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Corporate Governance And Efficiency Of Italian Water Utilities

Congress: 2015
Author(s): Giulia Romano, Nicola Salvati, Andrea Guerrini
University of Pisa1, University of Verona2

Keyword(s): Sub-theme 16: Public and private sector management,
AbstractIntroduction Over the last 25 years the governance of public services is a major challenge in many economies. The Italian water industry has undergone important reforms designed to end the direct supply of water services through public administrations by outsourcing these services to independent firms. However, the industry still presents a very complex landscape with the 75% of water operators that are municipalities or other public bodies that provide one or more water services directly. Moreover, public, mixed and private utilities now coexist, operating on different scales and with different strategic and organizational status (mono vs multi utilities, stand-alone firm and corporate group etc). The close connection between utilities and local government causes the dominance of politically connected directors on the boards of utilities, evergreen fueling a debate about which is the best ownership structure and the best size and composition of the board to meet satisfactory performances. Despite the relevance of this issue, highly debated among decision makers, scholars and citizens, the water industry literature to date has focused mainly on the ownership/performance linkage and lacks empirical studies investigating the relationship between efficiency of water utilities and board characteristics. This paper seeks to add to the existing literature on water utility management by investigating whether corporate governance of water utilities (i.e. their ownership, board size and board composition), by affecting firms' decisions, ultimately impact their efficiency. Method The present study uses 255 observation about 85 Italian water utilities and over 1,100 board members; so, it includes multi-year and recent data (2010-2012) and applies a two stage method, made by data envelopment analysis (DEA) to determine the relative efficiency of utilities and M-quantile regression to rank their efficiency estimation considering relevant corporate governance and strategic features (board size, political connection, age, graduation and sex of board members, firm size, membership in a corporate group and provision of the gross sale water service). Results and discussion Not fully publicly-owned firms are more efficient than fully publicly-owned firm, supporting the consideration that one cannot ignore the political dimension of public enterprises, thus publicly-owned firms prefer social and political objectives over profit and efficiency maximization. The board size is relevant in influencing the utilities efficiency: the highest efficiency is obtained by firms with a "medium" board size (4, 5 or 6 members), followed by firms with more than 6 board members; firms with boards made by few members (1, 2 or 3) have the lowest efficiency. So, larger boards are positively associated with better performance and are more effective, because the directors appointed might be able to draw on a broader range of knowledge and experience. When the presence of politically connected directors is limited (maximum one third of board members politically connected) or substantial (more than two third of board members politically connected) efficiency is higher. The worst situation is found to be when there is an equilibrium between the number of politically connected and not politically connected directors, probably because of the higher difficulties in communicating, discussing and define clear strategies. With reference to the percentage of graduate directors, the worst situation is where the entirety or the great majority of board members are not graduated. Boards, as strategic-issue-processing groups, must have members who possess knowledge and skills that cover business, accounting, finance, marketing, and law. Board members must also have firm specific knowledge and skills that allow an intimate understanding of firm operations. However, the efficiency is the highest in firms whose boards have more than one third but less than two third of graduated directors. This result could be explained with the idea that having a degree is not in itself sufficient to make a significant contribution to firm decision-making and thus firm performance. Moreover, efficiency is higher if the female presence is lower than one third of board members. In our dataset, female are always no more than two in each board so, this result could be explained considering that the female board members in our dataset do not reach the critical mass of three or more women per board; so, these women may not feel comfortable on homogeneously male-dominated boards and their contributions may not therefore be as exploited as they could be, given broader representation. Considering the average age of directors on the board, a proxies for business experience, the worst situation for efficiency is the one where board members are more than 59 years old (i.e. they are in the oldest tertile). On the contrary, the highest efficiency is found in firms whose boards have on average more than 49 but less than 58 years. So, it seems that the directors' business experience contributes to improve efficiency even if, reaching a threshold, an higher average age became a limit and the positive effect of experience is overcome by the negative effect of having an higher age, such as closeness to new ideas reflecting more active board involvement and more passivity in controlling management decision making. Efficiency is higher in smaller water utilities (both considering the production value and staff count). The worst situation is the "median tertile". So, water utilities are better able to reach efficiency if they remain small local firms or if they become big players; differently, they lower their efficiency if they stuck at a crossroads. Finally, being part of a broader corporate group and provide also the gross sale service have a positive impact on efficiency, since the utilities with these characteristics achieve on average higher efficiency than the others. Abbott, M., Cohen, B., 2009. 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