Good governance pays off

A new study has found that initial public offering (IPO) companies that engage in good corporate governance practices at the committee level may increase their likelihood of survival.

The study by two University of Melbourne academics examined the popularity and development of board committees for 46 new listings on the Australian Security Exchange (ASX) from the time of their IPO in 2008 to the end of 2011, and measured this against whether they survived as companies.

The research followed the release of the ASX Corporate Governance Council's second edition of its Principles and Recommendations in August 2007, which recommended that boards of listed companies should establish nominations, audit and remuneration committees and suggested how these should be structured.

The Principles, which are built on a "comply or explain" model, also suggested that smaller boards should be responsible for the auditing, nomination and remuneration practices of the company if respective committees are not established.

The academics – Helen Wei Hu, a lecturer in the University of Melbourne's Faculty of Business and Economics, and Paul Ali, an associate Professor in its Faculty of Law – collected information on the IPOs at three different phases: at time of the IPO (from 2008 prospectuses); one year after the IPO (from 2009 annual reports); and from the 2011 annual reports of IPO companies that survived.

Out of the 46 companies that listed in 2008, 31 companies survived after four years, while 15 IPOs delisted for various reasons, including because they were taken over by another company or the scope of their business or their name changed.

The study found that surviving IPO companies had established more committees at the time of their IPO – particularly audit committees – than their non-surviving counterparts. Indeed, none of the non-surviving IPOs established a remuneration or nomination committee at this time and only two had established an audit committee.

A year into their IPOs, 13 out of the 31 surviving IPO companies had established an audit committee, with non-executive directors accounting for 77 per cent of their members. In contrast, only four of the 15 non-surviving IPO companies had established an audit committee and these were much smaller than those of the surviving companies.

Four years after listing, the study found that 14 companies (45 per cent) had an audit committee, seven had a remuneration committee and four had a nomination committee.

The results show that, generally, the IPO companies that survived followed the ASX Principles on committees more closely than those that did not survive. In particular, the study reveals that the establishment of board committees – especially, an audit committee – was more common in the surviving IPO companies.

It also found that the independence of audit committees, because of the presence of non-executive directors and independent directors, was higher in surviving than in non-surviving IPO companies.

The researchers believe the results of this study not only provide clear support for the recommendations for establishing board committees, but also have important practical implications for companies, regulators and policymakers.