Commitment or entrenchment?: Controlling shareholders and board composition

Abstract

This paper examines the determinants of board composition and firm valuation as a function of board composition in Taiwan -a country that features relatively weak protection for investors, firms with controlling shareholders, and pyramidal groups. The results suggest that there is poor governance when the board is dominated by members who are affiliated with the controlling family but good governance when the board is dominated by members who are not affiliated with the controlling family. In particular board affiliation is higher when negative entrenchment effects -measured by (1) divergence in control and cash flow rights, (2) family control, and (3) same CEO and Chairman -are strong and lower when positive incentive effects, measured by cash flow rights, are strong. Moreover, relative firm value is negatively related to board affiliation in family-controlled firms. Thus, the proportion of directors represented by a controlling family appears to be a reasonable proxy for the quality of corporate governance at the firm level when investor protection is relatively weak and it is difficult to determine the degree of separation between ownership and control.

Corporate boards and the performance of Asian firms: A meta-analysis

“…Greene, 2008, Chapter 3 effect of ownership identity and board attributes on a firm's revealed strategy choices, and (4) the consequences of these choices for firm financial performance (see Figure 1). Firm size was included to capture size-related board attribute contingency effects (Linck, Netter, & Yang, 2008;Yeh & Woidtke, 2005). All variables are described in Table 2.…”

Remuneration Committee, Board Independence and Top Executive Compensation

“…Further, the independence of non-executives could be weakened if they are appointed by a CEO or previous members of the firm management team [14,20]. 4 Moreover, [21] argued that insiders may provide a beneficial monitoring function since they may better understand the social and political aspects of a firm that are useful for compensation advisors in regard to structuring incentives. Congruent with their argument, [21] found that an increase in board independence has little impact on pay levels.…”

“…This led to the recent regulatory and policy reforms. 4 However, this position does not necessarily imply an association between affiliated or interdependent RC members and CEO compensation [11,15]. One possible reason for this is that affiliated or interdependent directors serving on a powerful committee are mindful of their duty to shareholders, regardless of their level of dependence [11].…”

“…As is evident by the separation of cash flow rights from control rights, the controlling shareholders in Taiwanese firms tend to expropriate private interests by appointing family or affiliated board members on the board (e.g. [4]). …”

R&D and Insider Shareholing

“…Companies in the high-IS range sorted between 65% and 82% of companies over the sample period, and 71% of the companies belonged to the high-IS range. Yeh and Woidtke (2005) found that ultimate controllers in Taiwan had authority to choose both supervisors and directors, and could reinforce their power by choosing trusted people or family members. Boards of directors and supervisors in Taiwan are controlled by ultimate controllers associated to family conglomerates holding a huge part of equity, and usually have an motivation to join outside stockholder interests by contributing to the company's value (Villalonga and Amit, 2006;Maury, 2006).…”