youth/general_framework/c11082_ro.htm
20
the framework, including also a principles set to achieve these objectives.
The strategic objectives of the new framework ET 20120 are3:
 Making lifelong learning and mobility a reality – progress is
needed in the implementation of lifelong learning strategies, the
development of national qualifications frameworks linked to the
European Qualifications Framework and more flexible learning
pathways. Mobility should be expanded and the European Quality
Charter for Mobility should be applied;
 Improving the quality and efficiency of education and training –
all citizens need to be able to acquire key competencies and all levels
of education and training need to be made more attractive and
efficient;
 Promoting equity, social cohesion and active citizenship –
education and training should enable all citizens to acquire and
develop skills and competencies needed for their employability and
foster further learning, active citizenship and intercultural dialogue.
Educational disadvantage should be addressed through high quality
inclusive and early education;
 Enhancing creativity and innovation, including
entrepreneurship, at all levels of education and training – the
acquisition of transversal competences by all citizens should be
promoted and the functioning of the knowledge triangle (education-
research-innovation) should be ensured. Partnerships between
enterprises and educational institutions as well as broader learning
communities with civil society and other stakeholders should be
promoted.

The new economy in all its manifestations changes the type of

requirements for several occupations and the basic preparation in different
workplaces in the following way (Toia, 2011):
 80 % of the existing technology will be replaced in the following
decade ;
 The average life skills of an employee’s abilities is 3-5 years;
 From the point of view of technological progress, we get obsolete
every 5 years and we need re-training.

3
Council Conclusions of 12 May 2009 on a strategic framework for European cooperation
in education and training (ET 2020) [Official Journal C 119 of 28.5.2009].
http://europa.eu/legislation_summaries/education_training_youth/general_framework/ef001
6_en.htm
21
 This is why in the new economy the learning process is of major
importance, being a cumulative and continuous process in time. The new
information and communication technologies offer new forms of education
and training: distance learning, the virtual university, computer-assisted
training etc. The learning process must and can take place anywhere and
anytime.
In the new economy life-long learning and initiative become vital and
determine the efficiency of any activity.

1.2.4 The new economy – the innovation-based economy

The increase of competition as a consequence of the globalization

phenomenon generated the necessity for client-orientation, and the increase
in consumers’ exigencies obliges the organization to appeal to innovation
practices, esthetics and unique experience. Under these circumstances, the
success of the companies does not depend decisively on the production
facilities or the material capital as it used to happen a few decades ago. Peter
Drucker (2001) asserted that „The company has two and only two basic
functions: marketing and innovation. Only marketing and innovation
produce results – all the others are costs”.
Adapting the organization to the client’s needs, which are in continuous
change and transformation, need the development of the intellectual capital
that is of the knowledge amount the organization is based on. The future
belongs to the economic organization which, through training, is
preoccupied by the continuous development of its intellectual capital, by the
development of its knowledge basis (Holt, 2010).
The economic global system is about to become one of „technological
ideas and innovations”, where the potential of the „intellectual capital” of
the enterprise is represented by: organizational knowledge and abilities
(organizational capital), loyalty and staff cohesion (human capital), the
credibility of the enterprise (relational capital), becomes a competitive and
economic survival leverage) (Mironiuc, 2009).

1.2.5 The new economy – the corporate governance economy

The term corporate governance emerged in common usage in the 70’s,

in the United States, in the middle of the Watergate scandal, when it was
revealed that the U.S. companies were involved in the U.S. politics, by
making contributions to various political parties.

22
 Later, at the end of the twentieth century, financial scandals like Xerox
Guinness 1986, Poly Peck International 1989, Maxwell 1991, BCCI-1991,
Enron-2001, Allied Irish Bank- 2002, WorldCom-2002, Xerox 2002,
Merrill Lynch-2002, Parmalat-2003/2004, Andersen-2001/2002, have
disrupted the financial world and raised serious issues of trust concerning
corporate governance systems. Uncontrolled development of financial
innovations, especially derivatives, contributed to the dematerialization of
business operations and favored the creative accounting practices designed
to manipulate those who analyze the financial statements (Le Roy &
Marchesnay, 2005).
Stock-options techniques and the managers’ remuneration were based on
performance, but the interests of directors and stakeholders could not be
both satisfied, in addition these issues caused various complaints and losses
for the minority shareholders, which did not belong to the leading board of
directors (Mironiuc, 2009).
In the new framework for economic development, especially of the
organization, the management organization approach is changing towards
the corporate governance mechanisms. Effective corporate governance
allows shareholders to ensure that companies in which they own shares are
managed in accordance to their own interests.
The financial crisis which started in 2008 put its mark on re-establishing
a new economic world order. In this context, it is considered that the current
crisis produced „ breakages in the history of world economy, as a reality,
together with a disruption at the level of economic thinking. Moving away
from such a model also implies a reform of the financial capitalism and of
the architecture of international relations and the construction of plural
development directions” (Popescu-Bogdănesti, 2011).
Considering the recent financial crisis, it was urgent to reform the
institutional architecture of the national capital markets, by adopting some
effective stock market regulations together with the elaboration and the
implementation of measures for stimulating the development of the
corporate sector, starting from the premise that, a strong economy, with a
solid financial market, which is open and transparent, can face the
challenges which derive from the globalized international environment. The
developed countries were the first who became aware of the fact that the
need for financial transparency is one of the requirements of successful
corporate governance.
In the new economy development framework, especially in the
organizational one, there is change in approaching the leading mechanisms
of the organization under the form of corporate governance.
23
 Effective corporate governance allows the shareholders to ensure that
the enterprises where they own social parts are managed according to their
own interests. At the same time corporate governance answers to the
mutations which occurred in the mechanisms for evaluating the company
performance. From profit and then return-based performance, the beginning
of the XXIst century brings new approaches to organization performance, so
performance begins to be defined according to the value it creates for all
stakeholders.
In conclusion, the corporate governance of the organizations in the new
economy is meant to create added value for its shareholders, by satisfying
the clients’ exigencies, respecting the employees’ opinion and protecting the
environment. To do this, we need a complex of components which form the
corporation governance, determining a synergy effect where an important
role have the following: the transparency of the property structures; the
protection of the shareholders, the transparency of the information; the
separation of functions between Chief Executive Officer (CEO) and Board
of directors; the increase of the role of audit committees, internal control,
remuneration committees or nomination committees.

24
 CHAPTER 2

THEORIES OF THE FIRM AND CORPORATE

GOVERNANCE - THE MICROECONOMIC
FRAMEWORK OF THE NEW ECONOMY
Motto: Nothing is more practical than a good
theory. (Kurt Lewin)

Together with the crisis at the end of last century the concept of
corporate governance appeared and developed being influenced in turn by
economic environments based on family property, bank capital, institutional
investors or anonymous companies, environments which are dynamized by
the scandals which occurred in time. Surprisingly, the same crisis moments
had a good effect in identifying the ways for improving the concept of
corporate governance which would correspond to the new stage of economic
development.(Feleagă et al., 2011)
Asserting the principles of sustainable development makes the
enterprises to be exposed to the critical eye of the society which is more and
more attentive to ethical values. In specialized literature they talk about the
declared bankruptcy of the mechanisms of „enterprise governance” which
are based exclusively on strictly financial values and about the necessity of
„governing the enterprise” through a multi-partner approach, by the
conciliation of all stakeholders’ interests, based on social responsibility and
pertinent communication which integrates financial, social and
environmental information. (Mironiuc,2009)
The key element for improving economic efficiency and establishing an
attractive investment climate is represented by good corporate governance
adapted to the conditions of the „new economy”.

2.1 Defining the corporate governance concept

Being a current topic, the corporate governance topic has been largely
debated in the specialized literature, especially in the German and Anglo-
Saxon literature, wherefrom the diversity of the definitions.
Etymologically, the concept of corporate governance comes from the
ancient Greek word "Kybernaien" and then from a Latin word "gobernace",
to describe the ship navigation on the sea.
25
 Oxford English Dictionary (2008) defines "governance" as the act/
manner/ fact for management or stewardship.
The term of "good governance" is first mentioned in 1932 by Adolf
Berle and Gardiner Means in the agency theory that developed it, a theory
which is today based on the management systems.
Tricker (1984), called by Cadbury as "the father of corporate
governance", considers that the essential elements of good corporate
governance are: corporate strategy, executive management, responsibility
and supervisory.
A well-known definition is that given by Shleifer & Vishny (1997)
stating that corporate governance refers to the way in which the creditors
ensure themselves that they will just receive the benefits from the
investments made.
A strict accounting perspective of the corporate governance concept
belongs to KonTraG (1998), who defines corporate governance as being the
regulation about the control and the transparency of annual reports. The
author considers that the administrator is obliged to ensure the maintenance
of adequate risk management systems and monitoring the internal control
KonTraG also insists on the obligation of the Board to report to the council
the problems related to financing, investment and staff planning.
An extended definition of corporate governance is given by the Ethical
Investment Research Services which considers that corporate governance is a
set of relations between the company management, leadership, shareholders
and other interested parties. For the shareholders, this leading process may
lead to an increase in trust for obtaining a fair return on their investment. For
the other interested parties, this can provide the insurance that the company
activity is performed in a responsible way in relation to the society and the
environment. (Maier, 2005, p.5)
According to The Organization for Economic Cooperation and
Development-OECD (2004), corporate governance is the system by which
companies are managed and controlled. Analytically, it refers to how rights
and responsibilities are shared between the categories of participants in
business activities such as board of directors, managers, shareholders and
other stakeholders while specifying how to adopt the business decisions
policy for the company, how to define strategic objectives, which are the
means of achieving them, and how to monitor financial performance.
Hence, the concept is seen as having two facets such as: the behavior face
(which refers to how managers, shareholders, employees, creditors,
customers and suppliers, state and other interest groups within the overall
strategy of the company interact) and the normative face (which refers to the
26
set of regulations falling within these relationships and behaviors described
above - the companies’ law, securities and capital markets law, insolvency
law, competition law, stock exchange listing requirements and so on)
(Wagner et al., 2005).
World Bank defines corporate governance as a set of laws, rules,
regulations and ethic codes voluntarily adopted by companies, allowing to
attract the necessary of human resources and materials for its activity and
also giving them the opportunity to conduct an efficient business designed to
generate long-term value for shareholders, for another interest group and
also for society as a whole.
International Federation of Accountants – IFAC defines corporate
governance as an assembly of practices belonging to the Board and to the
executive management which are exercised in order to ensure the strategic
directions for action, achieving the proposed objectives, risk management
and responsible use of financial resources.
In Romania, the corporate governance concept is relatively recent,
authors have been preoccupied by this topic only in the last five years.
Thus, Morariu et al. define corporate governance concisely, as being the
system through which companies are managed and controlled (Morariu et.
al., 2008, pp.182). A group of Romanian professors and specialists, in the
book titled „Corporate governance and internal audit” give an extremely
complex definition, but also concise definition for corporate governance.
They consider the fact that corporate governance is an approach on
different levels in the system of relations between the interest groups
(employees, managers, shareholders, all business partners, the regulation
bodies, the large public, and mass medi) respectively corporate governance
includes the rapports which are established between the Board and the
interested parties, internal or external. (Pereş et al., 2009, pp. 20)
Feleagă et al. (2009) consider that „corporate governance represents a
set of „game rules” through which companies are internally managed and
supervised by the Board of Directors, in order to protect the interests of all
participating parties.”
Kolk & Pinks (2009), by investigating the different definitions of the
corporate governance concept, reach the conclusion that this concept is
greatly linked to the corporate responsibility concepts. The study made by
Kolk & Pinks (2009), on a sample of 250 companies, concludes that more
than half of the companies allocate a special section to corporate governance
in their reports about corporate social responsibility.
Based of the definitions above, we conclude that corporate governance
is the system through which companies are led and controlled in order to
27
achieve their microeconomic objectives of the new economy that is the
maximization of its global performances.

2.2 Theories of corporate governance

History emphasized the development of theories and models of

corporate governance and the fact there is no final, single or optimal form of
effective governance.
Together with the transition to capitalism, companies become stronger
while governments have had to give out the domination and the economic
implications
Theories of corporate governance are rooted in Agent Theory with the
Theory of Moral Hazard implications, developing further within
Stewardship Theory and Stakeholder Theory and evolving at Resource
Dependence Theory, Transaction Cost Theory and Political Theory. Later,
to these theories were added the ethics theory, informational asymmetry
theory or the theory of efficient markets. These theories are defined based
on the causes and effects of variables such as: configuration of the board of
directors and audit committee; the independence of directors; the role of top
management and their social relations beyond the legal regulatory
framework.
Effective corporate governance requires application of a combination of
existing corporate governance theories, rather than application of an
individual theory.

2.2.1 Agent Theory

Fundamental Theories of corporate governance rooted in Agent theory

(or Agency Theory) were developed in the early 70s American literature. The
theory refers to the relationships established between the owners of a
company and its directors, relationships embodied in a mandate (agent)
contract which consists in one first part (the principal) that engages the other
part (the agent) to perform some services on their behalf.
Agent Theory has been developed from the theory of the firm, stated by
Alchian & Demsetz (1972) and further developed by Jensen & Meckling
(1976). Fundamentals of Agent Theory can be found even in the writings of
Adam Smith (1976) where we found the follows: "You can not expect those
who manage other people's money to be as careful and caring as it would

28
belong to them. Waste and negligence are present, always, more or less, in the
management of every business."
Although the development of Agency Theory is found only in the 70s,
the idea of separating the control government has been highlighted since the
30’s by Berle and Means (1932). According to studies of these authors, the
divergence between ownership and control is a potential conflict between
shareholders and management.
The Agent Theory also reformulated the theory of the firm, in which the
firm is not seen anymore as a collective actor with a mutual utility function
(maximizing the profit), but an assembly of groups of partners where each
has their own utility functions. The firm behavior is not supposed to be
homogeneous, as being determined by a unique group, with a unique
objective, but a skilful one with a market, where different groups act for
achieving their specific objectives and between which conflicts inevitably
appear. The solution for these conflicts is establishing a network of
contractual relationships (the most atypical being the one between the
employer and the unions), where a complex process of objective balancing
and divergence attenuation is taking place.
Jensen & Meckling (1976) and then Grossman & Hart (1976) elaborated
the first models of the agency theory. The first agency relation was between
owners and managers. More precisely, they analyzed the behavior of an
owner and of a manager (at the same time) of its enterprise (100% share
ownership, compared to the behavior of a manager who owns only a part of
the fortune he manages. The results of the research are the following:
 The owner manager 100% act for maximizing his utility function,
based on his fortune, either as total value (V) of the property, or as
advantages in nature (F) (increasing his manager salary) or a
combination between the two.
 The manager-owner with a share of “a” % tries to maximize as well his
utility function, based on the same income sources, that is ax V and F.

29
 Figure 2.2.1.1: The value of the firm (V) and the level of non-pecuniary benefits
(advantages in nature) consumed (F)
Source: Jensen and Meckling (1976)

In the first case, 1 unit of the advantages in nature (F) represents a

decrease by 1 unit of the cash flow of the company and so, a reduction by 1
unit of its value (V) which will be supported by the owner himself (null sum
game).
In the second case, the advantages F have the same effect on the value V
but the manager-owner in percentage of „a” % supports a part from the
value decrease (corresponding to his participation in a percentage of “a” %
of the social capital), but he gains 1 unit advantages in nature. It starts from
the hypothesis that advantages in nature have more utility if he procured
them from the market for money (his influent manager position determines
this supplement of utility). Practically it is about endowing the manager with
sophisticated offices, luxury work cars, participation in official dinners etc,
which he couldn’t afford otherwise on his personal expense. In this way, a
transfer of wealth is made from external shareholders who will support the
decrease of value V, in proportion with their participation, to ensure the
advantages in nature the manager benefits of completely. If we admit,
however, that external shareholders become aware of this free value transfer

30
and act rationally, then they will offer a lower price for the shares they will
buy. As an effect of their action, the global value of the enterprise will
decrease and also the manager’s remuneration will decrease and in this way,
his utility function will be not maximized anymore. The manager supports in
this case an opportunity cost which is called in the agency theory, residual
cost.
Under the Agency Theory, shareholders (the principal) are expecting
from the directors (the agents) to lead and make decisions in their interest,
and of those who have mandated. On the other hand, the agent can not only
adopt the decisions that pursue only the interests of the principal (Padilla,
2000). Such a conflict of interests between owners and managers was first
highlighted by Berle & Means (1932) and Adam Smith (1976) followed by
Ross (1973) and then expanded by Meckling (1976). Specifically, the
conflict is highlighted by Davis, Schoorman & Donaldson (1997).
The agent theory helps explain several phenomena at the level of the
company, among which we find (Jensen & Meckling, 1976, p. 2):
 Why an entrepreneur or a manager of a company with a mixed
financing structure will choose for the company those activities for
which the total value of the firm is smaller than it would be if he were
the only owner ?
 Why the fact that he does not succeed in maximizing the value of the
firm is perfectly coherent with the activity efficiency ?
 Why selling ordinary shares is a viable source of capital, although
managers do not maximize the firm value ?
 Why preferred shares are issued ?
 Why offer creditors and shareholders, voluntarily, the accounting
reports and should the management involve independent auditors to
certify the accuracy and correctness of these reports ?
As Jensen & Meckling assert, the manager who does not own the
property is oriented towards his personal interests and not the shareholders’
interests. The divergences which occur between shareholders and managers
jeopardize the maximization of the value for owners/shareholders.

Agency Theory leads to the need for harmonization of the interests of

managers with those of shareholders for the objective of maximizing the
company value could not be affected by the competing interests of managers
in different decision-making circumstances.
The Agency Theory can be represented in graphical form as follow:

31
 Figure 2.2.1.2: Agency Theory Model
Source: Abdoullah & Valentine (2009)

2.2.2 Hazard Moral Theory

The conflict of interest determined by the separation between power and

control (on which agency theory is founded) can cause opportunistic
behavior of the managers (as agents) which is not necessarily converged
with the shareholders interest (as principals), that of maximizing
shareholders wealth (Demsetz et al., 1985; Bonazzi et. al.,2007; Lan et al.,
2010; Abdullah,2009; Smith, 2011).
Thus, managers are prone to moral hazard and opportunistic behavior
guided by their own interests.
The Theory of Moral Hazard is central within Agency Theory and also
refers to hidden actions or opportunistic behavior of managers (Hendrik,
2003). Hidden action arises as a consequence of asymmetric information
held by counterparties (Arrow, 1968; Eisenhardt, 1989) and opportunistic
actions occur as human inclination. (Jensen, 1994)
Hendrik (2003) and Smith (2011) identify moral hazard as being
determined by two issues: the conflict of interests of the counterparties
(principal and agent), hidden actions and opportunistic behavior as a result
of asymmetric information. The result can only be extremely dramatic such
as decreasing performance and even business failure.
Dinga (2009) considers moral hazard to be a result of a high degree of
insurance against risk in the context of the financial crisis which began in
2007, when banks were launched in loans because they expected the
government to intervene in restoring liquidity (for example, by relaxing the
requirements minimal legal reserve).
In conclusion, the directions in which moral hazard manifests can be
placed in the managers’ remuneration policy (the bonus system) but also in
32
actions such as manipulation in financial communication to increase the
prestige and the fame or risky management decisions.
This is why the theory according to which managers’ reward must be
done in such a way as to have common interests with the shareholders (for
the attenuation of moral hazard) is at the basis of research in the economic,
financial and management field. In specialized literature, the Agency
Theory developed by Jensen & Meckling (1976) is analyzed from two
perspectives.
Firstly, the research made for determining the link between
compensating the executive staff and the company performance, it results
that there is indeed a positive link between them (Hall & Liebman,1998;
Jensen & Murphy, 1990).
Secondly, many studies made with the purpose of evaluating the effects
share bonuses have on managers’ behavior revealed the fact that share-based
bonuses stimulated excessive risk taking in the banking sector and this could
be one of the factors which started the financial crisis in 2008 (Bebchuk &
Spamann, 2010). The current economic crisis brought about serious critics
to the American capitalist model, especially for corporate governance and
the way to compensate the management staff (Bebchuk, Cohen & Spamann,
2010; Mintzberg, 2009). At the basis of this problem there is the Agency
Theory, which was quite contested by the non-functional practices from
Wall Street (Mintzberg, 2009) and criticized for its inability to explain the
differences between countries (Bruce, Bruck & Main, 2005).
The problem of the wage package given to top managers is much
analyzed given its complexity. For Anglo-American countries, the debates
on this subject (about the level, the structure and the role of compensations
for the key management staff from different countries), has determined a
great interest on the side of academics solving this problem. Also in
continental Europe there are constantly events on this theme.
For example, in 2000, the top managers from the German Mannesmann
company were accused of sharing among them 60 million dollar bonuses
resulting from the takeover by Vodafone. Similarly, in 2006, Siemens, also
a German multinational, rewarded its managers 30% more than in the
previous years, even though the number of employees was reduced and the
profit decreased. Critics about top management compensation were also in
Holland, where big corporations such as Royal Shell, Heineken, Reed
Elsevier, Unilever and Van der Moolen granted their managers significant
bonuses despite their weak performances in 2004.
The corporate failures at the beginning of 2000, culminating with the
actual economic crisis, worsened the problem of losing control over the
33
company governance, while exposing managers to a higher risk, which will
bring them more bonuses in his way.
So these financial failures appear as eloquent examples of conflicts and
risks manifested in agency relations. Although there are many possibilities
to stimulate the agents (managers), we need to be cautious because it is not
possible to attain a better performance just through bonuses (Fulop, 2011).
In order to find solutions to this problem, the federal agency which
supervises the application of the federal laws by the listed companies and
regulates the real estate transactions in USA (U.S. Securities and Exchange
Commission-SEC) made constant efforts in the field of regulating control in
corporate governance and strengthening the internal control and audit
function as palliative to this problem (Bockli, 2000).
The OECD regulations (2004) about corporate governance make the
following reference to management remuneration: „An entity must present
the remuneration policy to the members of the Board and to the managers as
well as information about the Board members, including their qualifications,
the selection process, the leading position at another entity, in the case they
are independent members of the Board”.
Consequently, the corporate governance codes of the countries
introduced serious parts meant to regulate the remuneration and other
bonuses for managers.
In Romania, the current Corporate Governance Code issued by The
Bucharest Stock Exchange in 2008 makes references about this aspect (at
art. VI, Recommendation 21), in the following way: “The Board will set up
a Remuneration Committee, made of its members, to elaborate a
remuneration policy for administrators and directors, with internal rules.
Until setting up a Remuneration Committee, the Board will perform these
tasks and responsibilities and will analyze them at least once a year. The
remuneration policy will have to be approved by General Meeting of
Shareholders”.
Consequently, good practices of corporate governance will strengthen
the role of internal audit and control committees, the role of the financial
audit (which guarantees a credible financial information) and the role of the
remuneration committee) which are key elements in stopping the moral
hazard at the level of agency relations in the organization.

34
 2.2.3 Stewardship Theory

Stewardship Theory describes the role of management leadership in

maintaining and developing the organization's value, although it works
temporarily therein.
Stewardship Theory has its origins in the psychology and sociology
areas and from this perspective this theory assumes that managers are faith,
responsive and effective people and therefore, they are good administrators
of the resources entrusted.
According to this theory, Schoorman & Donaldson (1997) state that an
administrator protects and maximizes shareholders' wealth, thus, the
shareholder’s utility functions are maximized. From this perspective,
directors and managers work for shareholders ensuring the growth of
shareholders’ wealth.
In comparison with Agency Theory, where the managers are tempted to
take decisions for their own advantage, not for the owners, the Steward
Theory assumes that managers act not in their own interests, but in a given
conflict of interest situation they put the company’s interests in front of the
personal ones.
The conceptual foundation of the theory is related to the development of
work motivation theories by McGregor in the ‘60s and more specifically to
the Y Theory that assumes that managers are rational beings, so there isn’t
any need to excessively monitor their behavior as the Agency Theory
assumes (Nicholson & Kiel 2007).
Table 2.2.3.1: Theories of work motivation X and Y (Douglas McGregor)
Theory X Theory Y
Man dislikes work, and if he can, he avoids it. Work is a natural activity, which is necessary
for the spiritual development of the man.
Man must be forced or bribed to make the Man wants an interesting work and if he has
necessary effort. good conditions, he will work with pleasure.
Man prefers to be directed instead of accepting Man is oriented towards accepted tasks and
responsibilities which he avoids anyway. in this context, he accepts and even looks for
responsibilities.
Man is motivated, especially by money and In adequate conditions, man is motivated by
anxiety about his safety. the wish to accomplish his own potential,
. and self-imposed discipline is often more
severe and efficient.
Most people have limited creativity, except the Creativity and ingeniosity are largely
cases when they want to avoid the rules distributed in men and too little used..
imposed by their bosses.

Source: McGregor (1960)

35
 Starting from X and Y theories, McGregor divides managerial behavior
into effective and ineffective managerial behavior. Effective leaders will
count on theory Y and ineffective leaders will count on theory X. Managers
who adopt the premises of X Theory use greatly the control of subordinates,
don’t put an emphasis on their involvement and have little preoccupation
about the employees’ training and development. This is because theory X is
based on employees’ aversion to work and to be determined to work they
must be constrained, controlled and directed.
The starting premise, in the case of Stewardship Theory is that managers
are essentially trustworthy concerning corporate governance. The theory
says that managers do not adopt automatically a behavior centered on their
own interests, but they are orientated towards owners’ interests. (Solomon,
2007)
Agyris (1973) considers that Agency Theory sees the employee or the
man as an „economic being” who suppresses his aspirations to their own
aspirations. However, the stewardship theory acknowledges the importance
of structures which will empower the administrator and offer him maximum
autonomy based on trust (Donaldson & Davis, 1991).Thus, either as an
employee or as a manager, these will act autonomously having as unique
objective the maximization of shareholders’ profits.
The consequences of applying the Stewardship’ Theory in
organizational practice would consist in minimizing costs with monitoring
and controlling these factors (Donaldson & Davis, 1994; Davis, Schoorman
& Donaldson, 1997).
Adopting Theory Y and accepting the supposition that manager are
rational and trustworthy beings, the managers’ interest is to act having as
unique objective the maximization of shareholders’ profits. However, there
is also an interest for better reputation and this can be a stimulus to act
towards increasing the performance of the entity. (Dalz et. al, 2003) In this
sense specialists appreciate companies performances can have an impact
upon the perception of individual managerial performance. (Abdoullah &
Valentine, 2009)
Indeed, Fama (1980) considers that managers and administrators
manage their own careers according to the perception on the effectiveness of
their work, reflected through managerial performances. In this respect,
Shleifer & Vishny (1997) conclude that according to their studies, obtaining
a good reputation in administration work is a stimulus for
managers/administrators to increase performances for shareholders.
More than that, the stewardship theory suggests the unification of the
role of managers and director reducing the agency costs and their role as
36
steward of the company activity will become more important (with more
important responsibilities resulting from the unification of the two roles).
Obviously, the interests of the shareholders to maximize profits would be
better achieved (Abdoullah & Valentine, 2009).
According to Fulop (2011), because Stewardship Theory considers as an
important factor the board director structure, it must be composed of
company internal members because they know best the company's problems
and can react accordingly. If the board of directors is composed only of
external members, they don’t react as promptly to the daily problems of the
company. As Solomon (2007) highlights, the outside directors (outsiders)
can monitor the maximizing of the business performance only on a short-
term because their knowledge about the work activities is less compared to
the directors coming from inside the company (the insiders) who closely
know the daily company’s problems.
The fierce supporters of the Stewardship Theory combat the actual
bonus system for executive management and characterize it as „the most
prominent hidden form of corruption which subminated the corporations
and led to the fall of global economy”. (Mintzberg: 2009) They consider
that people who want to be compensated with bonuses must resign from
their leading position, because they do not have the attitude of a good
administrator (according to this theory) which is necessary in a successful
company.
The Stewardship Theory model can be graphically represented in the
following way:

Figure 2.2.3.1: The Stewardship Theory Model

Source: Abdoullah & Valentine (2009)

37
 Obviously, the Agency Theory and the Stewardship Theory have their
strengths and weaknesses, this is why they have to be adopted in a
combined way. Specialized studies come to support this affirmation, arguing
for the fact that the general performances of the company can be maximized
only by adopting both theories in the corporate governance practice and not
just one of them individually (Donaldson & Davis, 1991; Abdoullah &
Valentine, 2009).

2.2.4 Stakeholder Theory

As a development of the Agency Theory, The Stakeholder Theory rises

up. The term "stakeholders" refers to all persons, groups or organizations
that have an impact on the company’s activity or are influenced by the
company. It's about: the owners, shareholders, investors, employees,
customers, suppliers, business partners, competitors, the government, local
government, NGOs, pressure groups, communities, media and so on. Each
of these parts somehow interacts and influences the business of a company.
In the years 1980-1990, Stakeholder Theory has changed the
shareholders paradigm of Milton Friedman (1970) who considers that
maximizing the financial results for shareholders is the highest concern of a
company. Stakeholder theory was developed by Freeman (1984) and it is
focused on the corporate responsibility’s view related to various categories
of stakeholders.

In the graph below, we design the Stakeholder Theory Model as it

follows:

38
 Figure 2.2.4.1: Stakeholders theory model
Source: own view

Stakeholder Theory rises from an increasingly acute need for corporate

social responsibility in the current context of transition from an industrial
society to a new society called "post-modern", "post-industrial", "post-
capitalist", "post- structural", "post-traditional" society.
The new economy is characterized by a complex and profound change
in all fields, with major social and environmental implications in corporate
social responsibility areas.
In the actual context of world economy globalization, the performing
company is an "enterprise that creates added value for its shareholders,
customers demand, taking into account the views of employees and
protecting the environment. So, the shareholders are satisfied that the
company has achieved the desired return, customers have confidence in the
future of the company and the quality of its products and services. The
company’s employees are proud of where they work, and society benefits of
environmental protection.”(Jianu, 2006) The concept is based on the
stakeholder theory and managers acting to maximize the company's value in
order to avoid ignoring the interests of their social partners. The
harmonization of these interests is ensured by the corporate governance
system. (Robu, 2004)
The topic of corporate social responsibility acquired real dimensions
only at the beginning of the 90’s with a considerable acceleration towards

39
2000. The debate about the concept of corporate social responsibility in
integrated in the world debate about the future of the planet (economic,
social and environmental) around the „sustainable development” concept
introduced by ONU in 1992 at the Rio World Summit.
If in USA the social corporate responsibility concept appeared in
1953, in Europe its history is more recent. At the level of the European
Union, CSR was mentioned for the first time in the Lisbon Strategy (2000),
mainly through the appeal made to enterprises to contribute to achieving the
objectives of the strategy. In July 2001, The European Commission
published the Green Book „Promoting an European framework for the
social responsibility of enterprises”, through which the public powers at all
levels, that is international organizations, enterprises, social partners, and all
interested parties, are called to „express their opinion about the manner in
which a partnership could be created, which will set up a new framework
meant to favor CSR taking into account both the interests of the companies
and of the various parties involved”.
More and more European companies promoted strategies about social
responsibility as an answer to social, economic and environmental
pressures. The purpose of the strategies is to send a signal to all those
involved and with whom the companies interact: employees, employers,
investors, consumers, public authorities, NGOs. It is estimated that such a
policy can contribute to improving the financial force of the enterprises.
The European Union introduced the concept of social responsibility with
the declared purpose of contributing to putting in practice the strategic
objectives which were fixed at Lisbon in order to make the Union an
economic space characterized by competition capacity and dynamism, able
to ensure sustainable economic growth, with more and better workplaces
and more social cohesion. In this context, The European Union defines
social responsibility as „a concept through which a company voluntarily
integrates the preoccupations for social and environmental problems, in
business operations and in the interaction with interest partners”.
At present there is a great variety of definitions for this concept;
Alexander Dahlsrud identifies five main dimensions of social responsibility:
 The environment dimension – it refers to the environment;
 The social dimension – it refers to the link between the organization and
the society or the community where the organization performs its
activity;
 The economic dimension – it refers to the social-economic and financial
aspects ;
 The dimension of the interested parties – it refers to the groups of users;
40
  The voluntary dimension – it refers to actions which are not specified by
the legal framework (Dahlsrud, 2007).

”The expression corporate social responsibility has been used in so

many and different contexts that it has lost its meaning. Lacking structure
and internal content, it has come to mean everything to everyone.”
(Freeman, 1983; Sethi, 1975) Continuing the same idea, Gobbles considers
that social responsibility is a brilliant term (Gobbels, 2002, pp. 96) because
it helps debate the relations between the business environment and society
as a whole.
If corporate social responsibility is such a complex and hard to define
concept, putting the corporate social responsibility in the stakeholders
theory makes this management theory at least as complex as the element it
is built on. In this sense, Wheeler et al. (2002) argue that stakeholders
theory derive from a combination of sociological and organizational
subjects. The complexity of the theory is also emphasized by Abdoullah &
Valentine (2009) who consider that stakeholders theory is not a unitary
theory but more a multidisciplinary theory, at the border of traditional
research fields, incorporating philosophy, ethics, political theories,
economic theories, law and organizational sciences.
This theory of corporate governance based on maximizing the interests
of all stakeholders has proved to be the most efficient in history, not only
because it conducts to the economic success of the company, but also
because it works to achieve a competitive advantage due to gain people's
trust and consequently a goodwill on the market (European Commission,
2005).

2.2.5 Transaction Cost Theory

Unlike Agency Theory, Transaction Cost Theory explicitly uses the

concept of corporate governance (Fulop, 2011). This theory states that the
company is a relatively efficient hierarchical structure that serves as
framework to run the contractual relationships. The main concern in
Transaction Cost Theory is "to explain the transactions conducted in terms
of efficiency of governance structures." (Wieland 2005)
The fatherhood of "transaction costs" was attributed to Ronald Coase,
who in his famous article The Nature of the Firm, in 1937, has built the
judgment regarding the firm’s existence without using, explicitly, the
concept of "transaction costs" but that of "cost of using the price
41
mechanism" (Coase, 1988). Coase substantiates his argument about the
nature of the firm by emphasizing that organizing the production through
the market channels (contracting by market) involves some costs. So, by
creating an organization which has the responsibility for resources
allocation, some expenditure can be avoided.
Going forward, Transaction Cost Theory is developed by Kenneth
Arrow who defines transaction costs as "operating costs of the economic
system" (Arrow,1969). Later, Williamson, founder of the transaction cost
economics, believes that "the study of governance include: identifying,
explaining and combating all types of risky contracts" (Williamson, 1996).
For Williamson (as well as for Coase in 1937) firms and markets are
considered as alternative models of governance and activity allocation
between entities and markets and should not be considered as a pre-
established element but as an element which derives from the relations
between the two. For Williamson, the governance engines include both
structures and official rules, both formal and informal. The problem of
corporate governance in the context of this theory refers more to the
effective and efficient achievement of the operations by the companies, in
harmony with their cultural and political environment than to the protection
of shareholders’ property rights. (Williamson, 1996)
The transaction costs are conceived as costs of the interaction between
economic agents which are due to the contractual transmission of property
rights from an economic agent to another. As in any social interaction there
is uncertainty and the premise for opportunistic behavior on the side of
economic agents, it would then result that the existence of economic costs is
inevitable, wherefrom the necessity to diminish them in order to increase the
economic performance potential. In general, in the category of transaction
costs, the economists include the information efforts, the negotiation costs
and contract drawing costs, the copyright costs and the costs of imposing
rules and agreements from different contractual arrangements.(Marinescu,
2008)
Certainly, in addition to transaction costs, agency costs resulting from
divergent relationship between manager and shareholder’s interests and
information asymmetry, must be taken into consideration, costs which are
based on two sources (Fulop, 2011): the costs inherent due to an agent’s use
(eg. the risk that agencies use the company’s resources for their own
purpose) and costs involved by protecting against the risks associated with
the use of an agent (eg. the costs of preparing the financial statements or
costs consisting in the use of Stock-options techniques to align the managers
and shareholders’ interests.)
42
 Therefore, as Abdoullah & Valentine (2009) notice, Transaction Cost
Theory faces a complex theory incorporating interdisciplinary issues related
to organizational economics and legal sciences

2.2.6 Resource Dependency Theory

Resource dependency is an explanatory model of organization activities

that emphasizes the fact that they are open systems and the environment in
which they operate and the social relations are the basis in decision making
about resources allocation.
In this context, Pfeffer and Salancik (1978), highlighting the resource
dependence perspective on inter-organizational behaviour, argue that: “To
understand the organization behavior you must understand the context in
which that behavior occurs [...] this is understandable from the perspective
that organizations’ activity is inevitably linked with the environmental
conditions in which they operate."
Hillman, Canella and Paetzold (2000) argue that the resource
dependence theory focuses on the role that managers play in providing
essential resources for the organization in relation to the external
environment.
According to studies conducted by Hillman, Canella and Paetzold
(2000), in the decision making process, the managers contribute with
information resources, skills, access to key business partners of an
organization such as suppliers, creditors, government, social groups, etc..
According to Abdoullah & Valentine (2009), the managers responsible
for leading a business are classified into four categories: a) “insiders”,
meaning the current and former managers of the company offering expertise
in specific areas of the company and finance law; b)“business experts”,
meaning the managers of big companies who provide expertise in business
strategy, decision-making and solving economic problems facing the
company; c) „support specialists” represented by lawyers, bankers and
insurance companies, public relations experts and all those experts who
provide specialized support in their individual specialization area;
d)"community influential”, meaning political leaders, academic leaders,
religious leaders or social and community organization leaders.
From the point of view of allocated internal resources, the power
engaged in the process of allocated resources can be stronger or weaker and
it depends on the extent to which managers belong to one of the four
categories listed above. The same idea is supported by Pfeffer & Salancik
(1978) who consider that the main argument of resource dependency theory
43
is that organizations, due to their need for resources, will answer to the
demands of those environment groups who control the critical resources.
Environment adaptation, which is understood as the ability to obtain
resources, also represents an indicator of the importance and the relative
power that each organizational unit confronting the external environment
has (Vlăsceanu, 2010).
The Resource Dependency Theory emphasizes the complex, network
character which the corporate governance concept of a company is based on.

2.2.7 Political Theory

There are other areas and theories that could explain corporate
governance. One such area would be the law, based on the idea that many of
the corporate governance practices are based on laws. For these reasons,
many definitions of corporate governance encapsulated the political impact
of corporate governance mechanisms. For example, Cosma (2012) defines
corporate governance as the "branch of economics that studies how
businesses can become more efficient by using the institutional structures
such as constituted act, organizational chart and legal framework."
Political Theory refers to political influence in the governance structure
of companies, evidenced by the participation of the government in the
capital of companies or laws adopted by political structures which have a
significant influence on corporate governance.
The political model emphasizes the governmental favors on corporate
decision-making activities related to the distribution of corporate power,
profits or various benefits. (Abdoullah & Valentine, 2009) Regarding
dividend policy, for example, there may be legal rules that give special
importance of dividends as a potential tool for solving possible agency
problems related to hold shares. In this respect, countries such as Brazil,
Chile, Columbia, Greece and Venezuela make mandatory dividend
provisions. In other countries, the role of legal environment is more subtle.
Thus, in the UK there have been formed several boards that make
recommendations for improving corporate governance practices used by the
board of director. (Ileana, 2008)
The political model of corporate governance can have a huge influence
on the development of corporate governance. In this respect, the corporate
governance Institute for developed and developing countries (CIPE, 2002)
specifies for emerging countries that, “they must make the transition from
relation-based governance institutions to rule-based institutions”. This
transition is difficult because of possible expropriations which would affect
44
the people and the groups engaged in conflicts for power in economics and
politics.
We can mention the case of the communist or the former-communist
countries which are still struggling to emerge from political influence. The
case of Romania is an illustrative example in this regard. Although being a
former communist country for more than 20 years, it still faces major
problems related to government shareholding in the governance structures
of the Romanian companies.
Mark Mobius (2012), executive chairman of Templeton Emerging
Markets Group, stated that the reason for investors not coming in Romania
is the jam in profitability recorded by the companies with government
companies, stressing the need that the government should bring more
companies on the market. Further, Mobius stressed that these companies
will become attractive to local and foreign investors only if a change will be
produced in the governance system and new governance models will be
imposed.
Political manifestation of corporate governance structures concerned the
governments from many countries towards drawing the framework of the
separation between power and control..
In this regard, extensive research conducted by various authors (Roe,
1994; Thomsen, 2008) has shown that the policies adopted by the countries’
governments have had a growing importance in explaining the development
of corporate governance national systems and it is also being closely related
to sociological issues such as culture or religion specific to that country.

2.2.8 Ethics Theories

In addition to fundamental theories of corporate governance such as

Agency Theory, Stewardship Theory, Hazard Theory, Stakeholder Theory,
Resource Dependence Theory, Transaction Cost Theory or Political Theory,
the authors have identified the Ethical Theories that can be closely
associated with corporate governance.
These relate to business ethics theory, virtue theory, feminist theory and
discourse ethics theory or postmodern ethics theory (Abdoullah &
Valentine, 2009).
a) Business ethics is the study of those activities, decisions or business
situations referring to the current conduct, the people’s habits and attitudes

45
about the general concepts of good and evil,, truth and lie, equity and
discrimination, liberty and constraint etc.
The principles of business ethics must be developed and applied in all
activity spheres of the economic actor. In this vision, promoting an adequate
ethical behavior, both for managers and subordinates, is of crucial
importance, with decisive impact for the final results of the whole
organization (Mathis et al, 1997 quoted by Cohuţ, 2005). To understand
what’s good and what’s wrong in business behavior, Crane & Matten (2007)
refer to moral that is reflected in norms, values and individual and social
and community beliefs.
The business ethics theory has been brought in discussion by specialists
in the field since 2000, together with the adoption of sustainable
development principles when corporate social responsibility in relation with
business partners becomes an objective to achieve for all companies on the
global market.
b) Virtues Ethics is an updated version of the ideas exposed centuries
ago by Aristotle in Etica nicomachica. Aristotle distinguishes the values-
purpose, which are treasured and monitored for themselves, and the values-
means, which are treasured and monitored in order to achieve other higher
purposes. However, Aristotle asserts: „There is a difference between the
purposes which are followed: some consist in the activity itself; others,
beyond the activity, aim at finite works.” (Aristotle, 1988, p. 7) Naming the
value „good”, Aristotel considers that the supreme good, so the value-
purpose by excellence is happiness, because all people want to be happy
naturally and nobody wants to obtain happiness as means for something
else, but only as a purpose in itself. Happiness, in Aristotle’s vision, is a
durable and stable condition, achieved by the individual for long term, until
the end of his days. Happiness, in Aristotle’s vision, is a stable and durable
condition, acquired by the individual for long term, till the end of his days.
Happiness is man’s stable state and condition that acquires and amplifies
certain values-mean, called „virtues” by Aristotle.
Ethical virtues can be acquired by education. Aristotle mentions that
knowledge of ethics is like the basis of a building. (Annas, 2003) Ethical
virtue underlines the virtuous character towards the development of a
positive moral behavior of the members of an organization. The ethical
virtues are appreciated as an intangible value added to the organization.
(Crane & Matten, 2007)
c) While business ethics theory concentrates on „good and evil” in
business, the feminist ethics theory puts an emphasis on empathy, on healthy
46
social relations, love for your neighbor and avoiding harmful effects. In a
company, caring about the other is a social concern and obtaining profit at
any price is not the central reason for action. (Casey, 2006).
d) Discourse ethics is focused on the preoccupation to solve conflicts in
a peaceful way. At the level of the organization there are the moral
convictions of the various players in the organization (managers,
shareholders, employees etc) which can lead to conflict situations. The
discourse ethics, the so called „argumentation ethics”, refers to a type of
argument which tries to establish ethical truths by investigating the
discourse presuppositions. (Habermas, 1996) Such a peaceful solution for
conflicts is benefic because it leads to a rational approach to problems and
cultivates openness towards the interlocutor. (Meisenbach, 2006)
The traditional ethical theories we referred to are subject to criticism
these days because they offer a type of approach which is irrelevant to
business. Crane & Matten summarize the main objections to traditional
ethics:
 According to some people, they are too abstract. As they are caught
in their very concrete activity, it is less probable business people would
apply abstract principles, issued by philosophers who died a long time ago
when making decisions..
 The traditional theories are also reductionist as they focus each on a
single aspect of morality and neglect the others. Why should we be
preoccupied exclusively by the consequences or the duties or the rights
when all are important?
 A current objection incriminates the elitist character of the cabinet
ethical theories: because they are scholars in their speculative field,
philosophers consider they have the right to issue sentences about
correctness in business, although they have no experience in this activity.
 Traditional ethics are too impersonal, elaborating exclusively
rational argumentations, generally valid, which, however, ignore the
subjective determinants of our moral acts, those ineffable and
incommunicable „vibrations” which lead each person in life.
 Finally, ethical theories are excessively idealistic and formal, as
they try to define good and evil through a list of rigid rules which, in some
people’s conception, are meant to humiliate the spontaneity of our free
will, which does not manifest by submission to book rules, but invents
every time mew original solutions for the problematic context in which we
are. (Crane & Matten, 2004, p. 95).
47
 2.2.9 Theory of Information Asymmetry

Information Asymmetry Theory is based on the study of Akerlof (1970)

in which the behavior of buyers and sellers of used goods is analyzed by
abandoning the hypothesis of perfect information on the market and
assuming the contrary, the uncertainty of regarding the quality of products
purchased.” (Raimbourg, 1997, p.190)
The arguments of Akerlof result by analyzing the market place of some
product where the seller has more information about the quality of products
than the buyer. He analyses second-hand cars market which is called
“lemon” market.
The conclusions of Akerlof show that hypothetical information
difficulties can lead either to the collapse of the entire market, or to its
transformation by adverse selection, being chosen the poor quality products
instead of the higher quality ones.
Initially, the Theory of Asymmetry Information marked the first
research in the field of buyer behavior (Spence, 1977; Leland, 1979,
Heinkel, 1981; Allen, 1984) and the advertising one (Nelson, 1970, 1974
and 1978) but then rapidly expanded in financial theory and considerably
affected the classical theories of the firm (Robu & Sandu, 2006).
The hypothesis concerning the informational asymmetry is closely
related to the agency theory and to the existence of agency relationships.
Dividend or financing policies adopted by directors can be characterized by
different interests between the directors and shareholders.
In the context of this theory, an explanation for dividends paid to
shareholders is provided, although it is known that they will pay an
additional tax for this additional income. An answer in the "signaling"
theory area is that dividends can be a good sign for future investments, the
investor pay more for a share because, on the market, a big level of dividend
is interpreted as a good sign which will mean a higher price for the shares.
Likewise, “signals” of a strong company can be emitted through debt
policy because it is considered that a strong company is one which can
afford a high rate of indebtedness in order to finance ambitious investment
projects. (Stancu, 2006)
In conclusion, effective corporate governance will determine the
reduction of informational asymmetry effect and prevent the manifestation
of unfair actions of the managers to gain prestige and reputation but
affecting the company’s growth.

48
 2.2.10 Efficient Markets Theory

In connection with the informational asymmetry theory it is the Efficient

Markets Theory which focuses on the investors, as the main stakeholders.
Under the circumstances, the interest of any investor is to obtain information
about the actions of various companies listed on the market. The more
efficient the information channels, the more quickly each piece of
information about the companies listed on the market becomes public, which
will allow the investors to evaluate the perspectives of each investment
opportunity and investing in the portfolio with best perspectives.
As the shares are divisible and liquid, investors are able to adapt rapidly
to the changes of perception about the value of a company. This new
information will lead to sales and buying which will affect the rate until this
will correspond to the new value of the company. Thus information will be
quickly assimilated in the new price of shares. (Todea,2012)
Providing forecasting information involves significant incidents on the
market value of the company according to the research made by Penman
(1980), Trueman (1986) or Lev & Penman (1990). The majority of studies
emphasized the fact that voluntary publication of forecasting information
allows the delimitation of companies which communicate „favorable news”.
However, it was noticed that the entities which do not publish forecasting
information are not considered automatically as lacking adequate
communication. It was also noticed that there is a positive relation between
the nature of information and its publication date, because the entities tend
to accelerate the publication of „favorable news” and delay the publication
of „unfavorable news”. The market reaction is the same: whereas entities
which publish information before the pre-established date register an
appreciation of the stock rate, those which publish late have a decrease of
market value because delay is perceived as an indicator of low performance.
(Spătaceanu, 2011)
Summarizing the efficient markets hypothesis, all information which is
available at a certain moment is included in the share rate reflecting the real
value of the company, which is reflected in risk and uncertainty reduction
for investors.
In the context of corporate governance, as its mechanisms it will be
stronger and more effective, ensuring a transparency of internal processes of
governance, as market will reflect the stock value closer to the real
(economical) value of the company (Credit Lyonnaise Securities Asia –
CLSA, 2001; McKinsey 2001; Standard & Poor’s, 2002; Klapper & Love,
2004; Stiglbauer, 2010).
49
 2.3 Adopting the corporate governance codes

Within the international practices, the most solutions concerning the

implementation of the corporate governance provisions and policies appear
in the best practice codes or corporate governance codes as regulations or
guides. Corporate governance codes asses a set of provisions and
requirements that influence the management of a company in terms of
strategic planning and decision making in order to maximize the interests of
shareholders, creditors, customers, employers and employees. The code
does not set provisions for defining business ethics or relationships between
different companies or ethical rules that employees of a company must
comply. To guarantee that these provisions will be adopted in real business
they should be reflected in the legal acts of companies (e.g. its status).

2.3.1 The evolution of corporate governance codes on the world

economy

In the early '90s, in the U.S. there were several laws for the listed
companies such as Sarbanes-Oxley, which contain detailed rules for an
effective management of the companies. In recent decades, in a corporate
governance area, the UK brought the greatest contribution to its
development by developing reports and ethics codes.
The honor of drafting the first corporate governance code in 1992
belongs to Sir Adrian Cadbury, the chairman of Cadbury Company. The
Cadbury Code was the foundation of London Stock Exchange Code and
assessed the first basic rules in managing a company in order to achieve the
increase in efficiency, while facing a nondiscriminatory behavior towards
shareholders. Over time, all transnational companies have defined their own
best practice codes, becoming more and more transparent to shareholders,
largely because of the increase of their activism, but also because of being
traded on the market stock exchange; they were interested in having the best
market image for the investors.
In the European Union, the concept of corporate governance began to
emerge more clearly after 1997, when most countries have adopted
corporate governance codes, which were, however, optional. The impulse of
adopting these codes have led to financial scandals related to the failure of
British listed companies. On the other hand, the Asian economic crisis in
1978 and the withdrawal of the investors from Asia and Russia raised for
the international business community the issues related to the consequences
of the investors’ distrust in the companies’ management. All these crises
50
have captured the attention of governments, supervisory authorities,
companies, investors and even of the general public on the fragility of
corporate governance arrangements and the need to reassessing the system.
Thus, in consequence to the Asian financial crisis, the Organization for
Economic Cooperation and Development (OECD) and World Bank have
jointly initiated a common dialogue in the corporate governance area and
have organized roundtables, at regional levels, by adopting a strong
partnership with national policy makers, regulators and market participants.
The OECD Principles of corporate management were developed in 1999
and are the only set of principles generally accepted in the world nowadays,
being recognized as one of the 12 pillars of international financial stability.
The OECD Principles of Corporate Governance provide specific guidance
for policymakers, regulators and market participants in order to improve the
legal, institutional and regulatory framework that underpins corporate
governance, with a focus on publicly traded companies. They also provide
practical suggestions for stock exchanges, investors, corporations and other
parties that have a role in the process of developing good corporate
governance. They have been endorsed as one of the Financial Stability
Forum’s 12 standard key essential for financial stability.
The OECD Principles cover six key areas of corporate governance, as
it follows (OECD,2005): 4
I. Ensuring the basis for an effective corporate governance framework
The corporate governance framework should promote transparent and
efficient markets, be consistent with the rule of law and clearly articulate the
division of responsibilities among different supervisory, regulatory and
enforcement authorities.
II. The rights of shareholders and key ownership functions
The corporate governance framework should protect and facilitate the
exercise of shareholders’ rights.
III. The equitable treatment of shareholders
The corporate governance framework should ensure equitable treatment of
all shareholders, including minority and foreign shareholders. All
shareholders should have the opportunity to obtain effective redress for the
violation of their rights.
IV. The role of stakeholders in corporate governance

4
Organisation for Economic Co-operation and Development, The OECD Principles of
Corporate Governance, No. 216, May-August, 2005

51
The corporate governance framework should recognize the rights of
stakeholders established by law or by mutual agreements and encourage
active co-operation between corporations and stakeholders in creating
wealth, jobs, and the sustainability of financially sound enterprises.
V. Disclosure and transparency
The corporate governance framework should ensure timely and accurate
disclosure on all material matters regarding the corporation, including the
financial situation, performance, ownership, and governance of the
company.
VI. The responsibilities of the board
The corporate governance framework should ensure the strategic guidance
of the company, the board’s effective monitoring of the management, and its
accountability for the company and the shareholders.
The OECD Principles generally offer the governments a broad guidance
to follow when reviewing whether their corporate governance framework is
compatible when establishing the corporate governance they want.
Policymakers are encouraged to develop the governance framework with an
overall view on its impact on the economic performance, market integrity
and the incentives it creates for market participants and the promotion of
transparent and efficient markets. The OECD Principles gave the
governments from different countries the possibility of applying them as
partially or integrally as they considered.
Although it is clearly highlighted that no one wants to impose a
universal model of corporate governance, on the long-term the trend is
moving towards global standards.
Thus, depending on the countries’ level of economic development,
legislative progress, and property system, political and cultural
particularities and not least of mentality, there are several ways of
implementing the corporate governance principles, as follows:
• Voluntary codes of ethics and administration, adopted by security issuers
whose securities are publicly traded;
• Optional codes of corporate governance / best practices developed by the
regulatory bodies of the capital market or of the stock exchanges (as
recommendations for companies);
• Mandatory codes imposed by stock exchanges, on the conditions for
listing none of the categories of the grant;
• The inclusion of specific provisions in the legislation, which thus become
mandatory for all companies.

52
 Until nowadays, it can be identified approximately 180 worldwide codes,
characterized by a high degree of convergence in terms of their content
(Aguilera & Cuervo-Cazurra, 2004). Corporate governance is the concept
that has influenced most of the developed or developing countries. For these
reasons, the OECD has prepared a set of principles of corporate governance
that attempts to complete tasks of the Board with pressing issues for arising
democracies.
In conclusion, within the concept of corporate governance framework,
transparency and disclosure issues are a main concern because they serve as
a pillar for any decision-making process. For these reasons, financial and
accounting information must achieve a certain quality and contribute to the
efficiency of organizing the management and to increase its market value.
The quality of the information contained in financial reports in all countries
has increased from period to period as a result of internal and external
pressures of international regulatory organization, which are largely
consistent with the OECD Principles. (Morariu et al, 2008)
Once the benefits of corporate governance practices are understood and
adopted in developed countries, the emerging countries, besides modifying
the transition to the market economy, tend to adopt “the best practices” in
corporate governance.

2.3.2 The evolution of corporate governance codes in European Union

and Romania

The first phase of European corporate governance started in the early

1990s in the United Kingdom, at a time when the European Union
comprised less than half of the current Member States. In 1992, following a
number of local financial scandals, the Cadbury Report on the Financial
Aspects of Corporate Governance was released and became the first in a
series of important guidelines that would be published in the European
Union.
Cadbury Report was the first set of corporate governance guidelines
that highlighted the need of transparency and disclosure by providing a
“Comply-or-Explain Statement” designed to explain any deviations from
these recommendations. This system, although implemented on a purely
voluntary basis at the time of the Cadbury Report, was meant to encourage
the adoption of best practices while guaranteeing companies the necessary
flexibility in regard to governance practices. It was also praised for
supplying a constant flow of information about the companies’ corporate
53
governance practices. The Cadbury Report may, therefore be regarded as the
cornerstone of the comply-or-explain framework in Europe, long before this
system was introduced in the European law.
Later, this type of statement was adopted by many European countries,
as main characteristic of corporate governance transparency.
Consequently, although most are not based on a comply-or-explain
approach, a number of Western European Member States launched
initiatives to set up similar codes of best practices for their markets in the
late 1990s. From 1995 to 1999, France, Spain, the Netherlands, Finland,
Belgium, Italy, and Portugal have in succession adopted sets of corporate
governance guidelines that would come to set the foundation of well-
established corporate governance traditions in those Member States.
During the 2000s, on a second phase of institutionalization, those
Member States that have developed the first generation of good practice
codes have begun to adopt them. A large number of Member States that
have directly adopted the codes of best practice, developed by countries
with greater experience in this regard have joined them. Thus, in 2000-2005,
17 Member States have adopted corporate governance codes, four of which
have already implemented the first generation of codes.
The period coincides with a series of massive corporate scandals in
Europe and around the world. For a number of Member States from Central
and Eastern Europe, the period also corresponds to their pre-accession effort
required by the EU acquits.
In the EU Member States, these efforts to adopt the best practices codes
end up in 2007-2008, when adopted in the last EU member countries
namely Luxembourg, Bulgaria and Romania.
During the 2000s, on a second phase of institutionalization, those
Member States that have developed the first generation of good practice
codes have begun to adopt them. They were joined by a large number of
Member States that have directly adopted the codes of best practice,
developed by countries with greater experience in this regard. Thus, in
2000-2005, 17 Member States have adopted corporate governance codes,
four of which have already implemented the first generation of codes.
The period coincides with a series of massive corporate scandals in
Europe and around the world. For a number of Member States from Central
and Eastern Europe, the period also corresponds to their pre-accession effort
required by the EU acquits. In the EU Member States, these efforts to adopt
the best practices codes end up in 2007-2008, when the code was adopted in
the last EU member countries namely Luxembourg, Bulgaria and Romania.

54
 Figure 2.3.2.1: Adoption of corporate governance guidelines and codes
Source: Study on Monitoring and Enforcement Practices in Corporate Governance
in the Member States, 23.09.2009 (www.ec.europa.eu)

Where:
- Corporate governance guidelines characterize preliminary initiatives which have been
fully acknowledged by the market as providing a reference tool for the companies in terms
of corporate governance practices.
- Corporate governance codes characterize initiatives which have been fully acknowledged
by the market as providing a reference tool for the companies in terms of corporate
governance practices.

Until now, all EU Member States except Ireland (which applies "British
Combined Code") and Greece (which applies a corporate governance law,
being a legally and not voluntarily provision) have at least one national code
of corporate governance.
The main way to reflect the transparency of corporate governance
consists in preparing and reporting a "Comply or Explain Statement" by the
management companies. The document is voluntary required by Directive
2006/46/Economic Commission.
At the European Union Level, the adopting of "Comply or Explain
Statement" by the member states is reflected as follows:

55
 Figure 2.3.2.2: The adopting of Comply or Explain Statement by EU member
Source: Study on Monitoring and Enforcement Practices in Corporate Governance
in the Member States, 23.09.2009 (www.ec.europa.eu)

As shown in the figure above, the first countries that adopted such
compliance before 2002 were Portugal and Britain followed the next year by
Spain. From 2004-2005 countries like Hungary, Sweden, Finland and the
Netherlands have adopted this statement. Since 2007, countries such as
Germany, Czech Republic, France, Italy and Romania have aligned to this
voluntary require. Countries like Belgium, Greece and Ireland have not yet
adopted such a compliance statement.

Corporate Governance Code of Bucharest Stock Exchange

Once the benefits of corporate governance practices have been
understood and assimilated by the developed country, the developing ones
have begun to adopt "the best practices" in corporate governance especially
because this need is acutely felt with the changes required by the transition
to a market economy.
In 2001, the OECD with the support of USAID, developed a specific
program in order to improve corporate governance in Romania. The
OECD/USAID views envisaged by the program were pointing out the
following objectives: (i) evaluate corporate governance in Romania; (ii)
56
offer a set of key recommendations for improving corporate governance in
Romania and bring it closer to the international standard of the OECD
Principles; (iii) identify needed technical assistance in the area of corporate
governance; (iv) improve the understanding of present corporate governance
practices in Romania, informing the international community about the
progressive national reform Initiatives; and (v) facilitate full Romanian
access to the ongoing international dialogue on corporate governance. In
conducting the assessment and the program formulation, the OECD
Principles of Corporate Governance was considered the benchmark
(OECD, 2001). The key recommendations constituted a comprehensive
agenda for reform, including legislative changes, enforcement, institution
building and private behavior /capacity building.
The Bucharest Stock Exchange has only begun the first trading in 1995.
Only in 2001, Bucharest Stock Exchange created Plus Class ("with more
transparency") for admission to Bucharest Stock Exchange and adopted the
first code of corporate governance. The listed companies could promote
Plus Class only after they have fully adopted in their Constitution Acts the
Code of Corporate Governance. This process is not expected to be a
success because only one company has required a promotion to the Plus
Class level.
In 2008, Bucharest Stock Exchange has adopted a new Corporate
Governance Code which is based on OECD principles of corporate
governance. The code has come into force from the financial year 2009 and
it is applied voluntarily by companies traded on the regulated market
operated by Bucharest Stock Exchange. Companies that decide to entirely
or partially adopt the Code must annually submit to Bucharest Stock
Exchange a statement of compliance or non-compliance of the Code of
Corporate Governance ("Comply or Explain Statement") stating that the
recommendations have actually been implemented and the way of
implementation (Bucharest Stock Exchange, Corporate Governance Code,
2008).
Bucharest Stock Exchange considers the Code as having a voluntary
character compared to other laws of Romania applicable to companies
traded on the regulated market which are legal (for example, company law,
accounting law, capital market law, etc.).
Bucharest Stock Exchange codes are founded on 11th corporate
governance pillars, as follows:
I. Corporate governance framework
II. The share- & other financial instruments holders’ rights
III. The role and duties of the Board
57
IV. Composition of the Board
V. Appointment of Directors
VI. Remuneration of Directors
VII. Transparency, financial reporting, internal control and risk management
VIII Conflicts of interests and related parties’ transactions
IX Treatment of corporate information
X. Corporate social responsibility
XI. Management and control systems
The Corporate Governance Code of the Bucharest Stock Exchange is
similar to those adopted by other EU member states and provides new
recommendations for compliance, important for directors and boards at the
head of Romanian companies.

2.3.3 Respecting the transparency principle – a component which

defines the quality of corporate governance

The transparency of information about the activity of the company is

vital in the new economy under the circumstances of increased information
needs for all partners in the economic life. A great number of studies
emphasized the importance of transparency practices (Transparence &
Disclosure practices) as the main pillar of successful corporate governance.
Aksu & Kosedag (2006) emphasized the importance of transparency
practices for the sustainable development of the company. According to
Cromme (2005), the key for the functioning of corporate governance is
creating transparency at the level of the company. Ben Ali (2008) underlines
the fact that for companies from France the quality of the transparency level
is a function in the corporate governance mechanisms.
Junarso (2006, p. 4) shows that “timely and exact information about the
corporate governance of a company represents an important component of
corporate governance. This improves the understanding of the structure,
activities and policies at the level of the organization. Consequently, the
organization is capable of attracting investors.”
Desouki & Mousa (2012) also emphasize the transparency principle as
being an important component which leads to a good quality of corporate
governance.
Kuznecovs & Pal (2011) show that adopting the transparency and
dissemination practices, also it does not represent a direct measure of
corporate governance, is more a guidance parameter for shareholders and
investors.
58
 Referring to the transparency of financial information, a series of studies
associate the effective corporate governance with quality financial reporting.
Thus, Karamanou & Vafeas (2005), Bhat et al. (2006), Ionaşcu & Olimid
(2012) emphasize the positive effect of the governance policies upon the
financial information reported by the companies, which determines reduced
forecasting errors. In other words, quality corporate governance, reflected
by thorough transparency practices, is a clue for achieving the best forecasts
of the share price by the investors, as the best share price is better
forecasted.
At OECD level, companies are required to disseminate publicly
information about their activity in order to provide investors with equal
access to information, in short time and with reduced costs. (OECD,2004)
In this sense we should mention the preoccupations of the Global
Reporting Initiative, which in March 2009 published a document The
Amsterdam Declaration on Transparency and Reporting through which
they require governments to lead actions for the „rehabilitation of the world
economy”, considering that one of the major factors of the economic crisis
was the lack of transparency, through:
 Introducing policies through which companies can report
environment, social and corporate governance performances;
 Promoting reporting systems for the public sector (state-owned
enterprises, government pension funds and investment government
agencies);
 Integrating the reporting of the corporate social responsibility degree
into the financial reporting system. (Mironiuc, 2009)
Besides the financial information needs to be reflected by the financial
reports, there is a more acute need for extra-financial information, which is
characteristic for the informational needs of the new economy. In this
respect, a relevant study was made by the consultancy company Mc Kinsey
(2001) about the opinion of the institutional investors from emerging
countries (from Asia, Eastern Europe and Latin America) concerning
corporate governance, a study which shows that investors grant at least the
same importance to non-financial information about corporate governance
as to the financial information when adopting the investors’ decisions.
(Robu et al., 2004)
The American rating agency Standard & Poor’s grants special attention
to transparency and information dissemination practices, as an important
component in elaborating the general company rating. In evaluating the
extend to which companies adopted financial transparency practices

59
Standard & Poor’s (2002)5 underlines the extremely important role of the
transparency of annual reports, as the studies about the evaluation of
transparency scores are based almost exclusively on the information
provided by this document.
The important role of the public information from the annual reports is
also emphasized by a large number of researchers from the academic field.
For example, Botosan (1997) considers that, although the annual report
is just one of the means of corporate reporting, it should serve as a good
indicator for the level of voluntary information disclosure about the
company. This thing is due to the fact that the reporting levels achieved
through the annual report are positively correlated with the information
volume provided through other media. (Lang & Lundholm,1993)
The fundamental role of the annual report as a source for evaluating
the transparency practices is emphasized by Knutson (1992) who asserts
that on the top of the information list used by any financial analyst there
must be the annual report to shareholders which will comprise the financial
reports but also any other complementary information meant to complete
the shareholders’ information need.
Governments, as political decision factors, also underlined the
importance of providing information about the company, through the open
and unitary method reflected by annual reports. The US president,
George W. Bush mentioned in a speech from 2002 that he would require all
American managers to describe in detail in the annual reports the way they
achieved the remuneration policy and the extend to which this is correlated
with the company’s interests. (Standard & Poor’s, 2002)
Referring to the information transparency principle, in EU there are at
least two European Directives in this respect:
 At the EU level they adopted Directive 2004/109/CE the so-called
„ The Transparency Directive” which ensures the harmonization of the
transparency obligations of the financial information referring to the
issuers whose securities are accepted for trading on a regulated market.
„The Transparency Directive” imposes to the issuers whose securities are
traded on regulated EU markets to ensure an adequate transparency degree
for the investors by publishing regulated information and its dissemination
to the public in the whole EU. This information consists of financial
reports, information about the ownership of a significant proportion of the
voting rights and information published in compliance with article no.6

5
Standard & Poor’s , Transparency and Disclosure:Overview of Methodology and Study
Results—United States, 16 octombrie 2002, http://www.standardandpoors.com
60
 from Directive 2003/6/CE about abusive use of confidential information
and market abuse.
 Directive 2006/46/CE stipulates the existence of „a corporate
governance statement” (conformity statement at Directive 2006/46/CE)
the so called „Comply or Explain Statement”. Thus, art.10 from Directive
2006/46/CE specifies that „Companies whose securities are accepted for
trading on a regulated market and which have their headquarters in the
Community are obliged to present an annual declaration concerning the
management of the enterprise in a specific and clearly identifiable section
of the annual report. This statement should offer shareholders at least
basic, easily accessible information about the application of effective
corporate governance practices, including a description of the main
characteristics of risk management and internal control which exist in
relation with the financial reporting process.”
Considering these aspects, The Corporate Governance Codes grant a
significant space to the EU requirements about financial transparency,
internal control and risk management.
Although at EU level there are no directives about non-financial
reporting (they are still a voluntary action), The European Commission
remarks since 20106 the future need for consolidating the European
legislation about the publication of the so-called ESG ((ESG-environment,
social and governance) reports, which comprise information about
environment, social and governance activities, as the consequence of
requirements made by the interested parties (investors, NGOs).

2.4 The methodology for assessing the quality of corporate governance

A. Preparation and reporting the “Comply or explain statement”

A way to reflect corporate governance transparency which defines the
quality of the corporate governance system consists in the evaluation of the
extent to which companies draw up and report the

6
REPORT FROM THE COMMISSION TO THE COUNCIL, THE EUROPEAN
PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND
THE COMMITTEE OF THE REGIONS Operation of Directive 2004/109/EC on the
harmonization of transparency requirements in relation to information about issuers whose
securities are admitted to trading on a regulated market
http://ec.europa.eu/internal_market/securities/docs/transparency/directive/com-2010-
243_en.pdf

61
„Comply or Explain Statement”. The document has a voluntary character
and so does Directive 2006/46/CE.
At EU level the adoption of this declaration by the member states is
reflected in the following way:

Figure 2.4.1: The adoption of the conformity declaration by the EU member states
Source: Study on Monitoring and Enforcement Practices in Corporate Governance
in the Member States, 23.09.2009 (www.ec.europa.eu)

As it results from the above figure, the first states who adopted the
conformity statement before 2002 were Portugal and Great Britain, followed
by Spain in the following year. Since 2004-2005 states such as Hungary,
Sweden, Finland and the Netherlands have adopted this declaration. After
2007 other countries joined such as Germany, Czech Republic, France, Italy
and Romania. Countries such as Belgium, Greece and Ireland have not
adopted such a declaration yet.

B. Assessing a corporate governance score

In evaluating the quality of corporate governance system, the results of
numerous studies enhance that the main component of corporate
governance consists in transparency and disclosure practices (Cromme,
2005; Karamanou & Vafeas, 2005; Bhat et al., 2006; Aksu & Kosedag,
2006; Junarso, 2006; Ben Ali, 2008; Kuznecovs & Pal, 2011; Desouki &
Mousa, 2012; Ionaşcu & Olimid, 2012). It is also relevant that the
international rating agencies (Standards & Poor’s, Credit Lyonnais
Securities Asia-CLSA, Vigeo Agency) pay particular attention to the
practices of transparency and dissemination of information about the
company, as an important component in order to develop a corporate
governance score.
62
 Gompers et al. (2003), basing on a sample of 1500 US companies,
constructed a CG Index by using 24 variables, as a tool for analyzing the
quality of corporate governance system.
Larcker et al. (2007), on his survey consisting of the analysis of 2106
sample companies quoted in USA, between 2002-2003, constructed a
corporate governance score by using 39 criteria including board
characteristics, anti-takeover provisions, compensation characteristics,
ownership, and capital structure characteristics.
In Croatia, Vitezic (2006) analyzed the corporate governance of listed
companies by using three corporate governance qualitative variables such
as: environment of emerging economy, board attributes and disclose level.
So, he did not build a score of CG, but only used some qualitative criteria.
For Greece, Italya and Spain, relying on a sample of firms listed on the
Athens, Milan and Madrid Stock Exchanges, Bekiris and Doukakis (2011)
try to find some correlation between corporate governance and accrual
earnings management. For this scope, first they build a Corporate
Governance Index composed of 55 individual measures. More specifically,
they categorized these measures in five dimensions of corporate governance,
namely Board of Directors, Audit, Remuneration, Shareholder Rights and
Transparency.
In Russia, Kuznecovs & Pal (2011) analyzing the corporate governance
on a sample of the largest listed companies in Russia covering 80% of the
Russian stock market over the period 1995-2007, he did not construct a
corporate governance (CG) score but he used only a qualitative approach
for this purpose.
In Greece, Niels and Vasiliki (2011) composed a CG rating as a tool for
analyzing the corporate governance of 124 firms listed on the Athens stock
exchange, in 2004-2007.
In Korea, Black et al. (2006) analyzed the corporate governance of 515
Korean listed companies by using a self-constructed CG score.
In Europe, Bistrova and Lace (2012), on a sample consisting of 118
companies quoted on Central and Eastern European stock exchanges, over
the period 2007-2010, constructed a CG score by using 39 criteria.
In Italy, Gianpaolo and Poggesi (2010) analyzed the corporate
governance on Italian Listed Local Public Utilities (7 companies) over the
period 2000–2008, by composing a CG rating.
In Germany, Stiglbauer (2010) analyzed the transparency and disclosure
practices on 113 companies Frankfurt Stock Exchange, Germany by
calculating a T&D score.

63
 Other investigative studies in this area, in order to asses the corporate
governance system quality, used some CG scores already calculated by
different rating agencies, such as:
a) Standard’s and Poors Agency (Patel, Balic, & Bwakira, 2002;
Khanna, Palepu & Srinivasan, 2004; Durnev & Kim, 2005; Black et
al 2005, Aksu and and Kosedag, 2006; Doidge,2007);
b) Credit Lyonnais Securities Asia- CLSA (Klapper and Love, 2004;
Durney and Kim, 2005; Doidge,2007; Shen and Chih 2007; Yu,
2009; Chen, Chen and Wai, 2009; Hugill & Siegel, 2012);
c) Institutional Shareholder Service- ISS (Brown & Caylor, 2006;
Brown and Cavlor, 2006; Khanna et al., 2006; Doidge et al., 2007;
Anderson and Gupta, 2008; Daines et al. 2008);
d) Vigeo Agency (Gawer, 2012);
e) Government Reporting Initiative- GRI (Hugill & Siegel, 2012);
f) Deminor Rating Agency (Bauer et. al , 2003; Matos and Serra, 2009;
Renders et al., 2010; Hugill & Siegel, 2012);
g) Aspekt – a private Czech data (Klapper, 2006);
h) Corporate Governance Association of Turkey (Coşkun &
Sayilir,2012).
Data sources for assessing the corporate governance score are represented
by Comply or Explain Statement that companies voluntarily report, data
from Annual reports or any other information presented on the company's
website. The importance of Annual Reports as public information is
highlighted by various authors (Lang & Lundholm, 1993; Botosan 1997;
Knutson 1992; and also Standard & Poor’s Agency). The information
obtained from questionnaires sent to companies can be a good but hard to
obtain source about corporate governance, although this method is used by
some authors such as Drobetz et al. (2004), Toudas and Karathanassis
(2007).
In elaborating a corporate governance score, we want to present the
methodology adopted by Standards & Poor’s rating agency. This choice
is based on different specialized studies which use this methodology as basis
for the elaboration of transparency scores for different markets.
In order to assess corporate management, Standards & Poor’s
methodology aims at two components:
 The country score is analyzed through the analysis of the
effectiveness of the legal infrastructure for market regulation and
information, on the quality of the company corporate management,
in connection with the way in which the external environment acts,
at macroeconomic level;
64
  The company score is granted according to the effectiveness of the
interaction between managers, shareholders and other interested
people at microeconomic level.

For a more correct evaluation of the quality of corporate management,

both microeconomic and macroeconomic components are important.
According to Standard & Poor’s, the score which is granted to
companies, reflects the extent to which the company adhere to
internationally-recognized corporate governance standards, respectively its
codes and good practice principles. In this respect, Standard & Poor’s
methodology which was elaborated in 2002 uses the 98 criteria system
concerning the attributes of corporate governance.
When setting the transparency score, Standard & Poor’s (T&D ranking)
counts on the investigation of 98 corporate governance attributes, which are
detailed in three main categories:
 Property structure: in connection with it they analyze the following
elements: the transparency of the property structure; the concentration and
the influence of the property structure on the company and the
relationships with the shareholders when the analysis aims at:
regularity/access to information about General Shareholder Meeting; the
voting process and how shareholders meet, property rights (28 attributes);
 Financial transparency and information dissemination: the quality and
the content of the public information; programming and accessing
information dissemination; the independence and the position of the
company’s auditors (35 attributes);
 The structure and the management process in connection with which
the following are analyzed: the structure and the efficiency of the
leadership; the role and the composition of the management; the role and
the independence degree of the executive directors (35 attributes) Standard
& Poor’s (2002).

The results of the study made by Standard & Poor’s (2002) at the level
of world markets concerning the transparency of corporate information as
pillar in assessing the quality of corporate governance, is presented in the
following way:

65
 Table 2.4.1: The distribution of the transparency score on world markets

Source: Standard & Poor’s,2002

The results of the study made by Standard & Poor’s (2002) highlight
the high degree of transparency of the markets from Great Britain and USA.
Although these results don not distinguish the Australian market from other
markets in Asia-Pacific area, this market reflects a degree of transparency
which is comparable to the one from Great Britain and USA. The
transparency scores at European level and in the developed countries from
Asia and Latin America reflect a weak transparency level in corporate
governance especially when it comes to the transparency of executive and
management structures.
In the context of the current financial crisis, which damaged the trust in
company corporate governance, there are more preoccupations to develop
these scores in order to emphasize the quality of the corporate governance
system. Thus, the rating agency Standard & Poor’s developed a governance
rating system adding some distinct interest fields such as: (Standard &
Poor’s,2012)7
 Managerial culture shows whether the corporate governance system
insures the stakeholders’ interests in a balanced way. In this sense, it is
considered in managerial culture that excessive management is an
indicator of governance deficiency. Alternatively, a management which
dominates the board through CEO control is a mark of governance
deficiency.
7
Standard & Poor’s, Methodology: Management And Governance Credit Factors For
Corporate Entities And Insurers, November 2012
http://www.standardandpoors.com/home/en/us
66
 Legal/fiscal deviations/crimes; it is to be seen whether the company is
in conflict with the law and in this respect they should emphasize the
number of fines or legal issues;
 Communication, how communication works in connection with
different interested partners and if there consistently communication
conflicts with them
 Internal control is assessed according to the number of deviations from
standards/norms at different activity levels.

In the end the corporate governance score is reported to a four-level

scale: Strong, Satisfactory, Fair andWeak.

C. Concern in corporate social responsibilities activities

A large number of studies identify a strong correlation between the
adoption of good corporate governance practices and the manifestation of
the company's CSR activities. Also, some studies, such as Yermack (1996),
Basu et al. (2007), Nakamura (2011) argue that board characteristics are an
important control variable for the relationship between performance and
management. Similar conclusions are found in various studies such as:
McLaren (2004); Monks et al. (2004); Guay et al. (2004); Rossouw (2005);
Kimber & Lipton (2005); Ryan (2005); Wieland (2005); Aguilera et al.
(2006); Welford (2007); Sjöström (2008); Kolk & Pinkse (2009).
It is obvious that insuring the major objective of the company, that is to
maximize value for all interested parties, is the result of the fact that
companies are efficiently managed. In this context, adopting best
governance practices will lead to attaining the objectives of the company
which will be aligned to the general objectives of the corporation. In fact
stakeholders theory is one of the theories which led to the emergence of the
corporate governance concept.

2.5 Study on developing a methodology for assessing the quality of a

corporate governance system for companies on the Romanian market

Starting from the general methodology for the evaluation of corporate

governance quality adopted by international rating agencies, we will try to
elaborate a specific methodology for the Romanian market and for the
specific framework offered by the Corporate Governance Code (CGC)
issued by the Bucharest Stock Exchange.

67
 Thus at the level of the Corporate Governance Code issued by the
Bucharest Stock Exchange „Transparence & Disclosure” practices will be
assessed concretely in the following way:

A. Preparing and reporting the “Comply or Explain statement”

Referring to this statement, the Bucharest Stock Exchange recommends

that „Issuers who decide to adopt totally or partially the recommendations of
The Code will transmit annually to BSE a Declaration of conforming or
non-conforming with Corporate Governance Code stipulations („Comply or
Explain Statement”), which will contain information about the Code
recommendations to be effectively implemented and the implementation
modality. The statement will be drawn in the format indicated by Bucharest
Stock Exchange.
Specifically, they will analyze whether the company draws up and
reports „The Comply or Explain Statement”, as this aspect reflects the
availability to conform to the corporate governance good practices which
are comprise in the Bucharest Stock Exchange code.

B. Assessing a corporate governance score

We attempt to develop a corporate governance score based on

transparency and disclosure practices reflected by responses to the
questions in “Comply or Explain Statement”.
In order to assess the compared conclusions at the European or
international level, we have reclassified the 51 questions contained in the
“Comply or Explain Statement" into five main investigating areas as
follows:
i) Governance structure -G: 10 questions
ii) Investor relations -I: 10 questions
iii) Board and management -B: 20 questions
iv) Financial disclosure - F: 10 questions
In Appendix 1 we present the general structure of the component
questions in "Comply or Explain Statement” reclassified in order to assess
the corporate governance score. At each of the questions, except the last
one (about CSR) the companies answer with YES/NO/If NO then
EXPLAINS. For our reason, in order to assess a corporate governance
score, we will give 1 point for each answer with YES and 0 points for NO,
resulting the CG score as follow:

68
 10 10 20 10
CG   Gi   Ii   Bi   Fi where,
i 1 i 1 1 j 1

-CG is the corporate governance score for a company;

- Gi is the responses given to each questions referring to Governance
structure area;
- Ii is the responses given to each questions referring to Investor
relations area;
- Bi is the responses given to each questions referring to Board and
management area;
- Fi is the responses given to each questions referring to Financial
disclosure area.

The minimum governance score obtained by a company is 0 points and

the maximum is 50 points.

C. Corporate Social Responsibility

Corporate social responsibility is an attribute of corporate governance

quality’s system and this issue is supported by the recommendations of the
BSE Corporate Governance Code.
Corporate social responsibility is an attribute of corporate governance
quality and this thing is supported by the recommendations of the Corporate
Governance Code of the Bucharest Stock Exchange.
Therefore, art.10 from Code titled Corporate Social Responsibility
requires that „The corporate governance framework must know and
recognize the legally established rights of stakeholders and encourage active
co-operation between corporations and stakeholders in creating wealth, jobs,
and the sustainability of financially sound enterprises.”
One question is allocated to the „Comply or Explain Statement”, the 51
question which is formulated in a simple way, respectively, if the company
performs or not the corporate social responsibility activities. The answer of
the companies can be YES or NO and if it is NO then EXPLAIN. In order to
evaluate this field we will grant 1 point if the company says YES – that is it
performs social responsibility activities and 0 points for NO – that is it does
not perform social responsibility activities.

69
 2.6 Empirical study – assessing the quality of corporate governance
system for the Romanian market companies

The objective of our research is to evaluate the performance level of the

corporate governance system by evaluating the importance given to
corporate governance principles in the Romanian economy.
Data source is represented by “Comply or Explain Statement” that
companies voluntarily report to Bucharest Stock Exchange in 2012. If
companies do not prepare such a statement, then our data source will be
represented by the investigation of official information published by the
companies listed on Bucharest Stock Exchange (Annual reports of the
directors, the Financial Statements or any other information presented on the
company's website).
At the end of 2012, there are 106 companies listed on Bucharest Stock
Exchange which are classified into four categories: I Category (count 28), II
Category (count 52), III Category (count only one company) and Unlisted
Category (count 26). We take in our study 81 companies because we
removed from the sample the unlisted companies.

Research Methodology
In order to make this study we used the non-participative observation
method, starting from reporting the „Comply or Explain Statement” and
registering the information comprised in this declaration by the companies
listed at the Bucharest Stock Exchange to see whether the companies apply
corporate governance and transparency elements. In the absence of the
„Comply or Explain Statement we will use the public information from the
company site, including the administrators’ annual reports.
According to the methodology we elaborated in the previous chapter, the
quality of corporate governance is assessed through three dimensions:

A. Preparation and reporting the „Comply or Explain Statement”

which is the first dimension of corporate governance system quality.

B. Assessing a corporate governance score for the Romanian companies

listed on the Bucharest Stock Exchange.
The methodology for calculating the score of a company's corporate
governance was presented in the previous chapter. In order to calculate the
corporate governance score for the sample companies we extend the formula
for determining the score, as follows:

70
- CG represents the average score registered for the Romanian stock market
governance;
- CGi is the corporate governance score achieved by each of the "i" listed
companies;
- N is the number of companies in the sample.

In order to highlight the performance of corporate governance in each of

the four investigated areas of corporate governance, we will detail the model
for calculating the average score of governance, such as:
10 10 20 10

N
CGi N
 Gji  Iji  Bji   Fji
j 1 j 1 j 1 j 1
CG    
i 1 N i 1 N
10 10 20 10 where,
 Gji
j 1
 Iji
j 1
 Bji
j 1
 Fji
j 1
N   
 N N N N GI BF
i 1 N

- Gji is the score given to the questions "j" of the field "E-Governance
structure" for each firm "i" in the sample;
- Iji is the score given to the questions "j" for domain "I-Investor relations",
for each firm "i" in the sample;
- Bji is the score given to the questions "j" for domain "B-Board and
management" for each firm "i" in the sample;
- Fji is the score given to the questions "j" of the field "F-Financial
disclosure" for each firm "i" in the sample;
- N is the number of firms in the sample;
- G represents the average score registered by the sampled companies for
“G-Governance structure" area;
- I represents the average score registered by the sampled companies for
“I- Investor relations” area;
- B represents the average score registered by the sampled companies for
“B- Board and management” area;
- F represents the average score registered by the sampled companies for
“F-Financial disclosure” area.

The minimum average governance score of the Romanian market ( CG )

is 0 points and the maximum is 50 points.

71
 C. Corporate Social Responsibility
The assessment of environmental and social responsibility transparency
practices will be based on the answer given by the company in the " Comply
or Explain Statement” and in his absence we will investigate the information
published on its website, regarding the existence of such practices.

Research results

A. Regarding preparation and reporting of the „Comply or Explain

Statement”
A first way of reflecting the transparency of corporate governance-
defining the quality of the system of corporate governance is the preparation
and reporting of the " Comply or Explain Statement".
The analysis of the number of those who reported "Comply or Explain
statement" found that only 59 of the 81 numbers of companies have posted
this component on its website, in a separate section on the website or as part
of the Annual Report of the Trustees. This means that a percentage of 73 %
of the companies listed on the BSE have chosen to adopt such a statement.
With a share of 73%, Romania is below the EU countries (86%) in the
number of companies choosing to report the "Comply or Explain
Statement".

72
Reporting " Comply or Explain Statement" in Reporting " Comply or Explain Statement" in
Romania EU

Figure 2.6.1.: Reporting " Comply or Explain Statement”

Source: own processing Source: European Commission, Study
on Monitoring and Enforcement Practices
in Corporate Governance in the Member
States, 23.09.2009 (www.ec.europa.eu)

B. Assessing a corporate governance score for the Romanian listed

companies
On the basis of our investigation we can set up, at the level of the
Romanian economy a general score which is differentiated on fields and
which will reflect the quality of the governance system of the companies
which activate on the Romanian market.

73
 Table 2.6.1: General corporate governance score differentiated on fields, at the
level of the companies listed on BSE 2012
Corporate governance fields Achieved Maximum The degree of Average score
scores* score adopting CG per company
** principles
1.P- Property structure (10 442 810 54.57 % P = 5.45
questions)
2. S-Relationship with 707 810 87.28% S = 8.72
investors (10 questions)
3.C-Structure and 867 1,620 53.52%
C = 10.7
management process
(20 questions)
4.F- Financial transparency 421 810 51.98% F = 5.20
and information
dissemination (10 questions)
TOTAL AGGREGATE 2,437 4,050 60,.17% CG ≈ 30.07
Source: own personal calculations
* Are obtained as product between the YES answer number of each company for each of
the mentioned fields
**Are as the product between the number of questions corresponding to the respective
subcomponent (10 or 20) and the number of sample companies (81)
*** The maximum score corresponds to the value of 50 which is the maximum number of
questions corresponding o the „Comply or Explain Statement”

As a result of determining the governance score

100,00%
87,28%
90,00%
80,00%
70,00% 60,17%
60,00% 54,57% 53,52% 51,98%
50,00%
40,00%
30,00%
20,00%
10,00%
0,00%
Governance Investor relations Board and Financial TOTAL
structure management disclosure

Figure 2.6.2: The degree of adopting the corporate governance principles at the
level of the companies listed at BSE 2012
Source: own processing

74
 Table 2.6.2 : Descriptive statistics governance score
Governance Score
N Valid 81
Missing 0
Average 30.07
Median 33.00
Modal 10
Deviation 15.345
Minimum 0
Maximum 49
Quartile 25 10.25
50 33.00
75 41.75

Source: own calculations

On the basis of the processed data we can draw the following

conclusions:
a) The average corporate governance score at the level of the
sample companies is approximately 30, for values between 0 and 49. Half of
the companies have a maximum governance score of maximum 33 and the
others of minimum 33. Most companies have a corporate governance score
of 10.
The companies listed at Bucharest Stock Exchange adopt good practice
corporate governance codes and principles in a percentage of about 60 % of
the total principle number. This means that, on average, out of the total
number of governance principles, 60% of the questions were answered with
YES and 40% with NO and it is to be completed with explanations.
Reporting the percentage of NO answers to the total number of answers
provided by the sample companies (that is 50 questions for each of the 81
companies) there results an average of 20 questions (out of 50) to which
companies said NO and come with supplementary information. The result is
more above the EU average where there are only 3 explanations per
company (3 NO answers) (The European Commission, 2009). The situation
is, however, quite similar to Hungary’s situation, which registers the biggest
number of explanations at EU level respectively 24 explanations per
company (24 governance principles which are not accomplished). Hungary
is followed at great distance by Spain (8 explanations per company),
Denmark and Holland (6 explanations per company), Estonia (with an
average of 4 explanations per company).
75
 b) The highest percentage in adopting the corporate governance
principles (about 87 % of the principle number) is achieved in the
relationships with shareholders/investors.
The result is also below the level registered by the European average,
93% (according to the data provided by the European Commission, 2009).

c) The sample companies adopt little over half of the corporate

governance principles referring to the following corporate governance
fields: property structure (55%), management structure and process
(54%), financial transparency and information dissemination (52%).
Regarding the comparisons with the averages registered at the level of
the European Union we notice that the percentage of adopting the principles
about the structure and the management process is below the European
average, 64% (according to the data provided by the European Commission,
2009).
Also financial transparency and information dissemination are a lot
below the European average (93%) as Romanian companies have big
problems in financial reporting according to IFRS or in translating and
disseminating in English the financial reporting.

Among the detailed conclusions of the study we are going to present the
following:

Regarding Governance structure

1. On average the corporate governance principles connected to property
structure and its transparency are adopted in a percentage of 55 %.

2. Owning a Corporate Governance Code

A number of 45 listed companies, that is 56 % of their total, have their
own corporate Governance code which describes the main corporate
governance aspects. The percentage is superior to Croatia, for example,
where only 33 % of the listed companies have their own corporate
governance code (Vitezic, 2006).
Out of the 45 listed companies, which declare they own a corporate
Governance Code, only 40 of them (89%) post The Corporate Governance
Statute/Regulations on the company website, so this statement stays only as
a declaration.
The same 44 companies which declare they have their own Corporate
Governance Code declare that in the Corporate Governance Statute are
76
defined the corporate governance structures, functions, competences and
responsibilities of the Board and the executive management.
To strengthen the results in point 2 we notice that the corporate
governance structures of the 45 companies which declare they their own
Corporate Governance Code are also posted on the company website.
Out of the 45 companies which declare they have their own Corporate
Governance Code, a number of 41 companies, that is 91% present in The
Annual Administrators’ Report a chapter dedicated to corporate governance
where all relevant events are described, which are related to corporate
governance at the level of the previous financial exercise.

3. Internal Code of Conduct

Only 31 companies out of the 45 companies which declare they have their
own Corporate Governance Code disseminate on their website their own code
of conduct and its essential aspects for each specialized commission/committee,
that is a percentage of about 69 % of these companies and only 38 % of the
listed companies.
In conclusion, we notice that the biggest problems about the transparency
of the property structure are to be found in the transparency of the Internal
Code of Conduct, where only 38% of the companies posted this document on
the company site. For the rest, the recommendations about property structure
and its transparency are adopted in a percentage of 50%.

Regarding Investor relations

1. The highest percentage of aligning to the Corporate Governance
principles are registered at the category „Investors relations” (87.28 %).

2. The fair treatment of the shareholders

60 companies of those listed which means 74 % declare that they respect
the rights of the financial instrument owners, providing them with fair treatment
and submitting to their approval any modification of the rights in the special
meetings of those owners.

3. General Shareholders Meeting (GSM)

An average of 73 companies out of the 81 listed companies, which means
91 %, publish in a section dedicated to their own website details about the
General Shareholders Meeting. 63 companies of the listed ones, that is 78 % of
the companies listed on BSE, elaborated and proposed to GSM some
procedures for an efficient functioning of GSM. 69 listed companies, that is
85% of the companies listed on BSE, disseminate in a special section of their
website the shareholders’ rights as well as the rules and the procedures of
77
participating at the GSM. 73 companies, that is 90% of those listed on BSE,
provide information in due time (after GSM takes place) for all shareholders
through the special section in their+ website, about the decisions made at GSM
and the detailed vote result.

4. A person/department specialized in investors’ relations

A number of 74 companies (91% of the listed companies) have a
department which is specialized in investors’ relations.

Regarding the Board of Directors

1. The management system
The dual management system exists only in the case of 14% of the
companies listed on Bucharest Stock Exchange (only 11 out of 81 companies
are managed in this way). The majority of the listed companies (about 84%)
own a unitary management system. According to Vitezic (2006), in Croatia for
example no company was administered in dual system in 2006, when in Europe
77% of the companies had a dual management system.

2. The frequency of the meetings

In the case of 61 companies (75% of the listed companies), The Board
meets at least once every three months to monitor the activity, that is at least 4
times a year. In Croatia, for instance, the frequency of the Board meetings is 5.8
per year (Vitezic 2006). The average of the meetings in the European countries
where they a have a dual Board is 6.7 meetings, and in those where they have a
unitary board is 9.3 meetings (Albert-Roulhac, Breen, 2005, pp. 19-29).

3. Training in corporate governance

The Board members improve permanently the training knowledge in
corporate governance in the case of 56 companies out of 81 listed
companies (69% of the cases).

4. The independence of the Board members

Only 53 companies out of the 81 listed on BSE, that is 66% have a
Board structure which insures a balance between executive and non-
executive members (and especially the non-executive independent
administrators) so that no person or small group would be able to dominate.
Regarding the independence of the Board members, only 46 companies,
that is 58%, have a sufficient number of independent members. The analysis
made by Maier (2005, pp. 9-10) a shows average percentages for the
independence of the Board which varied on a scale from 1.5% in Germany

78
to 81.3% in Switzerland. At the level of the European average (The
European Commission, 2009), it is noticed that 14% of the companies
declare that they have one or more deviations from the independence of the
Board members, hence the fact that 86% of the companies own independent
Boards. Having a percentage of 58% the results from Romania show a
positioning far below the European average.
Ensuring the independence of the Board is an important indication of the
quality of managers’ decisions and implicitly an important indication about
the quality of the governance system (Garcia et al., 2007; Byard &
Weintrop, 2006; Ionaşcu & Olimid, 2012).

5. The existence of consultative committees

In less than half of the companies listed on BSE (approx. 52 %), the
boards use the support of consultative committees/commissions to examine a
specific topic. Only in the case of 20 companies out of the 81 which are
listed on BSE (25% of the cases) there is a Nomination Committee in the
company. In the rest of the cases, nomination is made by the Board
members or shareholders. According to the European average, 71% of the
companies have a nomination committee (Vitezic, 2006).

6. Regarding remuneration policy the results are quite discouraging. 31

companies, that is 38%, have a remuneration committee which is formed
exclusively of non-executive administrators. According to the European
average, 94% of the companies have a remuneration Committee which
places Romania again below the European average but superior to Croatia
for example where the average is just 20% (according to Vitezić, 2006).
Only 29 companies, that is 36% of the companies listed on BSE,
present their remuneration policy in the Corporate Governance
Statute/Regulation. The result is far inferior to the European average,
according to which 94% of the companies disseminate the remuneration
policy, nevertheless the result is over the Croatian average where only 20%
of the companies disseminate such information (Vitezić, 2006).
The administrators and managers’ policy is an extremely important
component in the preoccupation to align the managers’ interests with those
of the shareholders/owners. This is why the members’ countries grant great
importance to this aspect (see the percentage of 94% of the companies
which disseminate the remuneration policy). At EU countries level, they
disseminate the managers remuneration forms with the following results:

79
  68 % of the companies remunerate under the form of bonuses;
 49 % of the companies remunerate under the form of “stock-option
plans”;
 32 % remunerate according to the achievement of market
performance targets (The European Commission, 2009).
The study made by Maier (2005, p.11), on a sample of enterprises from
24 countries shown that the average of information disclosure about the
remuneration of the Board members is 84%. In Europe, the average
indemnity for an administrator for each meeting was 7,301 euros in 2005.
(Albert-Roulhac, Breen, 2005, pp. 19-29, quoted by Feleagă, 2011).

7. Conflicts of interest
In 43 of the listed companies (53% of the listed companies), the Board
adopted a procedure in order to identify and solve adequately the situations
where there are conflicts of interest.

Regarding financial disclosure

1. The dissemination in the native language (here is the Romanian
language) of the financial reports
A majoritary percentage of the listed companies that is 96% disseminate,
through a special section on their website, the financial calendar, annual,
biannual and quarterly reports. It means that 78 companies of the 81
perform such information dissemination and for two of the listed companies
respectively Casa de Bucovina Club de Munte and Uztel (which is in legal
reorganization) we did not find the corresponding information on the
company website.

2. The dissemination in English of the financial reports

Regarding the dissemination of information in English, which represents
the subject of the reporting requirements, the number of companies which
do it is reduced at less than half of the companies which disseminate in
Romanian the corresponding information and of the total of the listed
companies the percentage of the companies which disseminate the current
and periodical information in English is 42 % (34 out of 81 listed
companies).

3. IFRS reporting
Half of the listed companies prepare and disseminate in parallel
financial reporting according to IFRS.

80
 4. Meetings with financial analysts, brokers, rating agencies and other
market specialists
Half of the listed companies promote, at least once a year, meetings with
financial analysts, brokers, rating agencies and other market specialists with
the purpose of presenting the financial elements which are relevant to the
investment decision.

5. Audit committees
In less than half of the number of listed companies, there is an audit
Committee (in 38 companies representing 47% of the total number of listed
companies). The result is far inferior to the European average, which is 81%
(according to the European Commission 2009).
There where they have an Audit Committee, in 92% of the cases this is
formed exclusively of non-executive administrators and it has a sufficient
number of independent administrators. Only in 3 companies this
requirement is not fulfilled, respectively in Dafora, Ropharma SA Braşov,
Şantierul Naval Orşova SA, where the Audit Committee either comprises
executive adminstrators as well, or administrators who are not independent.
As in less than half of the Romanian companies there is an Audit
Committee, it results that only 43% of the sample companies have an Audit
Committee which is also sufficiently independent.
At the level of EU countries, approximately 73% of the Audit
Committee members are independent members. In Romania the
independence of the Audit Committee members is below the European
average. Countries such as Belgium, Germany, Poland or Spain also have an
independence level below the European average. High independence levels
are to be found in Hungary, Ireland, Italy, Holland and Great Britain. We
notice that in countries such as Belgium, Germany, Poland or Spain the
average is below the European one. (The European Commission, 2009)
According to the results of the European average (The European
Commission 2009), it is obvious that in approximately half of the
companies in EU the Audit Committee is formed entirely of independent
members. However, 12% of the companies do not have a majority of
independent members and 1% of the companies which have an Audit
Committee state that do not have any independent member.

C. Corporate social responsibility (CSR)

The last requirement from the “Comply or Explain Statement” is about if

company conducts the activities of Social and Environmental
81
Responsibility. A number of 62 companies in sample, representing a
percentage of 77 % in total, affirm at this time (2012 our note) that they
have conducted such activities until now.
Similar research conducted in Romania by Popa et al (2009) also by
using as sample the BSE listed companies shows that in 2007 and 2008 the
percentage was of 44 % representing the BSE listed companies which
disclose at least one type of information about environment, social
responsibility or sustainability.
Comparing our findings with those of a study by Popa et al (2009),we
found that the percentage of companies making CSR practices increased in
2012 at 77 % from about 44% (2008) representing the percentage of
companies which disclose information about CSR.

Conclusions
The globalization of capital markets, the competition for fundraising
also requires greater adoption of standards and procedures of corporate
governance internationally recognized. This aspect is particularly important
for emerging economies and those in transition, which typically have
recovered the credibility for investors.
In Romania, the principles of corporate governance have been taken at a
conceptual and regulations level since 2000. The first Corporate Governance
Code was adopted in 2001. In 2008, it was replaced by a new Corporate
Governance Code, which is based on the OECD principles. The new code is
applied voluntarily by companies traded on the regulated market operated
by Bucharest Stock Exchange. Our research has revealed the level of
Romanian Bucharest Stock Exchange listed companies which adhere to the
principles of corporate governance internationally recognized and integrated
into the Corporate Governance Code of the Bucharest Stock Exchange. The
results reflect the degree of adoption of principles of good practice in a
percentage of 60%, related results at the end of 2012. The results have
improved significantly since 2008, with the adoption of the Code of
Governance by BSE, and voluntarily requested to the companies traded on
the regulated market operated by BSE.
Although there is progress in this respect, many of the Romanian
corporate governance practices are well below of the EU average or even
below average record for other developing countries.

82
 CHAPTER 3

IMPLICATIONS OF ADOPTING THE BEST

CORPORATE PRACTICES ON REASSESING THE
THEORIES ABOUT THE BUSINESS PERFORMANCE

Motto:: Although economic and social objectives were

considered for a long time as distinct and often contradictory
elements, this artificial separation has become obsolete on a
global free market which based on competition through
knowledge. Thus, companies don not act separately from the
society around them; in fact, their ability to compete on a
market depends essentially on the market they operate in.
(Michael E. Porter, Mark R. Kramer, 2002)

3.1 Financial dimension of business performances

For a long time, global performance was reduced to the financial

dimension, based on the shareholders’ paradigm by Milton Friedman
(1970) who considers that maximizing financial results for shareholders is
the biggest social responsibility of a company.
In IFRS acceptance (2012) profit is frequently used as a performance
measurement. Revenues and expenses are elements which are directly
linked to profit evaluation (IFRS 2012, “General conceptual framework”
par. 4.24).
Cormier and Magnan (2003), from a study made on a sample of 300
companies from France, USA and Switzerland, draw the conclusion that the
most representative financial indicators for the financial performance are:
net profit, operating profit, operating cash-flow, retained profit.
Cohen (1995) assimilates performance with efficiency, following the
results obtained by the enterprise in rapport with the resources they used.
Among the financial performances selected as representative there are: net
profit, earning before interest and taxes and cash-flow.
Pintea (2011) using the questionnaire technique applied on various
respondents from the public and private environment from Romania makes
a top 10 financial indicators which are representative for the financial

83
performances of a company. These indicators are: added economic value,
return on investment, return on equity, operating cash-flow, liquidity
indicators, solvency indicators, total shareholders return, earning per
share, net profit and turnover.
Numerous authors were preoccupied by the selection of financial
indicators in order to create predictive models of business performance
through which they could evaluate the bankruptcy risk.
Beaver (1966) found that Net Income to Total Debt had the highest
predictive ability (92% accuracy one year prior to failure), followed by Net
Income to Sales (91%) and Net Income to Net Worth, Cash Flow to Total
Debt, and Cash Flow to Total Assets (each with 90% accuracy).
Altman (1968, 2000) in his studies found that financial ratios measuring
the company's liquidity position, profitability and solvency predicts potential
failure
Ohslon (1980) finds a negative correlation between the probability of
failure and the size, profitability and liquidity of the company. Also, he
found that the probability of failure is positively correlated with the
company's gearing.
Dugan & Zavgren (1989) and Chen & Shimerda (1981) identified seven
financial factors that may help predict financial distress: the return on
investment, leverage, capital turnover, the short-term liquidity, cash
position, time payable and inventory.
Lennox (1999) finds that profitability, leverage, and cash flow have
important effect on probability of bankruptcy.
In Korea, Nam and Jinn (2000) stated that financial expenses to sales, debt
coverage and receivables turnover were important to explain bankruptcy.
In Malaysia, Low et al. (2001) found that the cash flow ratios were
significant in explaining bankruptcy during the period 1996-1998; while
Mohamed, Li and Sanda, (2001) found that the leverage ratio and efficiency
ratio (total asset turnover) were found to be significant during the period
1987 to 1997. Zulkarnain et al. (2001) found in his study that total liabilities
to total assets, sales to current assets, cash to current liabilities and market
value to debt were significant in explaining financial bankruptcy in
Malaysia during the period 1980 to 1996. Later, Abdullah et al. (2008)
found leverage ratio, net income growth and return on asset to be an
important predictor of distressed companies in all the models used (MDA,
Logit and Hazard Model)
In Denmark, Lykke et. al (2004) by using the logit regression, developed
an accounting-based model developed in Danmarks Nationalbank to predict
failure rates in the Danish corporate sector. The estimated accounting-based
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failure-rate model contains a number of key financial ratios that are
commonly used in strategic accounting analysis such as: the company's
liquidity position, profitability and solvency. Other variables are age and
size of the company, form of ownership and critical auditor comments.
In Romania, in the bankruptcy prediction models developed for the
Romanian space by various authors (Cămăşoiu Negoiescu 1994, Ivoniciu,
1998; Băileşteanu, 1998; Anghel 2002; Robu-Mironiuc, 2012) the most
prevalent financial ratios are: cash-flow/active, debt / assets, turnover of
claims / liabilities / current assets and so on.
Investigating a vast literature (over 170 studies focus on prediction
failure problem) Bellovary (2007) found among those 752 factors which are
utilized in the individual studies the first ten financial ratios, as follows: 1)
Net income / Total assets; 2) Current ratio ; 3) Working capital/Total
assets, 4) Retained earnings / Total assets; 5 ) Earnings before interest and
taxes (EBIT) / Total assets; 6) Sales / Total assets; 7) Quick ratio; 8) Total
debt / Total assets ; 9) Current assets / Total assets; 10) Net income / Net
worth.
From the investigation of specialized literature we notice the fact that in
expressing financial performance the most utilized indicators are expressed
in relative form, under the form of financial ratios, more than the indicators
in absolute values. The usage of financial ratios has the advantage that,
comparing with absolute levels of indicators, they provide a degree of
general applicability. Using financial ratios largely removes limits generated
by the size firms.
By using financial ratios, the accuracy of the prediction of bankruptcy of
a company exceeds 90% (Chen and Shimerda, 1981). Altman, in his model,
uses a variety of ratios to examine the seven factors mentioned above. It
should be noted that some researchers (that is to say, Morris, 1998) argue
that since the bankruptcy was due to unforeseeable events, therefore it can
not be predicted.
More than that, it is imposed that financial ratios of a specific business
to be best interpreted as a group (Walton et al. 2003) rather than making
judgments on individual ratios because the interpretation of one ratio may
be altered by other ratios of the same business.
Among the most popular financial ratios used very often by researchers
are:
- Profitability ratio represented by return on assets (Beaver, 1966;
Deakin, 1972; Libby, 1975; Ohlson, 1980; Lennox, 1999; Abdullah,
2008; Zulkarnain, 2001; Lykke et. al 2004; Siminica, 2005) ;

85
- Leverage ratio repreyented by total liabilities to total assets (Beaver,
1966; Deakin, 1972; Ohlson, 1980; Zmijewski, 1984 ; Zavgren et
Dugan, 1989; Mohamed 2001; Anghel, 2002; Lykke et. al . 2004;
Abdullah; 2008) ;
- Cash flow ratio, represented by cash to total assets or cash to current
liabilities (Lennox 1999; Zavgren et Dugan, 1989; Low et al. (2001) and
Zulkarnain, (2001; Ivoniciu ,1998; Bailesteanu 1998, Anghel, 2002);
- Size activity (Ohlson, 1980; Lennox, 1999; Shumway, 2001; Lykke et.
al 2004).

3.2 From financial performance to global performance – the goal of the

"new economy"

Using financial ratios excessively, as indicators for reflecting the

company performances brings about numerous shortcomings, which are
mentioned by various authors as follows:
a) Short-term orientation, individual management, the temptation to
manipulate figures, the incomplete character of the financial performance
(Pintea, 2011).The same limits are mentioned by Henri Jean-Francois
(2006).
b) The current information system of managerial accounting,
constrained by procedures and reporting duration for the financial
statements is too slow, too complex and too distorted to be of help to
managers when planning and making decisions (Johnson & Kaplan, 1999).
c) Bӑtrâncea M. & Bӑtrâncea L-M. (2006) who consider that
performance measurement should be based exclusively on accounting
information present certain limits such as:
 They have a historical character, especially when the financial
statements are published a few months after they are drawn up;
 Ensure prioritary the knowledge of past performance;
 Indicate too late the change inside the enterprise;
 Do not ensure information about the capital which is difficult to
evaluate;
 Generate treatment cost, which is often very important, in connection
with the results registered by the enterprise (Bӑtrâncea et.al, 2006,
pp. 31).

86
 Using exclusively financial information in order to evaluate the
company performance presents certain limits which are summarized as
follows:

□ Accounting limits
These limits are generated by the accounting methods used for
reflecting the fair image of the position, performances and modifications of
the financial position, by appealing to „creative accounting” techniques,
which can distort the real image of the financial state under the mask of
respecting the letter of the law but not its spirit.

□ Limits generated by orientation towards the past for financial ratios

and the need for a strategic approach to performance
The performances reflected in the financial statements represent a past
picture of the company image. As international bodies for accounting
regulation make efforts to reflect in accounting the fair value of the
company, its position and performance, there are still many shortcomings
concerning the acknowledgement of this value at a level which will reflect
the reality on the field. Moreover, the biggest shortcoming of the financial
information is that it reflects only the short-term dimension of the company
performance and does not take into account the company sustainability.

□ Limits which are generated by the existence of qualitative (non-

financial) factors at the company level
At the level of the organization there are some qualitative (non-
financial) variables which have a significant impact upon the activity of the
organization, but cannot be reflected in the financial statements:
A. The manifestation of corporate social responsibility through social and
environmental activities, meant to ensure the sustainability of the
company on the market.
B. The characteristics and the structure of corporate governance;

We can add to those mentioned above:

C: The human capital of the company a) the staff training and preparation b)
staff turnover; ways to motivate the employees;
D. The image of the company on the market: a) the characteristics and
development degree (growth tendencies) of the organization’s activity
sector; b) the market position, market leader or not in its sector c) the
company brand; d) clients’ loyalty;
E. Orientation towards research-development-innovation activities;
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F. The informational capital which is reflected by the degree of IT
development;
G. The quality of drawing up and reporting financial statements such as the
suspicion of certain financial transactions reflected through the opinion
of the financial auditor.
H. The macroeconomic environment: a) the development degree of the
country where the company activates; b) government policies.

All these non-financial factors lead to an increase of the global

performances of the company, but they are not reflected directly and
immediately in financial performances.
All these shortcomings of the accounting performances are supported by
various specialized studies which emphasized the lack of correlation
between the economic (accounting) performances and the stock market
performances, determining a decrease of the investors’ trust in the reported
accounting information; they will appeal to other indicators to determine
their investment decision. For example, the study made by Amir (2000), on
5000 American companies, on a 16 year period, reflects a decreasing
correlation between the reported profits and the shareholders’ profitability
generating a reduction of the impact of financial results upon the investment
decisions of the potential market investors.
Other authors such as Kaplan & Norton (1996) through their studies
reach the conclusion that the non-financial indicators reflect better the
company performances in comparison with the financial ones.
The same conclusion was reached by the specialists from Ernst &Young
Center for Business and Innovation (1997) who, on the basis of the study
about the use of the non-financial indicators, highlight such factors as:
management quality, corporate culture, the quality of the communication
system with the investors and the effectiveness of the executive
management remuneration policies, as non-financial performance criteria
used by investors in order to evaluate the listed companies.
Moreover, the study made by the consultancy company McKinsey on
the opinion of the institutional investors from emerging countries (Asia,
Europe and Latin America) concerning corporate governance, demonstrates
that these investors grant at least the same importance to the information
about corporate governance as to financial information when adopting
institutional decisions, and they are also willing to pay a premium for the
companies which apply corporate governance standards (in South-Eastern
Europe and Africa this premium registers the maximum value of 30% of the
stock market capitalization in 2002) (Robu et al, 2004).
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 In the evolution of company performance systems, we can identify the
following stages (Achim, 2009):
a) The period 1960-1970 is marked by the representation of the
company performance through indicators which define the firm
dimension such as: turnover and total assets ;
b) The period 1970 -1980 is defined by profitability indicators such as:
net profit, profit per share, PER ;
c) The period 1980-1990 highlights the problem of liquidity liberated
from economic life, expressed by cash flow indicators;
d) The period 1990-2001 orients attention towards value-creating
concepts expressed through: cash flow return on investment,
economic value added, market value added.
e) The period 2001-present, performance is defined in terms of value
creation, which is subordinated to the purpose of sustainable
development.

As Bouquin (2001) states in his work “Controle de Gestion”, if

financial performance is just the „result of the race”, global performance is
the race in itself or even the vector of the future races success. (Albu, 2005,
pp.176) The same idea is emphasized by other authors who emphasize the
following: The contribution of the enterprise to sustainable development
does not consist in what a responsible enterprise does with 1% of its profit,
but more in how it obtains 99% of that profit. If, for example, the enterprise,
through its goods/services exercises negative effects upon health and
allocates 1% of the profit to the individuals to whom it caused side effects,
its impact from the social responsibility point of view is negative. The profit
stays the necessary condition for ensuring sustainable development, but the
company wants transparency about how it is formed “.(Mironiuc, 2009)
In a competition world, which got more dynamism because of the
economic-financial turbulences which produced mutations in the economic-
financial environment, achieving business excellence represents the way to
survive and develop for enterprises in a competitive economy. T.J Peter and
R.W.Waterman since 1995 have assimilated performance with the
excellence concept, which is a fundamental criterion for any organization
which is based on four major elements: organizational efficiency, social
identity, achieving objectives and organization reputation.
The new economy exposes the enterprises to the critical eye of the
society which is more and more attentive to ethical values. In the current
conditions of globalizing the world economy, the performing enterprise is
“the enterprise which creates added value for its shareholders, satisfies the
89
clients’ requests, takes into account the employees’ opinion and protects the
environment. Thus, the shareholding is content because the enterprise
obtained the desired profitability, the clients trust the company future and
the quality of its products and services, the employees are proud of the
company they work for and the company benefits, through its policy, of the
protection of the environment.”(Jianu, 2006, pp.18). The global
performance concept is based on the stakeholders theory, and managers, in
their attempt to maximize the company value, will not be able to ignore the
interests of their social partners. The harmonization of these interests is
ensured through the corporate governance system. (Robu, 2004)
Finding a common, unifying purpose is the solution all specialists look
for in order to solve the conflict between the principal’s interests and the
agent’s interests. A governance system based on solving the conflicts
between the parties involved, will appeal to the evaluation of the managers’
performance. Measuring performance will thus represent a result obligation
but also a modality obligation. The quality of the adopted decisions is an
important evaluation element together with the measurement of the financial
results. (Charreaux, 1996)
Thus the performance notion was extended in order to take into account
social responsibility as well (the term used by the European Commission) or
the societal responsibility of the organization towards all interested parties.
We have to mention that this last term also includes environmental aspects.
(Pintea, 2011)
One of the ways to achieve excellence is represented by performance,
and at present we speak more and more about global performance.
The concept of global performance is present in literature to evaluate the
application of the enterprises’ strategies in the context of sustainable
development. The concept is the reflection, at the management system level,
of the macroeconomic concept of sustainable development. (Capron &
Quairel, 2005) This new performance approach has three objectives: the
increase of the economic-financial performance of the enterprise, the
development of environment effectiveness and favoring social development.
The Triple Bottom Line approach introduced by Elkington (2002)
concentrates entities not only on added economic value but especially
towards the social and environmental values that it creates, or, on the
contrary, it destroys. The TBL concept means „economic prosperity,
respecting the environment, respecting and ameliorating social cohesion”.
(Pesqueux, 2002, pp.157). For Reynaud (2003, pp.10) and Baret (2006,
pp.2) global performance represents the aggregation of economic, social
and environment performance.
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 In parallel, the fourth dimension of global performance developed, the
one linked to corporate governance. Maximizing economic, social and
environment performances can be done only in the context of good
collaboration at the level of corporate governance structures through which
conflicts of interest are diminished. An efficient corporate governance
allows shareholders to make sure that the enterprises where they own social
parts are led according to their interests. In this respect we follow aspects
referring to: the competence and the composition of the Board, the
administrators’ independence, the managers’ remuneration, respecting the
shareholders’ rights and the principle „a share equals a vote equals a
dividend”, respecting the minor shareholders, information transparency,
guaranteeing the reality of the published information, the quality of internal
control.).
Even before the bankruptcies at the beginning of 2000, big international
consultancy companies emphasized the necessity of appraising the
performance of the listed companies according to performance criteria at the
level of corporate governance structure level.
At the same time, one of the performance concept promoters Pesqueux
stated the fact that: „Measuring company performance is linked to corporate
governance and the social products offered to society. The performance
evaluation and measurement systems change simultaneously with the
evolution of the market economy. Under these circumstances, there is a
confrontation with the principles of a new social era of the capitalism in the
developing countries which must adjust their attitude and behavior.”
(Pesqueux, 2004)
Sustainable development and implicitly globalization impose new
performance standards which exceed the economic sphere, both for national
and international companies. In the new context of sustainable development
new standards of corporate governance are necessary as well as new social
and environment standards, non-financial aspects which complete the
general performance of the company reflected through financial indicators.
Regarding the evaluation of the global performances of the company, we
should mention the preoccupations of the international rating agencies to
fundament the ESG scores of the companies (Environmental, Social and
Governance), which will be used complementary with the financial score, in
order to increase the accuracy of evaluating the company performances and
risks.

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 Figure 3.2.1 : From financial performance to global performance - goal of the
"new economy"
Source: Own view

So the modern governance of the companies is dominated by the

following concepts: governance, performance, value, stakeholders.

3.3 The benefits of adopting CSR upon the company performance

The complexity of the actual economic environment demonstrated in

time that the financial models for the evaluation of the company
performance are insufficient and do not reflect the real performance of the
company. Various studies reflect the fact that in many cases there is no
correlation between the financial performance reflected in the financial
statements of the company and the real performance of the company on the
market.
Various studies show that the firm’s concerns about environmental
issues influence its social valuation. Even since 1982, Arlow & Gannon
have included environmental management as an important duty of a
company. McGuire et al. (1988) found also a significant positive correlation
between corporate social responsibility and historical, instead of future,
economic performance.
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 Hart & Ahuja (1996) pointed out that financial performance is related
positively to environmental performance. According to them, by integrating
environmental activities into the existing management program, a firm can
achieve significant cost saving and higher productivity. Klassem et al.
(1996) found that environmental management composed of product and
operation technologies and management system is one important
determinant of environmental performance.
Moneva et al. 2009 analyze the environmental and financial
performance of a sample of 230 European companies over the period 2004-
2007. Under the stakeholder approach, the commitment to environmental
performance is analyzed and linked with the firms’ financial improvement.
The results support the fact that enterprises which obtained higher rates of
environmental performance show better financial performance levels in the
future. Remaining in Europe, Pérez-Calderón et al. (2011) used a sample of
122 firms from different sectors which belong to Dow Jones Responsibility
Index Europe for the years 2007 through 2009. They found that the best
environmental performances during this period are reflected in the largest
economic and financial benefits.
In Japan (2011), Eri Nakamura examined the effects of environmental
investment both in the short term and in the long term. Also, by using a
survey on 3,237 Japanese firms, obtains the following results: First, in the
short term, environmental investment does not affect firm performance
significantly; second, in the long term, environmental investment increases
firm performance significantly.
In the area of corporate social responsibility (CSR) investment, most
studies show that a firm dealing with social problems can achieve a higher
level of financial performance. Berman et al.(1999) and Hillman &Keim
(2001) based on some USA companies surveys highlighted a positive
relationship between financial performance and various aspects of social
performance, notably employees, clients and civil society.
Similar conclusions are achieved by McWilliams & Siegel (2001) who
found that increasing social responsibility of an organization in relation with
either its products offered or manufacturing process, may lead to increasing
the attractiveness of products offered and therefore increasing in turnover.
Therefore, organizations that are distinguished by better social performance
can be expected to achieve a better financial performance on the long term.
Brignall (2002) believes that an organization's partnership strategies are
nothing but the result of a social isomorphism phenomenon (Di Maggio,
Powell, 1983).

93
 Benefits of adopting corporate social responsibility (CSR) by companies
vary from one company to another, depending on the area and global
community in which the company operates. In any case, however, the
benefits of implementing corporate social responsibility come into desired
results on the long term, after a period of 3-5 years. The exception would be
companies whose brand is already well known in the market.
First, among the effects of implementing CSR in society are those of a
financial nature such as rise in revenue, reduction in costs and increase in
profits. Numerous studies in the literature come to support this claim.
Also, the Institute for Business Ethics, IBE (Institute for Business
Ethics-IBE) (2008) has highlighted through calculation of financial and
corporate responsibility indicators that 'ethical' companies generate an
economic value added and profits about 18% higher than other companies.
A large number of studies are concerned with the effects of
environmental performance on financial performance such as: Lapalnte &
Lano, 1994; Lano et al., 1998; Konar & Cohen, 2001; Khanna & Damon,
1999. Their results show either a positive or negative connection.
Konar & Cohen (2001) found environmental performance to be
correlated with the intangible asset value of S&P 500 firms, and reductions
in toxic chemical releases to be associated with greater firm market value.
Similarly, Austin et al. (1999) demonstrated that good environmental
performance, expressed through various measures (e.g. toxic emissions)
positively influence the rates of return on equity. In accordance with the
above-mentioned studies, Hart and Ahuja (1996) showed that the degree of
emission level results in a better financial performance, based on accounting
information for a period of two years. Further, Filbeck and Gorman (2004)
on their survey, by comparing the revenues for a period of three years to the
penalties related to the environment, shows a positive link between financial
and environmental performance.
A study conducted in 1997 by DePaul University - Chicago found that
those companies that have defined social involvement towards the ethical
principles strategy have got financial benefits (based on the annual sales /
revenues) much better than companies that do not involve themselves in this
direction. A similar study extended over a period of 11 years conducted by
Harvard University found that companies that acted as social partners in the
market had a growth rate of 4 times and 8 times higher than those
companies that focused only on their business and profit. (KPMG, The
Business Case for Sustainability 2001).
A study of Alan Griffith & Khalid Bhutto (2009) defines environmental
performance through the benefits that environmental oriented companies
94
derive from their actions taken in this regard. This study divides the benefits
into three groups, namely:
a) economic benefits (risk reduction in environmental penalties, reducing
litigation costs associated with environmental issues);
b) organizational benefits (improvement in opportunities related to capture
customer attentions which qualify a company by its "green" products);
c) ecological benefits (reducing pollution, reducing impact on natural
resources in order to reduce non-renewable and unsustainable natural
resources such as oil, fuel, minerals and so on).
The benefits of corporate social responsibility upon companies can be
summarized as follows:

Figure 3.3.1: The benefits of corporate social responsibility at company level

Source: Achim & Borlea, 2012
(adaptation after Weber, 2008:250)

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 3.4 The benefits of adopting good corporate governance practices for
the company performance

As we noticed in what we have presented so far, the pillar of successful

corporate governance is transparency and information dissemination about
corporate governance. And efficient corporate governance must lead to the
achievement of the company general objectives that is to maximize its
value, when all the stakeholders’ needs are satisfied.
The literature abounds with studies on the impact of effective corporate
governance on company performance. Regarding the emerging countries,
the consulting firm McKinsey (2001) carried out a study on the topic of
awareness of institutional investors in emerging countries (Asia, South-
Eastern Europe and Latin American) concerning corporate governance. The
study shows that these investors gave at least the same importance to
information on corporate governance as to financial information in
investment decisions, plus they are willing to pay an added value for
companies that apply and respect corporate governance standards. In South-
Eastern Europe and Africa this addition can be up to 30% of market
capitalization.
One year later (2002) the Standard & Poor's conducted a study
regarding the influence of corporate governance best practices on business
performance, by using a sample of 1,600 companies listed on major stock
exchanges around the world, representing 75% of the world stock market.
The results of the study are emphasizing a strong correlation between the
level of transparency provided through annual reports and market risk as
well as the market value (measured by PBR- Price to Book Ratio). Thus,
companies with a high score of transparency (T&D ranking) have a lower
market risk. In addition, these companies tend to have a higher PBR value
than companies with a reduced transparency. The study concludes that
companies can reduce their cost of equity by providing a more consistent
transparency and dissemination of business. The market will also pay a
premium for the shares of companies that provide a degree of transparency
in their annual reports, in accordance with the minimum requested by the
regulations.
Similar conclusions to those of the study carried out by Standard &
Poor's (2002) are also shared by other researchers. Stiglbauer (2010) based
on a survey of a 100 companies listed on the Frankfurt Stock Exchange,
confirmed an impact of transparency and disclosure practices on company
performance, highlighted by the ratio between the market value and the
96
book value of the company (PBR-Price to book ratio) and total shareholder
return (TSR-Total shareholder return). The study by Stiglbauer reveals the
impact of such a transparency on market performance, not on internal
performance made by the company, measured by ROE and ROA. Although
information transparency cannot improve internal (operational)
performance, they improve investor perceptions about the company's
governance, increasing the company's market value.
Al-Hussain & Johnson (2009) investigated the relationship between the
effectiveness of corporate governance structure and the performance in the
banking system, highlighting the fact that there is a strong relationship
between corporate governance structure efficiency and bank performance,
using return on assets (ROA) as indicators representative of the company's
performance.
Various studies carried out in markets around the world show that the
adoption of corporate governance best practice decreases the cost of capital
(La Porta et al. 1998, Patel & Dallas 2002, Ashbaugh-Skaife et al. 2006,
Errunza & Mazumdar 2001, Ashbaugh et al. 2004), a lower dispersion of
credit rates (Yu 2005) and a reduction in risk (Gompers, Ishii & Metrick
2003, Brown & Caylor 2006).
Various studies on the impact of implementing the principles of
governance on business performance have been assessed in emerging
economies. In 2001, Credit Lyonnais Securities Asia (CLSA) has developed
a corporate governance ranking for 495 companies in 25 emerging
countries. The report revealed that companies with higher governance index
registered a higher operating performance and stock returns (quoted Feleagă
et al. 2011). Klapper and Love (2004) used product CLSA rankings to
investigate the relationship between corporate governance and performance,
using multivariate regression. Their tests showed that better corporate
governance is highly correlated with operational performance and a better
market value.
A large number of studies focus on the impact of the ownership
structures concentration on transparency practices and implicitly on
company performances. Arcot & Bruno (2011) based on survey on the
FTSE 350 index (the top 350 companies listed on the London Stock
Exchange) in the 1998-2004 period, concludes that ownership structure
influences the decision of companies to adapt to the corporate governance
provisions. In particular, family businesses are less likely to comply with the
provisions on the monitoring role of directors (e.g., the existence of
independent directors) and therefore are less transparent. In this context,
such companies do not communicate openly with minority shareholders
97
because this represents the best practice for them. As a result of these
findings, companies with majority shareholders are far less transparent and
provide a minimum of information to other investors.
Similar findings were obtained by Ajinkya, Bhojraj & Sengupta (2005),
Anderson, Duru & Reeb (2009), Chen et al. (2008) showing that a lower
level of transparency of companies with a concentrated ownership structure
(the family level) is explained by the fact that such shareholders behave as
insiders and therefore they are no incentive to provide information to other
investors. The degree of concentration of ownership is lower and hence the
property is more dispersed, the conflicts between majority and minority
shareholders will worsen and transparency dissipates. In this area, Klapper
& Love (2004), Durnev & Kim (2005), Francis, Khurana & Pereira (2005)
point towards a negative correlation between governance score and the
degree of concentration of ownership.
A low transparency of such companies can also hide their own interests
in management decisions that do not correspond with the interests of others
shareholders (Shleifer and Vishny, 1986; Leuze; Nanda, & Wysocki, 2003;
Lang, Lins & Miller, 2004; Anderson, Duru & Reeb, 2009). In this context,
low transparency of corporate governance may be associated with
inefficiencies in resource allocation and in this way directly linked with the
company's poor performance (Shleifer & Vishny, 1997; Bushman & Smith,
2003; Klapper & Love, 2004; Durnev & Kim, 2006; Hope & Thomas,
2008). On the Tunisian stock market, El Mehdi (2007) also found a negative
relationship between the degree of concentration of ownership and company
performance.
Various studies conclude that poor corporate governance, including a
poor transparency, accentuates moral hazard and engagement in high
investment costs ("empire building") at a low rate of profitability. Thus,
these studies reveal a positive relationship between the company's growth
opportunities and lack of transparency in corporate governance.
Researchers such as Gompers, Ishii & Metrick (2003) point towards
conclusions such as the lack of transparency and governance practices
deviations causing an increase in agency costs through inefficient
investment. Extensive studies have revealed that managers can adopt
inefficient, risky projects in order to gain personal benefits. When corporate
governance transparency is low, predictable assumption of agency theory is
that managers can take decisions to maximize their own interests, which are
detrimental to the company, reducing the company's performance.
((Williamson 1964, Jensen & Meckling 1976, Diamond & Verrecchia 1991,
Titman, Wei & Xie 2004).
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 Similar findings were obtained by Arcot & Bruno (2011) which revealed
a positive relationship between non-compliance to corporate governance
practices, poor transparency of information about the company and high
investment costs, which have led to low profitability of the company. Arcot
& Bruno (2011) point out that firms with high growth opportunities are
more prone to non-compliance at corporate governance provisions in the
board and management structure (with a concentration of decision-making
power) and board committees (Audit Committee, Nomination Committee
and Remuneration Committee).
As a result of a high volume of investment is a less level of liquidity.
Consequently, many studies focus on the relation between a corporate
governance practice and the degree of liquidity. Thus, studies of Eng & Mak
(2003) identified that companies with high liquidity are more transparent,
provide a higher level of information disclosed by the annual report, and
disseminate a large volume of financial and non-financial information on
their website. Other studies also confirm these findings. (Li & Qi 2008,
Stiglbauer 2010)
Numerous studies have focused on the relationship between corporate
governance mechanisms and the level of debt. Debts are an important
mechanism for solving problems in corporations where there is a separation
between ownership and control. It is clear that managers have incentive to
expand the company’s size beyond the threshold imposed by profit
maximization, because as much the company they run is higher as much it
contributes directly to the increase of their power, prestige and
remuneration. In these circumstances, debts are used as a disciplinary
mechanism to reduce agency costs by aligning the interests of shareholders
and managers, according to the "control hypothesis" by increasing debts.
(Jensen 1986)
The above results are supported by the study carried out by Cremers
(2005) which concludes that self-financing companies have strong corporate
governance mechanisms. Thus, a strong corporate governance system
generates a higher level of debt by using debt as leverage to increase the
business performance. At the same time, Driffield et al. (2005) showed,
from a sample of companies in Korea and Indonesia, that higher levels of
concentration of holdings are associated with higher levels of debt, whether
the type of the ownership structure.
Another category of studies focuses on the relationship between the
growth rate of the company and corporate governance score. Thus, Klapper
& Love (2004), Durnev & Kim (2005) found a strong correlation between
the growth rate of the company and a high score of corporate governance.
99
 A synthesis of the literature that investigates the correlation between
corporate governance and business performance is provided in the
Appendix 2 Literature review regarding the correlation between corporate
governance and business performance.

3.5 Empirical research regarding the evaluation of the company global

performances

The general objective of our empirical research consists in developing

an econometric model for assessing the overall performance of the
Romanian companies.
For the first we will take a closer look at how are various assumptions
characteristically applied in the Romanian economy, "new economy" in
terms of the overall performance of the company and how this is to be
determined by factors specific for the "new economy". We refer mainly to
the concepts of corporate governance and social responsibility and to the
impact of these factors on the overall performance of the Romanian
economy. In this regard we will use multiple statistical hypotheses already
validated by various researches. So we have to mark some secondary
objectives of the research as follows:
a) Testing the hypothesis which refers to reflecting the impact of
adoption the good corporate governance practices on the
corporate social responsibility activities.
b) Testing the hypothesis which refers to reflecting the impact of
adoption the good corporate governance practices on the choice
to report a "Comply or Explain Statement".
c) Testing the hypothesis which refers to the impact of the adoption
of good corporate governance practices on financial performance
(overall financial performance, growth rates, liquidity ratios,
leverage ratio, level of investment propensity).

In order to achieve the secondary objectives of our research, we

propose first to test the statistical hypotheses validated in the scientific
literature regarding the impact of good corporate practices on the
manifestation of corporate social responsibility as well as on various
financial indicators (financial performance).
We formulated these hypotheses as follows:

1. Hypothesis H1: The companies inclined to report "Comply or Explain

Statement" are more ethical in terms of corporate governance.
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 We test the relationship between the variables:
a) Numerical variable CG = Corporate governance score
b) Dummy variable CE = Reports "Comply or Explain Statement" (YES
or NO).

2. Hypothesis H2: The adoption of good corporate governance practices

are reflected in corporate social responsibility policy conducted by the
companies.
We test the relationship between variables:
a) Numerical variable CG = Corporate governance score, or composite
variables as follows:
a1) G = Governance structure;
a2) I = The investor relations;
a3) B = Board and management;
a4) F = Financial disclosure.
b) Dummy variable CSR = Corporate Social Responsibility (with two
states: YES, if the company performs CSR activities and NO, if the
company does not perform CSR activities (NO).

3. Hypothesis H3: The adoption of good corporate governance practices

has an impact on the overall financial performance of the company.
In order to verify the validation of the hypothesis we test the link
between:
a) Numerical variable CG = Corporate governance score and
b) Numerical variables CAP = market capitalization, PBR = Price to book
ratio (ratio between the market value and the book value), TQ = Tobin's
((stock market capitalization + debt) / assets), ROA = Return on assets (net
income / assets), ROE = Return on equity (Net profit/ equity).

4. Hypothesis H4: The adoption of good corporate governance practices

has an impact on the economic growth rates.
We test the link between:
a) Numerical variable CG = Corporate governance score
b) Numerical variable GROW = Growth rate of turnover (turnover
variation / basic turnover).

5. Hypothesis H5: The adoption of good corporate governance practices

has an impact on the degree of company liquidity.
We determine the relationship between:
a) Numerical variable CG = Corporate governance score
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 b) Numerical variable FLEX = Financial flexibility (working capital /
assets) and CW = Cash flow to assets (Cash flow / Assets).

6. Hypothesis H6: The adoption of good corporate governance practices is

reflected in high levels of financial leverage.
We highlight the correlation between:
a) Numerical variable CG = Corporate governance score
b) Numerical variable LEV = Financial leverage (total debt / equity).

7. Hypothesis H7: The adoption of good corporate governance practices is

reflected in a lower level of investment propensity.
a) Numerical variable CG = Corporate governance score
b) Numerical variable EFA = Equity-to-fixed-assets ratio (Shareholder
equity/fixed assets)

We test the relationship between variables by calculating the

correlation coefficients of the variables and also by using the standard
deviations calculations. To validate or invalidate the hypotheses the Fisher
test (F) will be used.

Selecting variables
Regarding the work methodology we considered as a proxy for the
endogenous variables, the performance realized by the company on the
market, namely: Market capitalization-CAP, Price to book ratio (ratio
between market value and book value)-PBR and Tobin's Q- TQ ((market
capitalization + debt) / assets).

We selected two groups of indicators as exogenous variables:

a) On the one hand, internal (economic) performance achieved by the

company, represented in the scientific literature, by: Return on assets (Net
profit/Total assets)-ROA; Return on equity (Net profit/ Shareholder equity)-
ROE ; Leverage ratio (Debts/ Shareholder equity)-LEV; Equity-to-fixed-
assets ratio (Shareholder equity/fixed assets)- EFA; Flexibility ratio (Net
working capital/Total assets)- FLEX; Growth ratio (Turnover
deviation/Basis Turnover)- GROW; Cash flow return on assets (Cash
flow/total assets)- CW .

b) On the other hand, the corporate governance index (CG) and the
corporate social responsibility activities adopted by the company (CSR).
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 In testing the link between exogenous and endogenous variables, there
were determined, on the one hand correlations using the average calculation
and on the other side, using the calculation of deviations, first applied to the
calculations for the whole 2001-2011 period and then only for the 2011
period.

Sample and data

Sample selection
In determining the sample analysis, we started from the companies
traded on Bucharest Stock Exchange (BSE). At the end of 2012, the
Bucharest Stock Exchange traded 106 companies, classified into four
categories: Category I (28), Class II (52), Class III (1) and unlisted (26).
From the total number of companies traded on BSE, we remove the unlisted
companies because they are not likely to comply with BSE (so they do not
draw and report the "Comply or Explain Statement"). Thus, 81 companies
remained in our sample, which are listed on BSE (at respectively I., II. and
III Classes). Further, starting from the 81 companies listed on the BSE, we
selected a representative sample, having the composition of 76 companies
listed on BSE, eliminating the financial institutions (banks) and other
foreign companies.

Data sources for asses the quality of corporate governance

In order to assess the corporate governance quality system for
Romanian companies, we will use the information contained in the
"Comply or Explain Statement" that companies should voluntarily report to
BSE. These statements are publicly posted on the company’s website. If
the companies do not prepare such a statement, the data source is
represented by the data published by the BSE listed companies on their
own website (directors ‘annual reports, financial reporting or any other
useful documents or information presented on the company's website).
Since the application of “Comply or Explain Statement” is relatively
new in Romania (starting with the financial year 2009), it takes some time
for the companies to comply with the new requirements.
Thus, only since 2011, the concerns to do corporate governance reports
have been consistent and therefore representative for our study. Therefore
we analyzed the “Comply or Explain Statements” for the financial year
2011, statements that companies voluntarily reported to the BSE together
with the financial reports on the following year (2012).

103
 Data sources for assessing the financial performances
In order to assess financial performance, we use the financial statements
of sample companies. The companies’ financial reports are posted on their
websites or on Bucharest Stock Exchange websites (www.bvb.ro). We use
in our analysis of financial performance’s companies, a period of 11 years,
from 2001 to 2011.

Research results

a) Results for testing statistical hypothesis

Based on the processing series of data we have the following results:

1. Hypothesis H1: The companies inclined to report "Comply or Explain

Statement" are more ethical in terms of corporate governance.
The most common method when analyzing the link we were stating
above is based on the correlation coefficients. The tests returned a
correlation coefficient of 0.683 with a significance level (Sig.) of 0.000. We
can therefore say, with a probability of 99% of guaranteed results that there
is a statistically significant connection between the governance score and
reporting the statement which is direct and of medium intensity.
The above conclusion is also proven by the results of variance analysis
(ANOVA). The Fischer test returned a critical value of 0.000 which
indicates that we can accept at a confidence level of 99% the fact that an
ethical corporate governance is correlated with the management’s decision
to report "Comply or Explain Statement". Furthermore, descriptive statistics
by groups clearly show that the average governance score for those who
report is triple than of those who do not .

Therefore, hypothesis H1: Companies inclined to report "Comply or

Explain Statement" are more ethical in terms of corporate governance, are
accepted for the sample. The results are in accordance to those established
in the scientific literature (McKinsey, 2001; Standard & Poor's, 2002;
Aksu and Kosedag, 2006; Stilgbauer, 2006; European Commission, 2009;
Fulop, 2011).

2. Hypothesis H2: The adoption of good corporate governance practices

are reflected in corporate social responsibility policy conducted by the
companies.
According to our results the correlation coefficient obtained is again
positive and shows a medium intensity, even if the value is significantly
104
low, 0.651. The assumption is also confirmed at a level of 99%, resulting a
Sig. of 0.002. The results of the analysis of variance also lead to the same
conclusion.
Taking into consideration the fact that the corporate governance score is
calculated based on four indicators, we ran the above analysis individually
for each component and level of social responsibility, to see which of the
four areas of governance is correlated with a higher level of corporate social
responsibility practices. We found that for all four variables analyzed,
materiality is to 0, providing validation of working hypotheses to a
confidence level of 99%. Regarding the actual relationship between each
component of CG and CSR, the connection is direct and of medium
intensity in all the cases. But by ordering them, it is proven that the first,
with the highest coefficient are the aspects related to the board and
management -B (0.642). So, these two influences the most the CSR level.
At the same time the aspects related to the relationships with the investors
are the ones with the lowest influence (0.522).
In conclusion, the hypothesis H2: The adoption of good corporate
governance practices is reflected in the policy of social and environmental
responsibility that companies promote, is accepted for the companies in the
sample. Environmental and social responsibility practices positively
influence the corporate governance and conversely, a high quality system of
corporate governance is reflected in the adoption of a high degree of
corporate social responsibility. Moreover, the adoption of good corporate
governance practices (G = Governance corporate structure, I= Investor
relations, B = Board and management and F = Financial disclosure), is
positively correlated, each of them, with the CSR , but a stronger correlation
is faced at the Board and management component (B).
The results are consistent with McLaren (2004), Monks et al.(2004),
Guay et al. (2004), Rossouw (2005), Kimber & Lipton (2005), Ryan
(2005), Wieland (2005), Aguilera et al. (2006), Welford (2007), Sjöström
(2008), Kolk & Pink (2009).

3. Hypothesis H3: The adoption of good corporate governance

practices has an impact on the overall financial performance of the
company.
Since the database is for the 2001-2011 period, to capture the analyzed
variables in the entire period, the average of the variables has been
calculated.
From the results obtained, we can conclude the following:

105
 a) By looking at the correlation between CG and the stock performance,
we find that between corporate governance (CG) and stock performance
indicators (CAP, PBR and Tobin's Q) there is a direct relationship of low
intensity, with a probability of guaranteeing the results of 95%. The closest
connection would be the one between CG and PBR score (0.27) followed by
the equal relationship between CG and CAP and CG and Tobin's Q (0,239).
b) Regarding the correlation between GC and the economic
performance, we find that the strongest relationship is the one between GC
and ROA. It is direct and of medium intensity (0.357> 0.3) and it is
accepted at a significance level of 1%, so a 99% probability guarantee.
Regarding the correlation with ROE, it is insignificant in the sample
analyzed.
In conclusion, the hypothesis H3: The adoption of good corporate
governance practices has an impact on the global financial performance of
the company, is accepted, on the level of performance represented by ROA
(medium intensity), PBR (low intensity) and CAP and Tobin's Q (weak
intensity).If the company's performance is represented by ROE the
assumption is invalidated.
A positive relationship between good corporate practices and financial
performances has been established by numerous expert studies: McKinsey,
2001; Standard & Poor's, 2002; Bushman & Smith, 2003; Klapper & Love,
2004; Doidge et al., 2007; Hope & Thomas, 2008; Al-Hussain & Johnson,
2009; Stilgbauer, 2010; Kusnecovs, 2011; Feleagă et al., 2011; Arcot &
Bruno, 2011; Agrawal et al., 2012.

4. Hypothesis H4: The adoption of good corporate governance practices

has an impact on economic growth rates
According to the obtained results we find that the growth rate is
positively influenced, but at a low intensity by the governance score
(correlation coefficient is 0.209) at an error level of 10%. The turnover is
also in a direct relationship with the governance of low intensity (correlation
coefficient is 0.263), but the result is accepted with a probability of 95%
guarantee. In other words, the adoption of good corporate practice generates
an increase in the company's activity (expressed with a growth of the
turnover and its growth rate).
In conclusion, the hypothesis H4: The adoption of good corporate
governance practices has an impact on economic growth rates, is
acceptable at a low intensity (below 0.3). The results are in line with those
obtained by Klapper & Love (2004), Durnev & Kim (2005), Doidge et al.
(2007), Agrawal et al. (2012).
106
 5. Hypothesis H5: The adoption of good corporate governance practices
has an impact on the degree of company liquidity.
Based on the obtained results we can conclude that between the
governance score and the liquidity rate of the company (reflected by both
financial flexibility and cash flow through assets) there is a very low
connection (0.027 or 0.029). In other words, the adoption of good corporate
governance practices is not reflected in the liquidity of the company.
We can therefore say, that hypothesis H5: The adoption of good corporate
governance practices has an impact on the degree of liquidity of the
company, is rejected in the sample of analyzed companies. The results are
not the same with the ones related by the scientific literature, being devoted
to the positive impact of good corporate governance practices on the degree
of liquidity of the company (Eng & Mak 2003, Li & Qi 2008, Stiglbauer
2010).

6. Hypothesis H6: The adoption of good corporate governance practices is

reflected in a high level of financial leverage.
Our findings are that there is a very low and indirect connection between
corporate governance and financial leverage (-0.156). Thus, the correlation
shows that the adoption of good corporate governance practices is reflected
in a low level of indebtedness, emphasized by the financial leverage
indicator (debt / equity), but the intensity of the correlation is very low.
In conclusion, the hypothesis H6: The adoption of good corporate
governance practices is reflected in a high level of financial leverage, is
rejected for the sample analyzed. Thus, the Romanian companies have not
been identified with such a correlation, largely devoted in the literature
(Jensen, 1986; Driffield et al. 2005, Cremers,2005; Kuzņecovs & Pal,
2011).

7. Hypothesis H7: The adoption of good corporate governance practices is

reflected in a lower level of investment propensity.
The correlation between corporate governance score and propensity to
investment reflects an indirect and of low intensity relationship (-0.106). We
can therefore say that the adoption of good corporate governance practices
is reflected in a higher aversion risk, thus a balanced investment policy.
In other words Hypothesis H7: The adoption of good corporate
governance practices is reflected in a lower level of investment propensity,
is accepted at a low intensity, on our sample companies. The results
converge with those reached by a number of authors, such as: Williamson,

107
1964; Jensen, 1976; Diamond & Verrecchia, 1991; Titman, Wei & Xie
2004; Gompers, Ishii and Metrick, 2003; Arcot & Bruno, 2011.

b) Results for assessing a model for global business performance

Regarding the overall objective of the research, that is to develop an

econometric model to assess the overall performance, we use the processing
carried out for the period 2001-2011 and then for the period 2011.

1. For the period 2001-2011

For the first, given the large number of variables used and the long
analyzed period (2001-2011), running the tests of correlation using variable
averages, leads to inconsistent results. Therefore, the next step was to test
the correlations using the deviations of the variables from the average or the
volatility of the variables. Applying the testing at the level of volatility,
although many of the variables selected were rejected from the model, some
significant correlations still remained.
Thus, of the three endogenous variables (CAP, PBR and TQ) the
correlations persist at a significant level only for the PBR. Next we retain as
the only endogenous variable the PBR variable, the other stock indicators
being run as endogenous variables that determine PBR.
In what the remaining exogenous variables after running tests correlation are
concerned, only four variables remain significant: ROE, LEV, GROW and
CAP.
According to the results we obtained an R square value (R-squared) of
0.389 which shows that the exogenous variables determine the endogenous
variables on a rate of 38.9%. Variance ANOVA test shows that the model is
statistically significant (Sig = 0). The standardized form of the econometric
model can be determined as follows:

PBR = -0,425ROE +0,366 LEV– 0,893 GROW + 1,125CAP

The interpretation of the econometric model will be based on the

volatility (deviation) of the variables, such as:
1. At an increase of the mean square deviation of the financial return (ROE),
the ratio between the market value and the book value of the company
(PBR) will fall by an average of 0,425 deviations.
2. At an increase of the mean square deviation of the financial leverage
(LEV), the ratio between the market value and the book value of the

108
company (PBR) will increase by an average of 0,366 deviations.
3. At an increase of the mean square deviation of the growth rate (GROW),
the ratio between the market value and the book value of the company
(PBR) will fall by an average of 0,893 deviations.
4. At an increase of the mean square deviation of the market capitalization
(CAP), the ratio between the market value and the book value of the
company (PBR) will increase by an average of 1,125 deviations.
Unfortunately, in the analyzed period (2001-2011) by running all the
variables in the model, we couldn’t reach an econometric consistent model
of the overall performance of the company which incorporates a large
number of variables validated by the scientific literature as being significant
for determining the overall performance (stock) of the company. To the
endogenous variables rejected model we can also add the variables related
to the adoption of good practices (corporate governance) and corporate
social responsibility.

2. For the period of 2011

The unconvincing conclusions that we reached, in relation to the set
expectations, lead us to testing the same correlations, but only for 2011
(most recent year in which it is assumed that the practices of corporate
governance and CSR are most pronounced, with the need for convergence to
EU integration requirements).
We found that the exogenous variables are correlated (on a mean level)
best with the endogenous variable which reflects stock performance, TQ
(Tobin's Q). Among the exogenous variables selected as a model, there is a
significant number of variables that remain such as: ROA, ROE, LEV,
FLEX, GROW, CASH, GC, CSR. The results are obtained on a 95%
confidence level.
The econometric model of assessing the company’s performance
represented by the Tobin’s Q (TQ) can be represented as follows:

TQ = -1, 673 ROA + 0,475 ROE+ 0,038 LEV – 0,203 EFA + 0,4999 FLEX+ +0,009
GROW +1.242 CW + 0,003 CG + 0,182 CSR + 0,556

The econometric model of the global performance reflects the

highest influences of ROA (return on assets) and CW (cash flow to assets
ratio). Influences are but of different meanings (direct and indirect ROA
CW). FLEX (financial flexibility) has a quite big influence intensity upon
the rate of TQ. By ordering the factors on the intensity level, we mention
EFA (Equity to fixed assets), which indirectly influences the rate of TQ.

109
Then, the CSR (corporate social responsibility) followed by GROW (growth
rate) and GC (corporate governance), all with a positive influence
The results on the structure of econometric model for assessing the
overall performance of the company, appear in 2011, as being on the same
level with the results devoted by the scientific literature. The long analysis
period (2001-2011) with fluctuating results in the emerging economy in a
country like Romania, which is interrupted by the global financial crisis,
causes the generation of less consistent results that can be embedded in an
econometric solid model. In 2011 only, the results appear to be more
balanced and more relevant, and can build a consistent global evaluation
model.

CONTRIBUTIONS
In the new context of sustainable development, new corporate
governance, social and environmental standards are set, as well as non-
financial issues that come to complete the overall performance of the
company reflected in the financial indicators.
The results of our work bring more value to the knowledge stage in this
field through the following qualitative aspects of the scientific research
activity:
a) It presents the reevaluation of the organizational theories which lead to
an approach concept of the management and control system of the
organization: the corporate governance concept, highlighting also the
impact of this mutation in achieving organizational objectives and
maximizing performance;
b) The elaboration of an evaluation methodology for the quality of
corporate governance, adapted to the national framework for the
development of Romanian companies and of the Corporate Governance
Code issued by the Bucharest Stock Exchange;
c) The evaluation of the corporate governance system at the level of the
companies which activate on the stock market from Romania
d) Identifying the four global performance dimensions available in the new
economy which are: financial dimensions, corporate governance
dimension, social dimension and environmental dimension;
e) The evaluation of the global performances of the companies which
activate on the Romanian market for the period 2001-2011, by
emphasizing the extent to which the dimensions of financial
performance, corporate governance performance, social and
environmental performance manifest.
110
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 Appendix
Appendix 1

The general structure of the component questions in "Comply or Explain

Statement” reclassified in order to assess the corporate governance score
I. Attributes that show Governance structure (G):
1. Has the issuer drawn up the By-laws/Corporate Governance Regulations to describe the
main aspects of the corporate governance? (P1-R1)
2. Are the By-laws/Corporate Governance Regulations posted on the company website,
indicating the date of the last update? (P1-R1)
3. In The By-laws/Corporate Governance Regulations are there defined the corporate
governance structures, positions, components and responsibilities of the Board of Directors
(BD) and of the executive management? (P1-R2)
4. Does the issuer’s Annual report provide a chapter on corporate governance where they
describe all the relevant events related to the corporate governance, recorded during the
previous financial exercise? (P1-R3)
5. Does the issuer circulate on the company website the information related to
the following aspects of their corporate governance policy:
a) a description of their corporate governance structures? (P1-R3)
6 b) the updated articles of incorporation? (P1-R3)
7. c) the operation bylaws/essential aspects for each specialty? (P1-R3)
8 d) the “Comply or explain” Statement? (P1-R3)
9. e) the list of the BD members mentioning which members are independent and/or
nonexecutive, of the members of the executive management and those of the specialty
commissions/committees? (P1-R3)
10 f) a brief description of the CV for each BD member of the executive management? P1-R3)

II. Attributes that show Investor relations (I)

1. Does the issuer abide by the rights of the financial instrument holders, providing them
with the equal treatment and submitting to the approval any modification of the rights in
the special meetings of these holders? (P2)
2. Does the issuer publish in a separate part of the website the details of the
General Meetings of Shareholders (GMS):
a) GMS summons? (P3-R4)
3. b) materials/documents corresponding to the agenda as well as any information on the
agenda? (P3-R4)
4. c) special power of attorney forms? (P3-R4)
5. Has he drawn and proposed to GMS the procedures for the efficient and proper
development of the GMS agenda without any damage to the right of any shareholder to
express their free opinion on the debated topics? (P3-R6)
6. Does the issuer publish in a separate part of the website the details of the shareholders’
rights as well as the regulations for the attendance at GMS? (P3-R8)
7. Does the issuer provide the information in due time (immediately after the GMS) of all
the shareholders through the separate section on their website:

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 a) on the decisions made within GMS? (P3-R8)
8. b) on the detailed result of the vote? (P3-R8)
9. Do the issuers circulate through the special section of the website, that is easily
identifiable and accessible:
a) current/communicated reports? (P3-R8)
10 Is there within the issuer’s company a special department/person dedicated to the relation
with the investors? (P3-R9)

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III. Attributes that show Board and management (B):
1. Is the issuer managed under a dualist system? (P19)
2. Does the BD meet at least once a trimester for the monitoring and the activity of
the issuer? (P4,P5-R10)
3. Does the issuer have a set of rules referring to the reporting conduct and
obligations of the transactions of the shares or other financial instruments issued
by the company (“company assets”) made on their name by the directors and
other persons? (P4,P5-R12)
4. If a BD member or a member of the executive management or any other person
made on their interest a transaction in the company deeds, then, is the
transaction circulated through the company website, according to the
corresponding Regulations? (P4,P5-R12)
5. Does the structure of the Board of Directors of the Issuer provide a balance
between the executive and nonexecutive members (and especially independent
nonexecutive directors) so that no person or group of persons may dominate the
BD decision-making process of BD? (P6)
6. Does the structure of the Board of Directors provide a sufficient number of
independent members? (P7)
7. During their activity, does BD have the support of consultative
commissions/committees for the examination of specific topics, chosen by BD
for their counseling on these themes? (P8-R15)
8. Do the consultative commissions/committees forward activity reports to the BD
on their specific themes? (P8-R15)
9. For the assessment of the independence of their nonexecutive members, does the
Board of Directors use the assessment criteria listed in the Recommendation 16?
(P8-R16)
10 Do the BD members permanently improve their knowledge through
training/formation in corporate governance? (P8-R17)
11. Does the selection of the BD members have a procedure based on transparency
(objective criteria regarding the personal/professional qualification etc.)? (P9)
12. Is there an Appointment Committee within the company? (P10)
13. Does the Board of Directors analyze t least once a year the need to register a
remuneration policy committee for the directors and members of the executive
management? (P11-R21)
14. Has the remuneration policy been approved by the GMS? (P11-R21)
15. Is there a Remuneration Committee made exclusively of nonexecutive directors?
(P11-R22)
16. Is the company remuneration policy of the company provided in the Bylaws/
/Corporate Governance Regulations? (P11-R24)
17. Has the BD passed a procedure with the view to identifying and settling
adequately the conflicts of interests? (P14)
18. Do the directors inform BD on the conflicts of interests as they occur and do
they refrain from the debates and the vote on those matters, according to the
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 legal provisions? (P15-R33)
19. Has the BD passed the specific procedures in order to provide their procedure
accuracy (identification criteria of the significant transactions, relevant for
transparency, objectivity, non-concurrence, etc.) for defining the transactions?
(P16-R34,R35)
20. Has BD passed a procedure of the internal circuit and the disclosure to third
parties of the documents and information referring to the issued, with emphasis
on the information that can influence the price of the assets issued by them?
(P17-R36)

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IV. Attributes that show Financial disclosure (F):
1. Do the issuers circulate through the special section of the website, that is easily
identifiable and accessible: b) the financial schedule, the annual reports, the quarter and
semester reports? (P3-R8)
2. Does the issuer circulate, in the English language, the information representing the subject
of the reporting requirements:
a) periodic information (providing information periodically)? (P12,P13-R25)
3. b) continuous information (providing information periodically)? (P12,P13-R25)
4. Does the Issuer provide and circulate the financial report according to IFRS? (P12,P13-
R25)
5. Does the issuer promote, at least once a year, meetings with the financial analysts, brokers,
rating agents and other market specialists with the view to presenting the financial
elements relevant to the investment decision? (P12,P13-R26)
6. Is there an Audit Committee within the company? (P12,P13-R27)
7. Does the BD of the Audit Committee, as the case may be, examine on regular basis, the
efficiency of the financial report, the internal control and the control of the risk
management system passed by the company? (P12,P13-R28)
8. Is the Audit Committee made of nonexecutive directors and is there a sufficient number of
independent directors? (P12,P13-R29)
9. Does the Audit committee meet at least twice a year; are these meetings dedicated to
drawing up and circulating the quarter and annual results to the shareholders? (P12,P13-
R30)
10 Does the Audit Committee recommend to BD the selection, appointment re-appointment
and replacement of the financial auditor, as well as the terms and conditions of their
remuneration? (P12,P13-R32)

V Attributes that show Social corporate responsibility (CSR)

1 The issue runs the corporate social and environment activities?

125
 Appendix 2

Literature review regarding the correlation between corporate governance and business performance

Author(s) Sample Time Performance CG measure Findings

period measure
Gompers, 1500 U.S. firms 1990-1999 Net-Profit Margin Self constructed CG Index by Firms with stronger shareholder rights
P., Ishii, J., and Return-on- using 24 variables had higher firm value, higher profits,
Metrick, A., Equity higher sales growth, lower capital
2003 expenditures, and made fewer corporate
acquisitions.
Bauer et. al , 249 and 269 2000-2001 Tobin's Q, Return- Deminor Corporate A negative relationship between
2003 firms included in on-Equity, Book Governance Ratings governance standards and these
the FTSE Euro value of assets, Age performance – based earnings
top 300 firm
Klapper and 374 companies 1999 Tobin’s Q, ROA Credit Lyonnais Securities Better corporate governance is
Love, 2004 in 14 emerging Asia CG rating associated with higher operating
market performance (ROA) and higher Tobin’s
Q.
Black et al 114 Russian 1999-2004 Tobin’s Q, Is supplied by Standard’s and Strong correlation between governance
2005 firms Poors and market value
Black et. al. 515 Korean 2001 Tobin’s Q, Market Self-constructed CG rating They found corporate governance is an
2006 listed companies to book ratio, important factor in explaining the
Market to sale ratio market value of Korean public
companies, and instrumental variable
evidence suggesting that this effect is
likely to be causal
Aksu and 52 corporations 2003 Size activity, ROA, Is supplied by Standard’s and Size and market-to-book are significant
Kosedag, traded in the ROE, Market book Poors in explaining the variation in TDS
2006 Istanbul Stock ratio, Debt ratio,
126
 Exchange Market value of
equity
Vitezic, 50 % of total 1999 -2004 ROA,ROE It does not build a score, they There is no universal association
2006 number of used CG qualitative between board attributes, board roles
listed joint stock variables: environment of and enterprise performance
companies in emerging economy, board
Croatia attributes and disclosure
level.
Brown & 1868 firms 2002 Tobin’s Q CG index is self constructed CG index is significantly and positively
Caylor, by using information from associated with Tobin’s Q
2006 ISS Corporate Governance
Larcker et 2106 companies 2002-2003 Market CG is self –constructed by The study concludes that there is no
al., 2007 quoted in USA capitalization, using 39 criteria strong indication that good CG
ROA, Free cash improves the quality of earnings.
flow, book to
market ratio,
external financing,
acquisitions
Doidge,200 2304 from world 2000 and Sales growth, Credit Lyonnais Securities The firm characteristics explain from
7 countries 2003 Log(Assets) Asia (CLSA), Standard & 4% to 22% of the variation in
Cash/Assets, Poor’s (S&P), and FTSE ISS governance ratings.
Dependence on (ISS).
external finance
Anderson 1,736 firms from October TOBINS’ Q ISS (Institutional Positive correlation with market value.
and Gupta, 22 different 2003 - Shareholder Service) CGQ The relation is stronger when the firms
2008 countries June 2006 score operating in the market/common
combination countries and weaker
when we talk about bank/civil
combination countries.
Yu, 2009 753 emerging- April 2001 TOBINS’Q Credit Lyonnais Securities The positive relation between CG and
market ompanies to January Asia CG rating CG rating Tobin’s Q.
127
 2002
Gianpaolo Italian Listed 2000–2008 ROE , Return on Self constructed CG rating The main results are not wholly
Abatecola Local Public Investment, Return conclusive.
and Sara Utilities (7 on Sales, and
Poggesi companies) Return on Equity
(2010)
Stiglbauer, 113 companies 2007 ROA, ROE, CG score is reflected by a Inconsistent results
2010 Frankfurt Stock Tobin’s Q , Market self constructed T&D score
Exchange, to book ratio, Total
Germany shareholder return,
Market
capitalization
Renders et 938 companies 1999-2003 Tobin’s q (Q), Is supply by Deminor Rating Cross-European panel, higher corporate
al, 2010 from 14 EU Market-to-sales governance ratings are clearly
countries ratio (MtS); Market- associated with better performance,
to-book value whether market- or accounts-based.
(MtB); Return on
assets (RoA);
Return on equity
(RoE).
Samontaray, NIFTY 50 Index 2007-2008 Company’s share CG index is self constructed Corporate governance has significantly
2010 from India price by using Narayan Murthy affected the share price of these listed
Committee report on companies and hence it has been a very
corporate governance important predictor for their share price
value.
Bekiris and 427 Spanish and 2008 Accruals: Net CG is self –constructed by The main findings indicated that the
Doukakis Greek firms income minus using 55 criteria strong corporate governance
(2011) operating cash- mechanisms increase the credibility of
flow, Market to the financial reporting,
book ratio,
Kuznecovs the largest listed 1995-2007 Tobin’s Q, Size, No CG score but only Introduction of corporate governance
128
and Pal companies in Age, leverage qualitative approach codes in Russia has boosted
2011 Russia covering firm performance
80% of the
Russian stock
market
Hermes 124 firms listed 2004-2007 Tobin’s Q, and Self-constructed CG rating Better governed companies show higher
Niels and on the Athens ROA performance
Katsigianni stock exchange
Vasiliki,201
1
Sun-A Korean Stock 2005 -2007 The aggregated Self constructed CG rating Corporate governance affects
Kang, Exchange measure of real manager’s real operating or investment
Yong-Shik activity-based: Size, decision to control reported earnings
Kim, 2012 leverage, ROA practice.
Desoky and 100 publicly 2010 firm leverage, firm CG score is reflected by a There is a significant positive
Mousa traded companies size average self constructed T&D score association between the T&D index
2012 included in the liquidity FLIQUI , and FORLIS, FSIZE, and AUDITF .
EGX 100 the company is
listed in a foreign
exchange
(FORLIS), the
company reports are
audited by one of
the big four audit
firms (AUDITF),
Bistrova and 118 companies 2007-2010 Accruals: Net CG is self –constructed by Positive relationship between the
Lace (2012) quoted on income minus using 39 criteria quality of CG and firm’s quality
Central and operating and financial performance.
Eastern investments
European cash flow
stock exchanges,
129
Hugill & 475 companies 2000-2010 Sales Growth, FTSE’s CG Ratings Firm characteristics explain from 37,9
Siegel, 2012 from emerging Financial CLSA CG rating % to 43.8% of the ratings’ variance CG.
economies dependence Closely GRI CG rating
Held
Shares Log(Assets)
Cash/Assets
Gawer, 600 firms from 1999-2009 Market value, book Is supply by Vigeo agency High scores of corporate governance
2012 18 European to market value, are positively associated with
countries Sales growth, Total subsequent abnormal returns over
assets, medium-term horizons.
Kowalewski 298 non- 2006-2010 Tobin’s Q, Self constructed The results show a positive association
,2012 financial between corporate governance and
companies listed performance
on Warsaw
Stock
Exchange,Poland
Coşkun and 31 companies 2996-2010 Tobin’s Q and Corporate Governance The findings of the study do not support
Sayilir,2012 published by ROA Association of the hypothesis that better corporate
Corporate Turkey governance is associated with higher
Governance firm values and better performance
Asssociation of
Turkey
Monda and 100 large 2009-2011 Tobin Q Self They confirm the widespread
Giorgino, companies listed constructed by hypothesis of the existence of a positive
2013 on the main using 39 and statistically significant relationship
stock markets in criteria between Corporate Governance, as
France, Italy, measured by a
Japan and USA subset of 12 variables, and firm value.

130
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