This chapter discusses the study’s methodology that includes; the research model construction, research design and philosophy, approach, and methods that were employed for conducting this study. In addition, it provides an explanation of the data collection methods and data analysis, issues regarding accessibility and limitations of the research.

Research Model Construction

 Research has been conducted that compare different systems of corporate governance. Most of these studies such as those by Zhang (2003), Gregory & Andreas (2005), and Zeng (2006) placed their focus on comparisons at the country level. Other studies such as that by Cheema, Johansson & Mir (2009) were based on comparisons at the company and country level, and this study selected the approach used by Cheema et al. as it provides both the legal and practical senses to interested investors (Cheema, Johansson, & Mir, 2009). The comparison provided below provided the basis for evaluation of the best modern corporate governance methods for Baltic nations to attract investors.

The dimension of construction of corporate governance is a theme regarding how to set the key variables in this comparative study on corporate governance between different methods of corporate governance used in the past and today within the Baltic nations. Hence, it is a vital part of this study that rating schemes of corporate governance methods for different institutions and countries were referenced as professional analytical tools to provide professional opinions and suggestions including meeting the objective of this study.

On the basis that both the macro level (country level) and micro level (company level) required analysis in this study, most of the rating institutions and methods currently used fail to meet the country requirements for corporate governance evaluation. This is because they only provide company rankings based only on the company level apart from the Standard and Poor (S&P) that provides an analytical method for both levels. Therefore, the S&P was used in as a reference to a modern method of corporate governance and the S&P GAMMA rating model described earlier was used.

S&P is the most popular financial research and analysis provider globally. It develops a methodology to benchmark corporate governance that focuses on emerging financial markets such as those in the Baltic nations and especially after the global financial crises that occurred globally. These developed methodologies by the S&P evolved and became the present day analytical service of corporate governance referred to as Governance, Management, Accountability Metrics and Analysis (GAMMA) (Davies, 2014). This is applicable in different countries globally where there are different approaches to corporate governance approaches such as the Baltic nations and in this case Latvia.

The GAMMA scoring service provides a reflection of the corporate governance services effectiveness of different companies as a means of protecting investors from potential governance related failure to creation of value. It provides an analysis of corporate governance from a financial perspective both at the individual/company level and the country/regional level. Analyses that are done at the macro level provide a reflection of the best countries/regions that have good governance practices (Davies, 2014). At the micro level, analyses aim at assessing the effectiveness of governance practices at the level of individual companies as a system of interaction among the management, board, and shareholders including other stakeholders of a company (Davies, 2014). This is aimed at building the value of the company and ensuring the fair distribution of the company’s earnings.

Analyses done at the macro level provides a reflection of the degree of adherence by the company to corporate governance standards imposed externally. At the macroscopic level, the key dimensions addressed of the country/region level include the legal, regulatory, informational, and market infrastructure (Standard and Poor‘s, 2010). At the microscopic level analysis focussed on the structure of ownership, rights of shareholders, transparency, audit and enterprise risk management, the effectiveness of the board, strategic process, and practices for compensation (Standard and Poor‘s, 2010). This paper attempts to provide a comparison through an evaluative process of the different systems of corporate governance in Baltic nations using a case of Latvia through the application S&P’s GAMMA analytical method based on the firm level.

Reference is made to the GAMMA model to build the dimension construction at the country level. A legal environment that is effective is an important indicator of good corporate governance (Mallin, 2004). A country that provides good shareholder protection has the ability to prevent the rights from being abused or infringed. The frameworks for law and regulation have an interdependent relationship on the effectiveness of their functioning (Clarke, 2007). Laws that are well defined can provide the guidelines for effective regulation, on the other hand, for these laws to be effective they require effective regulatory enforcement to meet their purpose. They together play a pertinent role in the effectiveness of corporate governance (Cheema, Johansson, & Mir, 2009). Company law and/or ordinances and the codes of conduct were the major documents for examination of the corporate legal infrastructure of the country in the study. This is because they are the most vital legal documents covering the company’s fundamental issues from the construction of the company, responsibilities of the board, to rights of the shareholders among others.  The degree of regional regulatory infrastructure is determined by analysing the degree of adherence of the firm in terms of the legal requirements.

The degree of capital market being a functional mechanism for corporate control exhibits significant influence towards the corporate governance environment of a country. Disclosing public information effectively ensures that the stakeholders have the ability to monitor the performance of a firm. However, for the exploration of the extent of national market and information infrastructures need comprehensive real-time surveys that were not feasible for this study due to constraints of time and resources. In addition, legal and regulatory infrastructure can be perceived as the non-financial aspects with more emphasis on financial and accounting matters. For this study, the focus was on the non-financial elements of corporate governance that are more applicable for a mixed method research. In this regard, analysis based on market and information infrastructures were left out of the study.

The focus of this study as mentioned earlier was mainly on the company level, and the GAMMA model was also referenced. The models of ranking from alternative rating institutions were also referenced as they provide the ranking of corporate governance at this level. These ratings were reconciled to parts that fit the study. The structure of ownership, board composition and effectiveness and protection of shareholders were chosen to be the central dimensions of analysing at the company level. The ownership structure dimension was modified to provide an assessment of the highly ownership concentrated firms.

Finally, the OECD played a vital role in the study as they were the front runners in issuing the best practices of corporate governance. Their 2004 publication OECD Principles of Corporate Governance is widely known as the benchmark for effective corporate governance internationally. It provides guidelines for legislative and regulatory initiatives in OECD and non-OECD nations. The principles are benchmarks against which regional legislations draw their judgment.