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Alternative Internal Controls as Substitutes of the Board of Directors

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  • Carlos Fernández
  • Rubén Arrondo

Abstract

Empirical literature on corporate governance often assumes independence among different control mechanisms. However, different studies in the Anglo‐Saxon context find that control mechanisms are interrelated. The Spanish corporate governance system, unlike the Anglo‐Saxon one, is characterised by the dominance of internal controls, mainly the stock ownership concentration and the board of directors. In this internal control context, we specifically analyse the possible substitution of the supervisory potential of the board outsiders by the incentive effects derived from managerial stock ownership and the supervisory role of large shareholders. Our main results show a negative relationship between the proportion of outside directors and managerial and large blockholders’ ownership stake. These findings support the substitution among internal controls and suggest that Spanish firms form an efficient conglomerate of managerial controls, in which deficiencies in a single mechanism can be compensated by the action of an alternative one.

Suggested Citation

  • Carlos Fernández & Rubén Arrondo, 2005. "Alternative Internal Controls as Substitutes of the Board of Directors," Corporate Governance: An International Review, Wiley Blackwell, vol. 13(6), pages 856-866, November.
  • Handle: RePEc:bla:corgov:v:13:y:2005:i:6:p:856-866
    DOI: 10.1111/j.1467-8683.2005.00476.x
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    References listed on IDEAS

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    1. Dherment-Ferere, I. & Renneboog, L.D.R., 2000. "Share Price Reactions to CEO Resignations and Large Shareholder Monitoring in Listed French Companies," Discussion Paper 2000-70, Tilburg University, Center for Economic Research.
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    Cited by:

    1. Attiya Y. Javid & Robina Iqbal, 2010. "Corporate Governance in Pakistan : Corporate Valuation, Ownership and Financing," Governance Working Papers 22830, East Asian Bureau of Economic Research.
    2. Wafa Hili & Habib Affes, 2013. "Diversite En Genre Dans Les Conseils D'Administration Et Persistance Des Benefices Comptables : Investigation Empirique Dans Le Contexte Franҫais," Post-Print hal-00991930, HAL.
    3. Luis Rodriguez-Dominguez & Isabel Gallego-Alvarez & Isabel Garcia-Sanchez, 2009. "Corporate Governance and Codes of Ethics," Journal of Business Ethics, Springer, vol. 90(2), pages 187-202, December.
    4. Mohammad I Azim, 2012. "Corporate governance mechanisms and their impact on company performance: A structural equation model analysis," Australian Journal of Management, Australian School of Business, vol. 37(3), pages 481-505, December.
    5. J. Augusto Felício & Maria Purificación Galindo Villardón, 2015. "Family characteristics and governance of small and medium-sized family firms," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 16(6), pages 1069-1084, December.
    6. Addo, Kwabena Aboah & Hussain, Nazim & Iqbal, Jamshed, 2021. "Corporate Governance and Banking Systemic Risk: A Test of the Bundling Hypothesis," Journal of International Money and Finance, Elsevier, vol. 115(C).
    7. Peter, Zachariah & Kabir Hamid, Tahir & Ibrahim, Mohammed, 2020. "Board Attributes And Tax Planning Of Listed Non-Financial Companies In Nigeria," International Journal of Contemporary Accounting Issues-IJCAI (formerly International Journal of Accounting & Finance IJAF), The Institute of Chartered Accountants of Nigeria (ICAN), vol. 9(1), pages 130-146, March.
    8. narjess BOUABDALLAH & jamel Eddine HENCHIRI, 2020. "L' impact des mécanismes de gouvernance interne sur le risque opérationnel bancaire," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 11(1), pages 151-189, June.
    9. Pascal Dumontier & Sonda Chtourou & Soumaya Ayedi, 2006. "La qualité de l'audit externe et les mécanismes de gouvernance des entreprises : Une étude empirique menée dans le contexte tunisien," Post-Print halshs-00548115, HAL.
    10. Oliver Henk, 2020. "Internal control through the lens of institutional work: a systematic literature review," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 31(3), pages 239-273, September.
    11. Fodil Adjaoud & Chokri Mamoghli & Fatma Siala, 2007. "La réputation de l'audit externe et les mécanismes de gouvernement d'entreprise: Interactions et effet sur la performance," Post-Print halshs-00544896, HAL.
    12. Kalelkar, Rachana, 2016. "Audit committee diligence around initial audit engagement," Advances in accounting, Elsevier, vol. 33(C), pages 59-67.
    13. repec:mth:ijafr8:v:8:y:2018:i:4:p:287-306 is not listed on IDEAS
    14. Roberto Maglio & Andrea Rey & Francesco Agliata & Rosa Lombardi, 2020. "Connecting earnings management and corporate social responsibility: A renewed perspective," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(2), pages 1108-1116, March.
    15. Isabel‐María García Sánchez & Luis Rodríguez Domínguez & Isabel Gallego Álvarez, 2011. "Corporate governance and strategic information on the internet," Accounting, Auditing & Accountability Journal, Emerald Group Publishing Limited, vol. 24(4), pages 471-501, May.
    16. Din, Shahab-u- & Javid, Attiya Yasmin, 2011. "Impact of managerial ownership on financial policies and the firm’s performance: evidence Pakistani manufacturing firms," MPRA Paper 37560, University Library of Munich, Germany.

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