Description
While Luoma and Goodstein (1999) find
increased stakeholder representation on the
boards of American companies, Dimovski and
Brooks (2004) provide evidence that the
Australian initial public offering (IPO) market
does not require non equity stakeholder
representation on their boards. This paper
analyses the change in composition of the
boards of large Australian companies post
listing.
Accounting Research Journal
Putting Their Money Where Their Mouth Is: The Importance of Shareholder Directors Post Listing
William Dimovski Robert Brooks
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To cite this document:
William Dimovski Robert Brooks, (2005),"Putting Their Money Where Their Mouth Is: The Importance of Shareholder
Directors Post Listing", Accounting Research J ournal, Vol. 18 Iss 1 pp. 34 - 39
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ACCOUNTING RESEARCH JOURNAL VOLUME 18 NO 1 (2005)
34
Putting Their Money Where Their Mouth Is:
The Importance of Shareholder Directors
Post Listing
William Dimovski
School of Accounting, Economics and Finance
Deakin University
and
Robert Brooks
Department of Economics and Business Statistics
Monash University
Abstract
While Luoma and Goodstein (1999) find
increased stakeholder representation on the
boards of American companies, Dimovski and
Brooks (2004) provide evidence that the
Australian initial public offering (IPO) market
does not require non equity stakeholder
representation on their boards. This paper
analyses the change in composition of the
boards of large Australian companies post
listing. We find a substantial increase in the
number of directors holding equity capital in
the firms in which they hold their directorships.
We also find a decrease in the number of non
equity stakeholder directors post listing. This
suggests that directors putting their money into
the firms in which they have a stewardship
function is an important element in the
Australian capital market.
1. Introduction
In recent years there has been considerable
discussion in the management literature on
the accountability of companies. While
the traditional finance theory focused on
corporate accountability to shareholders,
some management theory has argued for
accountability to a wider set of interest groups.
By recognition of the wider variety of
Acknowledgments: The authors wish to thank an
anonymous referee for their helpful comments on previous
versions of this paper. The authors also wish to thank Tim
Fry for his helpful comments and advice.
stakeholders, such as employees, suppliers,
customers and public representatives, that are
associated with their organizations it is
claimed that companies will produce better
performance against a range of indicators. Agle,
Mitchell and Sonnenfeld (1999) argue that
understanding the needs and expectations of a
broader range of stakeholders than the
traditional equity shareholders is useful to profit
seeking organisations. As companies recognise
a wider range of stakeholders and increase their
aspirations for better corporate governance, the
question arises as to how companies can more
appropriately safeguard the interests of non
equity stakeholders. Evan and Freeman (1993),
Freeman and Evan (1990) and Jones and
Goldberg (1982) suggest direct stakeholder
representation on the board.
If direct stakeholder representation on
corporate boards is indeed useful, then as
Luoma and Goodstein (1999) suggest, there is
likely to be an increased representation.
Companies can simply add new stakeholder
directors to their boards or replace retiring
directors with stakeholder directors. In their
study of 224 NYSE companies over the period
1984 to 1994 they find increased stakeholder
board representation.
Dimovski and Brooks (2004) investigate
270 new issues in Australia over the period
1994 to 1997 to determine the level of non
equity stakeholder representation on the boards
of initial public offerings (IPOs). While
suppliers, suppliers with options to purchase
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Putting Their Money Where Their Mouth Is: The Importance of Shareholder Directors Post Listing
35
shares, employees and employees with options
to purchase shares were well represented on the
boards of these IPOs, there were only 5 of 1393
non financially interested public stakeholder
directors. They conclude that the IPO market in
Australia does not require non equity
stakeholder representation on the board.
The purpose of this paper is to examine any
possible changes to the board composition of
these Australian companies as they mature post
listing. We investigate if the Luoma and
Goodstein (1999) findings apply in the
Australian context. Our investigation is of the
board composition of 54 of the 270 new issues
companies during 1994 to 1997 that hold a
position in the top 500 companies listed on the
Australian Stock Exchange in 2002.
The plan of this paper is as follows. Section
2 briefly summarises the stakeholder literature.
In section 3 we report our empirical findings.
Section 4 contains some concluding comments.
2. Some Previous Stakeholder
Research and Hypotheses
One of the earliest contributors to the
stakeholder literature was Freeman (1984) who
argued that corporations should consider
widening the domain of corporate governance
to include non shareholder stakeholders that are
associated with an organization. He suggested
that understanding stakeholder needs and
expectations would be important to business
organisations because they may directly
influence the types of strategies (and hence
financial performance) of those organisations.
Initially Freeman (1984) discussed three
categories of stakeholders to which firms are
accountable. The first was the equity
stakeholder, or shareholder. The second was
the economic stakeholder which included
customers, suppliers, debt providers and
employees. The third was the “influencer”
stakeholder, which included, governments,
trade associations and consumer organizations.
Other classifications of stakeholders have
followed.
Clarkson (1995) suggested stakeholders
could be classified as primary and secondary
stakeholders. Primary stakeholders include
shareholders, investors, employees, customers,
suppliers, government and communities (those
the company depends on for its survival). The
secondary stakeholders are those the company
doesn’t depend on for its survival.
Luoma and Goodstein (1999) presented a
third classification of stakeholders. They
suggested non shareholder stakeholders could
be primary and public stakeholders. Primary
stakeholders are those the company has a
business relationship with, such as customers,
suppliers and financiers. Public stakeholders
are those the company doesn’t have a business
relationship with but would be interested in the
activities of the organization, such as
government officers, academics and
community representatives.
Evan and Freeman (1993), Freeman and
Evan (1990) and Jones and Goldberg (1982)
have all suggested that the presence of non
shareholder stakeholders at board level was
important. The basis for this view is that by
having a wider variety of stakeholders that the
board will make decisions that better consider
the needs of all groups, and not just focus on a
single group. Luoma and Goodstein (1999)
studied the composition of boards in the U.S. to
see if board seats were actually filled by non
shareholder stakeholders. They found that the
proportion of private stakeholder directors
(customers, suppliers, financiers) to total
directors remained at 5% in each of the years
1984, 1989 and 1994. The found, however, the
proportion of public stakeholder directors
(government officials, academics and
community representatives) to total directors
was 9%, 10% and 11% in each of those years.
They found that this represented a statistically
significant growth in the number of non
shareholder public stakeholder directors.
This study investigates the board
composition of large Australian companies at
the time of the initial public offering (IPO) and
subsequently as these companies mature into
established public companies. It also
specifically investigates industry influences and
organizational size influences on the board
composition at the time of the IPO and
subsequently. Three hypotheses are formally
advanced and tested with regard to changes in
the proportion of shareholder directors, public
non shareholder directors and private non
shareholder directors with the changes being
measured by reference to the time of the IPO.
The pre-IPO owners of the firm must select
the board of directors of the IPO firm at the
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ACCOUNTING RESEARCH JOURNAL VOLUME 18 NO 1 (2005)
36
time of preparing the prospectus. Jensen and
Meckling (1976) discussed the public company
reality that the shareholders of the company
(principals) are separated from the managers
(agents) controlling the activities of the
company. This separation of ownership and
control can allow conflicts of interest between
these two parties where managers may act in
their own interests rather than the best interests
of the shareholders. Such conflicts can involve
agency costs. Mak and Roush (2000) argued
that it is in the interests of the pre-IPO owners
to select a board with an ability to reduce any
potential agency costs. They suggested that
potential new investors may “price protect”
themselves by either looking for higher
underpricing or perhaps even refuse to buy the
primary shares. Such price protection would
provide a strong incentive to the pre-IPO
owners to nominate an “appropriate” board
with abilities to minimise these agency costs.
As the IPO company matures post listing
into an established public company and is
subject to greater external monitoring by the
capital markets over the years, we might expect
following Luoma and Goodstein (1999), the
proportion of non shareholder directors to
increase. Indeed public scrutiny, government
scrutiny, media scrutiny and investor scrutiny
might all suggest a higher level of non
shareholder stakeholder board representation.
This leads to the following hypothesis:
H1: The proportion of non shareholder
directors on a company’s board increases
as the company matures from IPO to an
older, more established, top 500
Australian public company.
Scott (1995) argued that companies, which
are highly accountable to the government, are
highly regulated. Banks and financial services
firms, transport companies and health and drug
companies are examples of such highly
regulated firms. Dimovski and Brooks (2004)
also argued that there is a high level of public
scrutiny over mining and oil companies. Such
companies that are highly accountable to the
public and to the government are likely to be
more concerned about promoting and being
seen to promote their corporate social
responsibility. Therefore the following
hypothesis is tested:
H2: The proportion of non shareholder
stakeholder directors on a company’s
board is greater in companies that operate
in highly regulated industries.
Luoma and Goodstein (1999) argued that
larger organizations, because of their size are
subject to greater attention from the public, the
media and the government. It is suggested that
large firms need to promote and need to be
seen to promote a higher degree of corporate
social responsibility. This leads to the
following hypothesis:
H3: The proportion of non shareholder
stakeholder directors on a company’s
board is greater in larger companies.
3. Empirical Findings
Australian Stock Exchange Float Reports were
used to identify new listings on the Australian
Stock Exchange over the period 1994 to 1997.
A total of 270 companies raised equity capital
from the public. Of these IPOs, 54 were listed
as a top 500 company in the 2002 year
(excluding 10 property and equity trust IPOs
that have a management company managing
the affairs of the trust). Board composition data
was found in each of the prospectuses of the
IPO companies and in the 2002 Annual
Reports. Each director’s interests (including
shareholding and option interests) and director
profiles (including occupation and affiliation)
were noted. Alternate directors were not
included. The prospectuses and annual reports
were sourced from the respective Connect 4
databases.
We identified the directors that had a
shareholding interest in each company (direct
or through one of their personally affiliated
trusts or companies) and classified these as
“shareholder directors”. Using Luoma and
Goodstein’s (1999) classification of “private
stakeholder directors” we identify the directors
who were non equity holding customers,
employees and suppliers. Similarly, we identify
the non equity holding “public stakeholder
directors” of government representatives and
academics. A number of directors in our
sample group were also non equity interested
professional directors. These too were
classified as public stakeholder directors.
In our initial analysis ordinary least squares
(OLS) regression models are developed to
examine the relationship between the
dependent variables and the explanatory
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Putting Their Money Where Their Mouth Is: The Importance of Shareholder Directors Post Listing
37
variables. The dependent variables examined
are defined as follows:
PNSHADIR the proportion of directors who
own shares directly or beneficially in the
company [Luoma and Goodstein (1999)];
PNPRODIR the proportion of private
stakeholder directors not holding an equity
stake in the company [Luoma and
Goodstein (1999)];
PNPUODIR the proportion of public
stakeholder directors not holding an equity
stake in the company [Luoma and
Goodstein (1999)];
The explanatory variables examined are
defined as follows:
POSTIPO A (0 or 1) variable with a value
of 0 if the data on directors is taken at the
time of the IPO or 1 if the director data is
taken in 2002 [Luoma and Goodstein
(1999)];
HIGHREG A (0 or 1) variable with a value
of 0 if the company is less regulated and a
value of 1 if the company is more heavily
regulated. Heavily regulated companies
are mining, oil, alcohol, transport, media,
financial services, drug, medical services
and gaming companies [adapted from
Luoma and Goodstein (1999)];
LNMKTCAP records the natural log of the
market capitalization of the company in
the year of the IPO and at November 2002
[adapted from Mak and Roush (2000);
Luoma and Goodstein (1999)].
Three regression models were performed
with the proportion of shareholder directors
(PNSHADIR), the proportion of private
stakeholder directors (PNPRODIR) and the
proportion of public stakeholder directors
(PNPUODIR) as the dependent variables.
These models used the number of shareholder
directors, private non shareholder directors and
public non shareholders directors respectively
in the numerator and board size in the
denominator.
PNSHADIR or PNPRODIR or PNPRODIR =
!0 + !1 POSTIPO + !2 HIGHREG
+ !3 LNMKTCAP + ? (1)
where all the variables are as defined
previously and the !’s are unknown parameters
to be estimated.
The models test whether the proportions of
shareholder directors, private stakeholder
directors and public stakeholder directors
changes after the initial public offering and
whether they are explained by the regulatory
environment in which the firm operates and by
the firm’s size (value) in terms of market
capitalization.
An issue is whether the linear model is
appropriate in this context. Because the
dependent variable is a proportion of directors
it is bound between 0 and 1. Thus the linear
model may be inappropriate as it can produce
predicted values of the proportions outside of
this range. As such it is worthwhile to consider
modeling in a framework that does not allow
predictions outside of the bounds. One such
framework is to utilize the logistic
transformation in the modelling. The logistic
transformation would adjust the proportions
variables as follows:
y = ln (p / (1-p))
Unfortunately this transformation is not
appropriate in this context due to the boundary
problems. Because we have a number of
observations where the proportions are zero or
one the above logistic function is not defined
1
.
Table 1 reports some descriptive statistics.
The mean number of board members of the
IPO companies at the time of the IPO was
slightly under 6 and nearly 6.5 and in 2002.
The mean number of shareholder directors,
private non shareholder directors and public
non shareholder directors at IPO time was 2.44,
1.17 and 2.30 respectively. The mean number
of shareholder directors, private non
shareholder directors and public non
shareholder directors in 2002 was 5.76, 0.06
and 0.63 respectively. The mean proportion of
shareholder directors, private non shareholder
directors and public non shareholder directors
at IPO time was 0.48, 0.19 and 0.33
respectively. The mean proportion of
shareholder directors, private non shareholder
directors and public non shareholder directors
in 2002 was 0.89, 0.01 and 0.10 respectively.
1 A further option would be to utilize a double censored
tobit model in the empirical analysis. This would
involve replacing the boundary points (0 or 1) with a
number very close to the boundary. This number is
arbitrary so computationally intensive sensitivity
analysis is needed. Because of the computational
intensity we do not pursue this option in this paper.
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ACCOUNTING RESEARCH JOURNAL VOLUME 18 NO 1 (2005)
38
Table 1
Descriptive Statistics for Dependent Variables
IPO (n=54) Top 500 Company in 2002
mean median s.d. mean median s.d.
Board Size 5.91 5 2.03 6.44 6 1.83
No. of shareholder directors 2.44 2 2.00 5.76 5 1.99
No. of private stakeholder
directors
1.17 1 1.68 0.06 0 0.30
No. of public stakeholder
directors
2.30 1 3.08 0.63 0 1.07
Proportion of shareholder
directors
0.48 0.50 0.38 0.89 1 0.16
Proportion of private stakeholder
directors
0.19 0.11 0.26 0.01 0 0.04
Proportion of public stakeholder
directors
0.33 0.25 0.34 0.10 0 0.15
Table 2
OLS of Proportion of Shareholder, Private and Public Stakeholder
Directors and Explanatory Variables *
PNSHADIR PNPRODIR PNPUODIR
Variable Coefficient Pr. Coefficient Pr. Coefficient Pr.
C 0.631 0.000 0.225 0.000 0.144 0.066
POSTIPO 0.452 0.000 -0.180 0.000 -0.272 0.000
HIGHREG 0.056 0.302 -0.004 0.916 -0.052 0.273
LNMKTCAP -0.040 0.019 -0.007 0.412 0.047 0.008
J-B 0.990 0.610 295.774 0.000 6.656 0.036
White 21.820 0.000 11.322 0.023 22.421 0.000
Reset 3.829 0.000 4.641 0.545 6.283 0.000
Adj R-squared 0.364 0.181 0.222
* White (1980) heteroscedasticity-consistent coefficients and p-values are reported.
These are interesting descriptive results:
briefly, of our sample 54 IPOs that rank in
Australia’s top 500 publicly listed companies in
2002, nearly 5 in 10 directors are shareholder
directors at IPO time but nearly 9 in 10
directors are shareholder directors in 2002.
The descriptive statistics identify that on
average there are 41% more shareholder
directors in our 2002 companies than when
those companies floated. This has come about
by the sample companies exchanging 18% of
their private stakeholder directors and 23% of
their public stakeholder directors at IPO time
for greater proportion of shareholder directors
by 2002.
Table 2 reports the results of the OLS
regressions with the proportion of shareholder
directors, proportion of private stakeholder
directors and proportion of public stakeholder
directors as the dependent variables. The results
reveal the following patterns. Hypothesis 1 is
supported by the significantly positive
coefficient on the POSTIPO variable in the
shareholder directors regression and by the
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Putting Their Money Where Their Mouth Is: The Importance of Shareholder Directors Post Listing
39
significantly negative coefficient on the
POSTIPO variable in the private and public
stakeholder directors regression. Hypothesis 2
is not supported as the HIGHREG variable is
insignificant in all three regressions.
Hypothesis 3 is supported by the significantly
positive coefficient on the market capitalisation
variable in the public stakeholder directors
regression.
To evaluate the reliability of the estimated
models a range of standard regression
diagnostics are reported. As a measure of
goodness of fit we report the adjusted R
2
.These
values range from 18% to 36%. As a test for
normality the Jarque-Bera (J-B) test is reported.
These results indicate some non-normality
issues in the stakeholder directors regressions.
Given the reported p-values on the coefficients
this is not likely to be a problem for inference.
As specification tests both Reset and White
tests are reported. These indicate some
heteroscedasticity problems. To adjust for this
White (1980) adjusted p-values and
coefficients are reported.
4. Conclusion
We find a substantial increase in the number
and in the proportion of shareholder directors to
non shareholder directors. It appears that not
quite 5 in 10 IPO company directors are
shareholder directors while nearly 9 of every
10 directors have a shareholding interest by
2002. The coefficients on the explanatory
variable POSTIPO, as they relate to
shareholder directors (positive) and private and
public stakeholder directors (negative) are
highly significant. This suggests the importance
of directors essentially putting their money
where their mouth is, is an important element
in the Australian capital market. This growth in
shareholder directors compared to stakeholder
directors is somewhat contrary to Luoma and
Goodstein’s (1999) finding, although this study
monitors the change in directors post IPO while
Luoma and Goodstein’s (1999) study monitors
the change in directors of existing listed
companies. Perhaps the Australian capital
market deals with Jensen and Meckling’s
(1976) agency cost problem by seeking
directors with a shareholding interest. Such
directors have a self interested incentive to
work in the best interests of shareholders
because they themselves are shareholders. We
also find, however, that larger companies are
likely to employ a higher proportion of public
stakeholder directors.
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doc_665095623.pdf
While Luoma and Goodstein (1999) find
increased stakeholder representation on the
boards of American companies, Dimovski and
Brooks (2004) provide evidence that the
Australian initial public offering (IPO) market
does not require non equity stakeholder
representation on their boards. This paper
analyses the change in composition of the
boards of large Australian companies post
listing.
Accounting Research Journal
Putting Their Money Where Their Mouth Is: The Importance of Shareholder Directors Post Listing
William Dimovski Robert Brooks
Article information:
To cite this document:
William Dimovski Robert Brooks, (2005),"Putting Their Money Where Their Mouth Is: The Importance of Shareholder
Directors Post Listing", Accounting Research J ournal, Vol. 18 Iss 1 pp. 34 - 39
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ACCOUNTING RESEARCH JOURNAL VOLUME 18 NO 1 (2005)
34
Putting Their Money Where Their Mouth Is:
The Importance of Shareholder Directors
Post Listing
William Dimovski
School of Accounting, Economics and Finance
Deakin University
and
Robert Brooks
Department of Economics and Business Statistics
Monash University
Abstract
While Luoma and Goodstein (1999) find
increased stakeholder representation on the
boards of American companies, Dimovski and
Brooks (2004) provide evidence that the
Australian initial public offering (IPO) market
does not require non equity stakeholder
representation on their boards. This paper
analyses the change in composition of the
boards of large Australian companies post
listing. We find a substantial increase in the
number of directors holding equity capital in
the firms in which they hold their directorships.
We also find a decrease in the number of non
equity stakeholder directors post listing. This
suggests that directors putting their money into
the firms in which they have a stewardship
function is an important element in the
Australian capital market.
1. Introduction
In recent years there has been considerable
discussion in the management literature on
the accountability of companies. While
the traditional finance theory focused on
corporate accountability to shareholders,
some management theory has argued for
accountability to a wider set of interest groups.
By recognition of the wider variety of
Acknowledgments: The authors wish to thank an
anonymous referee for their helpful comments on previous
versions of this paper. The authors also wish to thank Tim
Fry for his helpful comments and advice.
stakeholders, such as employees, suppliers,
customers and public representatives, that are
associated with their organizations it is
claimed that companies will produce better
performance against a range of indicators. Agle,
Mitchell and Sonnenfeld (1999) argue that
understanding the needs and expectations of a
broader range of stakeholders than the
traditional equity shareholders is useful to profit
seeking organisations. As companies recognise
a wider range of stakeholders and increase their
aspirations for better corporate governance, the
question arises as to how companies can more
appropriately safeguard the interests of non
equity stakeholders. Evan and Freeman (1993),
Freeman and Evan (1990) and Jones and
Goldberg (1982) suggest direct stakeholder
representation on the board.
If direct stakeholder representation on
corporate boards is indeed useful, then as
Luoma and Goodstein (1999) suggest, there is
likely to be an increased representation.
Companies can simply add new stakeholder
directors to their boards or replace retiring
directors with stakeholder directors. In their
study of 224 NYSE companies over the period
1984 to 1994 they find increased stakeholder
board representation.
Dimovski and Brooks (2004) investigate
270 new issues in Australia over the period
1994 to 1997 to determine the level of non
equity stakeholder representation on the boards
of initial public offerings (IPOs). While
suppliers, suppliers with options to purchase
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Putting Their Money Where Their Mouth Is: The Importance of Shareholder Directors Post Listing
35
shares, employees and employees with options
to purchase shares were well represented on the
boards of these IPOs, there were only 5 of 1393
non financially interested public stakeholder
directors. They conclude that the IPO market in
Australia does not require non equity
stakeholder representation on the board.
The purpose of this paper is to examine any
possible changes to the board composition of
these Australian companies as they mature post
listing. We investigate if the Luoma and
Goodstein (1999) findings apply in the
Australian context. Our investigation is of the
board composition of 54 of the 270 new issues
companies during 1994 to 1997 that hold a
position in the top 500 companies listed on the
Australian Stock Exchange in 2002.
The plan of this paper is as follows. Section
2 briefly summarises the stakeholder literature.
In section 3 we report our empirical findings.
Section 4 contains some concluding comments.
2. Some Previous Stakeholder
Research and Hypotheses
One of the earliest contributors to the
stakeholder literature was Freeman (1984) who
argued that corporations should consider
widening the domain of corporate governance
to include non shareholder stakeholders that are
associated with an organization. He suggested
that understanding stakeholder needs and
expectations would be important to business
organisations because they may directly
influence the types of strategies (and hence
financial performance) of those organisations.
Initially Freeman (1984) discussed three
categories of stakeholders to which firms are
accountable. The first was the equity
stakeholder, or shareholder. The second was
the economic stakeholder which included
customers, suppliers, debt providers and
employees. The third was the “influencer”
stakeholder, which included, governments,
trade associations and consumer organizations.
Other classifications of stakeholders have
followed.
Clarkson (1995) suggested stakeholders
could be classified as primary and secondary
stakeholders. Primary stakeholders include
shareholders, investors, employees, customers,
suppliers, government and communities (those
the company depends on for its survival). The
secondary stakeholders are those the company
doesn’t depend on for its survival.
Luoma and Goodstein (1999) presented a
third classification of stakeholders. They
suggested non shareholder stakeholders could
be primary and public stakeholders. Primary
stakeholders are those the company has a
business relationship with, such as customers,
suppliers and financiers. Public stakeholders
are those the company doesn’t have a business
relationship with but would be interested in the
activities of the organization, such as
government officers, academics and
community representatives.
Evan and Freeman (1993), Freeman and
Evan (1990) and Jones and Goldberg (1982)
have all suggested that the presence of non
shareholder stakeholders at board level was
important. The basis for this view is that by
having a wider variety of stakeholders that the
board will make decisions that better consider
the needs of all groups, and not just focus on a
single group. Luoma and Goodstein (1999)
studied the composition of boards in the U.S. to
see if board seats were actually filled by non
shareholder stakeholders. They found that the
proportion of private stakeholder directors
(customers, suppliers, financiers) to total
directors remained at 5% in each of the years
1984, 1989 and 1994. The found, however, the
proportion of public stakeholder directors
(government officials, academics and
community representatives) to total directors
was 9%, 10% and 11% in each of those years.
They found that this represented a statistically
significant growth in the number of non
shareholder public stakeholder directors.
This study investigates the board
composition of large Australian companies at
the time of the initial public offering (IPO) and
subsequently as these companies mature into
established public companies. It also
specifically investigates industry influences and
organizational size influences on the board
composition at the time of the IPO and
subsequently. Three hypotheses are formally
advanced and tested with regard to changes in
the proportion of shareholder directors, public
non shareholder directors and private non
shareholder directors with the changes being
measured by reference to the time of the IPO.
The pre-IPO owners of the firm must select
the board of directors of the IPO firm at the
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ACCOUNTING RESEARCH JOURNAL VOLUME 18 NO 1 (2005)
36
time of preparing the prospectus. Jensen and
Meckling (1976) discussed the public company
reality that the shareholders of the company
(principals) are separated from the managers
(agents) controlling the activities of the
company. This separation of ownership and
control can allow conflicts of interest between
these two parties where managers may act in
their own interests rather than the best interests
of the shareholders. Such conflicts can involve
agency costs. Mak and Roush (2000) argued
that it is in the interests of the pre-IPO owners
to select a board with an ability to reduce any
potential agency costs. They suggested that
potential new investors may “price protect”
themselves by either looking for higher
underpricing or perhaps even refuse to buy the
primary shares. Such price protection would
provide a strong incentive to the pre-IPO
owners to nominate an “appropriate” board
with abilities to minimise these agency costs.
As the IPO company matures post listing
into an established public company and is
subject to greater external monitoring by the
capital markets over the years, we might expect
following Luoma and Goodstein (1999), the
proportion of non shareholder directors to
increase. Indeed public scrutiny, government
scrutiny, media scrutiny and investor scrutiny
might all suggest a higher level of non
shareholder stakeholder board representation.
This leads to the following hypothesis:
H1: The proportion of non shareholder
directors on a company’s board increases
as the company matures from IPO to an
older, more established, top 500
Australian public company.
Scott (1995) argued that companies, which
are highly accountable to the government, are
highly regulated. Banks and financial services
firms, transport companies and health and drug
companies are examples of such highly
regulated firms. Dimovski and Brooks (2004)
also argued that there is a high level of public
scrutiny over mining and oil companies. Such
companies that are highly accountable to the
public and to the government are likely to be
more concerned about promoting and being
seen to promote their corporate social
responsibility. Therefore the following
hypothesis is tested:
H2: The proportion of non shareholder
stakeholder directors on a company’s
board is greater in companies that operate
in highly regulated industries.
Luoma and Goodstein (1999) argued that
larger organizations, because of their size are
subject to greater attention from the public, the
media and the government. It is suggested that
large firms need to promote and need to be
seen to promote a higher degree of corporate
social responsibility. This leads to the
following hypothesis:
H3: The proportion of non shareholder
stakeholder directors on a company’s
board is greater in larger companies.
3. Empirical Findings
Australian Stock Exchange Float Reports were
used to identify new listings on the Australian
Stock Exchange over the period 1994 to 1997.
A total of 270 companies raised equity capital
from the public. Of these IPOs, 54 were listed
as a top 500 company in the 2002 year
(excluding 10 property and equity trust IPOs
that have a management company managing
the affairs of the trust). Board composition data
was found in each of the prospectuses of the
IPO companies and in the 2002 Annual
Reports. Each director’s interests (including
shareholding and option interests) and director
profiles (including occupation and affiliation)
were noted. Alternate directors were not
included. The prospectuses and annual reports
were sourced from the respective Connect 4
databases.
We identified the directors that had a
shareholding interest in each company (direct
or through one of their personally affiliated
trusts or companies) and classified these as
“shareholder directors”. Using Luoma and
Goodstein’s (1999) classification of “private
stakeholder directors” we identify the directors
who were non equity holding customers,
employees and suppliers. Similarly, we identify
the non equity holding “public stakeholder
directors” of government representatives and
academics. A number of directors in our
sample group were also non equity interested
professional directors. These too were
classified as public stakeholder directors.
In our initial analysis ordinary least squares
(OLS) regression models are developed to
examine the relationship between the
dependent variables and the explanatory
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Putting Their Money Where Their Mouth Is: The Importance of Shareholder Directors Post Listing
37
variables. The dependent variables examined
are defined as follows:
PNSHADIR the proportion of directors who
own shares directly or beneficially in the
company [Luoma and Goodstein (1999)];
PNPRODIR the proportion of private
stakeholder directors not holding an equity
stake in the company [Luoma and
Goodstein (1999)];
PNPUODIR the proportion of public
stakeholder directors not holding an equity
stake in the company [Luoma and
Goodstein (1999)];
The explanatory variables examined are
defined as follows:
POSTIPO A (0 or 1) variable with a value
of 0 if the data on directors is taken at the
time of the IPO or 1 if the director data is
taken in 2002 [Luoma and Goodstein
(1999)];
HIGHREG A (0 or 1) variable with a value
of 0 if the company is less regulated and a
value of 1 if the company is more heavily
regulated. Heavily regulated companies
are mining, oil, alcohol, transport, media,
financial services, drug, medical services
and gaming companies [adapted from
Luoma and Goodstein (1999)];
LNMKTCAP records the natural log of the
market capitalization of the company in
the year of the IPO and at November 2002
[adapted from Mak and Roush (2000);
Luoma and Goodstein (1999)].
Three regression models were performed
with the proportion of shareholder directors
(PNSHADIR), the proportion of private
stakeholder directors (PNPRODIR) and the
proportion of public stakeholder directors
(PNPUODIR) as the dependent variables.
These models used the number of shareholder
directors, private non shareholder directors and
public non shareholders directors respectively
in the numerator and board size in the
denominator.
PNSHADIR or PNPRODIR or PNPRODIR =
!0 + !1 POSTIPO + !2 HIGHREG
+ !3 LNMKTCAP + ? (1)
where all the variables are as defined
previously and the !’s are unknown parameters
to be estimated.
The models test whether the proportions of
shareholder directors, private stakeholder
directors and public stakeholder directors
changes after the initial public offering and
whether they are explained by the regulatory
environment in which the firm operates and by
the firm’s size (value) in terms of market
capitalization.
An issue is whether the linear model is
appropriate in this context. Because the
dependent variable is a proportion of directors
it is bound between 0 and 1. Thus the linear
model may be inappropriate as it can produce
predicted values of the proportions outside of
this range. As such it is worthwhile to consider
modeling in a framework that does not allow
predictions outside of the bounds. One such
framework is to utilize the logistic
transformation in the modelling. The logistic
transformation would adjust the proportions
variables as follows:
y = ln (p / (1-p))
Unfortunately this transformation is not
appropriate in this context due to the boundary
problems. Because we have a number of
observations where the proportions are zero or
one the above logistic function is not defined
1
.
Table 1 reports some descriptive statistics.
The mean number of board members of the
IPO companies at the time of the IPO was
slightly under 6 and nearly 6.5 and in 2002.
The mean number of shareholder directors,
private non shareholder directors and public
non shareholder directors at IPO time was 2.44,
1.17 and 2.30 respectively. The mean number
of shareholder directors, private non
shareholder directors and public non
shareholder directors in 2002 was 5.76, 0.06
and 0.63 respectively. The mean proportion of
shareholder directors, private non shareholder
directors and public non shareholder directors
at IPO time was 0.48, 0.19 and 0.33
respectively. The mean proportion of
shareholder directors, private non shareholder
directors and public non shareholder directors
in 2002 was 0.89, 0.01 and 0.10 respectively.
1 A further option would be to utilize a double censored
tobit model in the empirical analysis. This would
involve replacing the boundary points (0 or 1) with a
number very close to the boundary. This number is
arbitrary so computationally intensive sensitivity
analysis is needed. Because of the computational
intensity we do not pursue this option in this paper.
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ACCOUNTING RESEARCH JOURNAL VOLUME 18 NO 1 (2005)
38
Table 1
Descriptive Statistics for Dependent Variables
IPO (n=54) Top 500 Company in 2002
mean median s.d. mean median s.d.
Board Size 5.91 5 2.03 6.44 6 1.83
No. of shareholder directors 2.44 2 2.00 5.76 5 1.99
No. of private stakeholder
directors
1.17 1 1.68 0.06 0 0.30
No. of public stakeholder
directors
2.30 1 3.08 0.63 0 1.07
Proportion of shareholder
directors
0.48 0.50 0.38 0.89 1 0.16
Proportion of private stakeholder
directors
0.19 0.11 0.26 0.01 0 0.04
Proportion of public stakeholder
directors
0.33 0.25 0.34 0.10 0 0.15
Table 2
OLS of Proportion of Shareholder, Private and Public Stakeholder
Directors and Explanatory Variables *
PNSHADIR PNPRODIR PNPUODIR
Variable Coefficient Pr. Coefficient Pr. Coefficient Pr.
C 0.631 0.000 0.225 0.000 0.144 0.066
POSTIPO 0.452 0.000 -0.180 0.000 -0.272 0.000
HIGHREG 0.056 0.302 -0.004 0.916 -0.052 0.273
LNMKTCAP -0.040 0.019 -0.007 0.412 0.047 0.008
J-B 0.990 0.610 295.774 0.000 6.656 0.036
White 21.820 0.000 11.322 0.023 22.421 0.000
Reset 3.829 0.000 4.641 0.545 6.283 0.000
Adj R-squared 0.364 0.181 0.222
* White (1980) heteroscedasticity-consistent coefficients and p-values are reported.
These are interesting descriptive results:
briefly, of our sample 54 IPOs that rank in
Australia’s top 500 publicly listed companies in
2002, nearly 5 in 10 directors are shareholder
directors at IPO time but nearly 9 in 10
directors are shareholder directors in 2002.
The descriptive statistics identify that on
average there are 41% more shareholder
directors in our 2002 companies than when
those companies floated. This has come about
by the sample companies exchanging 18% of
their private stakeholder directors and 23% of
their public stakeholder directors at IPO time
for greater proportion of shareholder directors
by 2002.
Table 2 reports the results of the OLS
regressions with the proportion of shareholder
directors, proportion of private stakeholder
directors and proportion of public stakeholder
directors as the dependent variables. The results
reveal the following patterns. Hypothesis 1 is
supported by the significantly positive
coefficient on the POSTIPO variable in the
shareholder directors regression and by the
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Putting Their Money Where Their Mouth Is: The Importance of Shareholder Directors Post Listing
39
significantly negative coefficient on the
POSTIPO variable in the private and public
stakeholder directors regression. Hypothesis 2
is not supported as the HIGHREG variable is
insignificant in all three regressions.
Hypothesis 3 is supported by the significantly
positive coefficient on the market capitalisation
variable in the public stakeholder directors
regression.
To evaluate the reliability of the estimated
models a range of standard regression
diagnostics are reported. As a measure of
goodness of fit we report the adjusted R
2
.These
values range from 18% to 36%. As a test for
normality the Jarque-Bera (J-B) test is reported.
These results indicate some non-normality
issues in the stakeholder directors regressions.
Given the reported p-values on the coefficients
this is not likely to be a problem for inference.
As specification tests both Reset and White
tests are reported. These indicate some
heteroscedasticity problems. To adjust for this
White (1980) adjusted p-values and
coefficients are reported.
4. Conclusion
We find a substantial increase in the number
and in the proportion of shareholder directors to
non shareholder directors. It appears that not
quite 5 in 10 IPO company directors are
shareholder directors while nearly 9 of every
10 directors have a shareholding interest by
2002. The coefficients on the explanatory
variable POSTIPO, as they relate to
shareholder directors (positive) and private and
public stakeholder directors (negative) are
highly significant. This suggests the importance
of directors essentially putting their money
where their mouth is, is an important element
in the Australian capital market. This growth in
shareholder directors compared to stakeholder
directors is somewhat contrary to Luoma and
Goodstein’s (1999) finding, although this study
monitors the change in directors post IPO while
Luoma and Goodstein’s (1999) study monitors
the change in directors of existing listed
companies. Perhaps the Australian capital
market deals with Jensen and Meckling’s
(1976) agency cost problem by seeking
directors with a shareholding interest. Such
directors have a self interested incentive to
work in the best interests of shareholders
because they themselves are shareholders. We
also find, however, that larger companies are
likely to employ a higher proportion of public
stakeholder directors.
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