Professional Documents
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CORPORATE GOVERNANCE
Is There a Relationship between Firm Performance, Corporate Governance, and a Firms Decision to Form a Technology Committee?
Ronald F. Premuroso* and Somnath Bhattacharya
Some S&P 500 rms have recently formed technology committees at the board-level. This study investigates the corporate governance and rm nancial performance implications of the voluntary formation of technology committees by members of the S&P 500. Using nancial performance and structure-related variables, the results of the study suggest that rms corporate governance ratings are signicantly and positively related to their decisions to voluntarily form technology committees. Specically, rm performance ratios such as return on assets, return on equity, and net prot margin appear to be associated with rms decisions to form board-level technology committees. These ndings have post Sarbanes-Oxley corporate governance and performance implications and should be relevant for stakeholders such as the SEC, various stock exchanges, and the rms themselves. Keywords: Board committees, board composition, board of directors, board quality measurement, board structure, corporate governance, rm nancial performance, information technology, intellectual property, research and development, science and technology
1. Introduction
*Address for correspondence: Florida Atlantic University, 777 Glades Road, Boca Raton, FL 33431-0991, USA. Tel: 1-561212-0766. E-mail: premuros@ fau.edu
he multitude of high-prole US corporate scandals over the past decade have increased both public and shareholder scrutiny of corporations. The regulatory reforms mandated by the Sarbanes-Oxley Act of 2002 (SOX hereafter) and adopted by the Securities and Exchange Commission (SEC hereafter) represent the most important securities legislation since the original federal securities laws of the 1930s (then SEC Chairman William H. Donaldson, September 17, 2003). One of SOXs objectives is to enhance corporate governance by promoting board independence and imposing new obligations and responsibilities on the audit committee (Linck et al., 2005, 30). The provisions of Sections 401 (Disclosures in periodic reports), 404 (External auditors attestation of managements report regarding internal controls) and 409 (Real time issuer disclosures) of SOX have also increased
the pressure on boards of directors of US-traded rms to improve overall corporate governance. While all US rms have formed audit and compensation committees to comply with SOX and stock exchange regulations, some US rms have also voluntarily formed board-level committees termed technology committees. According to the Spencer Stuart Board Index (2005), about 5 per cent of the S&P 500 boards now have technology committees, up from none in 2000.1 Technology committees are being formed to assist board members in the areas of information technology, science and technology-driven rm issues. If a rm has signicant changes relating to or affecting intellectual property or technology, such changes may have a material impact on a rms net worth (which would require a SOX Section 409 disclosure) (DeCarlo, 2005). Also, Section 404 of SOX requires rms to detail the adequacy of their internal controls over
2007 The Authors Journal compilation 2007 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
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technology systems (Murti, 2005). Directors who are bankers or nancial experts arent comfortable with complicated scientic and technology issues . . . the technology committee is a relative newcomer to the corporate governance scene (Feldman and Potamianos, 2005, 14). If a companys intellectual property assets are material, the rm is required to provide detailed disclosure and discussion in the business section of the annual report regarding such intellectual property assets such as patents, copyrights, trademarks, and trade secrets; the existence of material risks or litigation related to this intellectual property also requires disclosure and the failure to provide adequate disclosure of such information may be a violation of SOX (DeCarlo, 2005). In addition, Statement of Financial Accounting Standards No. 142 requires rms to regularly evaluate all intangible assets to determine if impairment in their value has occurred. Since such assets often involve technology and future value of technological innovations technology committees and their deliberations and resulting actions may have corporate governance and rm performance implications.2 In this paper we attempt to determine the corporate governance and rm performance implications of rms forming technology committees. These committees essentially represent a new type of voluntary board committee, and as the formation of other voluntary board committees continues to grow, the results obtained here may well also apply to other voluntary board committees appointed by rms in the post-SOX era. Our results suggest that corporate governance is signicantly and positively related to rms decisions to voluntarily form technology committees. Additionally, rm performance ratios such as returns on assets, returns on equity, and net prot margins are also associated with rms decisions to form technology committees. The rest of this paper is organised as follows: Section 2 contains the literature review. The research hypotheses and variable measurements are developed in Section 3. Section 4 describes the research methodology, including the statistical analyses performed on the data. Section 5 presents the results of the various statistical analyses. Section 6 presents the conclusions, limitations of the study, and related areas for future research.
committees; describes how the quest for rstmover advantages may motivate the voluntary formation of technology committees; and explores the potential relationship of board composition to corporate governance and rm performance.
2. Literature review
This section reviews the evolution of corporate governance guidelines; discusses potential incentives for the formation of board sub-
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members. Kesner (1988) in fact argues that most important board decisions originate at the committee level. Vance (1983) also posited that there are four board committees that greatly inuence corporate activities: the audit, executive, compensation, and nomination committees. These studies, and others, have related board composition to issues of rm performance and earnings management. Xie et al. (2003) have argued that outside directors may be more important on board committees that handle agency issues (e.g., audit and compensation committees), and inside directors may best use their company knowledge on committees that focus on rm-specic issues (e.g. investment and nance committees). Similarly, a study by Carson (2002) of 361 of the largest 500 Australian companies found: (1) audit committee presence to be positively associated with both Big 6 auditors and the number of intercorporate relationships of directors of the board; (2) remuneration committees to be positively associated with Big 6 auditors, intercorporate relationships, and high levels of institutional ownership; and (3) the presence of nomination committees to be not associated with auditors, directors, or investors, but to be positively associated with board size and leverage. Carson (2002) also concluded that audit committees are a highlydeveloped and mature corporate governance mechanism; remuneration committees were classied as developing committees, and nomination committees were deemed to be relatively immature. Thus, rms may have the incentive to form technology committees based upon the results of their past experiences with other board committees.
to identify any advantages (Rubach and Picou, 2005, 3536). Another study related to rst-mover advantages by Khallaf and Skantz (2007) on the effects of information technology expertise on the market value of the rm found evidence that the market penalises rms that fail to move quickly to obtain the potential strategic advantages of new Chief Information Ofcer positions. Given that SOX and stock exchange regulations do not currently require the appointment of board-level technology committees for publicly-listed rms, an argument can be made that rms engaged in the formation of such committees recognise the importance of technology-related matters to such rms and voluntarily disclose and form such committees in order to signal their superior technologyrelated corporate governance. This study thus is expected to add to the literature on the voluntary adoption of corporate governance measures in the post-SOX era. We are not aware of any research to date that have examined the relationship between the voluntary adoptions of board committees (such as technology committees), corporate governance, and rm performance.
2.4. The association between board composition, corporate governance, and rm performance
Prior studies have examined board composition (in terms of the number of outside and inside directors) and corporate governance. Deutsch (2005) prepared a meta-analysis of the composition of boards of directors (in terms of the percentage of outside directors) and related the analysis to critical decisions (including R&D expenditures, debt intensity, CEO turnover, and takeover defenses) undertaken by the board. Deutsch found that a higher percentage of outside board members were modestly related to lower R&D expenditures, and found positive relationships between the percentage of outside directors and debt intensity, CEO turnover, and the adoption of takeover defenses. Other studies have examined the relationship between the number of directors on the board and rm nancial performance. Dalton et al. (1998), in a meta-analyses of 54 empirical studies related to board composition and 31 studies related to board leadership structure, found little evidence of a systematic relationship between corporate governance structure (related to board size) and the nancial performance of the rm. However, in another metaanalysis performed by Dalton et al. (1999), adding rm size to such a model moderated
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the board size corporate nancial performance relationship, and the authors found a signicant statistical relationship for both large- and small-rm size groups. Finally, Daily and Dalton (2004, p. 16) state that the results of research over a 40-year period comprising over 40,000 rms . . . nd there is no evidence of a systematic relationship between board composition and corporate performance, and such results hold for a variety of board composition measurements and whether performance is accounting-based or a market-based measure of performance. More recent studies have focused on the inner workings of the board via board composition. One primary role of the board is to oversee the long-term investment strategy of the rm (Fama 1980). For instance, investment and nance committees review and approve long-term investment strategies, annual nancing policies, and projects. They also review dividend policies. A study by Klein (1998) for rms listed in the S&P 500 nds a signicant and positive relationship between the percentage of inside directors on the nance and investment board committees and accounting and stock market performance measures. These ndings support the contention that internal managers contribute valuable specic information about the organizations activities.4 For technology committees, boards will need specialised, expertprovided information about the rms technology activities to then evaluate and ratify the rms long-term technology strategy, both from internal and external sources.5
technology strategies. Independent directors on the technology committee should thus be effective monitors, a strategy which has been endorsed by the SEC in its governance reforms (related to board audit and compensation committees) of 2003. Firms forming technology committees may also receive favorable reviews from corporate governance rating and credit agencies as a result of voluntarily establishing such board-level committees. Following Lang and Lundholm (1993), Wallace et al. (1994), Camfferman and Cooke (2002) and Alsaeed (2005), we consider rm characteristics which are potential proxies for the degree of variation related to a rms voluntary decision to form a technology committee as our the independent variables and classify them into two categories: (1) performance-related variables (protability and liquidity), and (2) a structure-related variable (leverage). We also include control variables for size, the amount of research and development spending (including in-process acquired research and development expenses) by the rm, and Tobins q. This last measure is a gauge of overall rm performance (Tobin, 1969). For reasons explained later, we also use an additional variable related to corporate governance-the Quality of Financial Statement Transparency and Related Disclosure (S&P Composite Disclosure Index) for each sample rm rst as an independent variable and then as a dependent variable.
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Similarly, rms with higher liquidity ratios in the form of working capital are also more likely to signal their strong nancial condition to short-term lenders and/or suppliers. As rms assets include technology-related investments (both tangible and intangible), and their prots include the expensing of research and development costs, both the balance sheet and income statement are affected by rms management of technology investments. We expect rms that establish technology committees to signal their market and nancial strength and their resultant ability to both invest and manage technologyrelated investments which in turn maximise working capital and return on assets. Therefore, we posit that: H3: Firms with higher returns on assets are more likely to establish technology committees than rms with lower returns on assets. H4: Firms with higher liquidity in terms of working capital are more likely to establish technology committees than rms with lower levels of working capital.
(the market value of the rm divided by total assets) is used as a measure of overall market performance (Bhattacharya et al., 1997), an effective predictor of future operating efciency (Faught et al., 1995), and a model which relates the market value of a rm to the capital goods and intangibles that a rm owns (Brynjolfsson et al., 2001). Creating a new technology committee may potentially contribute to the long-term performance of the rm and its related intangible value; therefore, Tobins q may provide a more reliable measure of the technology committees contribution to rm value than traditional accounting-based measures of performance.
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(the composite rating can range from a score of zero to 100 zero being the lowest and 100 being the highest governance rating). We believe that the S&P composite T&D rating is unique due to the comprehensive nature of the evaluation of rm structure, rm nancial statement transparency, and board structure. Furthermore, Chiang (2005) adopted the same S&P measurement criteria in an empirical study of 225 Taiwanese rms and found that corporate transparency and good corporate governance were signicantly and positively related to nancial performance. Based on the comprehensive nature of the S&P model and bolstered by the results of the Chiang (2005) study, we posit that rms with higher corporate governance ratings and stronger nancial performance will be rst-movers and establish technology committees that signal these conditions to the marketplace.
that the committees were formed between 2003 and 2005 (post-SOX in 2002).
4.2. Methodology
4.2.1. Binary logistic regression Logistic regression is very similar to traditional regression analysis and can be used simultaneously to predict the probability of an event (Hair et al., 1998). Logistic regression is also used in studies where the dependent variable is not a quantitative or continuous variable (George and Mallery, 2000). It tests the ability of a model or group of independent variables to predict group membership as dened by a categorical variable. It can also provide several distinct advantages over multiple regression techniques as the independent variables do not have to be normally distributed, linearly related or have equal variances within each group. This makes logistic regression more exible than other parametric techniques (Tabachnick and Fidell, 1996). We employ a binary logistic regression with a dichotomous dependent variable (1 if a rm has a technology committee, 0 otherwise). Our goal is to predict rms with technology committees, using the specied performance and structure-related variables above. In order to run the logistic regression, the 46 rms (23 rms with a technology committee and the 23 matched pair rms) were randomly divided into two equal groups. The rst group was then used to develop a model later validated by the holdout group. The logistic regression thus helped identify which of the independent variables were potentially the best predictors of rms with technology committees.
4.2.2. Discriminant analysis Another categorising technique discriminant analysis classies groups based on a combination of measures and then focuses on the description of differences that exist in groups (Pedhazur, 1982; Tatsuoka, 1988; Stevens, 1992). It is also an appropriate statistical technique when the dependent variable is categorical or consists of two groups or classications (Hair et al., 2006). The technique generates discriminant functions derived from linear combinations of the independent variables that best discriminate among or between groups. We use discriminant analysis in an effort to triangulate the results of the logistic regression and in order to determine the best variables that predict rms propensity to form technology committees.11
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4.2.3. Multiple regression analysis Following the results of the logistic regression and discriminant analysis, we used multiple regression analysis to answer the main research question, viz: Is there a relationship between rm performance, corporate governance, and a rms decision to form technology committees? We conducted fundamental tests of the underlying assumptions for multiple regression analysis in order to ensure that the data were conducive to such analyses. For example, we analysed the relationships between the independent variables as well as the relationships between the dependent and independent variables using correlation coefcients for every potential pair of variables used in the study. Multicollinearity tests were developed using variance ination factors (VIF) to test for the presence of multicollinearity between each of the independent variables. The results of the tests for multicollinearity depended upon the values of the VIFs for all independent variables. Pearson correlation analysis with a condence level of alpha = 0.10 were used. In the presence of multicollinearity, we considered removing the independent variable with the least predictive ability in the analysis. It was important to address multicollinearity in order to ensure that each of the independent variables adequately and correctly explained its role in bringing about changes in the dependent variable.
that represent the leading companies in the S&P/IFCI emerging markets index. These 1,600 companies cover 40 countries and represent about 70 per cent of the worlds tradable market capitalisation. S&P evaluates corporate T&D by searching for the inclusion of 98 information items that exist in the annual reports and accounts of these 1,600 rms. These items are then grouped into three subcategories: ownership structure and shareholder rights, nancial transparency and information disclosure, and Board process and structure12. A composite rating is then developed by S&P for each rm from the scores developed in the rating process (the composite rating can range from a score of zero to 100). We use the S&P T&D study scores developed for each rm in this study as a proxy for corporate governance.
4.3. The quality of nancial statement transparency and related disclosure variable
The Quality of Financial Statement Transparency and Related Disclosure is not an empirically-dened variable. However, it is in keeping with past studies that have used qualitative terms such as adequacy, extent, and comprehensiveness, among others. For instance, Camfferman and Cooke (2002) operationalised an index of EU disclosure indexes for Dutch and UK rms, analysing the information contained in sample rm annual reports to the 4th and 7th EU Directives. Other studies, including Chiang (2005) and Alsaeed (2005) have developed disclosure indexes using variances of the S&P Corporate Governance Evaluation system or a list of voluntary disclosure items in rm annual reports developed by Meek et al. (1995), Botosan (1997) and Naser and Nusuerbeh (2003). The Quality of Financial Statement Transparency and Related Disclosure variable used here are based on the S&Ps T&D study (T&D study hereafter). This T&D study includes the S&P Global 1200 index and another 400 rms
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Table 1A: Descriptive statistics: rms with technology committees and matched pair rms Technology Committee Firms Variable S&P Code ISS CGQ R&D Exp. NPM ROE LEV ROA WC Tobins q LOGTA Minimum 62.240 11.300 0.000 0.030 0.030 0.000 0.020 0.810 0.630 21.540 Maximum 78.350 95.400 9,094.000 0.310 0.590 2.970 0.190 3.520 5.080 25.490 N = 23 Std. Dev. 4.286 24.657 2,409.934 0.072 0.129 0.619 0.046 0.655 1.084 1.259 Matched Pair Minimum 53.000 0.000 0.000 -0.070 -0.600 0.000 -0.070 1.090 0.310 20.430 Firms Maximum 84.000 95.400 4,846.000 0.220 0.640 1.720 0.200 3.410 4.490 25.230 N = 23 Std. Dev. 6.543 31.224 1,542.767 0.067 0.208 0.488 0.064 0.652 1.141 1.242
respectable protability, earning almost a 14 per cent net prot margin, a 25.7 per cent average return on equity, and an 11 per cent return on assets; relatively high levels of debt, with an average leverage ratio of 0.40 (only 3 out of the 23 rms did not have any long-term debt); and relatively strong liquidity, as evidenced by a working capital ratio of almost 1.9 to 1. The mean of the S&P rm T&D index code is about 69 (on a scale of zero to 100), which implies that rms with high S&P governance ratings try to protect these ratings by forming technology board committees. These rms have the most to gain by forming such committees to protect their investments in research and development projects and any other associated benets that may accrue to them from a high governance rating (such as a lower cost of capital and associated borrowing costs, for example). Table 1B shows the results of the T-test comparison of means and the non-parametric Wilcoxon Signed Rank test comparison of medians between the 23 rms with a technology committee and the 23 matched pair rms. Signicant differences are found between the two groups in both tests for three out of the nine independent variables (R&D expense, net prot margin, and return on equity p < 0.05); a signicant difference in medians is also found for the variable return on equity (p = 0.045). We infer from these results that our matching methodology (matching the rms with technology committees to rms in the same 4digit SIC based upon annual revenues) is adequately robust for application in the next stage of our statistical tests.
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Table 1B: Firms with technology committee and matched pair rms: comparison of sample means and medians Technology Committee Firms Variable S&P Code ISS CGQ R&D Exp. NPM ROE LEV ROA WC Tobins q LOGTA Mean 69.163 58.960 1,697.717 0.139 0.257 0.401 0.111 1.873 2.259 23.332 Median 69.070 61.300 391.000 0.128 0.263 0.254 0.122 1.766 2.110 23.534 Mean 70.584 41.161 1,071.987 0.103 0.164 0.464 0.094 1.865 2.001 22.916 Matched Pair Firms Median 71.000 31.800 153.000 0.103 0.182 0.281 0.097 1.713 1.800 22.689 T-test-diff. of Means p-value 0.455 0.028 0.032 0.008 0.077 0.576 0.158 0.964 0.293 0.066 Wilcoxon Test-diff of Medians p-value 0.162 0.048 0.028 0.006 0.045 0.523 0.301 0.879 0.403 0.083
p-values are two-tailed. S&P Code is the Standard & Poors Transparency and Disclosure Rating. ISS CGQ is the Institutional Shareholder Services (ISS) Corporate Governance Quotient (CGQ). R&D Exp. is the research and development and in-process R&D expenses on the income statement. NPM is net income divided by total revenues. ROE is net income divided by average shareholders equity. LEV is long-term debt divided by average shareholders equity. ROA is net income divided by average total assets. WC is current assets divided by current liabilities. Tobins q is the number of common shares outstanding times the end of year stock price divided by total assets. LOGTA is the natural log of total assets. T-test is difference of means for each regression model variable of the sample rms with a Technology Committee and 23 Matched Pair rms without a Technology Committee. Wilcoxon Signed Rank Test is difference of medians for each regression model variable of the sample rms with a Technology Committee and 23 Matched Pair rms without a Technology Committee.
in the correct classication of rms as either having or not having a technology committee 91 per cent of the time. Table 3 shows the regression results for the holdout sample. The regression results for the holdout sample were similar to the modeldeveloping group of rms and statistically reliable in distinguishing among rms that have board-level technology committees and those that do not (-2 Log Likelihood-index model of t = 24.560, Chi-Square Goodness of Fit (1) = 7.281, p = 0.007). The Cox & Snell R2 (0.271) and Nagelkerke R2 (0.362) measures were also acceptable. The holdout sample of rms resulted in the correct classication of rms as either having or not having a technology committee 65 per cent of the time. Research and development expense is the only signicant variable in the holdout sample regression (p = 0.013). While the above results lend support to the expectation that corporate governance, return on equity, and research and development expenses drive rms to form technology committees, it is important to note the limited
population size of only 23 rms in the S&P 500 having a technology committee. This makes it difcult to draw any denitive conclusions from the results of the logistic regression alone. An important outcome of both the modeldeveloping and holdout sample rms is that removing the S&P corporate governance score reduces the effectiveness of both models dramatically (p < 0.003). Removing any of the other eight independent variables (individually) does not have the same signicant impact as removing the S&P score. This suggests that the S&P governance score is driving the classication (and perhaps the decision process) of rms to form technology committees. This suggests that rms that are rst-movers in the voluntary formation of board technology committees reduce agency problems by closely monitoring management in the formation of research and development strategies and simultaneously protecting the rms governance rating. In order to further investigate the potential impact of the S&P rating variable on the classication of rms with technology
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Table 2: Regression coefcients (a)-logistic regression model-23 model-developing rms Unstandardised Coefcients Variable (Constant) S&P Code R&D Exp. NPM ROE LEV ROA WC Tobins q LOGTA B 3.364 -0.058 0.000 3.782 2.033 -0.399 -6.344 0.132 -0.274 0.058 Std. Error 3.905 0.033 0.000 2.548 0.890 0.375 3.749 0.144 0.157 0.107 Standardised Coefcients Beta t 0.861 -1.757 1.141 1.485 2.283 -1.064 -1.692 0.921 -1.744 0.542 p-values 0.405 0.102 0.275 0.161 0.040 0.307 0.114 0.374 0.105 0.597 Collinearity Statistics Tolerance VIF
a Dependent Variable: 1 = Technology Committee; 0 = Matched Pair Firm. p-values are two-tailed. S&P Code is the Standard & Poors Transparency and Disclosure Rating. R&D Exp. is the research and development and in-process R&D expenses on the income statement. NPM is net income divided by total revenues. ROE is net income divided by average shareholders equity. LEV is long-term debt divided by average shareholders equity. ROA is net income divided by average total assets. WC is current assets divided by current liabilities. Tobins q is the number of common shares outstanding times the end of year stock price divided by total assets. LOGTA is the natural log of total assets.
Table 3: Regression coefcients (a)-logistic regression model-23 holdout rms Unstandardised Coefcients Variable (Constant) S&P Code R&D Exp. NPM ROE LEV ROA WC Tobins q LOGTA B -1.917 -0.016 0.000 1.302 2.175 -0.269 -4.763 -0.089 0.116 0.161 Std. Error 4.082 0.018 0.000 1.921 1.760 0.298 4.634 0.238 0.108 0.149 Standardised Coefcients Beta t -0.469 -0.885 -2.861 0.678 1.236 -0.901 -1.028 -0.372 1.073 1.079 Sig. 0.646 0.392 0.013 0.510 0.238 0.384 0.323 0.716 0.303 0.300 Collinearity Statistics Tolerance VIF
a Dependent Variable: 1 = Technology Committee; 0 = Matched Pair Firm p-values are two-tailed. S&P Code is the Standard & Poors Transparency and Disclosure Rating. R&D Exp. is the research and development and in-process R&D expenses on the income statement. NPM is net income divided by total revenues. ROE is net income divided by average shareholders equity. LEV is long-term debt divided by average shareholders equity. ROA is net income divided by average total assets. WC is current assets divided by current liabilities. Tobins q is the number of common shares outstanding times the end of year stock price divided by total assets. LOGTA is the natural log of total assets.
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committees, we used discriminant analysis to conduct the second stage of our analysis. For the discriminant analysis, we used the S&P rating variable as the dependent variable in order to determine if the 46 rms (23 rms with technology committees and 23 rms in the matched pair group) cluster around this variable based upon the other six independent variables that we hypothesise as driving the need for rms to form technology committees. Should the discriminant analysis show clustering, we may view the S&P governance rating variable as the catalyst leading to rms decisions to form technology committees comprised of subsets of their boards of directors.
discriminant model using the standardised canonical discriminant function coefcients (which show the degree to which each variable contributes to each function) and the structure matrix (which shows the correlation coefcients between the independent variables and the function). Evaluation of the standardised discriminant function coefcients (results not reported for parsimony) reveals the log of total assets variable (in 2 out of the 8 functions) with the highest factor loading. In contrast, variable correlations with the functions (structure matrix results not reported for parsimony) indicate that each of the independent variables individually has a strong relationship within the various functions. These differences in the correlation coefcients and the functions make it somewhat difcult to interpret the function; however, both statistics indicate that all of the variables potentially could predict rms with or without technology committees, with return on assets being the strongest predictor variable. The nal step in interpreting our discriminant analysis was to evaluate the accuracy of the functions in classifying the 46 rms into appropriate groups (with or without technology committees). Initial classication indicated that 79.2 per cent of the cases were correctly classied; cross validation supported this level of accuracy in the classication of the rms (76.7 per cent). These results suggest a strong connection between S&P rating (especially for those rms with higher ratings) and the independent variables. This led to the nal stage of the statistical analysis as described below.
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Table 4: Regression results and coefcients-S&P transparency and disclosure rating as the dependent variable for the 23 rms with a technology committee (a) Unstandardised Coefcients Variable (Constant) R&D Exp. NPM ROE LEV ROA WC Tobins q LOGTA B 64.547 0 -4.311 -3.264 1.434 -36.906 2.305 0.822 0.124 Std. Error 43.852 0.001 22.616 18.293 3.031 60.562 2.287 1.321 1.738 Standardised Coefcients Beta t 1.472 0.387 -0.191 -0.178 0.473 -0.609 1.008 0.622 0.071 p-value 0.163 0.704 0.852 0.861 0.643 0.552 0.331 0.544 0.944
(a) dependent variable is S&P Transparency and Disclosure Rating for each rm. p-values are two-tailed. R&D Exp. is the research and development and in-process R&D expenses on the income statement. NPM is net income divided by total revenues. ROE is net income divided by average shareholders equity. LEV is long-term debt divided by average shareholders equity. ROA is net income divided by average total assets. WC is current assets divided by current liabilities. Tobins q is the number of common shares outstanding times the end of year stock price divided by total assets. LOGTA is the natural log of total assets.
dent variable is less than 0.1, the regression should be repeated by omitting the violating independent variable. The results (not shown for parsimony) show that all of the independent variables had VIF values of less than 8, the average VIF statistic was greater than 1, and none of the tolerance statistics for the independent variables were less than 0.1. We also conducted the Durban-Watson test for autocorrelation in the data for the 23 rms. According to Field (2000), values for the Durban-Watson statistic of less than 1 or greater than 3 may violate the assumption of independent error terms. The Durban-Watson statistic in the regression was 1.188. In conclusion, the regression model appears to be robust.
terms of its empirical denition and endogeneity. In order to test the regression results further, a series of robustness tests were performed on the technology rm data, including using another independent rating of each rms corporate governance which is more recent that the S&P rating.
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Table 5: Regression results and coefcients-ISS CGQ scores as the dependent variable for the 23 rms with a technology committee (a) Unstandardised Coefcients Variable (Constant) R&D Exp. NPM ROE LEV ROA WC Tobins q LOGTA B -104.817 -0.005 246.738 211.234 -17.056 -669.821 11.825 1.080 6.022 Std. Error 201.498 0.004 103.920 84.057 13.926 278.279 10.509 6.072 7.985 Standardised Coefcients Beta t -0.520 -1.496 2.374 2.513 -1.225 -2.407 1.125 0.178 0.754 p-value 0.611 0.157 0.032 0.025 0.241 0.030 0.279 0.861 0.463
(a) dependent variable is ISS (Institutional Shareholder Services) CGQ (Corporate Governance Quotient) for each rm. p-values are two-tailed. R&D Exp. is the research and development and in-process R&D expenses on the income statement. NPM is net income divided by total revenues. ROE is net income divided by average shareholders equity. LEV is long-term debt divided by average shareholders equity. ROA is net income divided by average total assets. WC is current assets divided by current liabilities. Tobins q is the number of common shares outstanding times the end of year stock price divided by total assets. LOGTA is the natural log of total assets.
sion coefcients using the ISS CGQ governance ratings for the 23 technology committee rms. Similar to what was found in the discriminant analysis, return on equity (p = 0.025) and return on assets (p = 0.030) were found to be signicant variables, lending support for H2 and H3. Net prot margin (p = 0.032) was also found to be signicant using the ISS, lending support for H1. No support was found using either the S&P Transparency Rating or the ISS CGQ governance rating for H4 or H5. These results are similar to Brown and Caylors (2006), who found that companies with weaker corporate governance perform more poorly, are less protable, and have higher stock price volatility than rms with stronger corporate governance. These results again suggest a strong connection between corporate governance and at least three (return on equity, return on assets, and net prot margin) of the independent variables in our regression model. Four of the 23 S&P rms with technology committees actually had no research and development expenses in their latest audited nancial statements.15 We thus removed these four rms and performed the regressions again for the remaining 19 rms, using the
S&P score and ISS CGQ scores as the dependent variable in two separate regressions. The regression results (results not shown, but similar to Tables 4 and 5) were similar to the previous regression results for both the S&P and ISS CGQ governance ratings except for the ISS regression. Here research and development expenses were now a signicant variable (similar to the results of the logistic regression model in Table 3, where R&D expenses were found to be signicant contributors to developing the model). We also determined the 2 and 4-digit industry SIC code medians for the variables in our study, and converted the variables in our regression to dichotomous variables (1 if the technology committee rm amount exceeded the industry median, 0 otherwise); we then attempted to run our regressions again shown in Table 4 and 5 after this conversion. As many of the 23 rms with a technology board-level committee are industry leaders, the majority of our dichotomous variables (in most cases, over 80 per cent) were in excess of the industry median; such a bias also biases the resulting regression coefcient results, rendering them of limited interpretative value.
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board-level technology committees at this time. We would, therefore, recommend a replication of our study in the future as more rms decide to appoint technology committees within their boards of directors. Another limitation of the study is the use of the S&P T&D ratings and the ISS CGQ measures of corporate governance. Prior studies including Spero (1979) have provided overwhelming evidence supporting the premise that there are no signicant differences between weighted and unweighted disclosure indices. S&Ps additive and unweighted T&D study is one of the most comprehensive and thorough analyses done by a rating agency of rmrelated corporate transparency and governance. Nevertheless, it is possible that the use of the S&P T&D ratings may not have captured the depth and importance of transparency, disclosure, and therefore corporate governance adequately. Additionally, a problem plaguing all corporate governance studies is the potential for endogeneity (Brown and Caylor, 2006). Lastly, some of the commonly used rm-specic independent variables (such as the leverage ratio and the working capital ratio) may not be the best measures of the underlying metrics (for example, determining the exact ratio by rm of interest-bearing debt to assets or using the quick ratio may change some of the results). Our ndings should be relevant to several groups of stakeholders, including the SEC and the various stock exchanges as they consider expanding the disclosure requirements for various board committees for publiclylisted rms. The opportunity exists to expand research in the area of corporate governance to determine the impact of changes in board composition (between insiders and outsiders), board committees, and the addition of new board committees on both corporate governance and rm nancial performance. Many rms are changing the number, composition, and responsibilities of their boards of directors to comply with SOX and to meet stock exchange rules regarding board composition and corporate governance. Research opportunities also exist in this area to determine if new board committees, other than technology committees, impact corporate governance and rm nancial performance (both in terms of stock market and prot performance). Additional research opportunities also exist in the areas of price performance and cost of capital implications of rms voluntarily forming incremental board committees such as the technology committees examined here that are also related to corporate governance issues.
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Acknowledgements
Data availability: Contact the rst author. We thank Standard & Poors for allowing us to use the results of the S&P Transparency and Disclosure survey in our study.
Notes
1. According to the Spencer Stuart 2005 Board Index, all of the S&P 500 rms have audit and compensation/human resource committees, 98 per cent have nominating/governance committees, 44 per cent have executive committees, 33 per cent have nance committees, 14 per cent have public policy committees, 6 per cent have investment/pension committees, 5 per cent have science and technology committees, and 4 per cent have legal compliance committees.. There were no board-level science and technology and legal compliance committees for members of the S&P 500 in 2000. 2. In their recent book on IT governance, Weill and Ross (2004) make the case that rms with superior IT governance have prots that are at least 20 per cent higher than rms with poor IT governance. 3. The SEC approved the NYSE and NASDAQ reforms on November 4, 2003 (see http:// www.sec.gov/rules/sro/34-48745.htm); the SEC approved the AMEX reforms on December 1, 2003 (see http://www.amex.com/atamex/ news / 34-48863 _ Approval _ Order _ on _Amex2003-65.pdf). 4. See Eugene F. Fama & Michael C. Jensen, 1983, Separation of Ownership and Control. Journal of Law & Economics 26: 30114. 5. In fact, an analysis of the composition of board of directors for the 23 rms in the study shows that 90 per cent of the board members are external board members. 6. Brown and Caylor (2006) provide rm-specic Gov-Score (governance score) data as of February 1, 2003 at a publicly available web site; unfortunately, many of the S&P 500 rms with technology committees did not have a Gov-Score in this freely-available database. 7. Financial sector rm balance sheets are nonclassied (therefore, no working capital ratio is available) and regulated sector debt ratios are regulated by various Federal or State-related regulatory agencies. 8. Specic technology committee names found include Science & Technology Committee and Technology Committee (the majority), Information Technology, Technology & Environment, Technology and Information Security, Technology Advisory, and Technology and Environmental Committee. 9. For example, for Johnson & Johnson, see the following web site: www.investor.jnj.com/ governance/committee.cfm
10. Four of the 23 rms did not disclose the charter for the technology committee in the investor relations web site-perhaps this is done for both strategic (Motorola, for example) and legal (Merck, for example) reasons. A check of lings on Edgar for these rms also did not locate the charter for the related technology committee (some rms le on Form 8-K the charters for board committees, as well as all and any changes to the corresponding members of all board committees, and some do not). 11. As is discussed in Ge and Whitmore (2006, p. 21), it is surprising that this multivariate method has received so little use in the accounting research literature. Discriminant analysis focuses the investigation more clearly on classication and prediction if these are the real purposes of the study. 12. The details of the S&P Transparency and Disclosure Survey Questionnaire for these 98 information items can be found at the following web site: http://www2.standardandpoors.com/ servlet/Satellite?pagename=sp%2FPage% 2FSiteSearchResultsPg&l=EN&r=1&b=10& search=site&vqt=governance&submit.x=11& submit.y=10 13. Also included in the discriminant analysis (not shown) is the Boxs M Test of Equality of Covariance Matrices, which is an indicator of the signicant differences in the covariance matrices among the group of rms. The signicant F-statistic (p = 0.000) in the Boxs M Test suggests that the homogeneity of covariance assumption might limit the interpretation of the results; according to Mertler and Vannatta (2002), the Boxs M Test is highly sensitive to non-normal distribution, and therefore the results should be interpreted with caution. 14. The corporate governance quotient (CGQ) prepared by ISS features corporate governance ratings on more than 7,500 rms worldwide and includes underlying data points for up to 61 corporate governance variables categorised under eight areas of focus. CGQ is a quantitative database. Here, rms are rated, whether they want to be or not, and rms cannot change their ratings by subscribing to the CGQ service or any other service provided by CGQ. In other words, the only way a rm can improve its governance rating is to make and publicly disclose changes in its corporate governance structure or practices. The ISS CGQ database is updated daily to reect all governance data changes that occur. In addition, every company prole is updated every 120 days. The ISS CGQ database and associated rm rating is also more recent than the S&P governance rating, which was last updated in 2003. 15. The matched pair rms for these four rms also had no research and development expenses; these rms are perhaps pondering investments in research and development or consider their technology committees as board oversight committees related to areas like information technology and security concerns in the area of Internet commerce.
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MERCK & CO MONSANTO CO MOTOROLA INC NOVELL INC PFIZER INC PITNEY BOWES INC PROCTER & GAMBLE ROCKWELL AUTOMATION ROCKWELL COLLINS SCHLUMBERGER LTD ZIMMER HOLDINGS
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Ronald Premuroso is a PhD candidate (DBA with a concentration in Accounting) at the School of Accounting at Florida Atlantic University in Boca Raton, Florida. He formerly worked for KPMG in the audit department of the Ft. Lauderdale ofce. He also worked for Sensormatic Electronics Corporation, most recently as a Senior Vice President and President of International Operations. He is a CPA in the State of Florida. Som Bhattacharya is the Director of the School of Accounting at Florida Atlantic University in Boca Raton, Florida. Dr Bhattacharya has published in journals including The International Journal of Accounting Information Systems, Issues in Accounting Education and Journal of Accounting Education. He formerly worked for Nestle (India) Private Limited and has consulted on accounting information systems related projects both in the United States and in Mexico.
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