تعهد و یا جبهه گیری:؟ کنترل سهامداران و ترکیب هیئت مدیره

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.

Is corporate board structure indicative of corporate governance in firms with concentrated ownership? Does shareholder concentration allow controlling shareholders to select board members that are more likely to monitor or provide expertise? Or does shareholder concentration allow controlling shareholders to select board members that enable them to expropriate wealth from minority shareholders? Does the independence of the board appear to matter in firms with concentrated ownership? These are important questions that have not been fully addressed in the literature. Existing studies on corporate boards of directors are generally restricted to large US firms with disperse ownership, and they generally treat board composition as exogenous (see Hermalin and Weisbach, 2003, for a survey). It remains an open question whether results in existing studies can be generalized to firms with controlling shareholders. Hermalin and Weisbach (1988) argue that understanding how directors are chosen is crucial to understanding the roles the board can play and how effectively it can play them. Existing studies suggest CEOs wield major influence in selecting new board members when ownership is disperse (Mace, 1971, Lorsch and MacIver, 1989 and Shivdasani and Yermack, 1999).1 Moreover, Shivdasani and Yermack find that when CEOs are involved in selecting directors, they choose directors who are less likely to monitor. However, several recent studies suggest that ownership tends to be more concentrated and agency problems tend to be more severe in countries with weaker investor protection (e.g., La Porta et al., 1999 and La Porta et al., 2000). On the one hand, concentrated ownership arises when investor protection is weaker to help solve the managerial agency problem because controlling shareholders have the power and incentive to discipline management (e.g., Grossman and Hart, 1988). On the other hand, concentrated ownership creates the conditions for a new agency problem because the interests of controlling and minority shareholders are not perfectly aligned, especially when there is a divergence between control and ownership (e.g., Bebchuk et al., 2000 and Claessens et al., 2002). In such instances, corporate boards could play an important role in limiting the power of controlling shareholders to expropriate the interests of minority shareholders by ratifying and monitoring important decisions (Fama and Jensen, 1983). However, board composition is likely to be influenced by controlling shareholders in such instances. Therefore, a firm’s board structure could serve as an important indicator of whether the controlling shareholder is committed to good corporate governance or is entrenched. This paper contributes to both the literature on corporate boards and the literature on ownership structure. As mentioned previously, existing studies on corporate boards generally focus on US firms with disperse ownership. On the other hand, cross-country studies on firms, which are predominantly characterized by concentrated ownership structures, have not yet examined the role of corporate boards. For example, Claessens et al. (2002) find that relative firm value increases with concentrated ownership of the largest shareholder but decreases as the wedge between control and ownership increases in family-controlled firms. They suggest that family-controlled firms can more efficiently divert resources to themselves than widely held corporations and financial institutions. One would expect the role of the board to be especially important in such situations – situations where complex pyramiding and cross-holding schemes make it more difficult for minority shareholders to monitor and easier for controlling families to divert resources to themselves. Because of the difficulty in obtaining the necessary data, we focus our analysis on one country, Taiwan. Taiwan represents an ideal setting to examine these issues because it features relatively weak protection of minority shareholders, high ownership concentration, a predominance of family control, and an abundance of pyramidal groups and cross-holdings – characteristics common to many countries (La Porta et al., 1999, Claessens et al., 2000 and Faccio and Lang, 2002).2 In this environment, it may be difficult for minority investors to determine whether positive incentive or negative entrenchment effects dominate. The use of pyramidal groups and cross-holdings makes it easy for large shareholders to separate ownership and control and difficult for minority investors to detect both the degree of separation and the diversion of resources. Thus, a firm’s board structure may be viewed as a strong indicator of the controlling shareholder’s commitment to corporate governance, especially in weaker investor protection countries. Controlling shareholders may select board members that are more likely to both monitor and provide professional expertise when the positive incentive effects of ownership are high. In this situation, controlling shareholders would gain more from increasing shareholder wealth than they would lose in foregoing expropriation. In contrast, controlling shareholders may select board members that are less likely to monitor and more likely to support their decisions in order to entrench themselves further when the entrenchment effects of excess control outweigh the positive incentive effects of cash flow ownership. In this situation, the net personal benefit of expropriation is greater than the net personal benefit of shareholder wealth maximization. We examine both the determinants of board composition and firm valuation as a function of board composition in Taiwan. We carefully identify the ownership and control structures for a sample of Taiwanese firms to measure the positive incentive and negative entrenchment effects of the controlling shareholder. Specifically, we use cash flow rights to measure positive incentive effects and the divergence between cash flow and control rights to measure negative entrenchment effects. We find that the fraction of board members affiliated to a firm’s largest shareholder is higher when that shareholder: (1) has a greater divergence in control and cash flow rights, (2) is a member of the controlling family, and (3) is the firm’s CEO and chairman. We also find that family-controlled firms have lower firm value when the fraction of board members affiliated to the controlling family is higher. These results suggest that controlling shareholders do wield influence over board member selection and that corporate boards are good indicators of a firm’s governance structure when ownership is concentrated, protection of minority investors is relatively weak, and determining the degree of separation between ownership and control is difficult (i.e., the controlling shareholder is a family). In particular, boards that are closely linked to controlling families are associated with strong, negative entrenchment effects, and firms with these board structures are valued less by investors. In contrast, boards that are independent of controlling families are associated with strong, positive incentive effects, and firms with these board structures are valued more highly by investors. Thus, the negative entrenchment effect from a divergence between ownership and control in Claessens et al. (2002) appears to be reinforced when boards are closely linked to controlling families, but this effect appears to be mitigated when boards are independent of controlling shareholders. The remainder of the paper is organized as follows. Section 2 describes the corporate governance environment in Taiwan. Section 3 describes the sample and provides summary statistics. Section 4 presents the empirical analysis. Section 5 concludes.

We examine whether a firm’s corporate board is indicative of its corporate structure in an environment where ownership is concentrated, investor protection is relatively weak, and determining the degree of separation of ownership and control is difficult. Existing studies indicate that ownership structures tend to be concentrated in most countries outside the US. Yet studies on corporate boards of directors are generally restricted to large US firms, where investor protection is strong and ownership is disperse, and treat board composition as being exogenous. Our results suggest that controlling shareholders influence the board selection process, and a firm’s board structure is indicative of the quality of its corporate governance when ownership is concentrated, investor protection is relatively weak, and determining the degree of separation between ownership and control or monitoring diversion of resources is difficult. In particular, boards that are closely linked to controlling families are associated with strong, negative entrenchment effects or larger agency problems, and firms with these board structures are valued less by investors. In contrast, boards that are independent of controlling families are associated with strong, positive incentive effects or smaller agency problems, and firms with these board structures are valued more highly by investors. These findings have important implications for potential investors. Existing studies of firms with concentrated ownership structures, such as Claessens et al. (2002), primarily use the divergence between control and ownership as a measure of the agency conflict between majority and minority shareholders. However, the divergence measure can be difficult for investors to calculate accurately, especially when families use pyramids and cross-holdings to leverage control or divert resources. It is also possible that effective board oversight could mitigate agency conflicts in these situations. The results in this paper, however, suggest that controlling shareholders entrench themselves further by selecting both board members that are more likely to make decisions favoring controlling shareholders and those that are less likely to monitor when divergence is higher. Moreover, the resulting increase in board affiliation is associated with negative valuation in family-controlled firms. In sum, our results are consistent with larger agency conflicts and weaker corporate governance existing when the majority of directors and all of the supervisors belong to the controlling family. In contrast, a minority of affiliated directors and at least one unaffiliated supervisor appear to indicate smaller agency conflicts and stronger corporate governance. Thus, board affiliation seems to be a reasonable proxy for the degree of agency conflicts in family-controlled firms.