Accounting Policy and IFRS

#### **Chapter 9**

## National Adoptions of IFRS: Accounting Perspectives

*Maria Bengtsson*

#### **Abstract**

In the past few decades, there has been a global trend of international harmonization of accounting standards. The intended goal is to remove the barriers that hinder investors when comparing the accounting information of companies from different nations, while simultaneously reducing the transaction costs for firms. However, research has shown that countries adopt IFRS unequally, ranging from resistance, partial adoption to full adoption. If the IFRS are not adopted to the same extent around the world, the central purpose of international standards can be compromised. This chapter aims to explain some key terms essential in understanding current development in international accounting and lay out the development and progress of IFRS diffusion.

**Keywords:** IFRS, national adoption, convergence, divergence

#### **1. Introduction**

National accounting standards have historically been developed by each nation or by a cluster of nations for the entities that reside within their accounting judiciaries [1, 2]. These standards are typically designed to meet specific national needs [3]. However, in the past few decades, there has been a global trend of international harmonization of accounting standards, with many countries having either partially or completely replaced their national accounting standards with the International Financial Reporting Standards (IFRS) [4, 5]. As profiled by the International Accounting Standards Board (IASB) in 2019, over 140 jurisdictions in all major regions in the world (**Figure 1**) have either required or permitted IFRS usage for their domestic publicly accountable entities [6]. Such a massive adoption of a single set of accounting standards worldwide may represent the most significant accounting regulatory change in recent years [7].

The IFRS can be defined as a single set of accounting standards that are intended to be consistently and globally applied—that is, to be used by developed, transitional, and emerging economies alike [8]. The IFRS are intended to provide investors and other users of financial statements with the ability to compare the financial performance of publicly listed companies on a like-for-like basis with the companies' international peers. Conceptually speaking, adopting a single set of global accounting standards is undeniably appealing. In theory, global standards would remove the barriers that hinder investors when comparing the accounting information of companies from different nations, while simultaneously reducing the transaction costs for firms [9–11]. Empirical

**Figure 1.** *IFRS adoption by region. Source: IFRS Foundation 2019.*

studies have confirmed that IFRS adoption has (to a certain degree) increased the compatibility of financial statements across national borders, and that the IFRS have achieved many of the goals they were intended to reach [1, 7, 12, 13].

However, despite the economic benefits of the IFRS and their apparent support by the great majority of countries, research has shown that national IFRS adoptions are difficult and problematic [14–16]. One major issue is that countries do not adopt IFRS to the same extent. Nobes and Zeff [17] show that some countries adopt the IFRS as issued by the IASB, while others claim that their own national GAAP are "based on" or "similar to" the IFRS—when, in fact, large differences remain. According to an extensive report compiled by Deloitte [18], it is also common for countries to claim that they have "adopted" the IFRS while choosing to deviate or not to include certain provisions from the IFRS as issued by the IASB. In addition, despite the great number of countries that have adopted IFRS, the three largest economies in the world—the United States, China, and Japan—have not yet fully accepted the IFRS into their national reporting standards, even for listed companies [6].

Thus, it is debatable whether international accounting harmonization is indeed as successful as it seems to be [19]; in fact, it may be just a veneer over continued national differences [15, 20]. Users of financial information should be aware that IFRS do not necessarily carry the same implications throughout the world [16], despite the IASB's intentions. Some scholars warn that, if the IFRS are not adopted to the same extent around the world, the central purpose of international standards will be compromised, as foreign investors will be unable to be confident when reading financial statements [15, 17]. Uneven IFRS adoption could even be harmful to investors who believe that accounting standards have been converged worldwide—when, in fact, financial reporting differences continue to exist across national borders while being covered under the façade of the IFRS.

#### **1.1 The IFRS adoption process**

IFRS adoption is a complex and multi-level governance process (**Figure 2**) [2, 21]. After being promulgated by the IASB, IFRS adoption occurs at both the *de jure* level

**Figure 2.** *Multi-tier IFRS adoption.*

(e.g., recognizing the IFRS as part of a nation's law) and the *de facto* level (e.g., annual and quarterly reporting by the nation's entities). That is, a country may choose to adopt the IFRS as issued by the IASB, include it as part of its mandatory regulations [22], and require some or all of the entities within its jurisdiction to comply with the IFRS. On the other hand, when allowed by national regulation, firms may also choose to adopt IFRS before the country's official IFRS adoption [10]. These two level of adoption are interrelated, although differences must be acknowledged [23]. National accounting standard-setters are likely to take domestic firms' needs into consideration when deciding whether or not to adopt IFRS. By the same token, firms need to comply with the national requirements to either mandatorily adopt or voluntarily adopt IFRS. **Figure 2** depicts the multi-level diffusion and adoption of IFRS.

It is important to recognize that firm-level IFRS adoption is conditional on countries' decisions to allow or mandate IFRS in an adoption process [23]. Many countries first voluntarily adopt IFRS at the national level, and then write the standards into the local GAAP, which then become mandatory at the firm level. It has been shown that countries have adopted IFRS unevenly [18], so differences in countries' IFRS adoptions already exist at the national level before trickling down to the firm level [5, 24, 25]. As most domestically listed firms must comply with the national GAAP or regulations, instead of directly complying with IFRS, they may have no choice but to deviate from the IFRS, as issued by the IASB [7, 26–28].

#### **1.2 Some key terms**

**159** Financial accounting research is often loaded with special concepts, both technical and theoretical, that bear specific meanings that either clarify for or further confuse readers. This issue is manifested in international accounting due to the scope of diversity in accounting traditions. Some of the important concepts in this field have been unclearly used or defined. Many employ these concepts, but few define them. In

addition, certain concepts are often treated as interchangeable, even though they do not represent precisely the same thing. This is perhaps inevitable for a subject as complex as IFRS. Nevertheless, to better understand international accounting harmonization, it is necessary to clarify these embedded meanings, since different usages may tilt discussions in somewhat different directions. It is also important to note that there is no strict "right" or "wrong" definitions of these terms, as important and evolving concepts can hardly be expected to have clear-cut definitions. Rather, the purpose of the effort is to note blurred or unclear definitions and introduce some clarity to the extent that has been identified in IFRS literature.

#### *1.2.1 International accounting system*

A dichotomy exists in the accounting literature in regard to what is meant by the term "international accounting system" and how it should be approached. One approach defines "accounting system" at the national level. For example, Gray [29] states that a country's accounting system constitutes various national characteristics, such as the structure and development of capital markets, legal requirements, professional accounting standards, and tax law. Similarly, Doupnik and Salter [30] believe that the international accounting system resides in national legislature. By contrast, other authors regard an accounting system as a firm-level practice. For instance, Nobes [31] defines an accounting system as "a set of practices used in a published annual report." Commenting on the difference in the two approaches, Nobes [31] argues that, although there is a formal set of rules or systems at the legislature level, companies sometimes choose to depart from these rules. According to Nobes, the advantage of using the firm-level definition, although it is admittedly narrow, is that this definition can actually have wider empirical implications.

#### *1.2.2 De jure harmonization versus de facto harmonization*

An important conceptual distinction must be understood between the *de jure* and *de facto* harmonization. *De jure* harmonization of international accounting standards involves the formal harmonization of regulations at the country level, while *de facto* harmonization refers to the material harmonization of the financial reporting practices performed at the firm level [22]. In the accounting literature, both Tay and Parker [32] and Canibano and Mora [33] refer to *de jure* harmonization as the harmonization of accounting regulations and to *de facto* harmonization as the increase in comparability that arises from greater conformity in practice. Qu and Zhang [22] argue that *de jure* harmonization is the basis for achieving *de facto* harmonization. In fact, *de jure* harmonization can but does not necessarily lead to *de facto* harmonization, if the standards allow for more options for companies [33]. Nevertheless, *de facto* accounting harmonization cannot be achieved without first achieving *de jure* accounting harmonization [33]. The decision to adopt IFRS can be made both at the *de jure* level (if the IFRS are mandated to be followed as nation-wide reporting standards) and at the *de facto* level (if the IFRS are one of the reporting standards firms are allowed to choose from) [34].

#### *1.2.3 Convergence versus adoption*

The terms "convergence" and "adoption" have recently come into use as nations attempt to narrow the gap between their national accounting standards and the

#### *National Adoptions of IFRS: Accounting Perspectives DOI: http://dx.doi.org/10.5772/intechopen.103679*

IFRS. It is important to note that convergence is not equivalent to adoption [5, 15]. The differences between these two concepts have set off a great deal of debate within the field of international accounting research. Nobes [35] argues that, in order to be called adoption, relevant entities must state that their financial statements are in full compliance with the IFRS as issued by the IASB. Thus, at the country level, "adoption" should mean that the national set of accounting standards is directly replaced by the IFRS as issued by the IASB. This position is taken by the Member States of the EU, which have fully applied the IFRS since 2005. By comparison, "convergence" is the gradual mechanism of changing local accounting standards into IFRS. Although it does not mean full adoption, convergence can indicate only a minimal difference between a nation's standards and the IFRS [36]. According to the IASB's position, convergence will not, by definition, lead to a common set of global standards. Nevertheless, convergence has been and will likely remain a useful process to facilitate adoption by narrowing differences. Thus, convergence should be a means of making the transition to the full adoption of IFRS standards, and not an end in itself [37]. By the same token, Zeff and Nobes [38] emphasize that convergence is a dynamic process of consistency with IFRS in accounting principles and substance, which is neither a direct adoption of IFRS nor a word-for-word translation of IFRS. Rather, convergence is the act of moving towards uniformity. Zeff and Nobes use China and Venezuela as examples of countries that use the IFRS as a starting point for drafting national standards, but then diverge significantly from the IFRS as issued by the IASB. Some countries that have "converged" with the IFRS are nonetheless counted by the IFRS Foundation and by others as adopters of the IFRS, which—according to Zeff and Nobes [38]—is misleading.

In the same vein, Ball [15] notes that convergence is "the process of narrowing the differences between IFRS and the accounting standards of countries that retain their own standards." Convergence is a modified version of adoption in which multiple sets of rules or practices are the same [5]. Therefore, the relation between convergence and adoption is not dichotomous. These two concepts represent the subtleties of the development and diffusion of IFRS at various stages. Following this logic, Nobes [35] states that the word "convergence" is more correct when applied to the joint program of the IASB and the United States' Financial Accounting Standards Board (FASB), because both have changed particular standards to match each other's, and the IASB and FASB have run many joint projects. In the case of other countries, however, convergence with the IFRS is a euphemism for the piecemeal adoption of IFRS [35].

#### *1.2.4 Standardization versus harmonization*

Standardization and harmonization are often used interchangeably in IFRS studies. However, the difference between them should not be ignored [39]. Standardization implies a movement towards uniformity, whereas harmonization is a movement away from total diversity [32]. In the context of International Accounting Standards (IAS), McLeay et al. [39] suggest that "whilst international standardization implies a movement towards global uniformity, harmonization implies a movement towards similarity in the choice between alternative accounting treatments." They define international standardization as a process that constrains choice, ultimately resulting in the adoption of the same accounting method by all firms and all countries. International accounting harmonization, on the other hand, is a process that results in a systematic choice between accounting methods across national borders [39]. Such choices are dependent upon the nature of the nation or firm and its

operating environment, but are otherwise independent of the location in which the nation or firm happens to be registered [39]. Similarly, Canibano and Mora [33] argue that harmonization is a more realistic and conciliatory approach than standardization, and is also more attainable and less rigid. However, other scholars disagree. For instance, Arnold [40] believes that harmonization is equivalent to standardization. That is, according to Arnold, accounting harmonization equates to the standardization of financial reporting standards, auditing standards, and/or other accountingrelated rules and regulations such as licensing and qualification requirements or ethics rules.

#### **2. The history and legitimacy of IFRS**

It has been argued that the international harmonization of accounting standards is a result of the economic integration and increasing trading between national borders [41]. In addition, corporate economic scandals have shaken investors' trust in financial reporting. To regain both inventors' trust and economic order, it has become necessary to strengthen the comparability and transparency of financial reporting across national borders [8].

#### **2.1 Background of IFRS diffusion: economic integration and global financial crisis**

Economic globalization and integration form an important context in which national IFRS adoption has become not only necessary, but also urgent [9, 42]. Economic globalization has created a new common ground for businesses to engage in trade and transactions across national borders [41]. In this new "game," certain common rules must be understood and followed by all participants to ensure a functional trading place. As the vice chairman of IASB, Ian Mackintosh comments:

It is increasingly difficult to see different and often incompatible national accounting standards as anything other than a legacy of a bygone era. They add cost, complexity and translation risk to companies and investors operating in today's global marketplace [43].

According to the IASB, about one third of all financial investments in the world are international transactions. It is essential for differences in national accounting standards to be eliminated, or at least understood by all players. Thus, it is necessary for national accounting standard-setters to change their existing national accounting systems in order to facilitate international economic changes, assuming that a growing economy is part of the national plan. Global standards are achievable and an inevitable consequence of continued economic globalization. As stated on the IASB website:

This [globalization] evidence indicates that global standards are both desirable, achievable and inevitable. As economic globalization continues apace, so too will the force of the arguments in favor of IFRS adoption within those remaining jurisdictions [44].

In addition to global economic integration, the accounting scandals in the early 2000s that brought down large multinational corporations (MNCs) such as Enron and Arthur Anderson have increased investors' awareness of the importance of trustworthy accounting standards. Furthermore, in the summer of 2007, accumulating losses on U.S. subprime mortgages triggered widespread disruption to the

global financial system. In less than a year, the situation developed into an international financial crisis and eventually resulted in a global economic downturn that further shook investors' confidence in the stock market. As stated on the IASB website:

Post-crisis, policymakers are all too aware of how every national capital market in the world, even the largest, functions as little more than a satellite of the global financial system [43, 44].

To reestablish confidence in the soundness of markets and financial institutions, as well as to prevent further crises, the G201 summit in Washington on November 15, 2008, produced a thorough analysis and summary of the root causes of these crises and put forward action plans that included improving the IASB's governance and supporting the IFRS as the single set of high-quality global accounting standards. Both national and international organizations developed recommendations and resources aimed at promoting the IFRS. The G20 called on the IASB and the Financial Accounting Standards Board (FASB) in the US to improve standards on valuation and provisioning and to achieve a single set of accounting standards. The G20 summit in London in April 2009 further required proactive collaboration from member countries on convergence with the IFRS in order to prevent similar financial crises. In the same year, the G20 formed the special Financial Crisis Advisory Group (FCAG). The FCAG supports the IASB in promoting the IFRS to be the single set of global accounting standards in order to reestablish investors' confidence in accounting information.

However, the G20 has never required countries to fully adopt the IFRS. Instead, it encourages its members to converge with the IFRS. The IASB does not agree with this position and has expressed on multiple occasions that only full adoption of IFRS, not convergence with IFRS, can ensure global financial stability and prevent similar financial crises. According to the IASB, the G20 and its various committees, while pushing the diffusion of IFRS, have frequently focused on national interests, which can create barriers and impediments to economic growth and jeopardize global financial stability. As the chairman of the IASB remarked:

This inability to deliver compatible outcomes with the FASB clearly demonstrates the inherent instability of convergence as a means to achieve a single set of global accounting standards. For this reason, our Trustees wisely concluded that convergence can never be a substitute for adoption of IFRS. Thankfully, throughout the financial crisis, the momentum towards adoption has continued unabated in many countries [44].

Despite this disagreement from the IASB, the G20—which promoted the IFRS in the past due to the financial crisis—has recently been less enthusiastic. Support for the work of the IASB has been decreasing. For example, in the past, the communiqués had always included a paragraph such as this:

We underline the importance of continuing work on accounting standards convergence in order to enhance the resilience of the financial system. We urge the International Accounting Standards Board and the US Financial Accounting Standards Board to complete by the end of 2013 their work on key outstanding projects for achieving a single set of high-quality accounting standards [45].

However, the newest communiqués issued after the meeting of the G20 in 2014 and thereafter no longer contain a call for converged accounting standards.

<sup>1</sup> The G20 consists of the finance ministers and central banks from 19 countries and the EU.

#### **2.2 The history and development of the IASB**

The formal history of the IASB began with the International Accounting Standards Committee (IASC). In 1973, the IASC was jointly established by professional accounting bodies in Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom, Ireland, and the United States. Between 1973 and 2001, the IASC issued IAS. The IASC was essentially a structure, rather than a committee in the traditional sense of a group of people. The IASC originally had a goal of "harmonization" by reducing differences between accounting standards in major capital markets. By the 1990s, however, the IASC reshaped its goal into "convergence," which, according to the organization, is a step above harmonization. The convergence concept is to develop a "single set of high-quality, international accounting standards that would be used in at least all major capital markets." In 1995, The IASC and the International Organization of Securities Commissions (IOSCO) agreed on what constituted a comprehensive set of core standards. The IASC undertook a project to complete those core standards by 1999. The IOSCO agreed that, if it found these core standards acceptable, it would recommend the endorsement of IASC standards for cross-border capital and listing purposes in all capital markets [46]. In May 2000, the IOSCO completed its assessment and accepted the IASC's core standards. Members of the IOSCO were encouraged to use the IASC standards to prepare their financial reporting for international offerings and listings, supplemented where necessary to address outstanding substantive issues at a national or regional level, or to use waivers of particular aspects of the IASC standards without requiring further reconciliation under exceptional circumstances [47].

In 1997, after nearly 25 years of existence, the IASC concluded that, in order to continue to bring about convergence between national accounting standards and practices and high-quality global accounting standards, it had to find a better way to perform its role effectively. To do so, the IASC saw a need to change its structure. The standard-setting body was thus renamed as the IASB. Formally, the IASB is a private standard-setting organization based in London. It operates under the IASC Foundation, which is more widely known as the IFRS Foundation. The IASB is primarily funded by fundraising activities, which are the responsibility of the IFRS Foundation. The governance, oversight, and standard-setting processes of the IASB are similar to those of the FASB in the United States. The IASB has 14 board members (including a chair and a vice chair) with a variety of functional backgrounds and from different continents. The currently sitting IASB Chair is Andreas Barckow. The primary purpose of the IASB is to promulgate IFRS. It is committed to the mission of developing a single set of high-quality, understandable, and enforceable global accounting standards and working with national standard-setters to achieve accounting standards convergence. The IASB has inherited 25 standards issued by the IASC, covering various issues. Because the IAS standards were essentially distillations of existing accounting practices used around the world, they often allowed alternative treatments for the same transactions. The IASB decided to undertake a comparability and improvement project to reduce the number of allowable alternatives and make the IFRS standards more prescriptive than descriptive [48].

#### **2.3 The development and adoption of IFRS around the world**

Although IFRS have now been accepted by the majority of countries around the world, their initial acceptance by national accounting standard-setters and firms was not as smooth as many might think. The process began in the 1970s, and it took a long time for the IFRS to gain worldwide recognition.

#### *2.3.1 Initial hesitations and uncertainties regarding adoption*

Prior to the first major wave of IFRS adoption among the European countries in 2005, there was a great deal of debate about the relevance and feasibility of implementing a single set of accounting standards worldwide. During this time, national and international standard-setters tried to understand how the globalization of the economy had influenced countries' acceptance of IFRS; they also tried to identify key factors or obstacles that could affect a nation's capacity for adoption and willingness to adopt. In this process, there were concerns that, even if countries or firms chose or were required to adopt IFRS, they might not be ready and might apply IFRS differently, creating a bigger problem than before. The KPMG issued a survey of 149 accounting professionals showing that there was general concern that uncertainty over the applicability of IFRS among EU companies had delayed the voluntary IFRS adoption of many [49]. Similarly, the Institute of Chartered Accountants in England and Wales (ICAEW) raised concerns regarding the lack of preparation for the introduction of IFRS. The ICAEW conducted a survey among its members asking whether they would, if given the choice, move to IAS. Only over a third of the businesses said that they would be likely to move to IAS. The ICAEW concluded that tardy preparation for IFRS adoption by some firms could cause them to receive qualified audit opinions upon IFRS adoption [50].

Another concern was the feasibility of implementing an Anglo-Saxon accounting model into other social contexts. Some observers have regarded international accounting harmonization as predominantly implying compliance with an Anglo-Saxon accounting model [51], and contend that the international accounting standards agenda of the IASB is a means of imposing an Anglo-American hegemony. Such a contention was somewhat evident in the 1990s, when the staffing complement of the IASB was dominated by Anglo-Americans. For example, even though the ASEAN Federation of Accountants (AFA) had sought a greater level of representation and participation by Asian nations in the deliberations of the IASC, prior to 1995, only Malaysia and Singapore out of the ASEAN AFA member countries had been represented on working committees. Setting aside the achievability of global standardization, Dye and Sunder [52] also question whether having a single global set of accounting standards is even desirable. They argue that there were several benefits in allowing firms to follow either IFRS or the U.S. GAAP, and contend that competitions among standard-setters can help to meet the needs of globalization and increase the efficiency of accounting standards.

#### *2.3.2 Major waves of IFRS adoption around the world*

Despite the skepticism in the early stage of IFRS harmonization, during the push for the internationalization of accounting standards, the accounting differences between IFRS and other major national accounting standards, such as the U.S. GAAP, were narrowing [53]. In the late 1990s, some countries began to allow voluntary adoption of IFRS. For example, in 1998, the law §292a HGB was passed in Germany, permitting German listed companies to prepare consolidated accounts in accordance with the IFRS. In the meantime, many major stock exchanges around the world, including the London, Frankfurt, Zurich, Luxembourg, Bangkok, Hong Kong, Amsterdam, Rome, and Kuala Lumpur stock exchanges, began to accept financial statements from foreign listed companies prepared under the IFRS without reconciliation. In the United States, the SEC also began to allow disclosures based on IFRS. As stated by the SEC, the reasons for accepting such standards in the U.S stock changes were as follows:

Our decision to adopt the International Disclosure Standards was based on our conclusion that the standards were of high quality and that their adoption would provide information comparable to the amount and quality of information that U.S. investors receive today [54].

The FASB decided that the need for international standards was strong enough to warrant more focused activity on its part. The then FASB Chairman, Dennis Beresford, expressed his support for "superior international standards" that would gradually replace national standards, and identified new initiatives to get the FASB more directly involved in the drive to improve international standards [55]. The FASB and the IASC began to undertake concurrent projects to improve their earnings per share standards with the specific objective of eliminating the differences between them.

The large listed European companies that chose early voluntary adoption of IFRS did so because they believed that the use of international standards would enable better communication with information users, especially international investors. For example, KPMG [49] reported in a survey that the reasons for European companies to switch from national standards to international standards included (1) the possibility of increasing the availability of capital and lowering its cost; (2) the perceived high quality of the IFRS; and (3) the preferences of institutional investors and analysts.

Then, in the early 2000s, efforts to internationally harmonize accounting standards finally evolved into a broad worldwide convergence effort at the national level. In 2002, the EU adopted legislation requiring all listed companies to prepare their consolidated financial statements using IFRS starting in 2005, which represented the first major capital market to require IFRS. The regulation states that IFRS adoption is intended to achieve "a high degree of transparency and comparability of financial statements and hence an efficient functioning of the (EU) Community capital market and of the Internal Market." In the same year, the FASB and the IASB embarked on a partnership to improve and converge the U.S. GAAP and international accounting standards. That partnership is described in the Norwalk Agreement, which was issued after the joint meeting. The Norwalk Agreement set out the shared goal of developing compatible, high-quality accounting standards that could be used for both domestic and cross-border financial reporting [56]. Beginning in November 15, 2007, the U.S. SEC allowed the listing of foreign companies using the IFRS on the NYSE without having to first reconcile their financial statements with the U.S. GAAP. In the meantime, several other jurisdictions such as Hong Kong and Australia also chose to adopt IFRS. Japan and China also formed convergence plans with the IASB. In 2007, China achieved major convergence between the Chinese GAAP and the IFRS.

In addition, there was a continuation of the worldwide planning efforts at the international level. For example, in response to the international financial crisis, the G20 summit in Washington on November 15, 2008 produced a profound analysis and summary of the root causes of the crisis and put forward action plans that included improving the IASB's governance and establishing a single set of high-quality global accounting standards [57]. The G20 summit in London in April 2009 required proactive collaboration from member countries in converging accounting standards [58]. The IMF routinely provided foreign aid to developing countries or countries in

#### *National Adoptions of IFRS: Accounting Perspectives DOI: http://dx.doi.org/10.5772/intechopen.103679*

financial trouble with the demand that reform be enacted in the public and private sectors. Such demands were often tied to the demand that IFRS accounting standards be adopted. After the few rounds of major waves of IFRS adoption around the world, the success of IFRS convergence is now apparent. According to the recent IASB report, more than 140 jurisdictions have adopted IFRS with very few modifications, and the few jurisdictions that have made modifications are generally regarded as taking temporary steps in their plans to adopt IFRS.

#### *2.3.3 Recent slowdown and increased skepticism*

In more recent years, despite the momentum of IFRS adoption by nations, there have been renewed concerns over the success and legitimacy of IFRS. Notwithstanding the claims by the IASB that modifications to the IFRS are rare, some academic research has shown continued major differences among national financial reporting [15, 59–61]. Of course, as Nobes and Zeff [17] point out, the most obvious limitation to the scope of the mandatory use of IFRS is that the phrase "all the major countries" does not include the world's three largest economies: the United States, China, and Japan. They argue that, with the great increase in adoptions of IFRS, warnings about the vague claims are even more relevant, because the population of adopters is now much larger yet still shows considerable variety.

In addition, the speed of IFRS adoption has begun to slow down as the initial enthusiasm fades away. The Chinese GAAP, for example, have remained in a convergence but non-adoption status since 2006. The Chinese Ministry of Finance (MOF) originally set 2011 as the target year for the continuing and full convergence program of the ASBE, making 2010–2011 a critical period for China's convergence. The MOF planned to initiate the overhaul of its ASBE system in 2010 and finish by 2011. All large and medium-sized enterprises would be required to use the revised standards as of 2012 [62]. This goal, as of 2019, remains in the planning stage without further movement. In the United States, in January 2008, participants in an FASB roundtable predicted that it would take about 5 years to complete the full adoption of IFRS by the United States. More than 12 years have passed since then, yet the United States has not only not adopted the IFRS, but also started to actively resist them.

Even if IFRS could achieve global convergence in the short term, observers have questioned whether these benefits are sustainable. By adopting IFRS, a country essentially allows a foreign entity with no local accountability to dictate its reporting laws and thereby control the economic incentives and activities of its people and businesses [63]. The former chairman of the SEC, Cox, points to this concern as a reason why a full-scale adoption of IFRS is unlikely to occur in the United States. He expressed his frustration and the downgrading of his trust in the IFRS in a keynote speech addressing the SEC:

…when I was SEC Chairman, I worked to ensure that the United States was doing everything necessary to make financial information from companies in different countries both comparable and reliable. But that was several years ago. And a great deal has changed since then. Today, I come to bury IFRS, not to praise them [63].

Cox further argued that the full adoption of IFRS by the United States might once have been possible, but is no longer so [63]. Some of the IFRS-adopting economies have also been requiring a national standard-setter to review and, if needed, modify the IFRS before they become the law of the land. This cherry-picking approach may lead each national regulator to adopt certain standards while rejecting others, thereby causing countries to diverge again in their accounting standards in the long run. On

the other side, the IASB, which is facing increasing resistance, has emphasized that it remains committed to the long-term goal of the global adoption of IFRS as developed by the IASB, in their entirety and without modification. The IASB believes that convergence may be an appropriate short-term solution for a particular jurisdiction and may facilitate adoption over a transitional period. Convergence, however, should not be a substitute for adoption. Adoption mechanisms may differ among nations and may require a period of time to implement, but they should enable and require relevant entities to state that their financial statements are in full compliance with IFRS as issued by the IASB [64]. As stated on the IASB's website:

There is a natural temptation for countries (and stakeholders within those countries) to argue against full adoption of IFRSs, to call for convergence of national standards and IFRSs rather than adoption, or to introduce national exceptions to IFRS rules. The temptation to pursue convergence rather than adoption should be resisted. Full adoption of IFRSs must be the end goal…Having once achieved convergence, standards could well diverge again [64].

To summarize, the most important reasons for the speedy and wide diffusion of IFRS are the growing integration of the world's economy and a series of financial crises. This combination has increased the demand from international investors for better quality and comparability of financial reporting. As a result, the mission of the IASB has evolved over time. After initial hesitation on the part of nations, followed by fast adoption in many parts of the world, IFRS harmonization has begun to slow down in recent years.

#### **3. Chapter summary**

This chapter has provided clarifications of some seemingly exchangeable but different terminologies when examining the complex topic of IFRS. The development and diffusion of IFRS have led a winding road characterized by initial doubts, fast adoption and recent slowdown. This chapter brought forward important insights regarding current development on international accounting harmonization by pointing out the trend of massive adoption of IFRS by country and the simultaneous variations that continue to hinder the efforts by the IASB. After 20 years of diffusion around the world, the IFRS have been widely recognized as high-quality accounting standards that can make it possible for financial information to be compared across national borders [8]. However, this success can only be sustained if the IFRS are adopted and applied properly in practice [20, 60].

*National Adoptions of IFRS: Accounting Perspectives DOI: http://dx.doi.org/10.5772/intechopen.103679*

#### **Author details**

Maria Bengtsson Kristianstad University, Sweden

\*Address all correspondence to: maria.bengtsson@hkr.se

© 2022 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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### **Chapter 10**

## Monitoring of the Entrenchment of Managers through Board Characteristics: Insights from Gender Diversity, Background and Independence Director's

*Nadia Ben Farhat-Toumi, Nouha Ben Arfa and Rim Khemiri*

#### **Abstract**

The purpose of this study is to investigate the relationship between the entrenchment managerial and board characteristics in publicly traded French firms. These two concepts are at the intersection of corporate finance and accounting, as managerial entrenchment and board characteristics may affect earnings management, which would make investors reluctant to invest in a firm. Using data on listed firms belonging to the SBF120, over the period 2011–2018, we mainly find that: the entrenchment managerial is impacted by (1) gender diversity, (2) educational background (3) and independence directors.

**Keywords:** managerial entrenchment, board diversity, educational background, board independence

#### **1. Introduction**

The literature on both opportunistic and autocratic behavior of executives has bent the debates on the composition and functioning of the board of directors (BOD) to better protect the interests of shareholders, as well as the stakeholders of the company [1–3]. Recently, the resurgence of scandals of financial malpractice by CEOs, such as Bernard Maddof for the Ponzi pyramid in 2009, Jeffrey Skilling for the Enron affair in 2006 and recently Carlos Ghosn for the Renault-Nissan alliance in 2018, have furthermore oriented studies towards the analysis of the impact of certain characteristics of the BoD on the managerial latitude of executives. In France, the law of May 15, 2001 on the New Economic Regulations (NER) concerning the powers and functioning of governing bodies, has highlighted the dissociation of the functions of chairman and chief executive officer as well as the limitation on the accumulation of mandates.

A board of directors is effective when management and control functions are exercised by two different people [4–7], to establish checks and balances and to avoid any personal misappropriation that is harmful to the company and its shareholders. In practice, this rule remains uncommon, even though it allows for real separation of decision-making and control functions, thus distributing responsibilities while guaranteeing a clarified separation of powers. The accumulation of functions thus allows the manager to adopt an autocratic management style to appropriate power in his or her interest and, moreover, to extend the duration of his or her mandate. This is the phenomenon of entrenchment as defined by Shleifer & Vishny [8]. According to entrenchment theory, this behavior allows the executive to entrench himself and anesthetize the boards [9]. This phenomenon has been the subject of several questions, especially about the effectiveness of the board. The board, which must monitor and advise the executive, is composed of directors with different demographic, individual and social characteristics. Several research studies emphasize the importance of the diversity of profiles within a board. Wirtz [3] and Maati & Maati-Sauvez [2], emphasize that a diverse board reduces the opportunism of managers. In this work, we are interested in certain characteristics of the board of directors, namely the independence of board members, gender diversity and the education of directors. The choice of these variables is explained on the one hand by the importance given to the feminization of boards in France through the Copé/Zimmerman law of 2011. On the other hand, the social ties between directors and executives from the Grandes Écoles such as École Nationale d'Administration (ENA) and Polytechnique, is favorable to the entrenchment of executives [2, 10, 11].

Moreover, the results of studies examining the relationship between the board and executive entrenchment appear to be controversial. In particular, studies of the relationship between the social ties between executives and directors are controversial, as these relationships can both hinder and contribute to the effectiveness of boards. Another debate on the issue of the entrenchment of managers is that of the presence of women on boards. Can this presence call into question the autocratic behavior of the CEO? Is this presence a reason for legitimacy in the face of the quota imposed by the law or can the woman face an entrenched CEO?

Thus, these questions and the lack of consensus on the link between the composition of boards of directors and the entrenchment strategies of managers call into question past studies. In this article, we propose to analyze the impact of women directors, education of directors, and board independence on executive entrenchment strategies.

Our research makes both theoretical and managerial contributions. First, for the relationship between the presence of women and the presence of a rooted CEO, few studies have examined this relationship in the French context. Thus, our article contributes to the governance literature by explaining the relationship between gender diversity and executive behavior. We provide some support for the hypothesis that the presence of women can change the strategies implemented by CEOs.

Then, we apprehend the means of entrenchment of the CEO by integrating the three strategies from the literature namely the age of the CEO, the duration of his mandate and the accumulation of functions. Indeed, studies have mainly focused on the entrenchment of CEOs through his network or his mandate [2, 11].

We quantify our work using a sample of 83 listed companies comprising the SBF 120 index and observed over a period from 2011 to 2018. In this framework, we show that women can both control and be impartial to the autocratic behavior of executives and this is a function of the rooting strategy. We also identify a negative and significant impact between directors from the Grandes Écoles (ENA/Polytechnique) and executive tenure, whereas the literature has only highlighted a positive link between

*Monitoring of the Entrenchment of Managers through Board Characteristics… DOI: http://dx.doi.org/10.5772/intechopen.103071*

these directors and executive tenure. Finally, we show that an independent board can limit the discretionary power of managers. Our results may have a managerial effect if we focus on the dissociation of the executive's functions. The presence of a woman as well as directors who are enarques or polytechnicians seems to be useful when the manager combines the two functions of chairman and director.

The remainder of the paper is organized as follows. Section 2 reviews the literature and develops our hypotheses. Section 3 describes the methodological aspects. Empirical results are presented and discussed in Section 4. Finally, in Section 5, we conclude with implications for further research and practice.

#### **2. Board diversity**

In this section, we present the review of the literature on the relationship between gender diversity, education of directors, board independence, and management entrenchment, while developing our research hypotheses.

#### **2.1 Gender diversity**

Since the constitution and implementation of the policy on quotas for women's representation on boards, several European countries such as Spain, Norway, Belgium and Italy have adopted legislative measures for the implementation of this policy in companies. Since 2011, France has introduced a law requiring listed companies to increase the number of women on their boards. This law sets a mandatory quota of 40% of the underrepresented gender on boards of directors by January 1, 2017 in listed companies. It also requires companies that do not have any women on their Boards at the time of its enactment to appoint women within the following 6 months.

The activism that has focused on the gender balance in corporate governance bodies bears witness to the pitfalls of the feminization of boards. Beyond the regulatory and institutional framework, several researchers have stressed the importance of increasing the appointment of women to boards of directors. The arguments put forward for increasing the number of women on boards of directors are numerous [12, 13]. Two perspectives can be mobilized.

First, consistent with Fama & Jensen's agency theory [14], board members should monitor managers to minimize agency costs and maximize firm value for shareholders. Researchers have investigated the relationship between board feminization and firm financial performance [15–19]. Other empirical studies highlight the importance of the latter in strengthening governance practices, including the board of directors. Harford et al. [20] and Wang et al. [21], specify that firms with an effective board reduce managerial opportunism and authority. In addition, Adams and Ferreira [15], show that board feminization impacts CEO departure rates at the head of the lowestperforming firms.

Second, the other stream of literature on gender diversity, which focuses on women's human capital, has shown a positive relationship between the feminization of boards and the quality of governance. Huse & Solberg [22] as well as Spell & Bezrukova [23] find a positive and significant relationship between the human factor of women (skills, attitudes, behavior...) and managerial manipulation (financial fraud).

In the same spirit, another group of researchers highlights the importance of appointing women to boards [24, 25]. They argue that a board with one or more women is less prone to manipulation by managers. However, the Maati and Maati-Sauvez [2] study find that executives are more influential in the presence of increased board feminization.

Given the conflicting results on the relationship between women's presence and CEOship manipulation, we propose the following hypothesis:

*Hypothesis 1: CEO is less entrenched when the percentage of women present on the board is high.*

#### **2.2 Education of directors**

As suggested by some authors such as Hambrick & Mason [26] and Barro & Lee [27], human capital is the body of knowledge and skills that each individual has been able to acquire through education and training. The human capital theory assumes that individuals' knowledge and skills enable them to be productive in their assignments [28]. A highly educated board will be better able to advise and monitor the CEO [21]. Several research studies highlight the importance of the level of director education on the effectiveness of the board and strategic choices. Rosenkopf & Nerkar [29], highlight a significant and positive relationship between the quality of director education and organizational decision making.

Gales & Kesner [30] as well as other researchers point out that a board with scientific directors allows for more innovative strategies, and can advise and monitor a research project [21]. Other work has examined the relationship between board member education and firm performance. The results reveal that the level of education of directors is positively associated with financial performance and enhances the monitoring role of the board [31, 32]. Thus, an educated board improves corporate governance. These ideas could therefore lead us to assume that good corporate governance requires an effective board composition.

The education of its members is a decisive criterion in the composition of the latter, thus reducing the opportunism of the CEOs. Hence the following hypothesis:

*Hypothesis 2: The nature of the education of directors reduces the entrenchment of CEO.*

Several empirical studies define the quality of education by the prestige of the schools attended [33, 34]. Despite the importance of educational background in the recruitment of directors, the prestige of the institution they attend, as well as the networks developed within that school, have a very important impact on the selection of board members. The social capital built up within these prestigious institutions contributes not only to the development of human capital but also to the company's social network [35, 36]. Work on the sociology of education and the elite has highlighted the importance of schools in the construction of elite identity [37]. Most empirical studies emphasize that administrators from elite schools possess a social network that allows them easy access to even government resources [38] and possesses greater control to monitor CEOs [39].

In France, the Grandes Écoles (GÉ), notably ENA and Polytechnique play a similar role as Ivy Leagues in the US or Cambridge and Oxford in the UK [40]. Several research studies argue that this elite network, which allows easier access to the board of directors, weakens the latter's monitoring role [41, 42].

However, the existence of these social relationships can also be a key factor in the governance structure. For Kramarz & Thesmar [41], CEOs may use their social networks to make advice and monitoring more effective. Examining these results does not provide a general framework, which leads us to test the following hypothesis:

*Monitoring of the Entrenchment of Managers through Board Characteristics… DOI: http://dx.doi.org/10.5772/intechopen.103071*

*Hypothesis 3: A predominantly elitist board of directors impacts executive entrenchment.*

#### **2.3 Board independence**

For the proponents of the agency theory, the presence of independent directors on the board of directors makes it possible to restrict the opportunistic behavior of the managers. Fama & Jensen [14] emphasize that these independent members must work in the interest of the shareholders.

Several empirical studies have tested the relationship between board independence and management entrenchment. The results obtained are not conclusive and do not show a consensus concerning this relationship. Indeed, Chen & Jaggi [43] and Ben Ali [44], show that boards dominated by independent members are likely to better monitor the executive and protect shareholders' interests. In this sense, Jensen [6] and Patelli & Prencipe [45] emphasize that independent directors must fulfill their oversight role to build their reputation. The results of Chen [46], show that an independent board reduces agency conflicts. According to the same authors, investment opportunities are higher in firms with a more independent board. Thus, managerial incentives are better controlled in the presence of independent members [47–49]. The results of Ma & Khanna [48] show that reputation strongly motivates independent directors, who for their own interest must disapprove of executive strategies and decisions that may lead to a bad decision. However, Parrat [50] does not confirm the monitoring role of independent directors. Indeed, the author explains that the latter are chosen by the manager according to personal criteria. Therefore, they cannot oppose the decisions of the latter [51].

The analysis of this research does not allow for a consensus due to the diversity of the results, which leads us to formulate the following hypothesis:

*Hypothesis 4: Board independence impacts CEO entrenchment.*

#### **3. Research methodology**

#### **3.1 Sample and data**

The initial sample is composed of French companies belonging to the SBF120 index over the 2011–2018 period1 . The choice of this period for our empirical study is justified by the entry of the Copé-Zimmerman law adopted in 2011.

The data was collected from several sources. Data on the education of directors was collected manually from the companies' annual reports. When not available, we used the Who's Who database2 . We used Bloomberg for data on corporate governance and executives and Datastream for accounting and financial data.

To create our sample, we first excluded firms belonging to the finance sector. Then, we selected́ firms for which annual reports and data on directors and officers

<sup>1</sup> Our starting sample is composed of all companies belonging to the SBF120 index as of December 31,

<sup>2018.</sup> We have removed companies that have disappeared from the SBF120 index (for example, Dexia and Areva were removed from the index in 2012).

<sup>2</sup> Directors are also officers of other companies. Who's is a database that provides information on directors.

are available. After applying these selection criteria, the final sample was reduced to 82 companies.

#### **3.2 Measures**

*Dependent variables:* these are the three following variables.


*Explanatory variables:* to test our models, we retain the following explanatory variables that constitute governance variables.


*Control variables:* our models include control variables that may influence executive entrenchment. As a result, we included variables controlling for the effects of industrý (ICB) [52], firm size (CA), firm performance (ROA). Listing seniority (ANCOT) is likely to influence managerial entrenchment [8, 53]. We also used ownership concentration (CONCAC), which is measured by the percentage of voting rights of the largest shareholder.

#### **3.3 Descriptive statistics**

Descriptive statistics for the period 2011–2018 are presented in **Table 1**. It can be seen that, on average, 21% of the French managers in our sample are over the legal retirement age (60 years). We observe that 27% of firms have an executive with more than 8 years of service. About 53% of firms have an executive who combines the two functions of executive and chairman of the board. A separation is implemented by 46% of listed companies3 . This observation can be explained by the opening of the

<sup>3</sup> In 2017, 32.7% of SBF120 companies opted for a board with separation of functions. https://hcge.fr/wpcontent/uploads/2018/10/Rapport\_HCGE\_octobre2018.pdf.


*Monitoring of the Entrenchment of Managers through Board Characteristics… DOI: http://dx.doi.org/10.5772/intechopen.103071*

#### **Table 1.**

*Descriptive statistics of the dichotomous explanatory variables.*

market to foreign investors, who are in favor of the separation of functions. About 93.75% of the companies in our sample belong to the industrial sector and 6.25% to the technological sector. We find that 85% of the companies have a concentrated shareholding structure4 .

**Table 2** also shows that on average 19%<sup>5</sup> of women hold a position on the board of directors, an average that has risen slightly according to the study by Hollandts et al. [54]. This tiny increase can be explained by the quota requirement introduced


#### **Table 2.**

*Descriptive statistics for continuous explanatory variables.*

<sup>4</sup> Shareholder concentration: measured by the percentage of voting rights of the main shareholder. If this percentage reaches 50% the variable equals 1, 0 otherwise.

<sup>5</sup> A figure that does not reach the quota set by Copé-Zimmerman, i.e., 40%.


## **Table 3.**

*Pearson correlation matrix.*

#### *Banking and Accounting Issues*

*Monitoring of the Entrenchment of Managers through Board Characteristics… DOI: http://dx.doi.org/10.5772/intechopen.103071*

by Copé Zimmerman in 20116 . On average, 52% of directors are independent, which refers to the recommendation made by the AFEP-MDEF code. Directors with a background in higher education occupy an average of 36.06% of board positions, followed closely by legal experts with an average of 35.9%, then managers with an average of 34.6%<sup>7</sup> and finally, engineers who occupy 23% of board positions.

Before starting the logistic regression in panel data, it is necessary to check for the possible presence of multicollinearity between the variables retained in our model. Multicollinearity can distort the accuracy of the estimation of the regression coefficients by making it sensitive to small fluctuations in the data. Therefore, we use the Pearson correlation matrix presented in **Table 3**. The study of the Pearson correlation matrix reveals the non-existence of multicollinearity problems between the selected variables.

#### **3.4 Models**

In line with the work cited in the second section, we use the following models to test our hypotheses and analyze the effect of the composition of the board of directors on executive entrenchment:

$$\begin{aligned} \text{AGEDIR}\_{\text{it}} &= \beta\_0 + \beta\_1 \text{FEM}\_{\text{it}} + \beta\_2 \text{INDEP}\_{\text{it}} + \beta\_3 \text{GEST}\_{\text{it}} + \beta\_4 \text{JURI}\_{\text{it}} + \beta\_5 \text{INS}\_{\text{it}} + \beta\_6 \text{GE}\_{\text{it}} \\ &+ \alpha\_1 \text{ANCOT}\_{\text{it}} + \alpha\_2 \text{ICCB}\_{\text{it}} + \alpha\_3 \text{CA}\_{\text{it}} + \alpha\_4 \text{ROCACAC}\_{\text{it}} + \varepsilon\_{\text{lt}} \end{aligned} \tag{1}$$

The first equation of our study links the age of the executive (AGEDIR) and the characteristics of boards of directors, namely gender diversity (FEM), the percentage of independent directors (INDEP), the education of directors: (GEST) for managers, (JURI) for legal experts, (ING) for engineers, as well as the attendance of top schools (GE)8 .

Indeed, several empirical studies emphasize that the age of the CEO and the proximity of retirement are factors that favor his or her entrenchment [56, 57]. The age of the CEO reflects his or her experience in leading the company and his or her ability to become entrenched. CEOs close to retirement have a strong legitimacy that allows them to take root [58–60]. In the same vein, Krause [61], Hollandts et al. [54] as well as Raheja [62] show that the entrenchment strategies of CEOs are related to their retention until retirement. In our study, the legal retirement age is set at 60 years [54, 61].

$$\begin{aligned} \text{ANCDIR}\_{\text{it}} &= \beta\_0 + \beta\_1 \text{FEM}\_{\text{it}} + \beta\_2 \text{INDEP}\_{\text{it}} + \beta\_3 \text{GEST}\_{\text{it}} + \beta\_4 \text{JURI}\_{\text{it}} + \beta\_5 \text{INS}\_{\text{it}} + \beta\_6 \text{GE}\_{\text{it}} \\ &+ \alpha\_1 \text{ANCOT}\_{\text{it}} + \alpha\_2 \text{ICCB}\_{\text{it}} + \alpha\_3 \text{CA}\_{\text{it}} + \alpha\_4 \text{ROC}A\_{\text{it}} + \alpha\_5 \text{CONCAC}\_{\text{it}} + \varepsilon\_{\text{it}} \end{aligned} \tag{2}$$

The second equation of our study links the seniority of the executive (ANCDIR) and the characteristics of the boards of directors, namely gender diversity (FEM), the percentage of independent directors (INDEP), the education of directors: (GEST) for managers, (JURI) for legal experts, (ING) for engineers, as well as the attendance of top schools (GE). Previous studies argue that the CEO's rootedness is related to his seniority in the company [63, 64]. The seniority of the CEO allows him to strengthen his bargaining power against shareholders and therefore to become entrenched [60].

<sup>6</sup> The percentage of women on boards according to the study by Hollandts et al. [54] is 13% with a study period from 2002 to 2014. Our period is from 2011 to 2018.

<sup>7</sup> Managers outside ENA/Polytechnique.

<sup>8</sup> In our study, we define the Grandes Écoles by the institutions: ENA and Polytechnique, institutions that reflect the ties of friendship between the CEOs and an elite [55].

$$\begin{array}{l} \text{CUMMDIR}\_{\textit{u}} = \beta\_{\textit{o}} + \beta\_{\textit{i}} \text{FEM}\_{\textit{u}} + \beta\_{\textit{z}} \text{INDEP}\_{\textit{u}} + \beta\_{\textit{\zeta}} \text{GEST}\_{\textit{u}} + \beta\_{\textit{u}} \text{UDR}\_{\textit{u}} + \beta\_{\textit{\zeta}} \text{NIG}\_{\textit{u}} + \beta\_{\textit{\zeta}} \text{GE}\_{\textit{u}} \\ \quad + \alpha\_{\textit{i}} \text{ANCOT}\_{\textit{u}} + \alpha\_{\textit{\zeta}} \text{ICK}\_{\textit{u}} + \alpha\_{\textit{\zeta}} \text{CA}\_{\textit{u}} + \alpha\_{\textit{\zeta}} \text{ROCAC}\_{\textit{u}} + \varepsilon\_{\textit{u}} \end{array} \tag{3}$$

The third model of our study links the duality of the CEO (CUMDIR) and the characteristics of boards of directors, namely gender diversity (FEM), the percentage of independent directors (INDEP), the education of directors: (GEST) for managers, (JURI) for legal experts, (ING) for engineers, as well as the attendance of top schools (GE). Proponents of agency theory emphasize the importance of separating the roles of CEO and chairman of the board [65]. Indeed, this duality encourages the entrenchment of the CEO [66–68].

We performed the Hausman test, which is the standard test for specifying individual effects in a panel. It is used to discriminate between fixed and random effects, otherwise to control for individual and time-specific effects. We find that in almost all equations, the p-value of the Hausman test is below the 5% threshold. Thus, the fixed effects models are the most appropriate. The fixed-effects model assumes that the influence of the independent variables on the dependent variable is identical over any period for all individuals.

#### **4. Results and discussion**

The results of the different estimates are presented in **Table 4**. The association between gender diversity and the rootedness of managers is represented by a double effect, which may be related to the observation period, which includes the



*Monitoring of the Entrenchment of Managers through Board Characteristics… DOI: http://dx.doi.org/10.5772/intechopen.103071*

#### **Table 4.**

*Regression results.*

introduction and application of the Copé-Zimmerman Act. The first Model 1 presented below shows the positive and significant effect of the gender diversity variable on the age variable (AGEDIR), at the 1% threshold, which partially refutes hypothesis 1. Model 3 reveals a negative and significant effect of the gender diversity variable on multiple job titles (CUMDIR), at the 5% threshold, which partially confirms hypothesis 1. This overall effect may be linked to the increase in the number of women on boards following the Copé-Zimmerman Act (2011, 2014). The presence of women thus reinforces the retention of the executive until the legal retirement age. However, this presence also allows dissociation of the manager's functions.

The first result could be explained by the pressure on women directors to conform to the choices of an entrenched CEO and therefore with some discretionary power. Our results are in line with the findings of Eagly and Carli [69] who point out that women face discriminatory barriers mainly in male-dominated environments. These include her exclusion from the executive's networks and moreover from the board of directors [70]. Our finding also corroborates the conclusions of Pigé [60] who considers that an executive with a high level of seniority, especially those beyond retirement age, benefits from an external legitimacy that gives him significant weight in front of the different members of the board.

This limits women's access to information and board decisions and negatively biases judgments about their performance as directors. However, this discriminatory disadvantage may give the appearance of a female competence advantage [71], and these barriers encourage women to be more competent and overcome prejudice. According to Eagly et al. [72], Yoder [73] and Fortier [74], this effect plays an important role in women's access and development within high responsibility positions. This may explain the result of Model 3 concerning the accumulation of the manager's functions. Indeed, our tests show the influence of women in the entrenchment of the CEO especially in the separation between the functions of chairman and CEO. This result is consistent with the agency theory. The presence of women thus constitutes a disciplinary lever in the control of entrenched CEOs [15].

Regarding the independence of the board of directors, our results show a negative and significant relationship between the presence of independent directors and the age of the managers, which confirms hypothesis 4. This result is consistent with agency theory, which assumes that the board of directors must be sufficiently independent to best supervise the manager [14]. Our results corroborate those of Hermalin and Weisbach [47] who point out that the effectiveness of control increases with the level of independence of the board. On the one hand, companies apply to the letter the new recommendations concerning the independence and control of the board. The academic literature has often criticized the proximity between managers and directors. By avoiding appointing directors who are close to management, companies gain a certain legitimacy with investors. Our results thus contradict these previous studies [42]. On the other hand, independent directors become opportunistic by seeking to enhance and improve their reputation [50]. They put aside their feelings towards the executive and carry out their monitoring mission objectively, thus avoiding a bad image of their status in the director market. This can explain our results and confirms the agency theory [14].

Concerning the social network of directors, a negative and significant influence of a curriculum at ENA/Polytechnique on the rooting of executives is highlighted (H3 validated). Contrary to the studies of Nguyen [42] and Kramarz and Thesmar [41], the network of Grandes Écoles does not favor the rooting of executives. A possible explanation for this result is possible concealment of the proximity between managers

#### *Monitoring of the Entrenchment of Managers through Board Characteristics… DOI: http://dx.doi.org/10.5772/intechopen.103071*

and directors. Indeed, to avoid any suspicion of elitism between the CEO, the director, the latter may control the decision-making and management functions of the BOD to take over the function itself. In the literature, the CEO can be replaced by a successor but cannot be ousted [75]. Indeed, **Table 4** shows that the variable (GE) negatively and significantly influences Model 3 (Cumulative tenure), but does not influence the age of the CEO (Model 1). This effect can be explained by the possibility of a succession of the same polytechnician or enarque. Elite directors do not oppose executives who are close to retirement and intervene when they hold multiple directorships to obtain a potential succession.

Our results also show that directors with an engineering background have a significant and negative impact on the age of managers. This result is consistent with the results of Johnson et al. [76] who suggest that directors with technical qualities and higher-level are likely to control the strategic decisions of a board. Their level and cognitive experience give them certain personal importance within the board [77, 78]. This gives them the power to reduce the CEO's entrenchment strategies, particularly by preventing him or her from maintaining the position until retirement. For our control variables, our results show a positive and significant relationship between firm size and managerial tenure and multiple job titles. A possible interpretation of this result is that the manager's anchoring is associated with turnover. Specifically, the executive has an interest in making profits to legitimize his position and maintain his tenure. This finding is consistent with the entrenchment theory. Indeed, by improving the performance of the company, the CEO acquires a capital of reputation that allows him to be irreplaceable and to acquire an important latitude within the company [79].

#### **5. Conclusion**

The purpose of this article is to examine the impact of women directors, director training, and board independence on the entrenchment of managers. First, the presence of women is significantly and negatively related to the age of the director. Women seem to favor the retention of the executive until retirement. But secondly, their presence reduces the number of functions they hold. Thus, women are more assiduous in applying the law concerning the dissociation of functions, but when it comes to their seniority through their legal retirement age, they do not have an impact, probably because of the age limit set by the law for managers, which remains flexible.

Our results also demonstrate the positive and significant impact of independent members as well as directors coming from top schools such as ENA and Polytechnique on executive entrenchment. From a theoretical point of view, our results corroborate those of previous research arguing that a diversified board contributes to the control of executive strategies. From a managerial point of view, our results should encourage companies to take more into account the recommendations of the AFEP-MEDEF regarding the diversity of the organization of management and control powers and the diversity of boards to guarantee certain objectivity in decision-making.

Our findings also highlight that the diversity of boards is an important governance mechanism that can limit the manipulation of managers. Moreover, this study is in line with the recommendations of the High Council for Equality between Women and Men on the need to have more diversity on boards of directors.

In particular, it might be interesting to include other characteristics, such as the education of women directors and the presence of foreign directors, in future studies to explain executive entrenchment.

*Banking and Accounting Issues*

#### **Author details**

Nadia Ben Farhat-Toumi1 , Nouha Ben Arfa<sup>2</sup> \* and Rim Khemiri3

1 Université Evry Val Essonne, France

2 ESTA School of Business and Technology, France

3 Université Polytechnique Hauts-de-France, France

\*Address all correspondence to: nbenarfa@esta-groupe.fr

© 2022 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

*Monitoring of the Entrenchment of Managers through Board Characteristics… DOI: http://dx.doi.org/10.5772/intechopen.103071*

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