Commitment or entrenchment?: Controlling shareholders and board composition |
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| Affiliation: | 1. Graduate Institute of Business Administration, College of Management, National Taiwan University, 1, Sec. 4, Roosevelt Road, Taipei, Taiwan, ROC;2. Institute of Technology Management, National Tsing Hua University, 101, Sec. 2, Kuang Fu Road, Hsin Chu 300, Taiwan, ROC;3. Dayeh University, No.168, University Rd., Dacun, Changhua 51591, Taiwan, ROC;4. Department of Business and Management, College of Science and Engineering, National University of Tainan, 33, Sec. 2, Shu-Lin St, Tainan 700, Taiwan, ROC;1. Business Studies, KU Leuven, Korte Nieuwstraat 33, 2000 Antwerpen, Belgium;2. Faculty of Economics and Business, KU Leuven, Naamsestraat 69, 3000 Leuven, Belgium;1. 70 Lien Hai RD, Department of Business Management, National Sun Yat-sen University, Kaohsiung 80424, Taiwan;2. 700 University RD Department of Finance, National University of Kaohsiung, Kaohsiung 81148, Taiwan;3. 415 Chien Kung RD, Department of Wealth and Taxation Management, National Kaohsiung University of Applied Sciences, Kaohsiung 80778, Taiwan |
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| 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. |
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