Purpose – This paper aims to provide a twofold empirical comparison: first, a comparison between the impact of corporate governance mechanisms on agency costs proxies and firm performance measures, and second, this comparison was used before and after the 2008 financial crisis, capturing two different economic states. Design/methodology/approach – Panel regression methods were applied to two data sets of nonfinancial firms incorporated in the FTSE ALL-Share index over the period 2005-2011. Findings – The results provide evidence that not all mechanisms lead to lower agency conflicts and/or higher firm performance. Ownership identity has a significant impact and the role of the governance mechanisms changes with the changes in the economic conditions surrounding the firm. Research limitations/implications – The results lend support to the notion that forcing a certain code of practice on firms to follow could compel them to move away from conflict reduction governance structures. Originality/value – To the best of the authors’ knowledge, this is the first paper to provide a comparison of empirical evidence for the impact of board characteristics and ownership identity on agency costs and firm performance by using a comprehensive set of corporate governance mechanisms. This comparison challenges the prior studies that use performance as an indirect proxy for lower agency costs. Additionally, it compares the impact of the governance mechanisms during two different economic conditions.

Introduction

The term “corporate governance” always attracts the attention of large investors, practitioners and regulators, especially after accounting scandals and financial crises. Investors blame regulators that they did not enact the proper regulations to protect their wealth from management fraud, and practitioners support these claims. Regulators respond by introducing stricter governance code. After the 2008 financial crisis, The International Corporate Governance Network issued a statement introducing corporate governance as the cause and the solution of the crisis. Strengthening boards was one of the underscored issues that should be improved to avoid any future crises (ICGN, 2008). Likewise, Kirkpatrick (2009) concluded that the Organisation for Economic Co-operation and Development corporate governance principles need to be revised to identify whether there is a need for more guidelines and/or clarifications. However, prior literature and real-life examples provide no evidence that strict regulations would lead to better performance or avoid any future fraud or scandals. Originally, corporate governance mechanisms are introduced to alleviate the negative consequences – mainly agency conflicts and the costs resulting from these conflicts – of the separation between ownership and control. However, most of the prior studies (Ujunwa, 2012; Yang and Zhao, 2014; Arora and Sharma, 2016; Mishra and Kapil, 2017; Bhatt and Bhatt, 2017 among others) were directed to investigate the impact of these mechanisms on enhancing firm performance and value as indirect proxies of lower agency costs. The reported results of this research stream failed in providing systematic and consistent results that can shape an optimal governance structure. Moreover, only a limited number of studies (Ang et al., 2000; Singh and Davidson, 2003; McKnight and Weir, 2009; Belghitar and Clark, 2015; Garanina and Kaikova, 2016), among others) have investigated the role of governance mechanisms on agency costs proxies. Nonetheless, these studies used a limited number of governance mechanisms; most of these studies were applied to other contexts different from the UK context. Even the UK studies used small and old data sets (Belghitar and Clark, 2015) cover the period of 2000-2004 and mainly examine the compensation structure as agency costs mitigating mechanism). The most common limitations of these studies are their analysis techniques. Renders et al. (2010) mention that a common issue with prior studies is that they suffer from econometric problems such as endogeneity and/or the lack of the statistical power. Moreover, each firm could design their governance structure that maximises shareholders’ wealth and fits with firm’s specific characteristics (Renders et al., 2010). Similarly, Brown et al. (2011) mention that prior studies used ordinary least squares (OLS), ignoring the endogeneity problem and that the examined models could suffer from unobserved heterogeneity, which means that the identified relations result from unobserved factors.