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Introduction

All the players on the financial market expect to obtain the potential gains from different opportunities, so that they are interested in aspects that affect the performance. As for key indicators researchers consider external factors to explore how some shocks of the financial market affects the companies' operations. However, the reason might be inside of the company as a response to the external shocks. A possible explanation comes to the corporate governance quality.

Under “corporate governance system” we assume a set of mechanisms that mitigate agency conflicts involving managers and shareholders, the interests of the latter represented by the Board of directors. Generally, the following players are involved in the operational process: employees, top management, shareholders, Board of directors and government.

In practice, the researchers Ruth Aguilera, George Yip / Global structure faces local constraints / FT Mastering Corporate Governance, 2005 highlight three major types of corporate governance systems: the “Anglo-American” system (the US and UK), the “Continental” system (Germany, Italy and France) and the “Extended” system (Japan). The Anglo-American system relies on the single-tiered Board that consists of non-executive directors selected by shareholders. Moreover, in the US companies CEO usually serves as a chairman as well. The Continental system includes a lot of constrains, it mainly concerns the employees. Besides, many countries require the two-tiered Board to distinguish executive and non-executive directors. The Anglo-American system looks more appropriate than two others do.

In our settings, we consider American companies where corporate governance model emphasizes the interests of shareholders. Usually, the Board of directors also includes executives from the company. Moreover, the CEOs serve as chairmen in majority of companies despite the widespread statement about effective separation of these roles.

The primary goal of this study is to figure out whether the corporate governance system affects the company performance, especially in case of the financial crisis. As soon as recession enhances the functioning of all institutions, induction of time effect makes the study more innovative. Furthermore, our research includes the data about executives' total compensation elements reflecting the motivation for management to perform better. This indicator serves as a very good proxy for the quality for the managerial decisions.

From the world economic history, we can find many examples when the financial problems resulted from the inefficiency of the authorities. For instance, accounting frauds of Enron, WorldCom and Lehman Brothers were world-shaking in 2001, 2002 and 2008, correspondingly. Information hiding and fraudulent transactions were the keystones of the bankruptcy in each scandal. It cannot be ruled out whether there was slackness in corporate governance. For the reason, the absence of confidence between the CEO and the Board of directors led to concealment of full timely intelligence. “The effective system of corporate governance should include not only a valid organization structure, but also strong operational team, where members trust each other and able to connect successfully” Jeffrey Sonnenfeld is Senior Associate Dean for Executive Programs and Lester Crown Professor in the Practice of Management at Yale School of Management (SOM) where he has taught since 1999.. corporate governance correlation financial

After the financial crisis of 2008 OECD released a report where it has stated that one of the most important causes of economic meltdown was the weakness of corporate governance in major financial institutions of the US and Europe. We take into account the evidence of the financial crisis in order to test the ongoing hypothesis.

Our attention is focused on the aspects of corporate governance, which affect the company performance in conditions of uncertainty and high risks under consideration of the US companies using the regression analysis with panel data. We test four models with different company performance measures: Tobin's q, return on invested capital (ROIC), earning per share (EPS), and growth rate of sales. As key explanatory variables, we identify CEO pay package elements, the board structure and the attendance in other major company boards. As control variables, two indicators are considered: size of the company (the natural logarithm of sales), capital structure (gearing).

Throughout this paper, we would like to accomplish the following «steps»:

§ To investigate the type of functional relationship between the corporate governance and company performance revealed in the previous researches;

§ To understand, based on the preceding literature, the approaches of corporate governance quality measurement;

§ To develop the methodology of the research;

§ To choose the relevant proxies for selected corporate governance and company performance variables;

§ To construct the appropriate sample for further estimations;

§ To test whether the proposed hypotheses are supported by our analysis;

§ To check time effect in the considerable regression analysis in order to reveal the significance of corporate governance under the crisis;

§ To make conclusions about the obtained results and interpret them;

§ To recommend some aspects for the future research.

The rest of the paper is organized as follows. The first part includes evidence about the corporate governance codes as well as the review of existing literature about the relationship between corporate governance and company performance, the measuring of the corporate government variables in the preceding papers. The second part presents the methodology that introduces the choice of relevant variables, descriptive statistics and model specification. The third part is dedicated to the description of the data set, explanation of the variables' set choice and formulation of the main hypotheses and expectations. The fourth part provides the empirical results of the executed study, interpretation of the relationships and concluding remarks about considerable models. In the last part we conclude.



Literature review

It is necessary to figure out that there has been not enough research associated with the evidence of corporate governance under uncertainty. However, there is a very large number of papers focused on different aspects of corporate governance that does not include the financial crisis attendance and emphasizes mainly the effect of the Board structure, executives' total compensation package and other measures, on the firm performance. We also consider the researches of the influence of the financial crisis on the corporate investments, empirical papers about appropriate proxies of corporate governance and company performance measures.

Corporate governance under uncertainty

The research by Johnson et al. Simon Johnson, Peter Boone, Alasdair Breach and Eric Friedman / Corporate governance in the Asian financial crisis / Journal of Financial Economics 58 (2000), 141-186 highlights the statement about the influence of corporate governance measures on the exchange rate depreciation and drop in stock market price during the Asian financial crisis. We may suggest that the loss of trust in relation to domestic and foreign investors triggered decrease in capital inflows and increase in capital outflows, and led to a significant drop in exchange rate and stock price. The authors took into account the fact of why so dramatic drop makes sense in some emerging markets.

The consideration of corporate governance system implicates very common institutional problem that is called agency conflicts.

According to Johnson et al. weak governance system affected the exchange rate depreciation and stock market during 1997-1998. In their paper, the weakness of corporate governance is implied by the expropriation of minority shareholders by managers.

During the crisis, many companies all around the world suffered from financial market troubles. The majority of Russian companies collapsed because of expropriation of outside investors. Appendix 2 contains information about crashes happened in the Asian financial crisis. In many cases, managers used money or assets for their own sakes.

Duchin et al. Ran Duchin, Oguzhan Ozbas, BerkA.Sensoy / Costly external finance, corporate investment, and the subprime mortgage credit crisis / Journal of Financial Economics 97 (2010), 418-435 explored how evidence of the financial crisis affects the corporate investments. Primary result pointed out that the recession forced on the external investments for non-financial firms as an unexpected negative shock. The effect became more critical for the firms with poor cash reserves or large net short-term debt and for the companies from industries with huge amount of external finance.

Johnson et al. stated very similar results to La Porta et al. Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer / Corporate ownership around the world / Journal of Finance 54 (1999), 471-517. They figured out that protection of minority shareholders is very important. Johnson et al. concluded the countries with weak legal protection of minority interests become sensitive to the loss of investor confidence. In case of even small loss of trust, the managers exceed the expropriation of minority shareholders, and this finally leads to drop in asset value and exchange rate depreciation.

Their settings suggest that corporate governance variables examine better the collapses of exchange rate and stock value than the macroeconomic variables during the Asian crisis. This statement does not mean that the macroeconomic parameters are not relevant, only that in case of crisis the governance system reflects more transparent explanation of the extent of exchange rate decline and stock market drop. Thus, it makes sense to consider corporate governance as the primary determinant in terms of macroeconomic troubles during the financial crisis.

One more study Michael L. Lemmon and Karl V. Lins / Ownership Structure, Corporate Governance, and Firm Value: Evidence from the East Asian Financial Crisis / THE JOURNAL OF FINANCE, Vol. LVIII, No. 4, August 2003 applied the statement about the effect of ownership structure on the company value during the Asian financial crisis. The case of crisis negatively affects the investment opportunities and enhances the expropriation of minority shareholders. Moreover, they stated the companies whose managers have control power and separated ownership in cash flow, have lower returns in comparison with other companies.

The impact of the Board structure on the performance

Another research group Yang-Chao Wang, Jui-Jung Tsai, Hsiou-Wei William Lin / The Influence of Board Structure on Firm Performance / The Journal of Global Business Management Volume 9 * Number 2 * June 2013 issue, Special Edition concluded that there is good empirical evidence between a board size and company performance for the sample of 2310 firm-year observations from 1996 to 2006. Moreover, they stated smaller board operates better. Under consideration of company board structure from different industries, the most important thing is to distinguish their size, leverage, scope of operation, existence of new product lines and new geographic territories. They explained it as follows: the companies with high leverage, large firm size and diversification should have larger board to benefit them by offering more directors' experience, advices. On the other hand, small firms with more simple operational process must have smaller board.

Francis et al. B. Francis, I. Hasan and Q. Wu / Do corporate boards affect firm performance? New evidence from the financial crisis / Unpublished working paper, 2010 analyses the impact of proportion of independent directors on the profitability of 873 companies. Their settings show that there is a strong positive correlation in the case of purely independent directors, i.e. working in the board earlier than the current CEO. The authors also find the importance of the presence of outsiders, the frequency of meetings of the board and others.

Nguyen and Nielsen wrote very innovating paper taking into account the relation between share of independent directors and company performance Bang Dang Nguyen, Kasper Meisner Nielsen / The value of independent directors: Evidence from sudden deaths / Journal of Financial Economics, 2010. They included into consideration the cases of sudden deaths of independent directors and their impact on the stock price. The sample consisted of the 108 cases of independent directors' deaths during the period from 1994 to 2007. Finally, the tragic event negatively affects the stock price, what confirms the widespread view that independence positively contributes the shareholder value. Furthermore, more important outcome implied the effect of outsiders' deaths on the stock price became weaker for the cases when the directors were appointed during the current CEO tenure or for the longer own directors tenure. Especially the deaths of directors responsible for the crucial board functions lead to more significant drop in stock value.

In empirical frameworks, there are conflicting results about such correlation. The following papers show similar outcomes. Rosenstein and Wyatt S. Rosenstein, J. G. Wyatt / Outside directors, board independence and shareholder wealth/ Journal of Financial Economics 26, 175-191, 1990 obtained that nomination of independent directors positively affect the stock price. Core et al. J. Core, R. Holthausen and D. Larcker / Corporate governance, chief executive officer compensation, and firm performance / Journal of Financial Economics 51 (1999), 371-406 ascertained a positive impact of outsiders' attendance on the market-to-book value.

Opposite views

Gupta et al. Kartick Gupta, Chandrasekhar Krishnamurti and Alireza Tourani-Rad / Is Corporate Governance Relevant During the Financial Crisis? Cross-Country Evidence / 2011 stated there is no evidence of the influence of governance measures on the company performance during the global financial crisis. They considered 4046 public non-traded companies from 23 countries during the global financial crisis. They tested two widespread hypotheses:

o “flight to quality”, which implies the companies with good governance operate better than weak governed firms during the global financial crisis;

o “contagion effect” which states the opposite: the companies with good governance system do not perform better than bad-governed firms.

As the result, Gupta et al. conduct the acceptance of “contagion effect” hypothesis meaning the corporate governance has no impact on the company performance during the global financial crisis. Moreover, they outlined the cross-border institutional patterns do not exist which affects the relationship between governance and performance.

Their outcomes contradict with majority of studies' settings and force to dispute whether corporate governance quality is related to the drop in stock price during the financial crisis.

With regards to the effect of the outside directors on the company performance, the following papers confirmed that this relation was insignificant: MacAvoy, Cantor, Dana, and Peck (1983), Bhagat and Black (1999, 2002), Hermalin and Weisbach (1991), Klein (1998). Agrawal and Knoeber A. Agrawal, C. R. Knoeber/ Firm performance and mechanisms to control agency problems between managers and shareholders/ Journal of Financial and Quantitative Analysis 31, 377-397, 1996 demonstrated negative correlation between outsiders' fraction and performance. The interpretations is in the ineffectiveness of several independent directors functioning.

The second main part of the research by Wang et al. covers the statement about the relationship between board composition In this case, “board composition” means proportion of outside and inside directors. and firm performance. The outsider fraction is negatively associated with the company performance in contradiction with the majority of papers' outcomes. The authors explained it in the following way: the larger number of outside directors leads to over-monitoring problem because of deficit of inside directors and insufficient advisory functions from insiders' fraction.

Family business companies

Operation process in the family business is strictly different from the one widely-held by listed companies. The main reason is the corporate governance system where the owners and the managers connect under confidential agreements. Due to the trust inside of the company, the families are more motivated to be attentive in relation to company performance.

The advantage of the corporate governance system in the family-controlled company is that the Board does not need to spend time on the monitoring of their managers. For that, the owners' responsibilities were formulated by John Ward John Ward / Keeping the business within the family / FT Mastering Corporate Governance, 2005, the Wild Group professor of family business and co-director of the LODH Family Business Research Centre at IMD, as follows:

· Owners determine the conditions to develop the company's culture.

· Owners define the restrictions for managerial decisions and consult them on the financial issues.

· Owners submit the ideas to optimize the operations, increase growth and others.

· Owners are responsible for the structure of the Board.

In case of the last term, it is important to point out that in the research by Ward Ward considered family-controlled companies with more than 500 employees in North America and Western Europe. approximately 25% of the companies have at least three independent directors. However, the majority of family businesses do not include outsider into the Board, because of fear of losing control.

Another peculiarity for such a company is the boundaries of responsibility for generations. The first and second generations usually hold the positions of operating owners. They actively included into the process of decision-making. The next generations typically take the place of governing owners and they are less involved into operation process. Families, whose interest is concentrated only on the stock returns, generally are called investing and passive owners. The latter almost does not differ from the widely-held companies.

If the company consists not only of family members, the family owners still can add value by providing the informed opinion on managerial decisions. That affords an enhancement of the confidence.

To distinguish the special aspects of functioning in the family business, we will call it a family governance system. The first step is to organize informal family meeting to formulate the key purposes. After that, the nature of the meeting becomes more formal. The family members shape a constitution, where explore the principles and goals of the company, company policy, board structure aspects, dividend payment scheme.

Besides the issues mentioned above the family companies might be enterprising families. That means they hold the collective purposes.

As soon as functioning of the company with ownership concentration seems interesting, we will also consider the studies linked with the family governance system.

La Porta et al. Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer / Corporate ownership around the world / Journal of Finance 54 (1999), 471-517 investigated the control structure of the largest 20 publicly traded companies in 27 countries, including East Asian countries. They outlined that the ownership structure in Japanese and Korean organizations is principally dispersed, Hong Kong companies are mainly family-controlled, and approximately half of respondent companies in Singapore are controlled by the state.

In the paper of Claessens et al. Stijn Claessens, Simeon Djankov and Larry H.P. Lang / The separation of ownership and control in East Asian Corporations / Journal of Financial Economics 58 (2000), 81-112 they studied the same problem by considering the separation of ownership and control in 2,980 publicly traded companies from East Asia only. They found out that control is strengthened by pyramid structure and cross-holdings among companies. This finding is associated with the statement that controlled shareholders try to expropriate from outside investors Stijn Claessens, Simeon Djankov, J. Fan and Larry H.P. Lang / Expropriation of minority shareholders: evidence from East Asia / Policy Research Paper 2088 (1999), World Bank, Washington DC.

Moreover, the researcher mentioned a single owner monitors two-third of respondent firms. Typically, the ownership and management institutions work cooperatively. Managers of nearly 60% of widely-held companies are relatives of the controlling shareholder. Furthermore, Claessens et al. figured out that older firms are more inhere to be family-controlled. The concentration of ownership depends on the level of economic development. For the developing East Asian firms a significant fraction of corporate capabilities belongs to few families. The authors believe that this is a barrier to reforming future corporate governance policy.

Measuring corporate governance

La Porta et al. Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert Vishny / Investor protection and corporate governance / Journal of Financial Economics 58 (2000), 3-27 stated that effective corporate governance anticipates strong protection of outside investors. The researcher considered cross-border differences in preventing regulation and laws to reveal how corporate governance standards may protect investors from expropriation by management and controlling shareholders. It is commonly known that extensive expropriation undermines the operation of financial system, so that important to take measures to limit it.

In terms of Modigliani and Miller F. Modigliani and M. Miller / The cost of capital, corporation finance and the theory on investment / American Economic Review 48 (1958), 261-297 theory, firms which design the cash flows during the investment project, define debt and equity as the requirement to these cash flows. They do not clarify the reason for managers to return the cash flows to investors.

To resolve this problem other researchers have proposed the models where the rights of outsiders are protected and returns of cash flows to investors are held. One of the studies by Jensen and Meckling M. Jensen and W. Meckling / Theory of the firm: managerial behavior, agency costs and ownership structure / Journal of Financial Economics 3 (1976), 305-360 reported that the ownership in equity enhances investor's interests prior to managerial benefits. The other group of economists (Grossman et al. O. Hart / Firms, contracts and financial structure / Oxford University Press, London (1995)) included the condition that cash flows are assigned to investors just because they have control rights. By contrast with Modigliani and Miller statement, the authors supposed that if capital structure changes, the power between the insiders and outsiders will be reallocated as well.

To understand precisely what conditions drive managers to choose “quiet life”, we examine the research of Giroud and Mueller X. Giroud, and H. Mueller / Does corporate governance matter in competitive industries? / Journal of Financial Economics 95 (2010), 312-331, where they checked how induction of new law passages affect the managerial behavior depending on the level of industry competitiveness. Their findings show that the companies from non-competitive industries usually undergo a dramatic drop in stock price after the business combination law “BC laws impose a moratorium on certain transactions, especially mergers and asset sales, between a large shareholder and the firm for a period ranging from three to five years after the large shareholder's stake has passed a prespecified threshold. This moratorium hinders corporate raiders from gaining access to the target firm's assets for the purpose of paying down acquisition debt, thus making hostile takeovers more difficult and often impossible” by Giroud and Mueller. introduction in comparison with competitive industries where there is no evidence. Furthermore, competition alleviates managerial slack.

The authors concluded the efficient governance is worked out especially in non-competitive industries. The quality of corporate governance is positively related to the equity price in the companies from non-competitive industries. For competitive industries they did not find an extent.

Lorsch Jay Lorsch / Building better boards by design / FT Mastering Corporate Governance, 2005 mentioned that some new laws and regulations made a significant improvement in functioning process. Especially, he emphasized the NYSE and NASDAQ listing requirements in the US and the Combined Code in the UK, which are requiring an assessment of the company performance annually.

The study of Bebchuk et al. L. Bebchuk, A. Cohen and A, Ferrell / What matters in corporate governance? / John M. Olin Center for Law, Economics and Business, 2004 includes the analysis of the impact of the corporate governance measures on the corporate valuation. They took into account which components of governance measure are the most significant. After testing 24 index provisions the researchers figured out the most appropriate as follows:

· staggered Board;

· limitation on amending bylaws;

· limitation on amending the corporate charter;

· supermajority to approve a merger;

· golden parachute;

· poison pill.

The parameters listed above are the most considerable and relevant. The provisions provide corporate governance measure that was negatively associated with the firm value. Bebchuk et al. gave the feedback for estimation of governance system that had been useful in major research papers.

Dybvig and Warachka Philip H. Dybvig and Mitch Warachka / Tobin's q Does Not Measure Firm Performance: Theory, Empirics and Alternative Measures / 2012 explored indicators that could be used as an appropriate measure for the company performance; especially their interest was related to the Tobin's q. They concluded that better firm performance could either decrease or increase Tobin's q depending on the relative importance of scale decisions versus cost discipline, respectively. Such a result consists in underinvestment's ability to inflate Tobin's q but contradicts with the widespread assumption that a high Tobin's q is an evidence of good firm performance.

Lacker et al. David Lacker, Scott Richardson and Irem Tuna / Rating add fire to the governance debate / FT Mastering Corporate Governance, 2005 discussed the problem of defining the appropriate governance measure. To explain this issue, they tried to determine the measure that affords to estimate corporate governance. The researchers concentrated on the data of major rating agencies, which include the following characteristics: the board structure, compensation of executives, ownership structure and so on. As a result, they concluded there is no evidence that governance measure affects the firm performance. The only exception is that TCL The Corporate Library (TCL) rating was associated with future operating performance. The companies with “good” ratings have a higher level of return assets in comparison with the companies with “bad” ratings.

Regardless of the exclusion, the authors believe that there is no relation between corporate governance and company performance. They explained it by the existence of overlap between measures of governance and those used by the rating agencies. Moreover, they considered too short time (July 2002 - December 2004). Only a small fraction of governance measures was associated with the operating performance level. The researchers also had unexpected results, such as, companies with larger Board, more control from insiders and fewer outsiders experienced with the higher level of company performance.

Lacker et al. clarified that the failure to determine the relation between company performance and corporate governance may lie in the fact that governance measures are not available for the correspondent financial results, what can produce measurement errors.

As we said previously, one of the most attractive motivations for executives is the high compensation. Bender Ruth Bender / Just rewards for a new approach to pay / FT Mastering Corporate Governance, 2005 took into account two major issues: who is responsible for determining executive package and what should be included into reward. The answer to the first question is the remuneration committee, which is designed for the compensation of the chairman, the executive directors and the company secretary. The remuneration committee is a very important institution of the Board, because it must account for managers' and shareholders' interests and to be oriented on the strategic purposes. The researchers note that independent directors must be included into the committee to ensure the objectiveness. Nevertheless, the committee should not consist of only outsiders, because they are not able to make the right decisions. The optimal structure involves the following members:

· HR professional;

· remuneration consultants;

· the CEO;

· the chairman

The key task of the HR is to control the committee. She needs to provide an appropriate compensation scheme and prepare comparative data about salaries in peers. The consultants usually play role of advisors and express their opinion about correspondence of design scheme to comparable companies. Bender highlighted that in 2004-2005 the consultants have been too close to the executives, which led to excessive rewards.

Given the obvious fact, that the CEO and the chairman should not determine their own packages, we define their option as the formulation of the general package structure, because we assume the remuneration depends on the company performance.

The second question suggests potential structure and level of the remuneration package. The UK Corporate Governance Code declares: “Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive directors' remuneration should be structured so as to link rewards to corporate and individual performance” UK Corporate Governance Code / Section D - Remuneration / https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-September-2012.pdf Such a formulation is not clear, as we cannot know “necessary amount”.

The Sarbanes-Oxley Act states that “… the Board shall have the power to appoint such employees, accountants, attorneys, and other agents as may be necessary or appropriate, and to determine their qualifications, define their duties, and fix their salaries or other compensation (at a level that is comparable to private sector self-regulatory, accounting, technical, supervisory, or other staff or management positions)” Sarbanes-Oxley Act of 2002 / Title I - Public company accounting oversight board, Section 101 - Establishment, administrative provisions / http://www.gpo.gov/fdsys/pkg/PLAW-107publ204/pdf/PLAW-107publ204.pdf. As well as the UK Code, the Sarbanes-Oxley Act does not answer the question.

As the principles of corporate governance do not contain the instruction for determining the pay package, the committee has to care about fair compensations. To take a decision the members use executive salaries in comparable companies as a benchmark.

Bender considered two types of reward - share option schemes and long-term incentive plans. In the UK share options usually include performance conditions, so that this type is useless. In the US there is a tendency to vest shares into annual tranches. Option-holders have the advantage of shareholders, because if the stock price drops they will not lose anything. The holders of outstanding options prefer to restrict their dividend payments, because it reduces future stock price by paying cash to current shareholders. Thus, option scheme does not add value to shareholders. That was popular last decade, but for the moment, options are used less.

The second type - long-term incentive plan - can be used in addition to or instead of share options scheme. For options the key measure is the pursuance of given level of stock price growth, while for long-term incentive plan it is the shareholder return or capital gain return. It is possible to compare such a measure with the peers. On the one hand, this plan can be preferred, as includes shareholders' interests and operates outside the executives' control. On the other side, the problem is in identification of most comparable companies or groups.

Compulsory disclosure made clear our knowledge about remuneration schemes and effectiveness of remuneration committee functioning. However, it also lead to increase in pay package growth, as all peers will try to pay at least their competitors, so that the salaries range will go up.

Core et al. J. Core, R. Holthausen and D. Larcker / Corporate governance, chief executive officer compensation, and firm performance / Journal of Financial Economics 51 (1999), 371-406 explored the effect of CEO compensation package on the company performance considering 205 publicly traded companies from the US. They assumed the board and ownership structure are associated with the compensation package for executives. The settings include the following findings:

· pay package is negatively related to the share of inside directors and to the CEO's ownership stake;

· pay package is positively related to the board size, the number of outsiders and to the cases, when CEO and chairman is the same person;

· there is negative correlation between the level of pay and the stock price and firm performance.

Their implications are consistent with the widespread statements that to make corporate governance system more efficient the empowerment of CEO and chairman should be separated; the board ought to be consisted of insiders and outsider in equal parts, board size should be small. However, they did not find out the significance of outside directors' share in relation to the corporate governance effectiveness.

M&A integration

One of the most interesting questions is why corporate governance system fails during the mergers and acquisitions. The common statement explores that the merger increases the risk of fraud and decreases internal control. The integration may entail the corporate governance fail that could not been happened the merger has not been done.

Capron and Schnatterly Lauren Capron and Karen Schnatterly / How M&As can lead to governance failure / FT Mastering Corporate Governance, 2005 studied this question and distinguished short-term and long-term problems.

M&As often lead to erratic transition period that is described by organizational turmoil, leadership confusion, employee warning. During the transition period, employees of the target company are in pitch, because they do not reveal the primary purposes of the new leaders and do not know anything about future expectations. This is one of the reasons for swindling. During the study of 57 companies, Schnatterly concluded that those of them, which were coming from criminal environment, has very weak control inside. Another study by Capron detected that assets of acquirer are threefold than the target company's assets. These provide opportunities for fraud, as well as employees estimate new leader as unfair, and feel like they have been mistreated.

Moreover, new boardroom puts pressure on the employees. If the acquirer and the target company belong to different industries, the problem is in asymmetric information. Otherwise (when they are from the same industry), the acquirer overestimates company value to take their capabilities. Then, some employees can be involved into out-of-the-way activity to protect them and save their jobs. The survey of employees in 1994 A 1994 landmark survey of 4,035 US employees undertaken by the Ethics Resource Center shows that 29% of respondents admitted that under pressure they have been inclined into conduct that infringed the initial company's principles.

In comparison with short-term effects, long-term problems may be deathful. The integration process also includes political aspects, so that sometimes it means one company wants to implement their control procedures and corporate governance system into the target company. The transfer can be harmful if they have various regulations. The acquirer may have worse management and inappropriate governance, so that the target will suffer from insufficient monitoring.

In case of cross-board M&As, companies face with more complicated problems, such as cultural differences, language barriers, variety of market regulations, corporate laws and so on. If the company acquires the foreign organization, it may lead to increase in investor protection. The target company with strong corporate governance will have to accept weaker principles.

To prevent corporate governance failure Capron and Schnatterly propose the following recommendations:

1. During due diligence process it is necessary to reveal whether the target company is able to accept the acquirer's standards.

2. The acquirer should evaluate the target's fair value and define the way to decrease an opportunity of fraud.

3. Managers should monitor the employees to minimize the risk of fraud, especially during the transition period.

4. Under the pressure, employees try to deviate and disturb, so that managers should tend this issue.

5. Both companies should be adopted the best of standards. It means if the assessment shows that the target company has better control practices, then the acquirer should accept it.

6. In case of cross-border acquisitions, it is necessary to explore the national environment of both countries and choose between them.



Summary

After the consideration of different research papers, corporate laws, boiler plates, annual reviews we fully realized the advantages and disadvantages of directors' solutions, protection measures and responsibilities of the Board members. During the past decade, we observed many economic collapses that led to huge losses and damages. To find out focal points the researchers investigated corporate governance quality as a possible explanation.

The empirical findings gave us both the extent that there is influence of corporate governance system quality on the firm performance and the absence of such relationship. The explanation is simple: there are different institutional arrangements, samples, and time scale case by case.

Overall, the impact of board, ownership structure and executive pay on the firm performance is unclear given the mixed nature of the empirical results, so that the further investigation could be very useful in terms of uncertainty and high risks.



Methodology

As we saw above, the topic about relation between corporate governance and firm performance is very popular in practical settings. Few researchers considered this problem in case of financial crisis data. Our aim is to investigate such a relationship for American public companies in case of financial crisis of 2008-2009.

Model

The common approach to investigate the relations between variables is the regression analysis that will also serve as the primary purposes of the present research. However, the first difficulty to be resolved is the necessity to determine the appropriate proxies for indicators under consideration. This step is especially crucial in case of the quality of corporate governance as it is a very complex concept including several aspects. Previously we highlighted that the major studies used indices consisting of governance provisions (Bebchuk et al., Lacker et al., Gupta et al.). Moreover, a qualitative variable is hard to be measured quantitatively.

The set of expended variables may be partitioned into three basis subsets: dependent variables (reflect company performance), explanatory variables (this is corporate governance measures) and control variables (the indicators of company specifics, as there are companies from different industries).

As dependent variables, we consider earning per share (EPS), growth rate of Sales, return on invested capital (ROIC) and Tobin's q.

The design choice of explanatory variables comes from the following features:

· the size of the board,

· the share of independent directors in the board,

· CEO duality as a dummy,

· attendance in the boards of other companies,

· CEO pay package elements (salary, bonus, option reward and share ownership).

As control variables, we exploit the indicators of the size of the company (market value of the shares), capital structure (gearing), and company specifics (the natural logarithm of sales). As far as we consider the companies from various sectors and with different amount of reserves, the leverage can be an appropriate feature of the capital structure.

The table below reports detailed description of all implemented variables.

Notation	Description
Dependent variables
Tobinq	The ratio by comparing the market value of a company's equity and liabilities with its corresponding book values
ROIC	The rate of return on invested capital
EPS	The monetary value of earnings per outstanding share of common stock for a company
Salesgrowth	The growth rate of the company sales
Explanatory variables (corporate governance measures)
CEO_salary~c	The share of CEO salary in the total compensation of CEO
CEO_bonusp~c	The share of CEO bonus in the total compensation of CEO
CEO_option~c	The share of CEO value of option reward in the total compensation of CEO
CEOShareso~p	CEO percentage of total shares owned
Boardsize	Number of directors on the company's board, as reported by the company
Ratioindep~t	The ratio of independent directors in the company's board
Duality	Indicates whether the company's Chief Executive Officer is also Chairman of the board, as reported by the company.
ofOtherBoa~s	Number of other major company boards where company's directors also attend
Crisis	Dummy variable which equal to 1 for data from 2008 to 2013 and 0 for 2003-2007
CRICEO_sal~c	The share of CEO salary in the total compensation of CEO for 2008-2013
CRICEO_bon~c	The share of CEO bonus in the total compensation of CEO for 2008-2013
CRICEO_opt~c	The share of CEO value of option reward in the total compensation of CEO for 2008-2013
CRICEOShar~w	CEO percentage of total shares owned for 2008-2013
CRIBoardsize	Number of directors on the company's board, as reported by the company, for 2008-2013
CRIRatioin~t	The ratio of independent directors in the company's board for 2008-2013
CRIDual	Indicates whether the company's Chief Executive Officer is also Chairman of the board, as reported by the company, for 2008-2013
CRIofOther~s	Number of other major company boards where company's directors also attend for 2008-2013
Control variables
lsales	Logarithm of gross sales
Financiall~e	Financial leverage is calculated using the following formula: Average Total Assets/Average Total Common Equity

The descriptive statistics table with mean, median, standard deviation for all company performance proxies, corporate governance measures and control variables is attached in Appendix 3.

The hypothetical equation looks as follows:

where and are the vectors of explanatory and control variables, correspondingly.

The idea of the research is to define whether there exists the relationship between corporate governance and company performance before and after the crisis using the regression analysis with panel data. In order to reveal this dependence, especially for checking crisis induction, we used dummy Crisis to account for time effect, which is equal to one for data from 2008 to 2013 and zero, elsewhere. Hence, in the regression we can see also as known `crisis variables', which imply the interception of dummy Crisis and each explanatory variable:

As there are lots of views about what should be considered as a proxy for the company performance, we have decided to test fourth model, which differs by the dependent variable. Also for all cases, we used fixed-effect model with clustered robust estimators.

In addition, we considered separately each corporate governance variable to identify the direct impact on the performance. This is mainly because of insignificance of the explanatory variables' coefficients for all models that have been reported in Stata.

Hypotheses

Wang et al. considered the evidence between board size and company performance based on the data from 1996 to 2006 or on the before-crisis Here we are talking about the financial crisis of 2008-2009, which is a part of our consideration. data. Their result explained that there exists strong negative empirical relation between board size and firm performance. We expect that small group of directors with optimal composition of inside and outside directors would provide effectiveness of the Board.

Hypothesis #1: The small board operates better in comparison with the large.

Lorsch Jay Lorsch / Building better boards by design / FT Mastering Corporate Governance, 2005, professor of human relations at Harvard Business School, determined the following slackness of the board effectiveness. Firstly, he observed an increase in fraction of independent directors. The advantage of their attendance in the Board is objective view and assurance that there are no conflicts of interests (Francis et al.). Even despite the fact that independent directors have no entire gamut about company functioning, we mainly suppose independent directors are better at monitoring the management, because they care about their reputation.

Hypothesis #2: The number of independent directors positively affect the company performance.

The familiar problem is how to build the effective leadership. Here, there is difference depending on the companies and countries. In most European, Australian and Canadian companies, there exists both the chairman and the CEO and they are two individuals. However, in the US the same person performs these functions. Lorsch regards it does not matter. Both structures are acceptable, but the responsibilities must be clearly determined and reconciled. Most of researchers mentioned that American structure comes to concentration of power single-handedly.

Hypothesis #3: CEO duality have negative impact on the company performance.

The attendance of directors in other company boards may relate on the company performance as similar as the number of independent directors. The motivation is in directors' experience, advices, talents and knowledge received from operation in different industries.

Hypothesis #4: The more directors attend in other company boards the more effective operation in the company.

As we provided above, the additional problem is the compensation of executives. Lorsch explained high rewards as follows: the directors want to requite their CEO and managers for the services and efforts. To specify an optimal amount they use “market surveys” submitted by compensations that are invalid. We suppose the executive bonus as an extra reward for good executed job could positively depend on the company value. In contrast, salary as a fixed part is almost irrelevant element of the total compensation. Thus, let us formulate the fourth and fifth hypotheses:

Hypothesis #5: Executive's salary does not affect the company performance.

Hypothesis #6: Executive's bonus motivates to work better and performs the business.

Option reward as a part of the executive total compensation was very popular last decade, as we pointed out above. The option-holders prefer to restrict dividend payment, because it decreases future stock price. Hence, option-holders expropriate shareholders' interests.

Hypothesis #7: Option reward diminishes the shareholders' value.

Share ownership in hand of executives serves as a good motivation to increase the shareholders' value and stock price. In this case, the shareholders have protection from managerial expropriation.

Hypothesis #8: Share ownership guarantees the increase in shareholders' value.

Data set

The object of the study is the US public companies that are listed on New York Stock Exchange and NASDAQ, details of which were taken from Bloomberg database, company reports and rating agencies' reports.

The subject of the research is the effectiveness of corporate governance under consideration of the company performance and comparison with the after-crisis period. Moreover, the financial indices S&P 500 and Dow Jones demonstrated numerous drops after the crisis. This fact applies to the importance of consideration financial crisis as a key part of the research paper.

As well as the subject of our interest is the corporate governance system in the US we have considered American public companies during the period from 2003 to 2013, including the financial crisis of 2008-2009. One of the key distinctions in the research is the implication of crisis data to specify how the recession affects the company performance through the corporate governance system. The sample consists of financial and corporate governance data of 171 public companies The list of the considered companies attached in Appendix 4. from S&P 500 listed on New York Stock Exchange and NASDAQ. The underlying sources are Bloomberg (company financials), Execucomp (compensation and ownership) and RiskMetrics (board structure).

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