Are corporate governance recommendations relevant for small companies?

This study examines the extent to which small listed companies in Australia comply with the Australian Securities Exchange corporate governance recommendations, and whether applying these recommendations is associated with benefits in terms of performance and accountability. The results indicate that many small listed companies comply with the recommendations, although the benefits to these companies from doing so appear to be low. We do not find evidence of a positive association between small company compliance with recommendations regarding board independence, diligence and formation of an audit committee and performance. However, we find that compliance with the recommendation against having a dual CEO/Chair structure is beneficial. The voluntary regulatory approach is likely to be disproportionately costly for small companies if as our findings suggest compliance has few benefits for small companies. This is an important issue because small companies represent a substantial proportion of all listed companies. The current study has international relevance because the problem of designing effective governance regulation for a broad range of companies is not unique to the Australian jurisdiction. The findings have worldwide implications for regulators because the implementation of governance recommendations is costly for small companies and many regulatory frameworks require companies to implement formal corporate governance mechanisms regardless of their size.