The Level of Compliance with Corporate Governance Requirements in Companies Listed in Tehran Stock Exchange

Document Type : Research Paper

Authors

1 Assistant Professor, Accounting Department, Faculty of Social Sciences and Economics, Alzahra University, Tehran, Iran.

2 Professor, Department of Accounting, Faculty of Social Sciences and Economics, Alzahra University, Tehran, Iran.

3 Master of Science, Department of Accounting, Faculty of Social Sciences and Economics, Alzahra University, Tehran, Iran.

Abstract

1- Introduction
Corporate Governance (CG) is an important issue that has received  more attention from legislators, regulatory authorities and investors in recent years following widespread financial scandals such as Enron, and it deals with the need to monitor the company's management and to protect the rights of investors and stakeholders. Strong CG practices are now a sine qua non in corporations due to its benefits to all stakeholders.
The objective of this study was to assess the level of compliance of the requirements in the CG reporting under the suggested list provided by Tehran Stock Exchange (TSE), in the first market of the TSE, and to investigate the CG determinants that drive the level of the compliance of CG in Iran. In  other words, the purpose of this paper is to examine the level of compliance of the requirements in the CG reporting to access the determinants that drive the level of the compliance. Analyzing the determinants of compliance can reveal interesting issues in the business regarding the CG  requirements (Berglov and Pejast, 2005).
In this regard, a conceptual framework for components of the requirements in the CG reporting was reviewed, using the survey method. The results of this survey provide valuable information about the degree of compliance with the requirements of the CG and also in the direction of advancing the goals of CG, especially because it reflects the willingness/ability or unwillingness/difficulties of companies in implementing or disclosing some issues. Establishing the system of CG, and requiring issuers to report CG and disclose financial and non-financial information, can help improve capital market performance.
 
2- Hypothesis
Considering the theoretical foundations of the desirable structure of a CG and the research literature, the main question is, To what extent is the degree of compliance with the corporate governance requirements in the companies listed in TSE? Thus, the following hypotheses are presented:
H1: The companies of the first market in TSE comply with the requirements of the corporate governance by more than 50%.
It is assumed that compliance of more than 50% can be a good sign of the commitment of companies to implement the requirements, and of course, if it is more than the mentioned percentage, it is considered desirable.
Also, in order to investigate the factors that determine the degree of compliance with the requirements of the corporate governance in the companies of TSE, and according to the theoretical foundations of the research, the following hypotheses have been developed:
H2: There is a positive and significant relationship between the size of the company and the degree of compliance with the requirements of corporate governance in the first market of the TSE.
H3: There is a positive and significant relationship between the percentage of institutional ownership and the degree of compliance with the requirements of corporate governance in the first market of the TSE.
H4: There is a positive and significant relationship between the percentage of free floating shares and the degree of compliance with the requirements of corporate governance in the first market of the TSE.
H5: There is a positive and significant relationship between the composition of the board of directors (the ratio of non-executive members to the total members of the board of directors) and the degree of compliance with the requirements of corporate governance in the first market of the TSE.
H6: There is a positive and significant relationship between the size of the auditing firm and the degree of compliance with the requirements of corporate governance in the first market of the TSE.
 
3- Methods
The study covered 68 companies listed on the TSE, First Market. The analysis is performed based on publicly available information for the year ended March 19, 2020. In order to assess the level of compliance with the CG requirements, a checklist is compiled in 3 sections, based on the requirements indicated in the Iran Corporate Governance Code (2019) including a) company elements, b) internal controls and c) reporting. In order to determine the level of compliance with the CG requirements, this study has followed the approach in which all items are assumed equally important. Finally, we ran a multivariate regression model to investigate the relationship between dependent (CGI) and independent variables.
In this study, by preparing a checklist, the mandatory items in the form of a questionnaire and in terms of existence or non-existence and compliance or non-compliance with those requirements are examined. For the scoring of each item in the checklist, if it is met, 1 is given, and if it is not met, it is given 0. This method has been successfully used by other researchers (Ahmed and Nichols, 1994; Hossein, 2000 and 2001). Finally, the compliance score of a company's corporate governance requirements (compliance index) was measured as follows (Cook, 1992).
Compliance index = total score of checklist items in a company divided by the total number of checked items.
To categorize the data collected Excel 2019 was used and the final analysis of the multiple regression model was done by Eviews 10.
 
4- Results
The findings revealed an average level of 48% of compliance, minimum 30% and maximum 59%. The highest value of compliance index (59%) is related to (Ranfur) and the lowest value of compliance index (30%) is related to (Dakimi). Considering the lowest level of compliance is reported in the reporting section (40.92), followed by (52.08) in the company's section,  the highest level is reported in the internal controls (52.7).
The highest level of compliance in the reporting section of CG code (62 percent) is related to companies such as (Dalbar) and (Serud), and the lowest level of compliance (8.86 percent) is related to companies such as (Valesapa) and (Khegostar). The highest level of compliance in the company's section (62 percent) is related to the (Kala) and the lowest level of compliance (40.58 percent) is related to the (Vasandoq). The highest level of compliance in the internal controls section (62%) is related to companies such as (Dalbar) and (Seroud), and the lowest level of compliance (46.5%) is related to companies such as (Akhaber) and (Khegostar).
The results showed that variables such as the firm size, free float, board structure and audit firm size have significant positive impact on the level of compliance, while the percentage of institutional ownership has no significant influence.
 
5- Discussion and Conclusion
The research findings showed that the degree of compliance with the requirements of corporate governance is on average (48%), and the variables of company size, percentage of floating shares, the composition of the board of directors and the size of the auditor have a positive and significant effect on the degree of compliance with the requirements of the corporate governance code.
According to the results of the regression model, about 21% of the changes in the dependent variable, i.e., compliance with the instructions, are expressed by the changes in the independent variables. The adjusted determination coefficient of 21% of this research has been compared with similar studies in the field of compliance with corporate governance 

Keywords

References

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Journal of Accounting Advances
Volume 14, Issue 2 - Serial Number 83
November 2022
Pages 253-284

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History

  • Receive Date: 02 May 2022
  • Revise Date: 27 November 2022
  • Accept Date: 28 November 2022

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