figure 5: corporate reputation

UNIVERSIDAD POLITÉCNICA DE

CARTAGENA

2015

Director: Juan Carlos Navarro García

Codirector: Emma García Meca

Alumno: Eva López González

EFFECTS OF CORPORATE

GOVERNANCE ON

CORPORATE

REPUTATION

The objective of this Project is to find out whether a good corporate governance affects company’s corporate reputation. So we are assuming that corporate reputation is the dependent variable. This is one of the main differences with previous literature, which sets this variable as an independent one.

17/09/2015

Universidad Politécnica de

Cartagena

Grado en Administración y Dirección de Empresas

(Bilingüe)

TRABAJO FIN DE GRADO

2015

Eva López González

Index

1. INTRODUCTION ................................................................................................................................. 3

2. GOOD CORPORATE GOVERNANCE ...................................................................................................... 5

1.1.

Board of directors .............................................................................................................. 7

1.2.

Ownership structure ........................................................................................................ 15

3. CORPORATE REPUTATION ................................................................................................................ 18

4. EMPIRICAL DESIGN .......................................................................................................................... 23

3.1.

Objectives ........................................................................................................................ 23

3.2.

Hypothesis ....................................................................................................................... 23

3.3.

Sample and methodology ................................................................................................ 26

3.4.

Empirical results ............................................................................................................. 29

5. CONCLUSIONS ................................................................................................................................. 34

6. REFERENCES .................................................................................................................................... 36

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1.

INTRODUCTION


2015


One of the most critical strategic and enduring assets that a corporation may possess is good reputation. The positive impact of corporate reputation on firm performance has been analyzed and documented for ages. Intangible assets like reputation are increasing their importance in companies as sources of sustainable advantages. Organizations used to look for tangible assets as the drivers of these advantages, but nowadays intangible ones are getting much more weight in this sense. This is why researchers are now focusing in the development of resources to measure these intangible assets as reputation. We could say that the reputation that a company has is constructed by the public of that organization. In fact, it is constructed on the basis of a company’s market position with respect to other companies in the industry. The construction is made with information such as market and accounting facts or information related to the performance of that organization. It can also come from experiences of satisfied c onsumers with the company’s products, hence it has been inherited from past action of the organization. Reputation can also arise from the combination of past actions of the organization and conscious image building and good public relations.

Taking into account the importance that corporate reputation is starting to have in recent years, this paper analyzes the effects that good corporate governance has on it. In order to do so, we are going to use variables such as the presence of women on boards or the independence of the board of directors. So, the main singularity of this paper is that it places

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Cartagena TRABAJO FIN DE GRADO

Eva López González corporate reputation as the dependent variable and, furthermore, it relates it with variables such as female directors, which is currently focused of research.

Going into these topics, The Unified Code of Good Corporate Governance (2002) and the

“Ley 3/2007 of March 22 nd ", for the effective equality between men and women, highlight the importance of gender diversity in board of directors as a way of increasing their levels of efficiency. We will see later how gender diversity affects positively on reputation, as well as independent directors do.

The paper is organized as follows. Part 2 and 3 review the main theoretical ideas about corporate governance and corporate reputation, respectively. Part 4 deals with the empirical design, including the analysis and results, and Section 5 provides our conclusion.

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2.

GOOD CORPORATE GOVERNANCE

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What is corporate governance? This expression has been explained by many authors as

Goergen and Renneboog (2006), who said that corporate governance system is the combination of mechanisms which ensure that the management (the agent) runs the firm for the benefit of one or several stakeholders (principals). You can also find a definition of this term in the Cadbury Report (1992), to which corporate governance is the system by which companies are directed and controlled. In this sense, the Organization for the Economic

Cooperation and Development (2004), defined corporate governance as a set of relationships between a company’s management, its board, its shareholders and other stakeholders that also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performances are determined.

Nowadays, there exist the Good Governance Code of Listed Companies (CNMV, 2015) in Spain, which was definitely approved in February 2015. It arises in order to solve the problematic that exists in most of the companies that came out when dividing the responsibilities of the owners and the managers. Where managers usually have more information than the owners and they also look for their own interests in expense of them.

So these Codes try to solve these kind of problems and they also look for goals as generating confidence and transparency for national and foreign shareholders and investors, improving internal control and corporate responsibility of Spanish companies as well as assuring the adequate distinction of functions, duties and responsibilities in the companies.

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One of the main characteristics of these Codes is that they contain the voluntary good corporate governance recommendations. Another characteristic is that they are focused on listed companies, which are those which shares are accepted for negotiation on a public secondary share market. Finally, they also take into account several principals and recommendation about the board of directors, the general shareholders’ meeting and some others general aspects.

Furthermore, corporate governance has two types of mechanisms: the internal mechanisms and the external ones, like for example formal legal and regulatory obligations.

The first ones have to do with the board of directors and the equity structure of the firm. On the other hand, the external mechanisms are related to the influence of the outside parties in the company, which are the market for corporate control and the legal system.

In table TABLE 1 you can observe the several efforts that have been made to create a full report with the recommendations that we have been talking about previously, which conclude in the Good Governance Code of Listed Companies (CNMV, 2015) for traded companies that is currently being used.

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TABLE 1. BROADCASTED REPORTS IN SPAIN

Report name

Entrepreneur circle

Olivencia Report

Year

1996

1998

2003 Aldama Report

AED 1 : Managerial Commandments

IC- A* 2 : Good Corporate Governance

Principles

2004

2004

Unified Code of Good Corporate

Governance: Conthe Report

IC- A*: Ethical Code for companies

Agreement of the CNMV 3

Partial updating of the Unified Code

2006

2006

2006

2013

2015 Good Governance Codes of Listed

Companies

1 Asociación Española de Directivos.

2 IC-A*: Insituto de Consejeros y Administradores.

3 CNMV: Comisión Nacional del Mercado de Valores (National Security Market Committee)

1.1.

Board of directors

Board of directors has always been analyzed by the literature as the culmination of the internal control system of companies. It has the power to hire, fire and compensate senior management teams, but, furthermore, it serves to resolve conflicts of interests among decision makers and residual risks bearers (D.Baysinger and N.Butler, 1985).

Spanish firms are usually controlled by the management body, which has different composition options: a sole director, several managers or a board of directors. In the case of

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Public Limited Companies, law usually states that they need to have a structure with just one level, the so called one-tier structure. Actually, listed firms must have a board of directors

, according to the “Ley de Sociedades de Capital” and the “Orden ECC/461/2013, of March 20 th ”. Private Limited Companies do otherwise; they are structured as the articles of association state, which may establish different ways of organization for the firm.

The main functions that the members of this board have to fulfill are mainly two. First of all, approving the strategy of the firm and looking for the necessary means to follow it; and, secondly, assuring that the executives and staff of the company correctly achieve the corporate goals as well as look for the co mpany’s interests. There are also some specific positions related to specific functions as the Chairperson and the Secretary. Moreover,

Spanish legislation stresses two general duties: to act diligently and to be loyal to the firm’s interest. These duties are instrumented through several specific obligations: diligent management; loyalty; prohibition of using the firm’s name by the director to perform acts for himself or related parties; prohibition to take advantage of business opportunities regarding inve stments or activities affecting the firm’s assets; duty of notify conflicts of interest; prohibition of competition and secrecy.

Focusing on the size that the board of directors should have, there coexists different opinions from different authors. For ex ample, Mínguez and Martín Ugedo (2005) stated that, in Spain, there is an inverse relationship between the firm value and the size of its board. On the cont rary, Fernández et al (1998) found a non-linear relationship between firm value and board size. They suggest that there comes a point where the advantages of greater boards

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Eva López González are nullified by the problems of coordination between its members. In this sense, Yermack

(1996), pointed out that smaller boards have generally been considered to be more effective in decision making. According to the Good Governance Code of Listed Companies (CNMV,

2015), the perfect size for the board of directors is between 5 and 15 members. There exists other indicators about board of directors, such as the meeting frequency, which was analyzed by Vafeas (1999), who stated that more frequent meetings are often associated with better future operating performances.

The composition is another characteristic of the board of directors, which comprises inside and outside directors, or executive and non-executive, respectively. The firsts ones count with a technical profile related with the position in which they are going to stand. They usually create the strategic guidelines. On the other side, the non-executive directors are professional directors with experience in any other sector and they also have a substantial and good reputation to maintain. The Unified Code of Good Corporate Governance (2006) recommends an appropriate balance between these two types of directors. Moreover, it recommends that the ratio of owner directors to independents should reflect the relationship in the company’s capital between nominating shareholders and the rest. This classification is for Anglo-Saxon companies.

In Spain, the board is classified by execut ive, independent and “dominicales” directors. The executive directors are members of the managerial team of the company, they could either have or not the executive-shareholder condition and, finally, they usually have a technical profile related to its position. The independent ones are external parties

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Eva López González that have no connection with the company neither its shares. So, they are professional directors who contribute with an external and independent vision of the company. Finally, the dominical directors or “dominicales” represent a percentage of the company’s shares.

They are unconnected to the day by day management of the company but they have a direct link with it.

In FIGURE 1, there is an evolution of the directors in the Spanish traded companies, according to the CNMV last annually report, of 2013. As you can see, the independent directors are increasing their presence in 4.5 percentual points with respect to the previous year, while the proportion of executive directors remains constant and the dominical ones significally dropped almost 4 percentual points.

FIGURE 1. Composition of the board by typology

Excutives

Others

Dominical Independent

Source: public information from companies

As it has been commonly seen in the literature, the independence of the nonexecutive directors is really important. The definition of independence directors is those in a

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Eva López González position in which they perform their tasks without been influenced by the company, its crucial shareholders or its management team. According to the Unified Code (2006), these directors should occupy at least a third of board places.

Within the composition of the board of directors, it is also important to highlight the evolution of the presence of women. As you can see in FIGURE 2A and FIGURE 2B, although the percentage of them is considerable smaller than men’s one, they have been increasing their power inside companies, moving from 5.1 percentual points in 2006 to 16.6 in the past year, 2014. So, the directors of Spanish companies, belonging to the IBEX 35, are improving their gender diversity, but not as much as they should do according to the

“Ley de Igualdad” or Equality Law, which sets out that at least 40 percent of the members of the companies’ management bodies should be women.

FIGURE 2A: Directors evolution

Female directors

Male directors Total

Source: Bankinter ban

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FIGURE 2B: Female directors evolution

2015


Source: Bankinter ban

Looking from an European sight, Spanish average is the same as the European, being this 16.6 percentual points. The goal of Spain is to raise it to 40 percent, in order to fulfill the Government requirements. It is interesting to highlight the efforts that Norway and

France have done in the last years, by establishing quotes by law in order to increase the presence of women inside the board of the companies. This mechanism consists of giving the companies a period of time, which it is usually one year, to raise the number of women directors and, if they do not accomplish this goal, the Government will introduce effective measures or actions, which are called quotes. The European Parliament is thinking of including this controversial mechanism on its legislation, especially on those companies with a public participation. You can observe these facts in FIGURE 3.

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FIGURE 3 : Shares of female directors on companies (Women on boards)


Going back to the Cadbury Report (1992), the roles of chief executive officer and chairperson are crucial. The chairperson’s role includes controlling the behavior of the board and also to ensure that the information is provided to directors on time. The CEO is responsible for the strategy and investment activities of the board and for administering dayto-day affairs. These two positions are recommended to be assumed by different individuals.

Within the board of directors, it is important to keep in mind the existence of committees, which are divided in three types. The Executive Committee has enough powers as to operate as a reduced board in the practice. Sometimes one of its functions is to regularly maintain meetings. Then, we can find the Audit Committee, which is formed by members of the board (they should be formed by a majority of external ones) and, if possible, chaired by an independent director. The role of this committee refers to the supervision of auditing practices, the relationship with the external and internal auditors, the

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Eva López González control of risk management policies and the review of the financial information that is going to be published. Finally, you will be able to find the Nomination or Remuneration committee

(or they could also be separated ones). It should mostly be formed by independent directors and also chaired by one of them. This committee has advisory power when the selection of candidates for the board is going to be achieved, it also has the right to make proposals relating to the appointment of the directors and to propose the remunerations policies.

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1.2.

Ownership structure

2015


The ownership structure of a firm defines the combination of residual claims and decision control that has consequences on firm behavior (Fama and Jensen, 1983). In the last decades, literature has pointed out the consequences of a firm’s ownership structure, such as Sheifer and Vishny (1997), Fama and Jensen (1983), Jensen and Meckling (1976).

These consequences are condition by the legal and institutional system of the country where the company is placed.

Firms in common law countries are characterized by a dispersed ownership, whether in civil law countries, as Spain, large shareholders are more common and they usually use their voting power to obtain private benefits. This fact also occurs in publicly traded firms.

To Galve y Salas (1992) the analysis of the ownership structure of the company can be made through the study of three main variables: the type of control over the company, which lead to a specific shareholders composition; the concentration degree of the shareholders and the institutional group that apply that control. These authors distinguish among:

1. Total control: when a person or a group possess 80 percent or more of the comp any’s shares;

2. Majority control: when the shares that a person or a group owns vary between 50 and 80 percent;

3. Minority control: situation in which a person or a group, without owning the majority of the shares, has the control, being these shares between 5 and 50 percent of the share capital.

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4. Internal control: the control of the company will be in the hands of the company or its board of directors if there’s no person or group that possess an important fraction of the share capital, which should be 5 percent or more.

According to the third variable, these authors stated that in Spain, the no financial companies appear to be the main shareholder, followed by family groups and financial institutions, being in the last positions foreign capital and the public sector. They also found that this type of structure also exists in Continental European Countries, which differ from the Anglo-Saxon ones.

The CNMV does a different classification of the ownership structure of the Spanish traded companies, which belong to the IBEX 35 Index. In FIGURE 4 you can see the evolution of the different categories. It differentiates four categories:



The board: It is the orange line of the graph below. It refers to the social capital that belongs to the board of directors, which has decreased 0.2 percentual points since the last years, reaching 10.8 percent.



Significant non-advisors shares: as its name points out, these are shares that belong to those significant shareholders who are not advisors of the company. They have reduced their presence in the social capital of Spanish traded companies, decreasing 4.2 percent.



Treasury shares: this term refers to the acquisition of own shares by the company itself.

As you can see in the graph below, treasury shares decreased almost 1 percentual point.

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

F ree float: it is the percentage of a company’s total shares that is susceptible to be traded in the stock market. The average of free float has increased 5.3 percentual points with respect to the previous year.

FIGURE 4: Distribution of the IBEX companies capital

Board Shares

Source: public information from companies

Treasury shares Free float

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3.

CORPORATE REPUTATION


2015


Corporate reputation can be defined as the evaluation of a company’s past actions and its ability to improve its future behavior in order to increase its stakeholders. The company should have different reputation with each stakeholder, first of all related to their experience according to their handling with the organization and also the reputation that they get from other stakeholders.

There are several authors that define corporate reputation. Spence (1974) interprets reputation as the outcome of a process in which firms signal their key characteristics to constituents to maximize their social status. Simon (1985) argues that reputation is the result of satisfying experiences with a company’s products. On the other hand, Weigelt and

Camerer (1988) state that reputation is a set of attributes ascribed to a firm, inferred from the firm’s past actions. This last definition is similar to those who gave Müller (1996), Buskens (1999) and Dukerich and

Carter (2000).

There exist several benefits that can be found in companies which have a good corporate reputation:



Customer preferences in your company when there are other companies’ products and services available at a similar cost.



The ability to charge a premium for its products and services.



Stakeholder support in times of controversy.



The value of the company in the financial marketplace.

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Although reputation is an intangible concept, researches show that a good reputation increases corporate worth and provides sustained competitive advantage. A business can achieve its objectives more easily if it has a good reputation among its stakeholders.

A US study showed that are ten main components that can be used to measure corporate reputation, as you can see in FIGURE 5.

FIGURE 5: CORPORATE REPUTATION

Source: own elaboration

It is important to highlight the financial performance; companies need to record profitability, to be financially strong, to have growing prospects in order the shareholders to invest on them. It is also important to offer high quality products and services, so customers will prefer to deal with you instead of others. These costumers will influence other potential

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Eva López González ones by word of mouth. In this sense the company’s customer focus, which refers to the commitment of the company to costumers, needs to be correctly achieved.

Apart from these components, there were found some others like, for example, value, differentiation, presence, and communication quality.

If a company deals with a good corporate reputation, it can have several benefits with customers, as we have seen before, also with suppliers and even with the Government.

Suppliers will be more inclined to trust in this company’s ability to pay and to provide fair trading items. If there comes out any problem, they will be more inclined to give the company the benefit of the doubt when it has a reputation of fair dealing. As well as suppliers, government regulators will trust it if it has a good reputation, and they will be less inclined to punish it. In this sense, Villafañe (2000) explains that corporate reputation is a shield against crisis. A company could be going through a bad situation that can weak its image in that moment. Nevertheless, if it has being working on its corporate reputation all along the years, it can maintain it by offering confidence to its clients, credibility to its financial analysts, honesty to its employees and responsibility to the society.

According to Vergin and Qoronfleh (1998), the most influential factor in terms of corporate reputation is the financial performance of the company, followed by its ethical behavior. And, precisely, the performance on the Stock market of the companies is directly related to their reputation. During 13 years, these authors compared the ten first companies in the Fortune Magazine ranking of corporate reputation and the ten last ones, and they checked that the stock-market value of the firsts increased every year a 20 percent more than the last ones.

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Taking all of this into account, nowadays, corporate reputation is considered as a more and more relevant asset in order to create confidence and loyalty within a markedly competitive environment.

FIGURE 6: MERCO RANKING

In Spain, there exists an instrument that measures reputation since 2000, which is called

MERCO (Monitor Empresarial de Reputac ión

Corporativa). It has become one of the world reference monitors in this sense. It annually elaborates several rankings that measure reputation in different aspects. In FIGURE 6, you can see the 23 rd companies in the reputation ranking of 2014. It also takes into account the positions that each company has increased or decreased according to the previous year.

Apart from this instrument, there also exist some others like for example the RepTrack, which is also designed in order to measure the reputation of companies, and it is leaded by the Reputation Institute, which is considered one of the most important organizations in corporate reputation matters. One of the most important aspects of Rep Track is that is frequently updated. According to Hernandez et al

(2007), this instrument helps the company to understand which the priorities of its interest group are, diagnose risks and opportunities, set goals, measure evaluations and establish

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Eva López González comparisons with other companies. Another instrument of this type is

Irma (Índice de

Reputacion de Marca or Brand Reputation Index), which assess the brand reputation, not as organizations or companies. It is characterized by making its measurements by surveys to final consumers, besides evaluating the brands comparing them with competitors of the same business sector.

Different academic areas have tried to relate corporate reputation to financial valuation of the company. A research made by Caprabo and Srivastava (1997) compared ten groups of companies with similar levels of risk and profitability, but with different levels of reputation. The results showed that 60 percent of difference in reputation was related to 7 percent difference in the market value of the company.

Another paper made by Black et al. (1999) points that reputational capital probably has a higher financial reflect. These authors examined the relationship between market value, book value, profitability and reputation in all the companies declared as most admirable by the magazine Fortune between 1983 and 1997. They conclude that a point changed in reputation was associated to 500 million dollars in market value.

So far, there are several authors that have tried to measure the influence of corporate reputation in economic and financial terms, but there is still needed some time to measure it as precise as physical and monetary units are.

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EMPIRICAL DESIGN


3.1.

Objectives

2015


Our main objective is to study if a good corporate governance affects a company’s corporate reputation. So we are assuming that the corporate reputation is the dependent variable. This is one of the main differences with previous literature, which puts this variable as an independent one. Although corporate governance is difficult to measure, when dealing with it we are referring to aspects such as independence, size or gender diversity of the board of directors, among others.

3.2.

Hypothesis

Recently, companies’ investments in corporate reputation are increasing due to public distrust of corporations together with increased regulations and a high demand for transparency. Moreover, reputation can explain why customers choose a company’s product or service in preference to another one and it can also make the difference between success and failure. So, we can say that reputation builds competitive advantage.

Furthermore, every organization will have reputation depending on if they help build that reputation or not, and it is also important to mention that reputation management is not an event, it is a process. So, we are going to analyze the factors that influence that process and help reputation increase and improve.

The board of directors is one of the most analyzed internal mechanisms in the literature. Moreover, a great number of authors have referred to it as the apex of the internal

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Eva López González control system. There exists a distinction in between the board. In the case of Spain, the structure of the board of directors consists of three types of directors: executive ones, independent directors and another type of them called “dominicales”. The first ones can or cannot have the position of executive-shareholder condition; the independent ones are not related with the company or its shares and, finally, the dominical advisors are part of the company’s shares.

According to Adams et al. (2008), although corpora te board’s impact is difficult to observe in day-to-day matters, they can become the center of attention when things go wrong. So we are going to analyze if its structure also affects the reputation of a company.

In a similar spirit, some other papers in literature set boards and their roles as monitors and advisors of corporate management, but several of these papers also analyze the optimal board size and independence, which are two of the issues we are focusing on.

Rosenstein and Wyatt (1990), stated that the independence of the board of directors plays a central role in every data research of this kind.

We thus propose the following hypothesis:

H1.Corporate reputation is related to the independence of the board of directors.

Board gender diversity is also a matter when referring to the effects that the presence of women can have on the firm. This type of diversity has become an active topic among the political debates in many countries. Indeed, there are countries that have established guidelines for gender diversity of companies (Singht et al. 2008). Upadhyay and Zeng

(2014), suggested that female board members made boards have more transparency.

Previous research also mention the “value in diversity idea”, which makes reference to the

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Eva López González fact that the inclusion of female on boards offer a great diversity of points of view during the board meetings and, in addition, help better represent all shareholders.

Larking et al. (2012), examined the influence of female directors on companies and they obtained that as the number of women directors increased, the probability of a corporation appearing on lists as “Corporate Responsibility Magazine’s” increased.

Although, being part of this lists did not affect positively return data in a statistically significant sense, it did dramatically reduce the degree of negative returns. There exists also other works (Bear et al. 2010) that conclude that diversifying boards by increasing the number of female directors may help guarantee that more issues are considered in the decision-making process, leading the board to achieve better decisions, which may influence reputation.

Therefore, we pose the hypothesis as:

H2. Board gender diversity is related to corporate reputation.

Size is one of the most studied factors related to board of directors. Several authors examined the relation between firm value and its size. Mínguez and Ugedo, (2005), establish in Spanish companies an inverse relation between their value and their board size.

On the contrary, Fernández et al, (1998), show a non-linear relationship between these two elements. Firstly, when increasing board size the company obtained more value but, there comes a moment when these relation reverse. The Good Governance Code of Listed

Companies (CNMV, 2015) suggested that the ideal size for boards is between 5 and 15 members, although Spanish board sizes depend in a great extent on the company size.

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Guest, (2009), examined the impact of board size on firms performance for a large sample of companies. They get to the conclusion that board size has a negative impact on firm performance. As a common interpretation of the board size

– performance relation is that many boards are too large, they are inefficient. So, with this hypothesis we are trying to analyze if board size also affects in a negative or positive way to corporate reputation.

Based on this, we state the following hypothesis:

H3.Board size is related to corporate reputation.

3.3.

Sample and methodology

The hypotheses were tested on firms included in the MERCO

– Monitor Español de

Reputación Corporativa – ranking of the 100 top reputed firms in Spain. From these 100 companies, we chose those ones which have the information related to MERCO available.

The period of analysis is from 2004 to 2012, although sometimes there is not available information for some companies, so the sample has an unbalanced nature. The data are collected from annual reports and database information comes from two different databases,

SABI –Sistema de Análisis de Balances Ibéricos– and CNMV –Comisión Nacional del

Mercado de Valores

–.

In order to develop our database, we started by obtaining the financial and economic data from these databases. After that we complemented this information with the rest of variables as the size of the board and the number of women advisors also taken from

CNMV webpage.

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The following model is used to test the effect of corporate governance on corporate reputation, where i equals each company and t equals time:

CORP REP it

=

α + β

1

(IND DIREC it

) + β

2

(FEM DIREC it

) + β

3

(BOARD SIZE it

) + β

4

(L SIZE it

) + β

5

(LEV it

) +

β

6

(ROA it

)

Where:

CORP REP: it corresponds to the variable corporate reputation, our focus of analysis. It has been obtained from the MERCO ranking of the most reputed companies in Spain.

IND DIREC: this variable corresponds to the percentage of independent directors in the company.

FEM DIRECT: it is the number of female directors that belong to the board of directors.

BOARD SIZE: this variable represents the whole number of directors that comprises the board of directors in each company.

L SIZE: it corresponds to the company size. It has been calculated as the logarithm of total assets.

LEV: it represents the level of leverage each company has. It has been computed as total liabilities divided by total assets.

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ROA: this variable is called Return On Assets and represents how profitable a company is related to its total assets. It has been calculated as income before taxes divided by total assets.

The board of directors is one of the forms the government body of a company can adopt. Independent directors should defend the interests of the shareholders as a complex, especially minority ones and small ones that have no direct representation in the board. In the last few years, these directors have increased their presence on company boards; in fact, the Unified Code (2006) has recommended companies to have at least a third of board places occupied by independent directors. So, we have included these directors as a variable of study because they perform their tasks without any influence of the company or any of its organs.

It is also important to highlight the increasing presence of women on boards.

Although the percentage of female directors is considerably smaller than male ones, they have raised their power inside companies. This is the reason we have included this factor as a variable in our paper.

As we are analyzing if the composition of the board of directors affects the corporate reputation of a company, it is logically to think that the size of the board should be one of the variables of study.

We have used the following control variables since they are closely related to corporate reputation. We also used them in order to avoid biased results. It is known that large firms, being more visible in markets, are expected to be more closely examined by audiences, so their efforts to build a good corporate reputation are higher. This is why we have used the

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Eva López González variable firm size, apart from the fact that there are empirical evidences that larger firms have better corporate re putation (Delgado García et al. 2011). In the paper mentioned before, it is also used the variable ROA as a control variable in order to take into account financial performance. On the other hand, there are also empirical papers which used leverage in their analysis (Weill, 2003; Mark and Kusnadi, 2005) as control variables.

3.4.

Empirical results

Table 2 shows the different descriptive statistics for the variables we are using in the research and also for other important variables that may help you understand the situation of the set of companies selected for the paper.

TABLE 2: Statistics

NET

SALES

TOTAL

ASSETS

CORP

REP

INDEP FEM

DIRECT DIRECT

BOARD

SIZE L SIZE

Mean 10565380.25 20031419.52 4.57 33.05 1,025 13.74 13.96

LEV

0.68

ROA

.051

Median

Std. dev

3200775 7590611

19602259.32 29347867.42

4.12

2.38

30.00

17.34

1,00

1.21

14.00

3.66

13.84

2.11

.70

0.15

.0497

.079

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As indicated above, the average board size of these companies, which is approximately 14 members, is inside the perfect range that the Good Governance Code of

Listed Companies (CNMV, 2015) recommends, which was between 5 and 15 members.

Moreover, the Unified Code (2006) also recommended that at least a third of board positions should be fulfilled by independent advisors and, as you can see in the TABLE 2, the average is 33.05%.

TABLE 3 shows the bivariate correlation analysis matrix between the independent variables used in this model. It is interesting to highlight that the variable L SIZE is statistically significant with all the variables of the regression. Contrary to this, the independent variables FEM DIRECT and ROA are just significant with L SIZE .

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TABLE 3: Correlations

INDEP DIRECT

FEM DIRECT

BOARD SIZE

L SIZE

LEV

Pearson correlation

Sig. (bilateral)

N

Pearson correlation

Sig. (bilateral)

N

Pearson correlation

Sig. (bilateral)

N

Pearson correlation

Sig. (bilateral)

N

Pearson correlation

Sig. (bilateral)

ROA

N

Pearson correlation

Sig. (bilateral)

N

NOTES



***p<0.01 ; **p<0.05 ; *p<0.1

IND DIREC FEM DIRECT

BOARD

SIZE

1 ,066

L SIZE

,020 ,154**

,358 ,784 ,032

,154**

,032

194

-,155**

,031

194

,090

194

,066

,358

194

,020

,784

191

194

1

198

-,040

,579

195

191 194

-,040 ,218***

,579 ,002

195

1 ,396***

195

198

,000

195

,218*** ,396***

,002 ,000

1

198 195 198

,051 ,271*** ,203***

,474

198

,017

,000

195

,004

198

-,016 ,182**

,211

194

,809

198

,822

195

,010

198


ROA

,090

,211

,182**

,010

198

-0,091

,200

198

1

194

,017

,809

198

-,016

,822

195

LEV

-,155**

,031

194

,051

,474

198

,271***

,000

195

,203***

,004

198

1

198

-,091

,200

198 198

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Finally, in TABLE 4, coefficients of the model are shown. They show the impact that the different variables have on the dependent one, CORP REP . The percentage of independent directors in the board, INDEP DIREC , is statistically significant at 10%. Its coefficient is

0.014, it has a weak positive relationship with corporate reputation . So, we accept the first hypothesis, which stated that corporate reputation is affected by the independence of the board. This fact supports the idea of Rosenstein and Wyatt (1990), which confirmed that independent directors are one of the main facts to have in mind when studying corporate reputation. Results also show that, with a strong positive relationship and a coefficient of

0.450, FEM DIREC is statistically significant at 1%. This makes us accept the second hypothesis. This result support the evidence that Larking et al. (2012) get, which indicates that as the number of women directors increased, the reputation of the company tends to be higher. Nevertheless, BOARD SIZE has a non-significant relationship with the dependent variable, CORP REP. This could be explained by the fact that big size boards are not necessarily the cause of higher corporate reputation; sometimes these big boards are not efficient for companies. Moreover, according to the results, small boards are not considered as source of high reputation either. It has a small coefficient, 0.058. According to this, we reject the third hypothesis. However, L SIZE , with a coefficient of 0.320, and LEV , with a coefficient of -4.126, are significant at 1%. There is ample empirical evidences that larger firms have better corporate reputation, such as Fombrun and Shanley (1990), Roberts and

Dowling (1997) or Sobol and Farrelly (1988). The effect that leverage has on corporate reputation is negative, as leverage increase corporate reputation decreases. This statement makes completely sense if we think about what leverage means for a company. Finally, the variable ROA is statistically significant at 5%. This result may be explained by the idea that

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Eva López González stakeholders will use previous firm performance to estimate future performance; the better the management is at using its assets the higher the generated earning, and thus this will create higher corporate reputation.

TABLE 4: Results of the model analysis

Model Coefficient

(t-statistic)

(Constant)

INDEP DIREC

FEM DIREC

BOARD SIZE

L SIZE

LEV

ROA

R squared

F

-1.480

(-1.151)

.014*

(1.685)

.450***

(3.717)

.058

(1.320)

.444***

(4.961)

-4.126***

(-4.277)

4.789**

(2.605)

.347

16.294 ***

NOTES



The data shown in this table corresponds to the regression of the model, in which the dependent variable is CORP REP, which is represents corporate reputation. The independent variables are INDEP DIREC, which is the number of independent directors on the board of directors; FEM DIREC is the number of female directors on the board; BOARD SIZE is the total number of directors on the board; L SIZE represents the size of the company, calculated as the logarithm of total assets; LEV represents the leverage of the company and it has been calculated dividing total liabilities by total assets; and, finally, ROA is the return on assets, which has been calculated as income before taxes divided by total assets.



The data in the table corresponds also to unstandardized coefficients.



As you can observe, the joint significance of the model is also statistically significant at 1%.



Independent variable: Merco/1000



***p<0.01 ; **p<0.05 ; *p<0.1

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5.

CONCLUSIONS


2015


Our research has analyzed the influence of corporate governance on a firm’s corporate reputation among Spanish companies listed in the MERCO ranking. The availability of information marked out the area of study.

Our results, for a sample of the most reputed firms in Spain, encourage evidence that the independence of the board affects corporate reputation. Going deeper, when companies have more female directors on their boards their reputation increases. Furthermore, it is logical that results also show that the bigger the company the better the corporate reputation. This makes sense when we think about these two last variables together.

Generally, big companies have a higher number of women hired than small ones; this fact leads us to think that the presence of women is also high on boards. Contrary to our hypothesis, the size of the board does not affect corporate reputation, either in a positive or a negative way.

You can also observe that there is a negative relationship between corporate reputation and leverage. This means that as leverage increases, corporate reputation decreases. This is logical because as the leveraging of the company goes up, the reputation should go down because people would trust less on the company.

On the other hand, one limitation of our study is related to the structure of the sample. The

MERCO index publishes scores only for the best reputed firms, leaving not so reputed companies away. Furthermore, our study refers to the influence of characteristics of board of directors among the most reputed firms, but not between reputed and non-reputes ones.

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Finally, our research focuses on a single civil law country, Spain; new analysis on other civil law countries should be an interesting future line of research, together with non-reputed companies.

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6.

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figure 5: corporate reputation - Repositorio Principal

UNIVERSIDAD POLITÉCNICA DE

CARTAGENA

EFFECTS OF CORPORATE

GOVERNANCE ON

CORPORATE

REPUTATION

Index

1.1.

Board of directors

FIGURE 1. Composition of the board by typology

FIGURE 2A: Directors evolution

FIGURE 2B: Female directors evolution

FIGURE 3 : Shares of female directors on companies (Women on boards)

1.2.

Ownership structure

FIGURE 4: Distribution of the IBEX companies capital

FIGURE 6: MERCO RANKING

3.1.

Objectives

3.2.

Hypothesis

3.3.

Sample and methodology

Empirical results

TABLE 2: Statistics

TABLE 3: Correlations

TABLE 4: Results of the model analysis

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