UNIVERSIDAD POLITÉCNICA DE
CARTAGENA
EFFECTS OF CORPORATE
GOVERNANCE ON
CORPORATE
REPUTATION
The objective of this Project is to find out
whether a good corporate governance affects
company’s corporate reputation. So we are
assuming that corporate reputation is the
dependent variable. This is one of the main
differences with previous literature, which sets
this variable as an independent one.
2015
17/09/2015
Director: Juan Carlos Navarro García
Codirector: Emma García Meca
Alumno: Eva López González
Grado en Administración y Dirección de Empresas
(Bilingüe)
Universidad Politécnica de
Cartagena
TRABAJO FIN DE GRADO
2015
Eva López González
Index
1.
INTRODUCTION ................................................................................................................................. 3
2.
GOOD CORPORATE GOVERNANCE ...................................................................................................... 5
1.1. Board of directors.............................................................................................................. 7
1.2. Ownership structure ........................................................................................................ 15
3.
CORPORATE REPUTATION ................................................................................................................ 18
4.
EMPIRICAL DESIGN .......................................................................................................................... 23
3.1.
3.2.
3.3.
3.4.
Objectives........................................................................................................................ 23
Hypothesis ....................................................................................................................... 23
Sample and methodology ................................................................................................ 26
Empirical results ............................................................................................................. 29
5.
CONCLUSIONS ................................................................................................................................. 34
6.
REFERENCES .................................................................................................................................... 36
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1. INTRODUCTION
One of the most critical strategic and enduring assets that a corporation may possess is
good reputation. The positive impact of corporate reputation on firm performance has been
analyzed and documented for ages. Intangible assets like reputation are increasing their
importance in companies as sources of sustainable advantages. Organizations used to look
for tangible assets as the drivers of these advantages, but nowadays intangible ones are
getting much more weight in this sense. This is why researchers are now focusing in the
development of resources to measure these intangible assets as reputation. We could say
that the reputation that a company has is constructed by the public of that organization. In
fact, it is constructed on the basis of a company’s market position with respect to other
companies in the industry. The construction is made with information such as market and
accounting facts or information related to the performance of that organization. It can also
come from experiences of satisfied consumers with the company’s products, hence it has
been inherited from past action of the organization. Reputation can also arise from the
combination of past actions of the organization and conscious image building and good
public relations.
Taking into account the importance that corporate reputation is starting to have in recent
years, this paper analyzes the effects that good corporate governance has on it. In order to
do so, we are going to use variables such as the presence of women on boards or the
independence of the board of directors. So, the main singularity of this paper is that it places
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corporate reputation as the dependent variable and, furthermore, it relates it with variables
such as female directors, which is currently focused of research.
Going into these topics, The Unified Code of Good Corporate Governance (2002) and the
“Ley 3/2007 of March 22nd ", for the effective equality between men and women, highlight
the importance of gender diversity in board of directors as a way of increasing their levels of
efficiency. We will see later how gender diversity affects positively on reputation, as well as
independent directors do.
The paper is organized as follows. Part 2 and 3 review the main theoretical ideas about
corporate governance and corporate reputation, respectively. Part 4 deals with the empirical
design, including the analysis and results, and Section 5 provides our conclusion.
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2. GOOD CORPORATE GOVERNANCE
What is corporate governance? This expression has been explained by many authors as
Goergen and Renneboog (2006), who said that corporate governance system is the
combination of mechanisms which ensure that the management (the agent) runs the firm for
the benefit of one or several stakeholders (principals). You can also find a definition of this
term in the Cadbury Report (1992), to which corporate governance is the system by which
companies are directed and controlled. In this sense, the Organization for the Economic
Cooperation and Development (2004), defined corporate governance as a set of
relationships between a company’s management, its board, its shareholders and other
stakeholders that also provides the structure through which the objectives of the company
are set, and the means of attaining those objectives and monitoring performances are
determined.
Nowadays, there exist the Good Governance Code of Listed Companies (CNMV, 2015)
in Spain, which was definitely approved in February 2015. It arises in order to solve the
problematic that exists in most of the companies that came out when dividing the
responsibilities of the owners and the managers. Where managers usually have more
information than the owners and they also look for their own interests in expense of them.
So these Codes try to solve these kind of problems and they also look for goals as
generating confidence and transparency for national and foreign shareholders and
investors, improving internal control and corporate responsibility of Spanish companies as
well as assuring the adequate distinction of functions, duties and responsibilities in the
companies.
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One of the main characteristics of these Codes is that they contain the voluntary good
corporate governance recommendations. Another characteristic is that they are focused on
listed companies, which are those which shares are accepted for negotiation on a public
secondary share market. Finally, they also take into account several principals and
recommendation about the board of directors, the general shareholders’ meeting and some
others general aspects.
Furthermore, corporate governance has two types of mechanisms: the internal
mechanisms and the external ones, like for example formal legal and regulatory obligations.
The first ones have to do with the board of directors and the equity structure of the firm. On
the other hand, the external mechanisms are related to the influence of the outside parties in
the company, which are the market for corporate control and the legal system.
In table TABLE 1 you can observe the several efforts that have been made to create a full
report with the recommendations that we have been talking about previously, which
conclude in the Good Governance Code of Listed Companies (CNMV, 2015) for traded
companies that is currently being used.
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TABLE 1. BROADCASTED REPORTS IN SPAIN
Report name
Year
Entrepreneur circle
1996
Olivencia Report
1998
Aldama Report
2003
AED1: Managerial Commandments
2004
IC- A* 2: Good Corporate Governance
2004
Principles
Unified
Code
of
Good
Corporate
2006
Governance: Conthe Report
IC- A*: Ethical Code for companies
2006
Agreement of the CNMV3
2006
Partial updating of the Unified Code
2013
Good Governance Codes of Listed
2015
Companies
1
Asociación Española de Directivos.
2 IC-A*:
3
Insituto de Consejeros y Administradores.
CNMV: Comisión Nacional del Mercado de Valores (National Security Market Committee)
1.1. Board of directors
Board of directors has always been analyzed by the literature as the culmination of
the internal control system of companies. It has the power to hire, fire and compensate
senior management teams, but, furthermore, it serves to resolve conflicts of interests among
decision makers and residual risks bearers (D.Baysinger and N.Butler, 1985).
Spanish firms are usually controlled by the management body, which has different
composition options: a sole director, several managers or a board of directors. In the case of
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Public Limited Companies, law usually states that they need to have a structure with just
one level, the so called one-tier structure. Actually, listed firms must have a board of
directors, according to the “Ley de Sociedades de Capital” and the “Orden ECC/461/2013,
of March 20th”. Private Limited Companies do otherwise; they are structured as the articles
of association state, which may establish different ways of organization for the firm.
The main functions that the members of this board have to fulfill are mainly two. First
of all, approving the strategy of the firm and looking for the necessary means to follow it;
and, secondly, assuring that the executives and staff of the company correctly achieve the
corporate goals as well as look for the company’s interests. There are also some specific
positions related to specific functions as the Chairperson and the Secretary. Moreover,
Spanish legislation stresses two general duties: to act diligently and to be loyal to the firm’s
interest. These duties are instrumented through several specific obligations: diligent
management; loyalty; prohibition of using the firm’s name by the director to perform acts for
himself or related parties; prohibition to take advantage of business opportunities regarding
investments or activities affecting the firm’s assets; duty of notify conflicts of interest;
prohibition of competition and secrecy.
Focusing on the size that the board of directors should have, there coexists different
opinions from different authors. For example, Mínguez and Martín Ugedo (2005) stated that,
in Spain, there is an inverse relationship between the firm value and the size of its board. On
the contrary, Fernández et al (1998) found a non-linear relationship between firm value and
board size. They suggest that there comes a point where the advantages of greater boards
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are nullified by the problems of coordination between its members. In this sense, Yermack
(1996), pointed out that smaller boards have generally been considered to be more effective
in decision making. According to the Good Governance Code of Listed Companies (CNMV,
2015), the perfect size for the board of directors is between 5 and 15 members. There exists
other indicators about board of directors, such as the meeting frequency, which was
analyzed by Vafeas (1999), who stated that more frequent meetings are often associated
with better future operating performances.
The composition is another characteristic of the board of directors, which comprises
inside and outside directors, or executive and non-executive, respectively. The firsts ones
count with a technical profile related with the position in which they are going to stand. They
usually create the strategic guidelines. On the other side, the non-executive directors are
professional directors with experience in any other sector and they also have a substantial
and good reputation to maintain. The Unified Code of Good Corporate Governance (2006)
recommends an appropriate balance between these two types of directors. Moreover, it
recommends that the ratio of owner directors to independents should reflect the relationship
in the company’s capital between nominating shareholders and the rest. This classification
is for Anglo-Saxon companies.
In Spain, the board is classified by executive, independent and “dominicales”
directors. The executive directors are members of the managerial team of the company,
they could either have or not the executive-shareholder condition and, finally, they usually
have a technical profile related to its position. The independent ones are external parties
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that have no connection with the company neither its shares. So, they are professional
directors who contribute with an external and independent vision of the company. Finally,
the dominical directors or “dominicales” represent a percentage of the company’s shares.
They are unconnected to the day by day management of the company but they have a
direct link with it.
In FIGURE 1, there is an evolution of the directors in the Spanish traded companies,
according to the CNMV last annually report, of 2013. As you can see, the independent
directors are increasing their presence in 4.5 percentual points with respect to the previous
year, while the proportion of executive directors remains constant and the dominical ones
significally dropped almost 4 percentual points.
FIGURE 1. Composition of the board by typology
Excutives
Dominical
Independent
Others
Source: public information from companies
As it has been commonly seen in the literature, the independence of the nonexecutive directors is really important. The definition of independence directors is those in a
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position in which they perform their tasks without been influenced by the company, its
crucial shareholders or its management team. According to the Unified Code (2006), these
directors should occupy at least a third of board places.
Within the composition of the board of directors, it is also important to highlight the
evolution of the presence of women. As you can see in FIGURE 2A and FIGURE 2B,
although the percentage of them is considerable smaller than men’s one, they have been
increasing their power inside companies, moving from 5.1 percentual points in 2006 to 16.6
in the past year, 2014. So, the directors of Spanish companies, belonging to the IBEX 35,
are improving their gender diversity, but not as much as they should do according to the
“Ley de Igualdad” or Equality Law, which sets out that at least 40 percent of the members of
the companies’ management bodies should be women.
FIGURE 2A: Directors evolution
Female
directors
Male
directors
Total
Source: Bankinter
ban
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FIGURE 2B: Female directors evolution
Source: Bankinter
ban
Looking from an European sight, Spanish average is the same as the European,
being this 16.6 percentual points. The goal of Spain is to raise it to 40 percent, in order to
fulfill the Government requirements. It is interesting to highlight the efforts that Norway and
France have done in the last years, by establishing quotes by law in order to increase the
presence of women inside the board of the companies. This mechanism consists of giving
the companies a period of time, which it is usually one year, to raise the number of women
directors and, if they do not accomplish this goal, the Government will introduce effective
measures or actions, which are called quotes. The European Parliament is thinking of
including this controversial mechanism on its legislation, especially on those companies with
a public participation. You can observe these facts in FIGURE 3.
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FIGURE 3 : Shares of female directors on companies (Women on
boards)
Going back to the Cadbury Report (1992), the roles of chief executive officer and
chairperson are crucial. The chairperson’s role includes controlling the behavior of the board
and also to ensure that the information is provided to directors on time. The CEO is
responsible for the strategy and investment activities of the board and for administering dayto-day affairs. These two positions are recommended to be assumed by different individuals.
Within the board of directors, it is important to keep in mind the existence of
committees, which are divided in three types. The Executive Committee has enough powers
as to operate as a reduced board in the practice. Sometimes one of its functions is to
regularly maintain meetings. Then, we can find the Audit Committee, which is formed by
members of the board (they should be formed by a majority of external ones) and, if
possible, chaired by an independent director.
The role of this committee refers to the
supervision of auditing practices, the relationship with the external and internal auditors, the
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control of risk management policies and the review of the financial information that is going
to be published. Finally, you will be able to find the Nomination or Remuneration committee
(or they could also be separated ones). It should mostly be formed by independent directors
and also chaired by one of them. This committee has advisory power when the selection of
candidates for the board is going to be achieved, it also has the right to make proposals
relating to the appointment of the directors and to propose the remunerations policies.
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1.2. Ownership structure
The ownership structure of a firm defines the combination of residual claims and
decision control that has consequences on firm behavior (Fama and Jensen, 1983). In the
last decades, literature has pointed out the consequences of a firm’s ownership structure,
such as Sheifer and Vishny (1997), Fama and Jensen (1983), Jensen and Meckling (1976).
These consequences are condition by the legal and institutional system of the country
where the company is placed.
Firms in common law countries are characterized by a dispersed ownership, whether
in civil law countries, as Spain, large shareholders are more common and they usually use
their voting power to obtain private benefits. This fact also occurs in publicly traded firms.
To Galve y Salas (1992) the analysis of the ownership structure of the company can be
made through the study of three main variables: the type of control over the company, which
lead to a specific shareholders composition; the concentration degree of the shareholders
and the institutional group that apply that control. These authors distinguish among:
1. Total control: when a person or a group possess 80 percent or more of the company’s
shares;
2. Majority control: when the shares that a person or a group owns vary between 50 and 80
percent;
3. Minority control: situation in which a person or a group, without owning the majority of the
shares, has the control, being these shares between 5 and 50 percent of the share
capital.
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4. Internal control: the control of the company will be in the hands of the company or its
board of directors if there’s no person or group that possess an important fraction of the
share capital, which should be 5 percent or more.
According to the third variable, these authors stated that in Spain, the no financial
companies appear to be the main shareholder, followed by family groups and financial
institutions, being in the last positions foreign capital and the public sector. They also found
that this type of structure also exists in Continental European Countries, which differ from
the Anglo-Saxon ones.
The CNMV does a different classification of the ownership structure of the Spanish
traded companies, which belong to the IBEX 35 Index. In FIGURE 4 you can see the
evolution of the different categories. It differentiates four categories:

The board: It is the orange line of the graph below. It refers to the social capital that
belongs to the board of directors, which has decreased 0.2 percentual points since the
last years, reaching 10.8 percent.

Significant non-advisors shares: as its name points out, these are shares that belong to
those significant shareholders who are not advisors of the company. They have reduced
their presence in the social capital of Spanish traded companies, decreasing 4.2 percent.

Treasury shares: this term refers to the acquisition of own shares by the company itself.
As you can see in the graph below, treasury shares decreased almost 1 percentual
point.
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Free float: it is the percentage of a company’s total shares that is susceptible to be
traded in the stock market. The average of free float has increased 5.3 percentual points
with respect to the previous year.
FIGURE 4: Distribution of the IBEX companies capital
Board
Shares
Treasury shares
Free float
Source: public information from companies
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3. CORPORATE REPUTATION
Corporate reputation can be defined as the evaluation of a company’s past actions and
its ability to improve its future behavior in order to increase its stakeholders. The company
should have different reputation with each stakeholder, first of all related to their experience
according to their handling with the organization and also the reputation that they get from
other stakeholders.
There are several authors that define corporate reputation. Spence (1974) interprets
reputation as the outcome of a process in which firms signal their key characteristics to
constituents to maximize their social status. Simon (1985) argues that reputation is the
result of satisfying experiences with a company’s products. On the other hand, Weigelt and
Camerer (1988) state that reputation
is a set of attributes ascribed to a firm, inferred from the firm’s past actions. This last
definition is similar to those who gave Müller (1996), Buskens (1999) and Dukerich and
Carter (2000).
There exist several benefits that can be found in companies which have a good
corporate reputation:

Customer preferences in your company when there are other companies’ products and
services available at a similar cost.

The ability to charge a premium for its products and services.

Stakeholder support in times of controversy.

The value of the company in the financial marketplace.
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Although reputation is an intangible concept, researches show that a good reputation
increases corporate worth and provides sustained competitive advantage. A business can
achieve its objectives more easily if it has a good reputation among its stakeholders.
A US study showed that are ten main components that can be used to measure
corporate reputation, as you can see in FIGURE 5.
FIGURE 5: CORPORATE REPUTATION
Source: own elaboration
It is important to highlight the financial performance; companies need to record
profitability, to be financially strong, to have growing prospects in order the shareholders to
invest on them. It is also important to offer high quality products and services, so customers
will prefer to deal with you instead of others. These costumers will influence other potential
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ones by word of mouth. In this sense the company’s customer focus, which refers to the
commitment of the company to costumers, needs to be correctly achieved.
Apart from these components, there were found some others like, for example, value,
differentiation, presence, and communication quality.
If a company deals with a good corporate reputation, it can have several benefits with
customers, as we have seen before, also with suppliers and even with the Government.
Suppliers will be more inclined to trust in this company’s ability to pay and to provide fair
trading items. If there comes out any problem, they will be more inclined to give the
company the benefit of the doubt when it has a reputation of fair dealing. As well as
suppliers, government regulators will trust it if it has a good reputation, and they will be less
inclined to punish it. In this sense, Villafañe (2000) explains that corporate reputation is a
shield against crisis. A company could be going through a bad situation that can weak its
image in that moment. Nevertheless, if it has being working on its corporate reputation all
along the years, it can maintain it by offering confidence to its clients, credibility to its
financial analysts, honesty to its employees and responsibility to the society.
According to Vergin and Qoronfleh (1998), the most influential factor in terms of
corporate reputation is the financial performance of the company, followed by its ethical
behavior. And, precisely, the performance on the Stock market of the companies is directly
related to their reputation. During 13 years, these authors compared the ten first companies
in the Fortune Magazine ranking of corporate reputation and the ten last ones, and they
checked that the stock-market value of the firsts increased every year a 20 percent more
than the last ones.
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Taking all of this into account, nowadays, corporate reputation is considered as a more and
more relevant asset in order to create confidence and loyalty within a markedly competitive
environment.
In Spain, there exists an instrument that
FIGURE 6: MERCO RANKING
measures reputation since 2000, which is called
MERCO (Monitor Empresarial de Reputación
Corporativa). It has become one of the world
reference monitors in this sense. It annually
elaborates
several
rankings
that
measure
reputation in different aspects. In FIGURE 6, you
can see the 23rd companies in the reputation
ranking of 2014. It also takes into account the
positions that each company has increased or
decreased according to the previous year.
Apart from this instrument, there also exist some
others like for example the RepTrack, which is also designed in order to measure the
reputation of companies, and it is leaded by the Reputation Institute, which is considered
one of the most important organizations in corporate reputation matters. One of the most
important aspects of Rep Track is that is frequently updated. According to Hernandez et al
(2007), this instrument helps the company to understand which the priorities of its interest
group are, diagnose risks and opportunities, set goals, measure evaluations and establish
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comparisons with other companies. Another instrument of this type is Irma (Índice de
Reputacion de Marca or Brand Reputation Index), which assess the brand reputation, not as
organizations or companies. It is characterized by making its measurements by surveys to
final consumers, besides evaluating the brands comparing them with competitors of the
same business sector.
Different academic areas have tried to relate corporate reputation to financial
valuation of the company. A research made by Caprabo and Srivastava (1997) compared
ten groups of companies with similar levels of risk and profitability, but with different levels of
reputation. The results showed that 60 percent of difference in reputation was related to 7
percent difference in the market value of the company.
Another paper made by Black et al. (1999) points that reputational capital probably
has a higher financial reflect. These authors examined the relationship between market
value, book value, profitability and reputation in all the companies declared as most
admirable by the magazine Fortune between 1983 and 1997. They conclude that a point
changed in reputation was associated to 500 million dollars in market value.
So far, there are several authors that have tried to measure the influence of corporate
reputation in economic and financial terms, but there is still needed some time to measure it
as precise as physical and monetary units are.
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4. EMPIRICAL DESIGN
3.1. Objectives
Our main objective is to study if a good corporate governance affects a company’s
corporate reputation. So we are assuming that the corporate reputation is the dependent
variable. This is one of the main differences with previous literature, which puts this variable
as an independent one. Although corporate governance is difficult to measure, when dealing
with it we are referring to aspects such as independence, size or gender diversity of the
board of directors, among others.
3.2. Hypothesis
Recently, companies’ investments in corporate reputation are increasing due to public
distrust of corporations together with increased regulations and a high demand for
transparency. Moreover, reputation can explain why customers choose a company’s product
or service in preference to another one and it can also make the difference between
success and failure. So, we can say that reputation builds competitive advantage.
Furthermore, every organization will have reputation depending on if they help build that
reputation or not, and it is also important to mention that reputation management is not an
event, it is a process. So, we are going to analyze the factors that influence that process and
help reputation increase and improve.
The board of directors is one of the most analyzed internal mechanisms in the
literature. Moreover, a great number of authors have referred to it as the apex of the internal
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control system. There exists a distinction in between the board. In the case of Spain, the
structure of the board of directors consists of three types of directors: executive ones,
independent directors and another type of them called “dominicales”. The first ones can or
cannot have the position of executive-shareholder condition; the independent ones are not
related with the company or its shares and, finally, the dominical advisors are part of the
company’s shares.
According to Adams et al. (2008), although corporate board’s impact is difficult to
observe in day-to-day matters, they can become the center of attention when things go
wrong. So we are going to analyze if its structure also affects the reputation of a company.
In a similar spirit, some other papers in literature set boards and their roles as monitors and
advisors of corporate management, but several of these papers also analyze the optimal
board size and independence, which are two of the issues we are focusing on.
Rosenstein and Wyatt (1990), stated that the independence of the board of directors
plays a central role in every data research of this kind.
We thus propose the following hypothesis:
H1.Corporate reputation is related to the independence of the board of directors.
Board gender diversity is also a matter when referring to the effects that the presence
of women can have on the firm. This type of diversity has become an active topic among the
political debates in many countries. Indeed, there are countries that have established
guidelines for gender diversity of companies (Singht et al. 2008). Upadhyay and Zeng
(2014), suggested that female board members made boards have more transparency.
Previous research also mention the “value in diversity idea”, which makes reference to the
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fact that the inclusion of female on boards offer a great diversity of points of view during the
board meetings and, in addition, help better represent all shareholders.
Larking et al. (2012), examined the influence of female directors on companies and
they obtained that as the number of women directors increased, the probability of a
corporation appearing on lists as “Corporate Responsibility Magazine’s” increased.
Although, being part of this lists did not affect positively return data in a statistically
significant sense, it did dramatically reduce the degree of negative returns. There exists also
other works (Bear et al. 2010) that conclude that diversifying boards by increasing the
number of female directors may help guarantee that more issues are considered in the
decision-making process, leading the board to achieve better decisions, which may
influence reputation.
Therefore, we pose the hypothesis as:
H2. Board gender diversity is related to corporate reputation.
Size is one of the most studied factors related to board of directors. Several authors
examined the relation between firm value and its size. Mínguez and Ugedo, (2005),
establish in Spanish companies an inverse relation between their value and their board size.
On the contrary, Fernández et al, (1998), show a non-linear relationship between these two
elements. Firstly, when increasing board size the company obtained more value but, there
comes a moment when these relation reverse. The Good Governance Code of Listed
Companies (CNMV, 2015) suggested that the ideal size for boards is between 5 and 15
members, although Spanish board sizes depend in a great extent on the company size.
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Guest, (2009), examined the impact of board size on firms performance for a large
sample of companies. They get to the conclusion that board size has a negative impact on
firm performance. As a common interpretation of the board size – performance relation is
that many boards are too large, they are inefficient. So, with this hypothesis we are trying to
analyze if board size also affects in a negative or positive way to corporate reputation.
Based on this, we state the following hypothesis:
H3.Board size is related to corporate reputation.
3.3. Sample and methodology
The hypotheses were tested on firms included in the MERCO – Monitor Español de
Reputación Corporativa – ranking of the 100 top reputed firms in Spain. From these 100
companies, we chose those ones which have the information related to MERCO available.
The period of analysis is from 2004 to 2012, although sometimes there is not available
information for some companies, so the sample has an unbalanced nature. The data are
collected from annual reports and database information comes from two different databases,
SABI –Sistema de Análisis de Balances Ibéricos– and CNMV –Comisión Nacional del
Mercado de Valores –.
In order to develop our database, we started by obtaining the financial and economic
data from these databases. After that we complemented this information with the rest of
variables as the size of the board and the number of women advisors also taken from
CNMV webpage.
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The following model is used to test the effect of corporate governance on corporate
reputation, where i equals each company and t equals time:
CORP REPit =
α + β1(IND DIRECit) + β2(FEM DIRECit) + β3(BOARD SIZEit) + β4(L SIZEit) + β5(LEVit) +
β6(ROAit)
Where:
CORP REP: it corresponds to the variable corporate reputation, our focus of analysis. It has
been obtained from the MERCO ranking of the most reputed companies in Spain.
IND DIREC: this variable corresponds to the percentage of independent directors in the
company.
FEM DIRECT: it is the number of female directors that belong to the board of directors.
BOARD SIZE: this variable represents the whole number of directors that comprises the
board of directors in each company.
L SIZE: it corresponds to the company size. It has been calculated as the logarithm of total
assets.
LEV: it represents the level of leverage each company has. It has been computed as total
liabilities divided by total assets.
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ROA: this variable is called Return On Assets and represents how profitable a company is
related to its total assets. It has been calculated as income before taxes divided by total
assets.
The board of directors is one of the forms the government body of a company can
adopt. Independent directors should defend the interests of the shareholders as a complex,
especially minority ones and small ones that have no direct representation in the board. In
the last few years, these directors have increased their presence on company boards; in
fact, the Unified Code (2006) has recommended companies to have at least a third of board
places occupied by independent directors. So, we have included these directors as a
variable of study because they perform their tasks without any influence of the company or
any of its organs.
It is also important to highlight the increasing presence of women on boards.
Although the percentage of female directors is considerably smaller than male ones, they
have raised their power inside companies. This is the reason we have included this factor as
a variable in our paper.
As we are analyzing if the composition of the board of directors affects the corporate
reputation of a company, it is logically to think that the size of the board should be one of the
variables of study.
We have used the following control variables since they are closely related to corporate
reputation. We also used them in order to avoid biased results. It is known that large firms,
being more visible in markets, are expected to be more closely examined by audiences, so
their efforts to build a good corporate reputation are higher. This is why we have used the
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variable firm size, apart from the fact that there are empirical evidences that larger firms
have better corporate reputation (Delgado García et al. 2011). In the paper mentioned
before, it is also used the variable ROA as a control variable in order to take into account
financial performance. On the other hand, there are also empirical papers which used
leverage in their analysis (Weill, 2003; Mark and Kusnadi, 2005) as control variables.
3.4.
Empirical results
Table 2 shows the different descriptive statistics for the variables we are using in the
research and also for other important variables that may help you understand the situation
of the set of companies selected for the paper.
TABLE 2: Statistics
Mean
Median
Std.
NET
TOTAL
CORP
INDEP
FEM
BOARD
SALES
ASSETS
REP
DIRECT
DIRECT
SIZE
10565380.25
20031419.52
4.57
33.05
1,025
13.74
13.96
0.68
.051
3200775
7590611
4.12
30.00
1,00
14.00
13.84
.70
.0497
19602259.32
29347867.42
2.38
17.34
1.21
3.66
2.11
0.15
.079
L SIZE
LEV
ROA
dev
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As indicated above, the average board size of these companies, which is
approximately 14 members, is inside the perfect range that the Good Governance Code of
Listed Companies (CNMV, 2015) recommends, which was between 5 and 15 members.
Moreover, the Unified Code (2006) also recommended that at least a third of board positions
should be fulfilled by independent advisors and, as you can see in the TABLE 2, the
average is 33.05%.
TABLE 3 shows the bivariate correlation analysis matrix between the independent
variables used in this model. It is interesting to highlight that the variable L SIZE is
statistically significant with all the variables of the regression. Contrary to this, the
independent variables FEM DIRECT and ROA are just significant with L SIZE.
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TABLE 3: Correlations
BOARD
IND DIREC
INDEP DIRECT
FEM DIRECT
-,155**
,090
,358
,784
,032
,031
,211
194
194
191
194
194
194
Pearson correlation
,066
1
-,040
,218***
,051
,017
Sig. (bilateral)
,358
,579
,002
,474
,809
194
198
195
198
198
198
Pearson correlation
,020
-,040
1
,396***
,271***
-,016
Sig. (bilateral)
,784
,579
,000
,000
,822
191
195
195
195
195
195
,154**
,218***
,396***
1
,203***
,182**
,032
,002
,000
,004
,010
194
198
195
198
198
198
-,155**
,051
,271***
,203***
1
-0,091
,031
,474
,000
,004
194
198
195
198
198
198
Pearson
correlation
,090
,017
-,016
,182**
-,091
1
Sig. (bilateral)
,211
,809
,822
,010
,200
N
194
198
195
198
198
N
N
L SIZE
Pearson correlation
Sig. (bilateral)
N
LEV
Pearson correlation
Sig. (bilateral)
N
ROA
ROA
,154**
N
BOARD SIZE
LEV
,020
Sig. (bilateral)
FEM DIRECT
L SIZE
,066
Pearson correlation
1
SIZE
,200
198
NOTES
 ***p<0.01 ; **p<0.05 ; *p<0.1
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Finally, in TABLE 4, coefficients of the model are shown. They show the impact that the
different variables have on the dependent one, CORP REP. The percentage of independent
directors in the board, INDEP DIREC, is statistically significant at 10%. Its coefficient is
0.014, it has a weak positive relationship with corporate reputation. So, we accept the first
hypothesis, which stated that corporate reputation is affected by the independence of the
board. This fact supports the idea of Rosenstein and Wyatt (1990), which confirmed that
independent directors are one of the main facts to have in mind when studying corporate
reputation. Results also show that, with a strong positive relationship and a coefficient of
0.450, FEM DIREC is statistically significant at 1%. This makes us accept the second
hypothesis. This result support the evidence that Larking et al. (2012) get, which indicates
that as the number of women directors increased, the reputation of the company tends to be
higher. Nevertheless, BOARD SIZE has a non-significant relationship with the dependent
variable, CORP REP. This could be explained by the fact that big size boards are not
necessarily the cause of higher corporate reputation; sometimes these big boards are not
efficient for companies. Moreover, according to the results, small boards are not considered
as source of high reputation either. It has a small coefficient, 0.058. According to this, we
reject the third hypothesis. However, L SIZE, with a coefficient of 0.320, and LEV, with a
coefficient of -4.126, are significant at 1%. There is ample empirical evidences that larger
firms have better corporate reputation, such as Fombrun and Shanley (1990), Roberts and
Dowling (1997) or Sobol and Farrelly (1988). The effect that leverage has on corporate
reputation is negative, as leverage increase corporate reputation decreases. This statement
makes completely sense if we think about what leverage means for a company. Finally, the
variable ROA is statistically significant at 5%. This result may be explained by the idea that
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stakeholders will use previous firm performance to estimate future performance; the better
the management is at using its assets the higher the generated earning, and thus this will
create higher corporate reputation.
TABLE 4: Results of the model analysis
Model
R squared
Coefficient
(t-statistic)
-1.480
(-1.151)
.014*
(1.685)
.450***
(3.717)
.058
(1.320)
.444***
(4.961)
-4.126***
(-4.277)
4.789**
(2.605)
.347
F
16.294 ***
(Constant)
INDEP DIREC
FEM DIREC
BOARD SIZE
L SIZE
LEV
ROA
NOTES
 The data shown in this table corresponds to the regression of the model, in which the
dependent variable is CORP REP, which is represents corporate reputation. The
independent variables are INDEP DIREC, which is the number of independent
directors on the board of directors; FEM DIREC is the number of female directors on
the board; BOARD SIZE is the total number of directors on the board; L SIZE
represents the size of the company, calculated as the logarithm of total assets; LEV
represents the leverage of the company and it has been calculated dividing total
liabilities by total assets; and, finally, ROA is the return on assets, which has been
calculated as income before taxes divided by total assets.
 The data in the table corresponds also to unstandardized coefficients.
 As you can observe, the joint significance of the model is also statistically significant
at 1%.
 Independent variable: Merco/1000
 ***p<0.01 ; **p<0.05 ; *p<0.1
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5. CONCLUSIONS
Our research has analyzed the influence of corporate governance on a firm’s corporate
reputation among Spanish companies listed in the MERCO ranking. The availability of
information marked out the area of study.
Our results, for a sample of the most reputed firms in Spain, encourage evidence that the
independence of the board affects corporate reputation. Going deeper, when companies
have more female directors on their boards their reputation increases. Furthermore, it is
logical that results also show that the bigger the company the better the corporate
reputation. This makes sense when we think about these two last variables together.
Generally, big companies have a higher number of women hired than small ones; this fact
leads us to think that the presence of women is also high on boards. Contrary to our
hypothesis, the size of the board does not affect corporate reputation, either in a positive or
a negative way.
You can also observe that there is a negative relationship between corporate
reputation and leverage. This means that as leverage increases, corporate reputation
decreases. This is logical because as the leveraging of the company goes up, the reputation
should go down because people would trust less on the company.
On the other hand, one limitation of our study is related to the structure of the sample. The
MERCO index publishes scores only for the best reputed firms, leaving not so reputed
companies away. Furthermore, our study refers to the influence of characteristics of board
of directors among the most reputed firms, but not between reputed and non-reputes ones.
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Finally, our research focuses on a single civil law country, Spain; new analysis on other civil
law countries should be an interesting future line of research, together with non-reputed
companies.
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