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Applied Economics Letters

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Corporate governance and subjective well-being

M. ule & M. E. Fulton
a b a b

Department of Economics, University of Regina, Regina, SK, Canada, S4S 0A2

Johnson-Shoyama Graduate School of Public Policy, University of Saskatchewan, Saskatoon, SK, Canada, S7N 5B8 Version of record first published: 16 Jul 2012.

To cite this article: M. ule & M. E. Fulton (2013): Corporate governance and subjective well-being, Applied Economics Letters, 20:4, 364-367 To link to this article: http://dx.doi.org/10.1080/13504851.2012.705424

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Applied Economics Letters, 2013, 20, 364367

Corporate governance and subjective well-being

M. Culea,* and M. E. Fultonb
Department of Economics, University of Regina, Regina, SK, Canada S4S 0A2 b Johnson-Shoyama Graduate School of Public Policy, University of Saskatchewan, Saskatoon, SK, Canada S7N 5B8
a

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The results from a cross-country empirical analysis show that corporate governance and ethics are linked to national scores of subjective well-being. This impact is over and above the effect that corporate governance has on national income, suggesting that people value corporate governance for additional reasons besides its economic impact. Keywords: well-being; corporate ethics; corporate governance; varieties of capitalism JEL Classification: G30; I30; P10 I. Introduction Academics and policymakers are paying increasing attention to the determinants of a nations well-being. Rich countries report higher levels of Satisfaction with Life (SWL) than poor countries and the correlation between income and life satisfaction is stronger among poor countries than rich countries (Deiner and BiswasDeiner, 2002). Social capital/connectedness, religion, perceived corruption and trust are also important determinants (Helliwell, 2003; Helliwell et al., 2010). In addition, government quality matters with the democratic aspect being of greater importance in rich countries and government service delivery being of greater importance in poor countries (Helliwell and Huang, 2008). Quality of government also affects the business environment. In a well-functioning democracy with a high regard for rule of law, an efficient bureaucracy and a lack of corruption, it is expected that the business culture adheres to high ethical standards, which in turn lead to better business and economic performance (Casson, 1991). Since previous work has established the link between government quality and SWL, we ask the question whether empirically the quality of the corporate world also affects peoples well-being that is, if corporate ethics and corporate governance affect SWL.
*Corresponding author. E-mail: monika.cule@uregina.ca
364 Applied Economics Letters ISSN 13504851 print/ISSN 14664291 online # 2013 Taylor & Francis http://www.tandfonline.com http://dx.doi.org/10.1080/13504851.2012.705424

II. Importance of Corporate Governance Successful firms are those that achieve coordination among input suppliers, labour, investors and managers. This coordination can be achieved through different varieties of capitalism. In liberal market economies, coordination is achieved largely through markets, hierarchies and extensive formal contracting, while in coordinated market economies, coordination is achieved primarily through nonmarket arrangements such as business and industry associations, well-organized worker unions and networks of crossshareholding (Hall and Soskice, 2001). The corporate governance system that is, the authority structure within the firm also affects a firms performance, because it determines the incentives for cooperation among the various groups associated with the firm. Of particular importance is the degree to which outside investors are protected from various forms of expropriation. Although firms in the same country exhibit differences in their corporate governance structures, the greater variation is across countries (La Porta et al., 2000). Indeed, two broad systems have been identified. In the diffuse shareholder model, well-developed equity markets keep managers honest and shareholders are provided with

A cross-country empirical investigation

assurance via minority shareholder protection policies (e.g. strong reporting requirements). In the blockholding model, management oversight is achieved through concentrated ownership where the investors actively participate in the firms management (Gourevich and Shinn, 2005). The prevailing corporate governance system in a country is related to the variety of capitalism present, as well as to the way that owners, managers and workers forge coalitions with one another to advance their objectives. The formal political institutions (e.g. majoritarian versus representative electoral systems) affect the way the preferences of these groups are aggregated (Gourevich and Shinn, 2005). The premise of this article is that the corporate governance system affects the well-being of citizens in a number of ways. First, the prevailing structure affects incentives, economic performance and thus the level of national income. In addition to these direct effects, poor corporate ethics can serve as an important catalyst in creating economic bubbles, whose eventual collapse results in economic hardship (Akerlof and Shiller, 2009). Second, an increasing number of people invest their savings in publicly traded companies, and thus, corporate governance matters for the viability of their retirement investments. Third, corporate governance affects the work environment, collective bargaining, wage rates and opportunities for training, all of which affect the well-being of workers and their families. Fourth, since corporate governance is ultimately about the structure of authority, it can be expected to affect well-being through the avenues of effectiveness (e.g. shareholder protection), voice (e.g. delegation of authority) and control of corruption in the economic sphere (see Helliwell and Huang (2008) for a discussion of similar issues in the political sphere).

365
Ethics Indices (CGI and CEI, respectively) for 68 countries.1 Figures 3 and 4, which replicate the diagrams for 36 European countries, show a strong positive relationship between SWL and corporate variables. The relationships observed in Figs. 14 could be the result of a positive connection between corporate governance and income, on the one hand, and income and well-being, on the other hand. To determine whether corporate governance has an independent impact on

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5 20

Satisfaction with Life 6 7 8

40 60 80 Corpotate Governance Index

100

Fig. 1. Satisfaction with Life (SWL) and Corporate Governance Index (CGI) (all countries)

III. Empirical Relationship between Well-Being and Corporate Governance Figures 1 and 2 show a positive relationship between SWL and Corporate Governance and Corporate
1

5 20

Satisfaction with Life 6 7 8

40 60 80 Corpotate Ethics Index

100

Fig. 2. Satisfaction with Life (SWL) and Corporate Ethics Index (CEI) (all countries)

Satisfaction with Life (SWL) is a national average score, with individual responses scaled from 1 (dissatisfied) to 10 (satisfied) and is from the fifth wave (20052007) of the World Value Survey (WVS) and fourth wave (2008) of the European Value Survey (EVS). The corporate variables are from Kaufmann (2004) and indicate the share of enterprises in the country that gave satisfactory ratings (5, 6, 7) to questions on corporate governance and ethics. The variables in the Corporate Governance Index (CGI) are based on answers to questions concerning the protection of minority shareholders, quality of training, willingness to delegate authority and nepotism. The Corporate Ethics Index (CEI) is composed of two components. The corporate illegal corruption component is constructed from questions on corporate ethics, illegal political funding, state capture cost, frequency of bribery in procurement and corruption in banking. The corporate legal corruption component is constructed from questions concerning legal political funding and undue political influence. All indices are scaled from 1 to 100 with higher values showing higher ethical standards. The respective correlation coefficients are 0.42 and 0.47. Single variable regressions of SWL on CGI and SWL on CEI give positive coefficients at a 1% significance level.

366
9

M. Cule and M. E. Fulton

corporate governance, the corporate indices (CGI and CEI) published in Kaufmann (2004) are included. Since CGI and CEI are highly correlated (correlation coefficient = 0.88), two alternative models are estimated, one for each of the indices.

Satisfaction with Life 6 7 8

IV. Results and Discussion Table 1 summarizes the estimation results. Model 1 is the base model and does not include the corporate variable. As found in the previous literature, (log) income and freedom of choice are statistically significant and have a positive effect on SWL. In addition, confidence in major companies, trust and more cooperative (less competitive) attitudes also have a positive effect on SWL. Confidence in labour/trade unions and attitudes in favour of income inequality have a negative effect. Kaufmann (2004) shows that corporate governance affects economic performance. As a consequence, including CGI or CEI in the model creates a problem of severe multicollinearity between the corporate governance variable and log income (confirmed through variance indicator factor diagnostics). To avoid dropping the (log) income variable, a new variable net (log) income is created. The observations in net (log) income are the residuals from a regression of (log) income on one of either CGI or CEI. The creation of this new variable removes the indirect effect that CGI or CEI has on SWL through the national income channel. Models 2 and 3 show the determinants of SWL when a corporate governance variable is included and net (log) income is used in place of (log) income. The noncorporate governance variables have a similar effect, both in magnitude and in sign, in all three models. As in previous work, net (log) income and freedom of choice are important determinants of SWL, as is evidenced by the standardized beta coefficients. The standardized betas also indicate that the impact of the corporate governance variables is roughly half of the magnitude of the effect of net (log) income and confidence in companies, and it is comparable to the effect of trust.

5 20

40 60 80 Corpotate Governance Index

100

Fig. 3. Satisfaction with Life (SWL) and Corporate Governance Index (CGI) (European countries)

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Satisfaction with Life

5 20

40 60 80 Corpotate Ethics Index

100

Fig. 4. Satisfaction with Life (SWL) and Corporate Ethics Index (CEI) (European countries)

SWL, a cross-section regression is undertaken for 62 countries (the variables are collected for dates in the mid to late 2000s). The model includes a number of explanatory variables that previous work has indicated are important in explaining SWL, such as log of income, trust, freedom of choice/control over life and income inequality. Variables that capture the degree of coordination within an economy, such as confidence in corporations and labour/trade unions and attitudes towards competition/cooperation, are also included.2 Finally, to capture the impact of
2

The income variable is in log form to capture the diminishing marginal utility of money. Income is the countrys per capita Gross Domestic Product (GDP) measured in 2000 USD from the Online World Development Indicators, World Bank (2010), and corresponds to the WVS/EVS year. Trust is the fraction of respondents that indicated that most people can be trusted (01 ascending); choice and control is the national average score, with responses scaled from 1 (none) to 10 (a great deal); and attitudes towards income inequality is a national average score, with individual responses scaled from 1 (income should be more equal) to 10 (we should have large income differences as incentives). Confidence in major companies/confidence in labour/trade unions is the respective fraction of respondents that indicated a great deal and quite a lot of confidence. Attitudes towards competition is a national average score, with individual responses scaled from 1 (competition is good) to 10 (competition is harmful) (WVS, 2009; EVS, 2011).

A cross-country empirical investigation

Table 1. Effect of Corporate Variables on Satisfaction with Life (SWL) Model 2 Net (log) income and CGI Model 1 (Log) income Net (log) income (CGI) Net (log) income (CEI) Corporate variable (CGI) Corporate variable (CEI) Trust Freedom of choice/control over life Confidence in major companies Confidence in unions Attitudes towards competition Attitudes towards inequality Constant Observations Adjusted R2 0.254*** 0.317*** 0.006** 0.562* 0.674*** 2.390*** -1.010** 0.215** -0.074* -1.010 62 0.789 0.823** 0.677*** 2.530*** -0.974** 0.187** -0.075* 0.838 62 0.798 0.416 0.307*** 0.191 0.189 0.559 0.386 -0.194 0.143 -0.109 0.007** 0.868** 0.684*** 2.560*** -0.967** 0.192** -0.073* 0.721 62 0.796 0.205 0.200 0.565 0.390 -0.193 0.147 -0.107 0.407 Estimated coefficient Standardized beta Model 3 Net (log) income and CEI Estimated coefficient

367

Standardized beta

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Notes: CEI, Corporate Ethics Index; CGI, Corporate Governance Index. *, ** and ***Denote significance at the 10%, 5% and 1% levels, respectively.

The analysis above reveals that countries with higher standards in corporate governance have a higher SWL; this impact is over and above the effect that corporate governance has on income. The corporate governance effect is also in addition to the impact that trust and confidence in companies have on SWL. Moreover, the magnitude of the corporate governance effect is substantial. While additional research is required to further explore the relationships, the conclusion of this article is that corporate governance matters for subjective well-being.

References
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