Corporate governance characteristics and control variables

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Non-executive directors

One major role of the board of directors is its control functions (Pound, 1995). For effective control of the management, the board of directors must be independent, in other words, mainly consists of non-executive directors (Gubitta & Gianecchini, 2002). Therefore, non-executive directors are seen as a toll for monitoring and controlling the actions of the managers, due to their opportunistic behaviour, (Jensen & Meckling, 1976; Leftwich et al., 1981; Fama & Jensen, 1983; Rosenstein & Wyatt, 1990; Pettigrew & McNulty, 1995; Mak, 1996; Leung & Horwitz, 2004) and protecting the shareholders interests (Leung & Horwitz). Both Leftwich et al. (1981) and Fama and Jensen (1983) argued that the non-executive directors strengthen the extent to which a board of directors is independent of the management. The larger the proportion of non-executive directors on the board, the more effective it will be in monitoring managerial opportunism; therefore, corporations can be expected to have more disclosure (Leftwich et al.; Fama & Jensen; Haniffa & Cooke, 2002). Our hypothesis is therefore as follows: H2: There is a positive association between proportion of non-executive directors and the levels of corporate governance disclosures.

Board activity

We believe that as more meetings of the board of directors are held, the more enhanced the board of directors will be at monitoring of the management, hence a stronger control role. Although, the length of the meetings can also be considered since one meeting of two hours and two meetings of one hour gives the board of directors the same amount of time to monitor the management. However, the enhanced monitoring by the board of directors can ensure that the management fulfils the shareholders’ interests and not act in a self-interested way, as mentioned earlier under heading 2.2.1.2. Therefore, our hypothesis is as follows: H13: There is a positive association between board activity and the levels of corporate governance disclosures.

Domestic listing status

We even believe that similar reasons, as for the industry characteristic, can be applied to the domestic listing status characteristic. Moreover, since the corporations in our sample are randomly selected in proportion to the total number of corporations on each of the Stockholm Stock Exchange’s four lists, the inclusion of this characteristic makes it possible to draw general conclusions about the listed corporations in Sweden. However, the characteristic can even serve as a proxy for corporation size, since larger corporations tend to be on the Stockholm Stock Exchange’s A-list. Therefore, to role out the possibility of this proxy, our hypothesis is as follows: H17: There is association between domestic listing status and the levels of corporate governance disclosures.

Literature exposition

We first searched on the website of the library at Jönköping University and used words and different combinations of words such as corporate governance, corporate governance disclosure, disclosure, mandatory disclosure, voluntary disclosure, annual reports, non-financial disclosure, annual report, agency theory. Here we found plenty of books, articles, essays and websites. Through LIBRIS, a national library data system in Sweden, we borrowed literature and articles from other universities and libraries in Sweden. We also searched for articles in several journals, as can be seen in the reference list, and databases, such as ABI/Inform Global and ArtikelSök. When we started to read the books and articles, we realized that most of them only described what corporate governance is and there were nothing about disclosure practices. Therefore, another search was conducted to find even more articles about the subject. We did not find any articles concerning corporate governance disclosure in particular, neither in Sweden nor abroad. The only authors, who used corporate governance characteristics in their study of disclosure practices, were Ho and Wong (2001).

Development of theoretical starting point

The following step is to compose the frame of reference. After the literature review, we had formed us a good understanding of corporate governance and the agency theory. The motivations for how most of the corporate governance characteristics are related to disclosure practices were gathered from the literature. Moreover, we motivated the characteristics that have not been used before, by our own, from the agency theory perspective. However, even characteristics that have been found to have a relationship with disclosure practices, in most of the prior studies (appendix 1), were included as control variables. We also included two characteristics, industry type and domestic listing status, since the corporations in our sample are classified into different industries and listed on different lists on the Stockholm Stock Exchange.

Management ownership

The corporate governance characteristic management ownership measures the proportion of how many shares the management group owned to the total amount of outstanding shares (less repurchased shares) in the corporation. Since not all corporations had disclosed the same information in the annual reports, we had to change the way of measuring this characteristic. To be consequent, we excluded all the members in the management group except the CEO, since all corporations had disclosed the amount of shares that the CEO held. Some of the corporations have not separated the CEO’s private holdings from holdings via corporations; therefore, we have included shares owned both privately and via corporations. Some corporations had a new CEO from 2004 and did not disclose information about the former CEO’s share holdings; therefore, the former CEO’s holdings were looked up in the annual report from 2002 on the corporation’s website (e.g. Borås Wäfveri, Senea).

Table of contents :

• 1 Introduction
  • 1.1 Background
  • 1.2 Problem discussion
  • 1.3 Purpose
  • 1.4 Disposition
• 2 Frame of reference
  • 2.1 What is corporate governance?
  • 2.2 Hypothesis development
    • 2.2.1 Corporate governance characteristics from prior studies
    • 2.2.1.1 Management ownership
    • 2.2.1.2 Non-executive directors
    • 2.2.1.3 Large audit firms
    • 2.2.1.4 Role duality
    • 2.2.1.5 Diffuse ownership
    • 2.2.1.6 Audit committee
    • 2.2.1.7 Board size
    • 2.2.1.8 Number of shareholders
  • 2.2.2 Own corporate governance characteristics
    • 2.2.2.1 Board ownership
    • 2.2.2.2 Board compensation
    • 2.2.2.3 Nomination committee
    • 2.2.2.4 Compensation committee
    • 2.2.2.5 Board activity
    • 2.2.3 Control variables
    • 2.2.3.1 Corporation size
    • 2.2.3.2 Multiple listings
    • 2.2.4 Other characteristics
    • 2.2.4.1 Industry type
    • 2.2.4.2 Domestic listing status
• 3 Method
  • 3.1 Examination
  • 3.2 The research process
  • 3.2.1 Step 1 – Hypothesis formulation
    • 3.2.1.1 Problem formulation
    • 3.2.1.2 Literature exposition
    • 3.2.1.3 Development of theoretical starting point
    • 3.2.1.4 Hypothesis formulation
    • 3.2.1.5 Step 2 – Examination plan
    • 3.2.2 Step 3 – Data collection
    • 3.2.2.1 Corporate governance characteristics and control variables
    • 3.2.2.1.1 Management ownership
    • 3.2.2.1.2 Non-executive directors
    • 3.2.2.1.3 Large audit firms
    • 3.2.2.1.4 Role duality
    • 3.2.2.1.5 Diffuse ownership
    • 3.2.2.1.6 Audit, nomination and compensation committee
    • 3.2.2.1.7 Board size
    • 3.2.2.1.8 Number of shareholders
    • 3.2.2.1.9 Board ownership
    • 3.2.2.1.10 Board compensation
    • 3.2.2.1.11 Board activity
    • 3.2.2.1.12 Corporation size
    • 3.2.2.1.13 Multiple listings
    • 3.2.2.1.14 Industry
    • 3.2.2.1.15 Domestic listing status
    • 3.2.2.2 The corporate governance disclosure index
    • 3.2.3 Step 4 – Processing and analyze of data
  • 3.3 Reliability and validity
    • 3.3.1 Interpretation errors
    • 3.3.2 Measurement process errors
• 4 Analysis and results
  • 4.1 Linear regressions
  • 4.1.1 Management ownership
    • 4.1.2 Non-executive directors
    • 4.1.3 Large audit firms
    • 4.1.4 Role duality
    • 4.1.5 Diffuse ownership
    • 4.1.6 Audit committee
    • 4.1.7 Board size
    • 4.1.8 Number of shareholders
    • 4.1.9 Board ownership
    • 4.1.10 Board Compensation
    • 4.1.11 Nomination committee
    • 4.1.12 Compensation committee
    • 4.1.13 Board activity
    • 4.1.14 Corporation size
    • 4.1.15 Multiple listings
    • 4.1.16 Industry type
    • 4.1.17 Domestic listing status
    • 4.1.18 Summary of the linear regressions
    • 4.2 Multicollinearity
    • 4.3 Multiple regression
    • 4.3.1 Role duality
    • 4.3.2 O-list other
• 5 Conclusions and comments
  • 5.1 Conclusions
  • 5.2 Comments
  • 5.3 Further studies
• References

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Corporate governance disclosure