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Blackwell Publishing Ltd.Oxford, UK CORGCorporate Governance: An International Review0964-8410Blackwell Publishing Ltd. 2005 November 2005136769784CORPORATE GOVERNANCE,
FAMILY OWNERSHIP AND FIRM VALUE: THE CANADIAN EVIDENCEPETER KLEIN, DANIEL SHAPIRO AND JEFFREY YOUNG
Corporate Governance, Family Ownership and Firm Value: the Canadian evidence
Peter Klein, Daniel Shapiro* and Jeffrey Young
We analyse the relationship between ﬁrm value, as measured by Tobin’s q, and newly released indices of effective corporate governance for a sample of 263 Canadian ﬁrms. The results indicate that corporate governance does matter in Canada. However, not all elements of measured governance are important, and the effects of governance do differ by ownership category. For the entire sample of ﬁrms we ﬁnd no evidence that a total governance index affects ﬁrm performance. This is mainly because we ﬁnd no evidence that board independence, the most heavily-weighted sub-index, has any positive effect on ﬁrm performance. Indeed, for family-owned ﬁrms we ﬁnd that the effect is negative. In general, sub-indices measuring effective compensation, disclosure and shareholder rights practices enhance performance and this is true for most ownership types. We also ﬁnd no evidence that governance practices are endogenous. Keywords: Corporate governance, governance rankings, board of directors, family ﬁrms, ﬁrm performance
here has been increased public and academic discussion of issues related to corporate governance in most countries with active capital markets. Both ﬁrms and regulators are considering how best to ensure good corporate governance. Oddly, however, there is no overwhelming evidence to suggest that within developed markets ﬁrm performance is enhanced by better governance practices. Nor is there total agreement as to whether corporate governance can be measured in a useful way. In his survey of the relevant literature, Black (2001) concludes that inter-company differences in corporate governance have no economically signiﬁcant effect on market value or performance of US companies. He suggests that the minimum quality of corporate gover-
nance, set by securities law, corporate law, stock exchange rules and behavioural norms is so widely accepted that there is little variance in governance practices among public ﬁrms. Other recent surveys (Leblanc and Gillies, 2003; Daily et al., 2003) also suggest that there is at best mixed evidence in support of the hypothesis that better corporate governance results in better performance. Many of the studies reporting a positive relationship between corporate governance and ﬁrm performance are for emerging markets (Bai et al., 2002; Campbell II and Keys, 2002; Klapper and Love, 2004; Black et al., 2003; Durnev and Kim, 2005). For the most part past studies have measured corporate governance using very speciﬁc measures that typically reﬂect only a single aspect of governance (for example, board composition). Recently, however, insti-
*Address for correspondence: Simon Fraser University, Harbour Centre, Faculty of Business Administration, 515 West Hastings Street, Vancouver, BC, Canada V6B 5K3. E-mail: firstname.lastname@example.org
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Factors that increase the ability of shareholders to monitor managers or to align incentives are therefore expected to improve ﬁrm performance. most ﬁrms are closely held. then one might also expect that any advantage of good governance would disappear over time. We also ﬁnd that ownership type does not affect performance in Canada. com). and in particular when ownership is concentrated in the hands of families (Corbetta and Salvato. In our analysis. families or private holding companies effectively control many of the largest ﬁrms (Roe and Lee-Sing. 2002. 2005). In this respect. Thus. and the effects of governance do differ by ownership category. disclosure and shareholder rights practices enhance performance and this is true for most ownership types. This study contributes to the emergent literature relating broad indices of corporate governance to ﬁrm performance. This phenomenon is referred to as “tunnelling” (Johnson et al. 1999). (1998) argue that the primary conﬂict in closely held ﬁrms is between majority and minority shareholders. 1999). one expects a positive relationship between measures of corporate governance and ﬁrm performance. compensation policies. Drobetz et al. It is not clear whether measures of corporate governance affect performance in the same way when ownership is not in general widely dispersed. other things being equal. 2003) have begun to collect more comprehensive measures of corporate governance (Bradley.. In most countries.. described more fully below. 2004). We examine the relationship between ﬁrm performance. 1998. and newly released indices of corporate governance for 263 of the largest Canadian ﬁrms. None of the variables that indicate ownership type is ever statistically signiﬁcant. We focus in particular on family ﬁrms. we therefore ask not only whether corporate governance broadly deﬁned affects ﬁrm performance. for family-owned ﬁrms we ﬁnd that the effect is negative. These indices. where ownership is dispersed. and we also provide separate estimates of the impact of governance variables for each ownership type. 2000). 2004). our paper contributes to the debate over the measurement of corporate governance (Tsipouri and Xanthakis. 2004.. either by families or by other companies (themselves often controlled by families). 1996. 2003. recent evidence also suggests that dispersed ownership is not the dominant ownership form in most countries (La Porta et al. Finally. 2003). and published in its Report on Business (McFarland. Manry and Strangeland... Our results indicate that corporate governance does matter in Canada. the dominant ownership category worldwide. In particular. ownership in Canada more closely approximates ownership structures observed in most countries around the world (La Porta et al. 2004).770 CORPORATE GOVERNANCE tutions such as Standard and Poor’s and Governance Metrics International (GMI. 2002). Morck et al. Although Canada may be thought of as being similar to the United States in terms of its national governance structures. Denis and McConnell. this study also contributes to the literature that examines the effects of corporate governance in different institutional environments (Gedajlovic and Shapiro.. as measured by Tobin’s q. measure board composition and effectiveness. This study therefore contributes to the body of research on the effects of corporate governance on ﬁrm performance. We control for ownership type in our performance equations. They are summarised in an aggregate corporate governance index (CGI). GMI reports that company performance is in fact positively correlated with its more comprehensive measures of corporate governance (http://www. and widely prevalent in Canada. If effective governance structures are clearly understood and can be easily imitated. The Canadian indices have been compiled by the Globe and Mail. 2000). As a consequence. but we also investigate whether some governance factors are more important than others. shareholder rights and disclosure practices. The traditional agency-theoretic approach to governance has emphasised the potential conﬂict between unmonitored managers and widely dispersed shareholders. Recent academic studies that have employed more general indices of governance also report positive governance effects (Gompers et al. However. We ﬁnd no evidence that the total governance index affects ﬁrm performance. In this regard. Sherman. a result somewhat different from Volume 13 Number 6 November 2005 © Blackwell Publishing Ltd 2005 . a Canadian newspaper. which is computed as the sum of four subindices. effective compensation. we distinguish among different ownership types in our analysis. 1998. as well as to the literature on the effects of family ownership. 2003. not all elements of measured governance are important. we ﬁnd no evidence that family ownership affects performance. This is mainly because we ﬁnd no evidence that board independence has any positive effect on ﬁrm performance.gmiratings. Hence. In general. regardless of ownership. ownership concentration in Canada tends to be higher since individuals. with the former having the potential to expropriate wealth from the latter. La Porta et al. However. even when ownership is dispersed.. La Porta et al. Indeed. Durnev and Kim. 2003.
8 per cent (of which ﬁnancials comprise 21. A clear advantage of these measures is that they capture an unusually wide variety of governance indicators. 2004). the governance index does not account for ownership concentration. and we have calculated separate measures for these variables. Details are provided in the Appendix. including the independence of the audit and compensation committees. 2004. followed by discussion and conclusions. Shareholding and compensation policies comprise the second sub-index. especially those that were re-priced in 2001 or 2002 and those with large gaps between voting control and equity ownership.7 per cent of the total). The third sub-index measures shareholder rights. The study proceeds as follows. including the regularity of meetings. For example. Companies score higher in instances where the CEO and directors are required to take equity positions in the ﬁrm. However. 2003). which is structurally different from that of the United States. The overall corporate governance index (CGI). The index and its components are described below. the comparable numbers for the US S&P Index are 30. as well as major institutional investors and associations” (McFarland. as well as the measures of ownership that are employed. and when they have in place systems that control or limit the use of stock options and low interest loans as components of managerial remuneration. notably the problem of endogeneity. the composition of ﬁrms in the Index (and therefore in our sample) reﬂects the nature of the Canadian economy. Each sub-index was in turn comprised of a series of factors with arbitrary weights.2 per cent of the US Index. (C) Shareholder rights policies and (D) Disclosure policies. The major components are the existence of employee stock options and subordinate shares that dilute ownership and voting rights. (B) Shareholding and compensation policies. B6). its parent or any ﬁrm with which the company does business. It should be noted that a stringent deﬁnition of independence is employed that rules out family members. In the following section we discuss the governance indices employed in this study. consumer product and IT ﬁrms constitute 23. Sherman. various information providers have begun to publish summary measures that allow the ranking of ﬁrms according to their governance standards (Bradley. the ROB weighted the sub-indices as 40. a clear disadvantage is that the list of measured variables and the weights attached to them are arbitrary. and various measures of board effectiveness. To score well a company had to be structured such that dual voting © Blackwell Publishing Ltd 2005 Volume 13 Number 6 November 2005 . In addition. structure and effectiveness. of which ﬁnancials comprise about half (33. the purpose of which is to measure the degree to which managers and the board have incentives that align their interests with those of shareholders. Evidently. the share of natural resources and ﬁnancial ﬁrms in the Canadian Index is 67. p. the most comprehensive (in terms of ﬁrm coverage) index has been published by the business section of the Globe and Mail newspaper. respectively. FAMILY OWNERSHIP AND FIRM V ALUE 771 recent US evidence that indicates that family ﬁrms may have performance advantages over non-family ﬁrms (Anderson and Reeb. The data were obtained from information the companies published in their most recent proxy information circular for shareholders. This sub-index also contains measures of whether the Chair and CEO positions are split.0 per cent of the total). The results are presented. Autonomy is measured though various indices of board independence. In compiling the overall index. Measuring corporate governance and ownership As corporate governance ﬁgures more prominently in the concerns of investors. 23.7 per cent. Report on Business (ROB) constructed the indices and published the results on 7 October 2002. 22 and 15 per cent. In contrast. or ownership type.9 per cent of the Canadian Index and 49. Independence requires that members have no afﬁliation with the company. In all. Corporate governance indices The Globe and Mail. our sample numbers 263 ﬁrms. For reasons related to data availability.CORPORATE GOVERNANCE. The ROB developed the measures based on a “tough set of best practices culled from the corporate governance guidelines and recommendations of US and Canadian regulators. Table A1. scored poorly. most of the points in this category (at least 31 out of 40) are allocated to measures that reﬂect board independence. 2002. The ROB rated all but ﬁve of the ﬁrms in the Canadian S&P/TSX Index at the beginning of September 2002. with a maximum value of 100. suppliers or customers as being independent. In Canada. The board composition sub-index captures board autonomy. was obtained by summing four sub-indices: (A) Board composition. We then present the empirical model to be estimated and discuss estimation issues. Companies with highly dilutive option plans. industrial. 270 ﬁrms were ranked.
it was classiﬁed as not widely held. even though families own less than 10 per cent of the equity. Thus some wellknown Canadian companies such as Magna and Canadian Tire were classiﬁed as family owned. For example. We therefore took some care to determine that companies classiﬁed as “owned by institutions/ corporations” were not in fact really controlled by families. and that in general. The shape of the left side of the score distribution may be a result of the relatively high level of corporate governance regulation in Canada. A ﬁrm with no equity owners that controlled 10 per cent or more of the voting rights was assigned to the widely held category. but not in the sample of family ﬁrms.3067. whereby an ultimate owner maintains control over other companies through indirect ownership. mixed and widely held. disclose non-audit fees paid to auditors and reveal director attendance score well in this category. government. Most of the remainder are held by ﬁnancial institutions and pension funds. the companies that score below the mean tend to be concentrated and relatively close to the mean. La Porta et al. Summary statistics Summary statistics and correlation matrices are provided in Table 1 for the entire sample of 263 ﬁrms. The ﬁnal sample comprised 123 widely held ﬁrms. These numbers illustrate the variety of ownership structures that co-exist in Canada. Those companies that were not widely held were then classiﬁed according to the identity of the owner. and 140 not widely held. and some are not statistically signiﬁcant. six were government-owned and four were mixed. Similarly. the correlation among the sub-indices is lower. family control may be enhanced by the existence of dual class shares. whereas a more dispersed distribution is observed for companies with scores on the right hand side of the distribution. (1999) indicate that pyramids are most important in emerging markets. Methodology and data Our primary interest is the relationship between ﬁrm performance and the corporate governance indices discussed above. ﬁrms that score well on one sub-index also score well on others. The sub-indices are positively correlated in the total sample.05 and a skewness of 0. The differences are not statistically signiﬁcant. Figure 1 provides a histogram of the overall index (CGI) scores.76. It attempts to measure a company’s public commitment to good governance. The correlation coefﬁcients are high enough to warrant caution in using them all in a single regression equation. and this is relatively common in Canada (AmoakoAdu and Smith. some of the signs are negative. We therefore focused on voting rights. and from individual corporate SEDAR ﬁlings. Thus ownership should be an important component of a corporate governance system. the ultimate owner maintains voting control over companies in the pyramid without signiﬁcant cash ﬂow rights. Although La Porta et al. institutional/corporate. In general. with a mean of 60. of which 84 were family-owned. 60 were owned by other companies or institutions. of which almost all are widely held US companies. and for a sub-sample of family ﬁrms. which acts as a barrier to very low scores. (1999) note the importance of ownership pyramids. they could be important in Canada in some cases. As illustrated. about 25 per cent of these companies are subsidiaries of foreign (non-Canadian) ﬁrms. In effect. provide director biographies. and standard deviation of 14. all involving government. We ﬁrst classiﬁed companies as widely held or not. 2001).772 CORPORATE GOVERNANCE rights systems were absent and managers were not unduly compensated at the expense of owners. We therefore estimate a model in which ﬁrm Volume 13 Number 6 November 2005 © Blackwell Publishing Ltd 2005 . The result was ﬁve different ownership classiﬁcations: family. Ownership Agency theory suggests that concentrated ownership will result in more effective monitoring. and not equity ownership to determine ultimate control. name and explain related directors. In a few cases. The ﬁnal sub-index deals with disclosure. Any company that reported a shareholder that controlled 10 per cent or more of the voting rights was assigned to one of the ﬁrst three categories. It can be seen that there is variation in governance practices across ﬁrms. we found two owners with shares of more than 10 per cent and these were classiﬁed as mixed. family ﬁrms score less well on all measures. For family ﬁrms. The index distribution is skewed to the right. We compiled ownership information for the 263 ﬁrms included in the Globe and Mail governance index based on the Inter-Corporate Ownership Directory published quarterly by Statistics Canada (2002). using a 10 per cent cut-off rule. Companies that comply with OSC governance regulations. If the ﬁnal beneﬁcial owner of any equity position controlled 10 per cent or more of the voting rights of any individual company.
Following Black et al. © Blackwell Publishing Ltd 2005 Volume 13 Number 6 November 2005 . as well as the ownership indicator variables.000 0.000 0.081 -0.80 2. ﬁnancial services and resource sectors.000 -0.000 0.82 4. It was not always possible to ensure that the performance variable (Tobin’s q) post-dated the governance variables.30 RIGHTS 16.05 8.76 BOARD 25. BOARD: Board Composition Index (maximum 40).51 4. These difﬁculties often cause researchers to eliminate such ﬁrms from their sample.603** 1. Statistical signiﬁcance at: ** 5% level. leverage (Debt/Equity Ratio). Our ability to estimate a fully-speciﬁed and identiﬁed model in the presence of four governance sub-indices was limited by the availability of instruments for the governance variables. The leverage and the variance of proﬁtability terms control for different risk characteristics of ﬁrms.584** 0. * 10% level. the special relationship between book and market values in the ﬁnancial industry and the difﬁculty of valuing reserves in the resource sector can affect the calculation of Tobin’s q.175** 0.000 0.457** 0.497** 0. COMP: Compensation Policies (maximum 23).279** 0.188* 0.96 DISC 6. (2003). In addition.21 BOARD 19. is regressed on the corporate governance indices.69 4.025 0. DISC: Disclosure Policies (maximum 15). market power and market opportunities. and various other control variables.233** 0.73 COMP 11.497** 1. discussed above.000 1. 2003). Unique government regulation in the utilities industry.41 Correlation coefﬁcients BOARD COMP RIGHTS DISC 14. we included as control variables measures of ﬁrm size (Ln assets).. FAMILY OWNERSHIP AND FIRM V ALUE 773 Table 1: Means and correlation matrices.424** 1.96 10.090 1.308** 1.45 DISC 5. governance indices Mean Standard deviation CGI Total sample (n = 263) C CGI 60.771** 0.87 1.000 -0.73 7.34 2.10 COMP 12. average sales growth and proﬁt variability. measured by Tobin’s q. 35 30 25 20 15 10 5 0 M or e 0 15 25 35 45 75 55 65 85 95 No. Endogeneity of the governance variables presents a potential estimation problem (Black et al.173** 0.CORPORATE GOVERNANCE. Firm size and growth control for potential advantages from economies of scale and scope. this would have meant that our sample would be reduced by over 60 per cent.472** 1.65 3.000 0. of Companies Frequency CGI Score Figure 1: CGI score distribution performance.638** 1.204* 1. and so endogeneity remains an issue. but given the composition of the S&P/TSX Index (and therefore our sample).000 0. RIGHTS: Shareholder Rights (maximum 22). We therefore chose to maintain sample size.62 RIGHTS 15. we added dummy variables for companies in the utility. but include the industry dummy variables.845** 0.000 CGI: Total Corporate Governance Index (maximum 100). Summary statistics for the continuous measures are found in Table 2.41 Family ﬁrms (n = 84) C CGI 52.
550** -0. which was included in the Volume 13 Number 6 November 2005 © Blackwell Publishing Ltd 2005 . there is a positive correlation between the aggregate governance index and years listed on the TSX (r = 0.148.05 Firm size 20.032 1. the simple correlation between the total index and the foreign listing dummy variable was r = 0. In fact. the ability of ﬁrms to change ownership categories is restricted relative to the ability to change ownership percentages. ownership dummy variables and ﬁnancial variables. there is also a relatively strong negative correlation between years listed and Tobin’s q (r = -0.104 -0. In addition.76 33. The second potential instrument is years listed on the TSX.95 3.91 Leverage 1. information asymmetry is reduced as investors become more familiar with the ﬁrm. the years listed variable alone. There is some evidence that this may be the case (Lang et al. For example.056 1.004).029 1. We employ the Hausman speciﬁcation test for endogeneity (Ashenfelter et al. Variance: Variance of return on assets (ROA). In fact. when either the foreign listing dummy variable or the years listed variable (or both) is included as an explanatory variable in the performance equation.000 -0. Dual listing is common in Canada. With the exception of market capitalisation information. In order to minimise this effect we measured ownership in terms of the dummy variables deﬁned above. 2003. it is very difﬁcult to ﬁnd variables that might qualify as instruments. variance of ROA. * 10% level. In all ﬁve cases (the total index and each of the four sub-indices). 1999–2002. We did identify two such variables.. and their inclusion never alters the main (governance) results. Growth: Average growth rate of sales over the past ﬁve years.168. using as exogenous variables ﬁrm size. There is evidence suggesting that this is not the case (Demsetz and Villalonga.56 1.129* -0.033 -0. neither is statistically signiﬁcant. Here we argue that ﬁrms with a longer history on an exchange become more familiar with best practice governance and so are more likely to accept higher governance standards. 2004). The ﬁrst potential instrument is a dummy variable indicating whether the ﬁrm was also traded on a US exchange. Statistical signiﬁcance at: ** 5% level. divided by the book value of assets. selected variables Mean Standard deviation Tobin’s q Total sample (n = 263) Tobin’s q 1. Indeed. with t-statistics below unity.000 0. or longest period available. endogeneity is rejected regardless of the number of instruments.177. we found that the dummy variable was not correlated with Tobin’s q (r = -0. of the total sample of 263 companies. whereby performance declines with age.98 Variance 1. This might reﬂect an age effect. Thus. To the extent that foreign listing subjects the ﬁrm to increased governance scrutiny. The sources of the governance and ownership data were described above. it may be associated with better governance practices. plus one or two of the instruments deﬁned above.49 Growth 2. In implementing the Hausman tests.278** 0. In addition. we use OLS estimation of Tobin’s q on the set of exogenous variables: governance indicators.010 1.355** -0.000 Tobin’s q: (Book value of liabilities plus market value of common equity).161). or both variables as instruments. similar values were recorded for the sub-indices. but it might make years listed a less effective instrument.49 Correlation coefﬁcients Firm size Leverage Growth Variance 1. Leverage: Book value of debt divided by market value of common equity. Likewise.107). 120 (46 per cent) were also listed on US exchanges. 2003. 2001). Our empirical strategy was to test for the endogeneity of each of the governance variables using either the foreign listing dummy alone.774 CORPORATE GOVERNANCE Table 2: Means and correlation matrices. 227–232). and this limits the ability of any ﬁrm to impose poor governance practices. Firm size: Natural logarithm of total assets. we do treat ownership status as exogenous.97 1. the sector and ownership dummy variables. ﬁrm growth..000 0.000 -0.43 11. Doidge. we estimated the relevant equations for the largest ownership categories. leverage. However. pp. but was more highly correlated with governance variables.
Empirical results Total sample results The results for the total sample are presented in Tables 3 and 4. For each ﬁrm. Past empirical evidence has generally failed to ﬁnd any signiﬁcant relationship between board composition and ﬁrm performance and recent surveys of the literature conclude that the evidence on this matter is at best ambiguous (Dalton et al. Thus. this conclusion is not necessarily correct because it does not take into account the various subindices of corporate governance. It is true that the mean Tobin’s q for family-owned ﬁrms is lower than the mean for the entire sample.. With the exception © Blackwell Publishing Ltd 2005 Volume 13 Number 6 November 2005 . For all of the results reported below. makes the overall level of corporate governance high enough that inter-ﬁrm differences are not important to investors. but this does not affect the other results. each sub-index individually. Firm size is consistently negatively related to performance. This result is consistent with the view that the high level of governance regulation in developed economies. and it ignores the nature of ﬁrm ownership. notably the ratio of market to book value and the ratio of market value to sales. This ﬁnding stands in contrast to the results in Anderson and Reeb (2003). Because the Board Composition Sub-Index comprises 40 per cent of the total index. and the difference is statistically signiﬁcant (assuming unequal variance). Although 270 ﬁrms were ranked by the ROB. At no time was the CGI score found to be statistically signiﬁcant. These results indicate that in fact all of the governance sub-indices with the exception of the Board Composition SubIndex are statistically signiﬁcant and positively related to performance. and size is penalised. 2003). although the t-statistic did at times exceed unity and was at times signiﬁcant at 90 per cent levels (column 4). Estimates were also obtained using alternative performance measures. at the 95 per cent level. Sub-index results The results based on the total governance index are somewhat misleading because they do not fully reveal the importance of corporate governance to ﬁrm performance. the ﬁrm ﬁnancial data used in this paper were taken from company balance sheet and income statements. we ﬁnd no evidence that ownership matters. Bahjat and Black. such as Canada. and when size is accounted for the family ownership term is never statistically signiﬁcant.CORPORATE GOVERNANCE. of a sometimes statistically signiﬁcant and negative impact of mixed ownership on performance. Family ﬁrms perform less well because they are larger. the absence of other data limits our sample to 263 ﬁrms. However. obtained from Globeinvestor. and all sub-indices included in equations that include all of the control variables. Board Composition has a negative sign. We ﬁnd very little evidence that ownership type affects performance. as is ﬁrm leverage. family ﬁrms are also on average larger than other ﬁrms. Thus we ﬁnd little evidence that corporate governance affects ﬁrm performance. the results are not different from those reported below. other things being equal. When entered alone. growth and performance are positively related. FAMILY OWNERSHIP AND FIRM V ALUE 775 ROB data. but is not statistically signiﬁcant. The same is not true for the Board Composition Sub-Index.com. We found no such effects. There is some evidence that ﬁrms in the resource and ﬁnancial sectors report higher Tobin’s q. engage in open and full disclosure. 1999. regression residuals were analysed to determine the possible effects of outlying observations. this explains why the total index is not found to be statistically signiﬁcant. However. and have compensation practices that align the interests of managers and owners. when the former is measured in aggregate terms and there is no consideration of type of ownership. 1998. and when entered with the other sub-indices the coefﬁcient is negative and statistically signiﬁcant. The ﬁnding that Board Composition is not positively related to performance is not unusual. In Table 3 Tobin’s q is regressed on the total corporate governance index (CGI) with each of the control variables added one at a time. In Table 4 we present results with the total index. investors are willing to pay a premium for companies that protect shareholder rights. an online investment website afﬁliated with the Globe and Mail newspaper. 2001. excluding the top and bottom 5 per cent of residuals resulted in no important changes in the results. The ﬁnancial control variables are for the most part statistically signiﬁcant. the most recent ﬁnancial statement was used to calculate the ratios used in this study. Hermalin and Weisbach. Markets do reward some good governance practices. As will be discussed shortly. even when they are all included in the same equation (the Shareholding and Compensation Sub-Index is statistically signiﬁcant at 90 per cent levels in that case). For example.
0065 (1.0021 5.0586 (0.7757) -0.3384 (-1.4852) 0.0021 (6.9963) (11) 0.2091 (-6.0685) 0.0346 (0.0124) (3) 0.1316 4.6020 (-2.0233) -0.0370 (-3.2107) 0.1619 (-3.1270 4.8267) -0.0059 (1.6161) -0.0055 (1.1164 (0.0913) (10) 0.2141) -0.3941) -0.9519 (5.5013) -0.9392) (4) 0.6412 (5.1602 (-3.0296) 0. N = 263.0252 (-1.0000 (-1.8984 (6.2761) 0.2638) 0.1157 (-0. .0493 (-0.8970) 0.5767) 0.0404 (-3.5249) -0.4287) -0.0000 (-1.8208) CORPORATE GOVERNANCE Intercept Adjusted R square 1.2042 (-4.9451) -0.7847) -0.6157) -0.1685 (-4.0549) -0.0838) -0.4787 (2.6638) 0. Dependent variable is Tobin’s q.3584 (6.3698 (-1.7209 (5.5135) -0.0000 (-1.0021 (6.6693 (5.8225) -0.1598 (-3.0031 (-0.1608 -0.0000 (-1.1250 4.3857 (-1.2178) -0.0056 (1.0057 (1.7908 (6.0049 (0.1300 4.2857) 0.0369 (-3.6183 (-2.0405) -0.7518 (7.1670 (-3.0071 (1.9261) (6) 0.6680) 0. Results signiﬁcant at the 5% level are presented in bold.7138) 0.6004) (9) 0.2680) -0.1516) -0.0021 (6.8251) 0.0000 (-1.9244) 0.0019 (4.0230 (0.1058 (0.1323) 0.0407 (-3.7278) -0.0560) 0.1322 4.7434) -0.0399 (-2.5096) -0.0358 (-2.7912) -0.6797 (6.8006) -0.9352) -0.0050 (0.4621) -0.0062 (1.7667 (5.1419 (0.4737) (5) 0.0541) 0.0383 (-3.1406 (-0.0019 (4.5142) -0.7597) (7) 0.1517 Values in parentheses are t-statistics.0019 (4.9110) 0.2839) 0.5870) 0.6723 (5.1668) -0.2644) 0.4929) -0.0342) 0.0000 (-1.5786 (7.8677) 0.1710 (-4.0783) -0.0056 (1.2363) 0.8545) (8) 0.1327 4.1481 (-0.0406 (-2.7068) -0.Volume 13 Number 6 Table 3: Performance and corporate governance results: total sample.0396 (-0.0293) -0.0000 (-1.0389 (-2.7803) -0.0594) 0.0477) -0.6412) -0.1627 (-3.6115 -0.1307 4.2254 (-1.8161) -0.4215 (2. various speciﬁcations (1) Total index Size Leverage Sales growth Variance of ROA Family Widely held Government Mixed Utility Resource Financial © Blackwell Publishing Ltd 2005 776 November 2005 (2) 0.0022 (5.0442 (-0.6130) 0.7512) 0.1356 (-0. Standard errors are adjusted for heteroscedasticity.1738 (-4.0000 (-1.0242 (-0.1287 4.4730 (2.4534) -0.8877) 0.6082) -0.0694) 0.8375) 0.1060 (0.0654 (-0.0019 (4.9731) 0.0061 1.2056) -0.0544) -0.0215) 0.0012 (-0.1237) 0.6218) -0.1250 4.1078 (0.1845 (-3.4922) -0.7683) 5.0723 (0.2569) (12) 0.9282) -0.0022 (6.
1797 (-4.0000 (-0.1932) -0.5300) 0.1608 -0.8259) 5.0691) -0.7846) 0.6004) 0.1743) -0.3255 (1.3337) 0.5379 (-1.8389 (-2.2398) -0.7627) -0.0544) -0.3886 (2.4730 (2.1011 (0.0016 (4.4950 (2. Of note.4869 (2.1078 (0.3448 (2.2692 (-5.1698) 0.4371 (-1.0688) -0.1651) 0.0365 (-2.2379 (6.1050 (0.6680) 0.4535) 0.5767) 0.1943) 0.0584) 0.9923) 0.4772 (2.4277) 0.0018 (4. Standard errors are adjusted for heteroscedasticity. Results signiﬁcant at the 5% level are presented in bold.2618) 0.4787 (2.0260 (-2.0218 (0.0342 (-2.1516) -0.0107 (0.9423) 5.6322) -0.7362 (6.2857) 0.4384 (2.1477) 0.2307) 0. Our particular interest is in family-owned ﬁrms.9239) -0.0119 (-1.7802) -0. We therefore estimate the model for various sub-samples.7112) -0.0395 (3.0694) 0.5881) -0.2169 (-4.0345 (0.8696) -0. but to provide contrast we also present the results for the sample of widely held ﬁrms.5022) 5.3857 (-1.7758) 0. Results for ownership categories Segmenting the sample on the basis of ownership provides further insight to the negative sign on Board Composition.0819) 0.4813) 0.3823 (-1.5228) -0.0920 (0. it can be seen that the total index remains statistically insigniﬁcant.0000 (-1.3793) 0.5643) 0.7683) 5.1696 -0.1740 (0.0208 (0.0522 (2.0358 (2.8381) 0.2141) -0.4616 (2.CORPORATE GOVERNANCE. is that the coefﬁcient on the Board Composition SubIndex is negative and statistically signiﬁcant when entered alone or with the other subindices.2231 (-4.0770 (2.0079 (-0.0000 (-0.0024 (6.8108) 0.7293) 0.5509) 0.2042 (-4.02384 (1. N = 263.6324) 0.7619) 0.2638) 0.1310 (0.1325 (0.0056 (1.0293) -0.0120 (0.0896) 0.1271 (0. Dependent variable is Tobin’s q.0000 (-1.1645 -0.4852) 0.0105 (-0.0140 (-0.0432) -0.4630 (2.0346 (0.8188) 0.5660) 5.1024 (0.2017 (6.7608) 0.0184 (-0.0000 (-1.1399) 0.0665) 0.0143) 0.0000 (-0.1753 -0.9766) 0.1023 (-0. however.4621) -0.0012 (-0.0520 (-0.0021 (6.2211 (2) (3) (4) (5) (6) Values in parentheses are t-statistics.4231 (-1.2094 (-4.7012) -0.1356 (-0.1753 0.4994) -0.0294 (-0.9887) 0.3194) -0.4491 (2.0399 (-2. When the model is estimated for the subsample of family-owned ﬁrms (Table 5). it is apparently the case that measures of board © Blackwell Publishing Ltd 2005 Volume 13 Number 6 November 2005 .0370 (-2.0289) -0.3584 (6.2725) 0.0019 (4.5851) -0.0703) 0.6192 (6.5216 (6.3740) 0. For family-owned ﬁrms.2843) -0.0007) -0.5380) -0. FAMILY OWNERSHIP AND FIRM V ALUE 777 Table 4: Performance and corporate governance results: total sample using the Total Governance Index and Sub-Indices Tobin’s q (1) Total index Board composition Compensation Shareholder rights Disclosure Size Leverage Sales growth Variance of ROA Family Widely held Government Mixed Utility dummy Resource dummy Financial dummy Intercept Adjusted R square -0.0020 (6.2426) 0.1852) 6.1984) 0.4620) 0.6218) -0.3847 (2.2730) -0.0350 (-2.5920) -0.0289 (2.
1568 (0.4025) 0.0622 (-0.0402 (2.1432 (-1.0290) 0.0085 (-0.0000 (0.0626 (0.0772 (0.0640 (0.0927 (-0. The remaining sub-indices maintain their positive signs.0000 (-1.0048 (-0.5786) -0.1545 (-1. but like the family-owned ﬁrms.3338) 0.9172) -0.0500 (1.7394) -0.0314 (-1.5030) 0.1172 (0. Standard errors are adjusted for heteroscedasticity.0034 (-0.0369 (-1.4817) -0.7011) -0.9524) 0.0414) 0.0828 (2. Thus.0000 (-1.8159) -0.0913 (0.1599) 0.0000 (-0. We note as well that the results obtained for the entire sample less the family-owned ﬁrms (not presented) are similar to those obtained for the sample of widely held ﬁrms.1036 -0.6346) -0.0033 (-0.0637 (0. no statistical difference in the coefﬁcients of the two sub-samples is found when the samples are compared using a model measuring governance by the total governance index.1955 (2.2250 (-2.3161) -0.2619) 0.6948) -0.3354) 0.3362) -0.8256) 0.3118) 0.1888) -0.5227) -0.0000 (-1. However.9520) 0. effectiveness are associated with inferior performance.3346 (3.0000 (-1.0031 (-0.778 CORPORATE GOVERNANCE Table 5: Performance and corporate governance results: family ﬁrms sample using the Total Governance Index and Sub-Indices Tobin’s q (1) Total index Board composition Compensation Shareholder rights Disclosure Size Leverage Sales growth Variance of ROA Utility dummy Resource dummy Financial dummy Intercept Adjusted R square -0.0553) 0.0311 (1.6040) -0. In contrast. and are for the most part statistically signiﬁcant at 90 per cent levels.4334) 0.3023 (2) (3) (4) (5) (6) Values in parentheses are t-statistics. Thus. N = 84.3528) 5.7896) 0.0383 (2.3147) -0.1517) -0. the remaining subindices are typically of positive sign and statistically signiﬁcant at 90 per cent levels.0052) -0.0039 (-0.1451 (-1.4429) 4.0840 (0. Dependent variable is Tobin’s q.5784) 0.5684) 0. Family ﬁrms are apparently penalised for Volume 13 Number 6 November 2005 © Blackwell Publishing Ltd 2005 .1617 (-1.0390 (-1.1613 0.5482) -0.1367 -0.0052 (0.0028 (-0.1736 (0. Results signiﬁcant at the 5% level are presented in bold.9379) 0.0620) 0.0813 (1.2811) 0.4933 (2.4260) 0.4113) -0.0853 (0.2971) 4.5221) 4. the coefﬁcient is negative and statistically signiﬁcant. It is important to note that Chow tests (Greene.0611 (0.4353 (2. we conclude that the impact of governance practices on ﬁrm performance varies by ownership category.4883) 0.0257 (-1. pp.2356) 0.2206 (2. when the sub-indices are used either alone or together.0105 (-0. the sub-samples cannot be pooled when the sub-indices are used.8740) -0.1416 -0.6469) -0. 130–139) reject the hypothesis of unequal coefﬁcients when the two samples are compared using model 1 in Tables 5 and 6.4947) 4.1220 (0. The major difference between the sample of family-owned and widely held ﬁrms clearly revolves around the effects of Board Composition on performance. 2003.0409 (-2.1389 -0.0606 (03374) 0.0287 (-2. That is. For family ﬁrms.7482) -0.9187) -0.4799) 5.0338) 0. A possible exception is the Disclosure Issues Sub-Index.3864) 0.4999) -0. and also by which governance practice is being measured. the hypothesis of unequal coefﬁcients is accepted. the results for the group of widely held ﬁrms (Table 6) indicate that Board Composition has no statistically signiﬁcant effect on performance.3546) 0.0371 (2.1068 (0.1716 (-1.2959) 0.0190 (-2.0483 (0.
3129) 0.7186) 0.0425 (5.6790 (2.0000 (-1.0000 (-1.5824) 0.9078) 0.9427) -0.3079) 0.0910 (0.7480 (2.7131) 0.7127 (1.0000 (-1.0019 (4.6645) 0.0071 (0.7315) 7.0024 (5.02493 (1.06915 (0.8577) 0. the coefﬁcients are never statistically signiﬁcant at 95 per cent levels.6081) 0.0505 (2.0897) 0.0115 (-0.2694) 6.0124) 0. This is interesting in that one of the main components of the shareholder rights index is a question concerning the existence of non-voting or subordinate voting shares. but not statistically signiﬁcant. the relevant coefﬁcient is negative.2177 (2) (3) (4) (5) (6) Values in parentheses are t-statistics.6814) -0.7367 (2.4026) 0. but the marginal penalty applied to family ﬁrms is lower. but higher for widely held ﬁrms.8912 (6.6145 (5.7131) 0.0231 (-0. Similarly.6789 (2.0597 (0.3001 (-3.0746) 0.2500) 6. the market places a greater weight on shareholder rights at the margin if the ﬁrm is widely held. Dependent variable is Tobin’s q.7151 (2.1258) -0.5600) 7. Results signiﬁcant at the 5% level are presented in bold.45 for family ﬁrms.0998 (1. making comparison tenuous.0021 (5.1862 -0.7525) 0.2482 (-3.0105 (1. For widely held (and indeed other non-family ﬁrms).7540) -0.9757 (-0.2757) 7.0019 (3.1651 -0.5364) -0.1862 0.0138 (-0. Evaluated at the mean value of the Shareholder Rights Sub-Index (15.8413) -0.3262) 0. © Blackwell Publishing Ltd 2005 Volume 13 Number 6 November 2005 .3632 (-5.9816) -0.CORPORATE GOVERNANCE.5362 (1.1937 -0. FAMILY OWNERSHIP AND FIRM V ALUE 779 Table 6: Performance and corporate governance results: widely held sample using the Total Governance Index and Sub-Indices Tobin’s q (1) Total index Board composition Compensation Shareholder rights Disclosure Size Leverage Sales growth Variance of ROA Utility dummy Resource dummy Financial dummy Intercept Adjusted R square -0.7295) -0.1262 (0.7186) 0. the coefﬁcients on the Disclosure Issues term in both sub-samples are positive.43 for widely held) and using the estimated coefﬁcients from Models 4.8022) 0.5057 (1.4391 (5. It is not clear why the coefﬁcient on the Disclosure Issues term loses signiﬁcance when compared to the full sample.3816) 0. There are other potentially interesting differences between family-owned and widely held ﬁrms that are more difﬁcult to estimate precisely.9052 (5.1687) 0.5030) 0.5164) 0.0175 (-0.3183 (-4. Standard errors are adjusted for heteroscedasticity.6145 (5.0485 (2.1609) -0.8685) -0.1717) -0.5619) 0.9336) 0.2733 (1. These results would indicate that investors do not like multiple share structures and in general ﬁrms are penalised for having them.0028 (5. That is.0000 (-1.0356 (2.2027) 0. 17.7990) 0.6594 (1.0617) 6.0000 (-1.0163) 0. which are common in familyowned ﬁrms. the differential impact on Tobin’s q is 0.0264 (-1.5573) 0. the estimated coefﬁcient for the Shareholder Rights term is lower for the sample of family ﬁrms.9426) 0.4853) 0.3179 (-4.5995) 0. However.3987) -0.6110 (1.0948 (1.5347) 0.1289) 0. For example.7944) 0. N = 123.2882 (-4.8489) -0.7630 (2.2434) 0.0021 (3.1714 -0.0219 (-0.0000 (-2.28 in favour of widely held ﬁrms.2697 (1.7012) -0. having a board that is independent of company management.5377) 0.5862) 0.6776 (1.
These cross- Volume 13 Number 6 November 2005 © Blackwell Publishing Ltd 2005 . In family ﬁrms. Dutta and Jog. the alignment of ownership and control is tighter. board independence is negatively correlated with performance for family ﬁrms. they also ﬁnd that compliance with board structure and functioning recommendations improves ﬁrm performance. and open and transparent disclosure mechanisms that reduce information asymmetry are highly valued by investors. competition in product and capital markets. the family ﬁrm may be better viewed from the vantage point of stewardship theory. In general. our assumption that all family ﬁrms can be treated in the same way may be incorrect. as in our study. Most importantly. compensation polices that align manager and shareholder interests. 2004). 2003). For example. thus obviating the need for outside directors. Another explanation for the family ﬁrm results is that the measure of board composition and independence employed in this study may not fully reveal the full extent of board independence. more reﬁned measures that account for board practices (Dulewicz and Herbert. and therefore suggests board structures which rely on insiders or afﬁliated outsiders (Sundaramurthy and Lewis. our ﬁnding that board structure is negatively related to the performance of family ﬁrms is perhaps more surprising. and these differences may mean that governance effects differ across family ﬁrms (Corbetta and Salvato. This ﬁnding supports the claim of many family-owned companies that a high level of board independence does not automatically lead to better performance and that board independence may not be detrimental to minority shareholders. unlike this study. In general. More importantly. However. as previous surveys have noted. 2004). However. In this regard. 2004. our results must be interpreted in light of country-speciﬁc differences in the governance and ownership environment. Family ﬁrms may well differ along many dimensions that impact governance (such as ownership structure. differences in the general governance environment (for example. Clearly there is a need for ﬁnancial analysts to examine carefully the speciﬁc construction of corporate governance measures when trying to draw a link with ﬁrm performance. Unlike this study. however. the efﬁciency of the market for corporate control and managerial labour markets) may produce different governance– performance relationships in different countries. strong shareholder rights. however. However. Since the weighting scheme is essentially arbitrary. it is possible that a different weighting scheme could lead to different results. they fail to ﬁnd a positive relationship between performance and any of the ROB governance sub-indices.780 CORPORATE GOVERNANCE Discussion and conclusions Our results suggest that corporate governance does matter in Canada. The importance of governance does appear to differ for family-owned ﬁrms as compared to ﬁrms that are widely held. using the same governance data. Similarly. we ﬁnd no evidence that board composition and independence are valued as governance mechanisms. we note that the variables that are most statistically signiﬁcant are those whose weights are lowest in the aggregate index. vary depending on ﬁrm ownership. 2004. our results call into question the usefulness of aggregate structural measures of corporate governance. Ours is not the only study that fails to ﬁnd a positive relationship between ﬁrm performance and the ROB governance index. managerial experience). Thus. 1998). It is not unusual to ﬁnd that board structure is in general unrelated to ﬁrm performance. Likewise. The result that board composition and independence is negatively related to ﬁrm performance may be seen as surprising from the vantage point of agency theory. As concerns the weighting scheme developed by the ROB. and as more recent evidence continues to suggest (Dulewicz and Herbert. Alves and Mendes (2004) ﬁnd that in Portugal there is no relationship between ﬁrm performance and compliance with overall recommended governance standards. Thus differences in ownership structures across countries may create differences in the governance– performance relationship. However. which sees the role of the board as providing service and advice rather than monitoring and control (Muth and Donaldson. Regulators also need to exercise caution when formulating policy based on such aggregate indices. We expect that these issues will become clariﬁed as research continues using the updated versions of the ROB indices. which focuses on the monitoring of managers whose interests are assumed to diverge from those of other shareholders. The difference in the results may be due to the fact that Dutta and Jog use somewhat different performance measures and control variables. outside directors with less knowledge of the ﬁrm and with less of a ﬁnancial stake may in this case lower company efﬁciency by distracting managers and by causing them to focus on short-run goals. the assumptions of agency theory may not fully apply to family ﬁrms. Similar results are reported by Dutta and Jog (2004). 2004) may be required. Finally. Park and Shin. The speciﬁc aspects of corporate governance that are most important to investors can. ﬁrm culture.
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Yun W. Ivey Business Journal. Peter is a CFA and chair of the Vancouver Society of Financial Analysts’ continuing education committee. Leblanc. 16–31. 12. 10. D. (2004) Can Corporate Governance Be Rated? Ideas Based on the Greek Experience.S. L. and Lee-Sing. 5–8. L. L. 1–11. M. B. Corporate Decision-Making and Firm Performance in North America. The Globe and Mail. Peter Klein is an associate professor of ﬁnance at Simon Fraser University’s Faculty of Business Administration. He has twice been awarded the TD Canada Trust teaching award. Journal of Corporate Finance. His research interests include return anomalies. H. (1996) Governance Structure. is fully independent? 8 4 0 6 2 0 4 2 Criteria: Maximum 40 marks marks for at least two 66% independent directors marks if more than 50% independent marks if more than 50% related directors marks if the committee is fully independent if there are one or more related directors if a member of management is on the committee marks if fully independent marks if there is one or more related directors who are not management 0 if a member of management is on the committee 3 marks if fully independent 2 marks if there is one or more related directors who are not management 0 if a member of management is on the committee 0 if no nominating committee Volume 13 Number 6 November 2005 © Blackwell Publishing Ltd 2005 . 9. C. R. D. Morck (ed. J. Academy of Management Review. Sundaramurthy. J. R. (2002) How ROB Created the Rating System. 28. pp.) Concentrated Corporate Ownership. corporate governance. 5–28. and Shin. (2004) Corporate Governance Ratings. Hyun-Han (2004) Board Composition and Earnings Management in Canada. Park. He has a law degree and MBA from the University of Western Ontario and a PhD in ﬁnance from the University of Toronto. the committee that recommends new directors. 431–457. M. B6. S. (2000) Inherited wealth. Sherman. Corporate Governance. he is a CFA. 41. and Lewis. Statistics Canada (2002) Inter-Corporate Ownership Directory. Corporate Governance. 353–375. where he specialised in global asset and wealth management. Ottawa: Statistics Canada. Muth. (2003) Control and Collaboration: Paradoxes of Governance. and Xanthakis. He has been Director of the EMBA programme. 4th quarter. the committee that determines executive pay. In addition. Corporate Governance. His research interests are in areas of corporate and national governance. and Gillies. 397–415. Working Paper No. 7. C. A. Journal of Corporate Finance. R. Manry. 7 October. corporate control and economic growth: the Canadian disease? In R. 319–369. Daniel Shapiro is the Dennis Culver EMBA Alumni Professor in the Faculty of Business Administration at Simon Fraser University. September/October.782 CORPORATE GOVERNANCE ing in the U. foreign investment and ﬁrm performance. taxation and derivative securities. 12. Morck. and Stangeland. M. M. CD ROM. D. He holds an MA and PhD from Cornell University. (2003) The Coming Revolution in Corporate Governance. The Journal of Accounting Research.. and Associate Dean responsible for executive and graduate programmes. (2003) The United Shareholders Association Shareholder 1000 and Firm Performance. and Donaldson. Industry Canada. Jeffrey Young holds an MBA from Simon Fraser University. 317–345. Appendix Table A1: Corporate Governance Index (CGI) components Sub-Index 1: Board composition What percentage of the company’s directors is fully independent? What percentage of the audit committee is fully independent? What percentage of the compensation committee. Chicago: National Bureau of Economic Research and the University of Chicago Press. and Yeung. Strangeland. is fully independent? What percentage of the nominating committee. 6. Improve a Firm’s Information Environment and Increase Market Value. (1998) Stewardship Theory and Board Structure: A Contingency Approach. McFarland. Tsipouri. Roe.
0 points if no 3 points if information disclosed and both the board and audit committee meets at least four times per year 1 point if they meet less often.000 shares after two years on the job 2 points if more than 20. 0 points if no Are there cosy or clubby relationships among directors? Are directors stretched too thin? Is the company’s CEO busy with outside commitments? Does the company have a formal system to evaluate the performance of the board and individual directors? Do directors sometimes meet without management present? How often does the board meet? How often do key committees meet? 2 points if yes. or if only partial information on the number of meetings 0 points if number of director’s meetings not disclosed Criteria: Maximum 23 points Sub-Index 2: Shareholding and compensation policy Are directors required to own stock? (Stock options don’t count) Do the directors own stock? Is the CEO required to own stock? (Stock options don’t count) Does the CEO own shares? 4 points if share ownership is mandatory and equals at least three times the annual retainer paid to directors 2 points if mandatory but ownership requirement is lower 0 if ownership not mandatory 4 points maximum Subtract a point for each director who has less than 1000 shares after sitting on the board for at least a year. (Score can be negative) 0 points if the CEO sits on four or more other boards of publicly traded companies.CORPORATE GOVERNANCE. or CEO is majority or controlling shareholder 3 points if CEO owns more than 50. (Score can be negative) 3 points if it is required.000 shares 0 if less than 20. but there is an independent lead director Start with a maximum of 5 points Subtract 3 if CEO or executive chairman of the company swaps boards with the CEO of another company Subtract 2 whenever three or more directors are together on the board of another public company Subtract 2 for any director who is on more that 8 other for-proﬁt corporate boards. 2 points if three or fewer 2 points if yes.000 shares *if CEO < 2 years on job lower ownership levels qualify for full marks © Blackwell Publishing Ltd 2005 Volume 13 Number 6 November 2005 . FAMILY OWNERSHIP AND FIRM V ALUE 783 Table A1: Continued Sub-Index 1: Board composition Is the role of chairman and CEO split? If not is there a lead director? Criteria: Maximum 40 marks 5 marks if jobs are split 2 marks if the chairman is also a related director 3 marks if the jobs are not split.
or allow them to be Exchanged for lower-priced options. Partial marks were given Criteria: Maximum 15 points 3 marks if company fully addresses all topics required by the Ontario Securities Commission 1 mark if company gives partial answers or discusses only some topics 0 marks if there is no statement of corporate governance practices 4 points for full disclosure of relationships 2 points if information is missing 1 point if company lists as “unrelated” someone ROB considers to be related 4 marks for disclosure (minus 1 if work exceeds the value of the audit and minus 2 marks if work is more than double the value of the audit) 1 point 1 point 2 points for disclosure but minus 1 for poor attendance Sub-Index 4: Disclosure policy Does the company have a full statement of corporate governance practices? Does the company fully name and explain which of its directors are “related” and why? Does the company disclose how much it paid its auditor for consulting and other work? Does the company disclose full biographies of its board members? Does it list other boards its director’s sit on? Does the company disclose attendance records of its directors at board and committee meetings? Volume 13 Number 6 November 2005 © Blackwell Publishing Ltd 2005 .784 CORPORATE GOVERNANCE Table A1: Continued Sub-Index 2: Shareholding and compensation policy Are directors in their own separate option plan? Does the company give loans to directors or ofﬁcers? Criteria: Maximum 23 points 3 points if yes or if directors don’t get stock options 6 points if there are no loans (or company is a bank and makes loans with interest payable) 0 points if loans are interest free Part marks given for loans with interest Marks decline with size of loan Criteria: Maximum 22 points 2 0 8 6 0 4 0 points points points points points points points for annual election of all directors for staggered boards if dilution is <5% of outstanding shares if dilution is between 5% and 10% if more dilutive than 10% for no for yes Sub-Index 3: Shareholder rights policy Do all directors stand for re-election annually? Are employee stock options excessively dilutive for shareholders? Did the company re-price its options in 2001 or 2002? (or extend their exercise date.) Are their non-voting or subordinate voting shares? 8 marks if no 0 marks if voting control is 5 times greater than the ownership stake.
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