Dominant shareholders, corporate boards, and corporate value: A cross-country analysis

Abstract

We investigate the relation between corporate value and the fraction of independent directors in 799 firms with a dominant shareholder across 22 countries. We find a positive relation, especially in countries with weak legal protection for shareholders. The findings suggest that a dominant shareholder, were he so inclined, could offset, at least in part, the documented value discount associated with weak country-level shareholder protection by appointing an 'independent' board. The cost to the dominant shareholder of doing so is the loss in perquisites associated with being a dominant shareholder. Thus, not all dominant shareholders will choose independent boards. Dominant Shareholders, Corporate Boards and Corporate Value: A CrossCountry Analysis This paper is an empirical investigation of the relationship between corporate value and board composition in firms with a dominant shareholder. The question addressed is whether a 'strong' board can offset the market value discount in firms domiciled in countries with weak legal protection for shareholders. Such a discount has been documented by Claessens, Djankov, Fan and Lang (CDFL) (2002), Durnev and Kim (DK) (2005), and La Porta, Lopez-de-Salanes, Shleifer, and Vishny (LLSV) (2002). This discount is often attributed to the ability of a dominant shareholder to divert corporate resources from other shareholders to himself for personal consumption, especially in countries with weak legal shareholder protection. In essence, the question that we address is whether a dominant shareholder could, were he so inclined, increase firm value by appointing a 'strong' board with a mandate of assuring minority investors that he will refrain from diversion of the firm's resources and whether the effect of board composition on firm value, if there is any, is different between countries with weak and those with strong legal shareholder protection. The studies most closely related to ours are Durnev and Kim (DK) (2005) and Klapper and Love (KL) (2004). Among other things, these studies empirically investigate the relationship between firm value and the 'quality' of a firm's corporate governance where the proxies for the quality of governance are two firm-specific indices: the Credit Lyonnais Securities Asia (CLSA) corporate governance scores and the Standard & Poor's (S&P) transparency rankings. As do the other studies cited above,

Politically connected firms in Spain

“…Thus, the results indicate that the dominant owner's level of voting rights and some qualitative aspects linked to family control influence board composition and, in particular, the presence of political directors. Thus, our results are consistent with previous studies that show dominant owners having an active role in the design of the governance system and, in particular, board composition (e.g., Yeh and Woidtke, 2005;Durnev and Kim, 2005;Kim et al, 2007;Dahya et al, 2008).…”

“…In this context, the dominant owners have the ability and the incentives to influence the design of the corporate governance system, particularly regarding the composition of the board and the different roles of board members (e.g., Yeh and Woidtke, 2005;Durnev and Kim, 2005;Kim et al, 2007;Dahya et al, 2008). Thus, board structure is shaped by the costs and benefits derived from company control and the directors' ability to advise internal agents (Li et al, 2008).…”

“…In this context, dominant owners have the ability and incentive to play an active role in designing the corporate governance system (e.g., Shleifer and Vishny, 1997;La Porta et al, 1999Cuervo, 2002;Burkart et al, 2003;Villalonga and Amit, 2006). This is particularly true of boards of directors because dominant owners have the power to influence board composition, defining the different roles that encompass this internal governance device (e.g., Yeh and Woidtke, 2005;Durnev and Kim, 2005;Kim et al, 2007;Dahya et al, 2008).…”

Are East Asian Companies Benefiting from Western Board Practices?

“…This indicates that family-owned companies are intentionally not improving their board governance to the level of non-family-owned companies in order to retain private benefits of control. This is consistent with Dahya et al (2005) who find that only dominant shareholders not worried about their loss of perquisites will maintain stronger boards. It also indicates that corporate governance code recommendations have not been effective in improving board governance in family-owned companies.…”

Impact of corporate governance score on abnormal returns and financial performance of mergers and acquisitions

“…Garay and González (2008) also document a positive relationship between governance practices and firm valuation. Dahya et al (2008) complemented Durnev and Kim (2005) and Klapper and Love (2004) by focusing on the board composition as a central building block of a firm's corporate governance structure. They investigate the relation between corporate value and the proportion of the board made up of independent directors in 799 firms with a dominant shareholder across 22 countries.…”