Springer 2010
Journal of Business Ethics (2011) 100:483–495 DOI 10.1007/s10551-010-0692-x
Corporate Governance and Intellectual Capital Disclosure
ABSTRACT. The aim of this article is to analyse the internal mechanisms of corporate governance (board of directors and ownership structure), which influence voluntary disclosure of intangibles. The results appear to corroborate the view that an increase in institutional investor shareholding has a negative effect on voluntary disclosure, supporting the hypothesis of entrenchment, whereas an excessive ownership by institutional investors may have adverse effects on strategic disclosure decisions. The results also indicate that an increase in the number of members of the board to up to 15 has a beneficial effect on the disclosure of intangibles. However, as this number increases, the effect inverts and becomes adverse to improving the capacity for supervision and control in the decision-making process regarding the voluntary disclosure of intangibles. The findings endorse the recommendation of the most of the Corporate Governance Codes regarding an advisable maximum of 15 members on a board to ensure its effectiveness and internal cohesion. KEY WORDS: corporate governance, intangibles, board of directors, intellectual capital
Introduction The specific characteristics of corporate governance mechanisms (included as recommendations in most Corporate Governance Codes), such as independence of the board or the separation of the roles of chairman and chief executive, are supposed to enhance monitoring quality and reduce the benefits for managers of withholding information. In this sense, one of the most recent and widely discussed issues in both the academic literature and the business press concerns with how to design corporate governance mechanisms to improve firm transparency and to solve the information asymmetry problem arising from the separation between ownership and control.
Ruth L. Hidalgo Emma Garcı´a-Meca Isabel Martı´nez
Previous literature illustrates the relationship between corporate governance and voluntary disclosure (e.g. Eng and Mak, 2003; Forker, 1992; Go´mez-Mejı´a et al. 2001; Markarian et al. 2007; McKinnon and Dalimunthe, 1993). There are also articles that study the inference of corporate governance in aspects such as profitability, debt costs, handling, transparency, corporate culture and auditing (e.g. Hannifa and Cooke, 2002; Healy and Palepu, 2001; Mangena and Pike, 2005; Millar et al. 2005). However, there is very little evidence of the influence of corporate governance on the disclosure of intangibles. Moreover, to date, few studies have undertaken systematic analysis of the factors influencing the decision to disclose intellectual capital (IC)-related information in annual reports. The literature regarding IC and its determinants is limited and inconclusive. However, a review of the current state of financial and external reporting research by Parker (2007) identified IC accounting research as being still in its infancy and a major area for further research. Information on a firm’s human resources, innovation, customers, or technology cannot be included in financial statements because of identification, recognition, and measurement problems. Investors are increasingly aware of the importance of company information not directly reflected in financial statements (Mavrinac and Boyle, 1996; Previs et al., 1994). According to Eccles et al. (2001), capital markets are looking for more reliable information regarding knowledge resources in a company, such as risk factors, strategic direction, managerial qualities, innovatory skills, experience, and integrity. This information is relevant given that it sets the parameters in which companies perform when faced with asymmetrical information, agency problems, investor profits and information transparency.
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This circumstance leads us to analyse the corporate governance mechanisms that influence voluntary disclosure of intangibles. Most prior studies focus on measuring the extent of IC information disclosed in corporate annual reports, but few seek to identify specific characteristics determining the variation across firms. In addition, fewer studies have addressed the effect of the corporate governance on IC disclosure (Li et al., 2008). This extends their research works studying a larger set of board attributes in a sample of Mexican listed firms during the period 2005–2007. The study of the Mexican context is relevant because of several reasons: (1) When it comes to studying the relationship between corporate governance and disclosure, most of the limited, recent research studies are focused within the framework of the conventional US/UK model of corporate control; (2) The results of the meta-analysis applied by Garcı´a-Meca and Sa´nchez-Ballesta (2010) emphasise the need to consider the legal and institutional setting explicitly when analysing the effect of corporate governance on voluntary disclosure; and (3) The specific characteristics of Mexican corporate governance: concentrated equity ownership, de facto subordination of shareholder interests to managerial interests, a weak emphasis on minority interest protection in securities law and regulation, and relatively weak requirements for disclosure make Mexico a good paradigm to study the effectiveness of the internal governance mechanisms to improve disclosure on intangibles. This study undertakes a systematic analysis of the corporate governance and other firm-specific factors influencing the decision to disclose this information in annual reports. We focused on the internal mechanism of board of directors by analysing attributes such as board size, the proportion of independent directors, the size of the audit committee and whether or not there is duality between the chairman of board of directors and the company CEO. We also analyse the ownership structure: shares owned by executives and board members; shares owned by the family members; majority shareholders; and share ownership by institutional investors. Moreover, while most previous studies on disclosure only analyse linear relationships, in this study we provide a non linear analysis of some corporate governance variables. In addition, we will analyse if
the change processes in the Best Corporate Practices Code, pursuant to which Mexican companies operate, have been basic grounds for such disclosure. Our research is connected with one such study which examines the association between general firm characteristics and voluntary disclosure, and more specifically with corporate governance characteristics, which has received increasing attention in the disclosure literature in the last years (e.g. Cerbioni and Parbonetti, 2007; Li et al., 2008; Patelli and Prencipe, 2007). The remainder of this article is organised as follows: ‘‘Background’’ section shows the background; ‘‘Objective and study sample’’ section focuses on sample selection, research design and hypotheses; ‘‘Presentation of results’’ section reports the results of the statistical analysis; and in the final section conclusions are summarised.
Background Literature has shown specific benefits that encourage in voluntary disclosure of information through corporate governance. These benefits translate into a reduction of the information asymmetry problems as a result of the separation of ownership and control of modern companies (Lev, 1992). Also, companies that opt to disclose information beyond the standard requirements reap benefits such as reductions in capital and debt costs, greater analysts’ cover or an increase in the liquidity of company securities (Glosten and Milgrom, 1985; Holland, 1997; Lev, 1992). The literature expresses the importance of the board of directors as the determining element in corporate decisions. For this reason, the existence of independent directors brings with it more effective supervision, and so there is greater capacity for control and assessment (Fama, 1980). Moreover, business governance reforms aim to increase truly independent external representations on the board as a means of protection and of increasing share interest (Rechner et al., 1993). However, the fact that independence of the board of directors exists is related to transparency and efficient supervision (Williamson, 1984). The results of studies of the board infer that information is best provided by large companies
Corporate Governance and Intellectual Capital Disclosure with independent boards (Adams and Hossain, 1998; Cheng and Courtenay, 2006; Chung and Gray, 2002; Hannifa and Cooke, 2002; Li et al. 2008; Lim et al. 2007; Mangena and Tauringana, 2007; Nasir and Abdullah, 2005; Patelli and Prencipe, 2007). The results bear out the view of the theory of agency, according to which independently managed companies are more prone to disclose information voluntarily. In this line, the recent meta-analysis conducted by Garcı´a-Meca and Sa´nchez-Ballesta (2010) analyses 27 relevant empirical studies, and their results reflect that board independence increases voluntary disclosure. However, the findings show that the positive association between board independence and voluntary disclosure only occurs in those countries with high investor protection rights. The size of the board of directors is another element that explains voluntary IC disclosure, as is evidenced by the studies conducted by Lim et al. (2007) and Mangena and Tauringana (2007). This result refers both to developed and to developing countries. Significant influence for efficient supervision and performance on the part of senior management depends on the adequate composition of the board of directors, in such a way that its size corresponds, amongst other factors, to the type of organisation, the sector and the influence of its environment. Studies associated with voluntary disclosure and CEO duality reflect that this may be seen in a double sense (Gul and Leung, 2004; Lakhal, 2004). Jensen (1993), highlighting that when power is concentrated in the same person, it may affect adequate decision making, as it would tend towards self profit rather than the interests of the company. The significant result of the influence of the audit committee on voluntary disclosure is supported by the work conducted in Kenya by Barako et al. (2006). Good corporate governance practices have resulted in audit committees which, based on their business experience, generate opportunities to achieve processes with greater levels of security, productivity and supervision of the controls implemented by management in the preparation and publication of corporate information. Previous studies highlight the fact that when there is ownership concentration, the results are contradictory in terms of voluntary disclosure. However,
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in their study, Fama and Jensen (1983) and Shleifer and Vishny (1997) point out that when ownership is held by majority shareholders, senior managers are effective in control mechanisms by helping to reduce agency problems. In addition, when ownership is held by managers, voluntary disclosure occurs in a significantly positive manner, as confirmed in Malaysia by Nasir and Abdullah (2005). This result confirms the stipulations of the theory of agency, which states that when the managers’ and owners’ interests are aligned, then information reporting increases, which results in a positive influence on the level of voluntary disclosure. Likewise, the hypothetical argument of converging interests is based on the assumption that when there is an increase in managerial ownership, the company’s value increases. However, studies carried out in Singapore (Cheng and Courtenay, 2006; Eng and Mak, 2003) significantly reveal negative results. Along these lines, the hypothetical entrenchment exercised by controlling shareholders on private profits to the detriment of the organisation may have an adverse effect on the company’s voluntary disclosure policy, as established by Fama and Jensen (1983). Another important aspect in corporate governance is the incidence of family ownership in aspects of voluntary disclosure. As stated by James (1999) and Anderson and Reeb (2003), the purpose of the family structure is to pass the company on to the next generations, as well as creating a reputation for itself, which means that family-owned companies are more likely to take decisions that maximise the wealth of the business. The studies conducted have basically focused on corporate governance and voluntary disclosure. In this regard, there is little research of corporate governance and voluntary IC disclosure, although the research done by Li et al. (2008), Cheng and Courtenay (2006), Beattie and Thomson (2006), Gisbert and Navallas (2008) and Cerbioni and Parbonetti (2007) stands out.
Objective and study sample Considering that efficient governance is an important incentive for the company to take the decision to disclose information on intangibles voluntarily, we propose to establish which factors of its internal
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mechanism influence the decision-making process. Thus, our interest rests on the board of directors, with regard to its size, the extent of the independence of its directors, the size of its audit committee and if there is CEO duality. Likewise, we focus on the manner in which shares are distributed, whether they are held by managers and directors, the family, controlling companies or shareholding concentration, and we analyse its effect on disclosure on intangibles. With these parameters, we aim to cover important aspects of corporate governance, which we believe make IC disclosure in listed Mexican companies possible. In order to prepare the sample, we read the annual reports of 100 companies traded on the Mexican Stock Exchange for the 3 year period, 2005–2007; therefore, we have a total of 300 annual reports. For the selection of the indices to be evaluated in the companies, we considered the instrument usually used in disclosure studies, known as the Information Disclosure Index. Thus, the disclosure index is normally formed from categorical variables, which we refer to as items, taking the value one if the company discloses the data item in question, and value zero if not; therefore, in its numerator, the index took the disclosed and in the denominator, the total number of possible items. The information disclosure index includes 58 items classified into three categories: Structural Capital, Human Capital and Relational Capital. The items prepared by Garcı´a-Meca et al. (2005) in Spain and Bukh et al. (2001) in Denmark were taken as a base for the selection of the different IC items considering that this methodology will enable us to obtain objective results, as well as a broad sample that demonstrates the different behaviours of the variables in our study. Items disclosed particularly by Mexican companies were also included. The literature demonstrates that the composition of the board of directors is primarily based on size, which has a significant influence on the efficiency, effectiveness and supervision of management conduct. At the time of writing, there is no consensus that stipulates the appropriate number for board of director membership. Based on this, Daily et al. (1999) demonstrate that the findings on this matter have been irregular. Larger boards may be beneficial because they increase the pool of expertise and resources available to the organisation but, as the
number of members on the board increases, this benefit may be offset by the incremental cost of poorer communication and increased decisionmaking time that are often associated with large groups. These assumptions lead us to consider the conduct of Mexican companies to form their boards of directors and if this affects voluntary disclosure. We address the competing views by testing the following hypothesis in its unsigned form: H1:
Board size is associated with disclosure on intangibles
Another variable selected is the composition of the board of directors in terms of its independence, since this type of member is not linked to the management of the organisation. The intention is to ensure equity in decision-making strategies by gambling on the transparency of information. The literature has generally posited that independence of the board of directors from management provides effective monitoring and control of firm activities (i.e. Fama and Jensen, 1983). Bueno et al. (2004) consider that the number of independent members leads to greater supervision and to maximisation of the value of the organisation. Based on this, we propose the following hypothesis: H2:
Board independence is positively associated with disclosure on intangibles
The size of the audit committee is also contemplated, which is considered as a fundamental component to reinforce the activities of the board of directors, specialising in specific tasks (Zahra, 1990). Klein (2002) and Xie et al. (2003) argue that the audit committee is required to supervise the conduct of the board of directors, which, the more independent it is, the more limited the management practices will be. Based on this, we propose the following hypothesis: H3:
Audit committee independence is positively associated with disclosure on intangibles
Finally, the variable of the chairman/CEO duality will be analysed within the mechanism of the board of directors. Boyd (1995) demands the independence of the CEO and the chairman of the board since it has implications of power in the structure of same. Moreover, Rechner and Dalton (1991) consider that
Corporate Governance and Intellectual Capital Disclosure the board of directors may be less independent when there is duality, since in certain cases, decisions may be contrary to the owners’ interests. However, existing literature is not consistent since it establishes that not all CEOs are equal nor do they seek the same things because, when they decide to diversify both their objectives and their conduct, they may be aligned differently in accordance with their new activities (Datta et al. 1991; Jensen and Zajac, 2004; Ramanujan and Varadarajan, 1989). We address the competing views by testing the following hypothesis in its unsigned form: H4:
The chairman/CEO duality is associated with disclosure on intangibles
In accordance with Jensen and Mecling (1976), the stockholding of upper management the company’s capital may reduce the problems of agency. Managers who are owners of the company have incentives to disclose information to increase liquidity of the firm’s stock and to meet restrictions imposed by insider trading rules. They would also voluntarily disclose more information to signal to the market that they are not engaged in suboptimal decision making, to prevent the market from reducing their wealth. On the contrary, in the hypothetical reference of entrenchment, Fama and Jensen (1983) contemplate that excessive internal ownership would produce a negative effect on the maximisation of the value of the entity given the attitude of managers and members in self-profit. Based on these inconclusive results, we developed our unsigned hypothesis as follows: H5:
Insider ownership is associated with disclosure on intangibles
If the power of a company is concentrated in the family nucleus, then the capacity for supervision, decision making, information transparency and other aspects inherent to the company would be subject to family appraisal, and there would be no diversity of opinions, which may affect the objectives of the company and the disclosure on intangibles. This context may be corroborated with the results of the work that demonstrates a negative association between voluntary disclosure of corporate governance and the proportion derived from family businesses (e.g. Aksu and Kosedag, 2006; Hannifa and Cooke,
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2002; Ho and Wong, 2001). DeAngelo and DeAngelo (2000) and Go´mez-Mejı´a et al. (2001) conclude that in the case of family-owned companies, there is entrenchment by the chairman of the board of directors when the said party maintains family links with the main shareholders. This line of thinking leads us to the following hypothesis. H6:
Family ownership is negatively associated with disclosure on intangibles
Jensen and Mecling (1976) contemplate the hypothesis of efficient supervision within the framework of the concentration of ownership in which adequate supervision and oversight of majority shareholders can prevent directors from acting in their own self-interest and even to the detriment of the company’s interests and therefore emphasising the maximisation of the company’s equity. Agency theory also suggests that information disclosure is likely to be greater in widely held firms so that principals can effectively monitor so that their economic interests are optimised, and agents can signal that they act in the best interests of the owners. However, there may be a conflict of agency, which transfers the divergence of interests between the controlling shareholders and the minority owners, causing, if the majority shareholding is very high, an expropriation of the interests of the minority shareholders (La Porta et al., 2001). Despite these insights, the evidence between ownership structure and voluntary disclosure is also far from being conclusive. Li et al. (2008) found a significant negative relationship between ownership concentration and the extent of disclosure, and others have found no relationship (e.g. Eng and Mak, 2003; Lim et al., 2007). We therefore construct our unsigned hypothesis as follows: H7:
Ownership concentration is associated with disclosure on intangibles
The presence of institutional investors is highly relevant within the ownership structure since generally, institutional investors assume command as traditional owners, which enables them to exercise more direct control over the company’s managers. Shleifer and Vishny (1986) confirm this by justifying that institutional investor experience and ability to supervise company management benefits the company in terms of agency, costs and contributes to
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profitability. Empirical evidence provides conflicting results; some studies have determined a significant positive association between institutional investors and voluntary disclosure (Barako et al., 2006; Mangena and Pike, 2005), while others do not find a significant association (e.g. Hannifa and Cooke, 2002). Our analysis is basically focused on institutional investors that are considered by quoted companies in their annual reports as main shareholders; therefore, our unsigned hypothesis will be: H8:
Institutional shareholding is associated with disclosure on intangibles
Table I shows the types of variables and their respective codes. We also include some control variables that are shown to have significant impact on disclosure in prior studies. The variables are firm size (Size), leverage (Lev) and profitability (Prof). Presentation of results Descriptive analysis Table II shows the descriptive statistic of independent variables in corporate governance. Total disclosure of IC variable has a mean of 39.36% and a standard deviation of 8.06%. In terms of the size of the board (BoDSize), there is a degree
of variance; a minimum of 4 members and a maximum of 34 members. In this regard, we have previously pointed out the obligatory corporate governance principles, stipulated in the new Stock Markets’ Law (2006), outlining that the board of directors must consist of a minimum of 5 and a maximum of 20 directors. Secondly, the variable audit committee size reflects the fact that there are companies that fail to mention the inclusion of this committee in their annual reports because the statistic reveals a minimum of 0 and a maximum of 10 members, with a mean of 3.49. Based on this situation, the new Securities Law contemplates boards of directors having no option but to include an auditing and corporate practice committee of a minimum of three members. Finally, regarding the board directors’ independence variable, it is noteworthy that there are firms that do not have independent directors as recommended by the Best Corporate Practices Law, which stipulates that at least 25% of directors should be independent. Nevertheless, the mean is 37%, which is quite higher the recommendations of the best practices code of governance. The distribution of major shareholders in Mexican companies is also illustrated in Table II. First, share ownership distributed amongst families, who reflect average percentages of 30.96%. These results
TABLE I Independent variables Independent variables
Code
Operational definition
Bard of Directors Board of Directors Size Board of Directors Independence Audit Committee Size Duality of Chairman/Director General
BoDSize BoDInd AudSize DualCEO
Total number of members of the board of directors Proportion of independent directors Total number of audit committee members Dummy Variable considering the value 1 if there is duality and 0 if not
Ownership structure Managers and Directors Shareholding Family Shareholding Shareholding Concentration Institutional investors Shareholding Firm Size Leverage Profitability
ManDirS FamS SC IIS Size Lev Prof
Share ownership ‡1% held by company managers and directors Share ownership ‡1% held by family members of the company Share ownership held by one person or more ‡5% Shareholding of institutional investors the natural logarithm of total assets the ratio of total book debt to value of assets net profit over the book value of equity
Corporate Governance and Intellectual Capital Disclosure TABLE II Descriptive variable statistics in corporate governance Min Total Capital Intelectual AudSize BoDSize BoDInd SC ManDirS FamS IIS Dual Ceo
13 0 4 0 0 0 0 0 0 167
Max 56 10 34 0.88 100.00 89.21 100.00 100.00 55.70%
Mean
Std. dev.
39.36
8.06
3.49 11.88 0.37 36.43 10.41 30.96 8.60 1 133
1.61 3.95 0.22 35.18 22.37 33.53 21.82 44.30%
confirm what is described in the previous literature by studies of disclosure and corporate governance of Mexican companies conducted by Chow and Wong-Boren (1987) and Price et al. (2007), who note that Mexican companies are set up as family enterprises, i.e. both ownership and control are held by a certain few, who have regular access to confidential information and with minority shareholder protection. Statistics of frequency show the variable chairman/CEO duality, and the results confirm that high duality (44.3%) is a predominant characteristic of Mexican boards. Having analysed the variables descriptively, Table III shows the correlation of coefficients between the dependent variable and the independent variables of firms for the period 2005–2007 (n = 300). The correlation of Pearson coefficients indicates the statistical significance of positive association between TOTCI and the independent variables BoDSize and AudSize. There is also a positive significance with Firm size and Food industry (p < 0.01).
Explanatory analysis The Kruskal–Wallis test is applied for the scale variables to compare the tendency of various populations or treatment levels by assigning ranks to the variable scores. Mann–Whitney test is applied to the dummy variable of CEO duality. The explanatory analysis of the results obtained in Table IV shows first that the size of the board of
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directors, is statistically significant at 1%; therefore, we can conclude that the size of the board of directors in Mexican companies improves the function of voluntary IC disclosure. In addition, the variable size of the audit committee indicates that in Mexican companies that have an audit committee, the larger it is, the more the information on intangibles is disclosed. With this result, we can assume that Mexican companies are considering the provisions of Securities Law, the regulatory requirements of which establish that there must be at least three directors on the committee. The results of the non-parametric tests applied to the ownership concentration (SC) and family ownership (FamS) show a weak statistically significant relationship with voluntary disclosure (p < 0.10). Linear regression We will use the multi-variant technique, which involves linear regression analysis. In this case, the model for regression is specified thus: ICit ¼ b0 þ b1 BoDSizeit þ b2 BoDIDit þ b3 AudSizeit þ b4 DualCEOit þ b5 ManDirSit þ b6 FamSit þ b7 SCit þ b8 IISit þ b9 Prof it þ b10 Levit þ b11 Sizeit þ b12 Year dummiesit þ b13 Industry dummiesit þ eit where IC = Voluntary Disclosure of intellectual capital, BoDsize = size of board of directors (total Lumber of members), BoDID = proportion of independent directors on the board of directors, Audsize = size of auditing committee (total number of member), DualCEO = 1 if duality exists in the company and 0 if not, ManDirS = share ownership ‡1% held by managers and directors of the company, FamS = share ownership ‡1% held by families, SC = share ownership held by one person or more ‡5%, IIS = share holding of institutional investors, Prof = financial profitability, Lev = derived by dividing total debt by total assets, and Size = logarithm of the total asset. The results of Table V show that the size of the board of directors in quoted Mexican companies has a bearing on the intensity of the disclosure of intangibles. This is in accordance with studies
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TABLE III Correlation matrix
[1] IC [2] BoDSize [3] BoDInd [4] Audsize [5] DualCEO [6] ManDirS [7] FamS [8] SC [9] IIS [10] Prof [11] Lev [12] Size [13] FoodS [14] BldS [15] IndS [16] ComS [17] TextS [18] OtherS
[1] IC [2] BoDSize [3] BoDInd [4] Audsize [5] DualCEO [6] ManDirS [7] FamS [8] SC [9] IIS [10] Prof [11] Lev [12] Size [13] FoodS [14] BldS [15] IndS [16] ComS [17] TextS [18] OtherS
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
1.00 0.22** 0.07 0.21** 0.01 -0.11 0.11 -0.07 -0.08 0.05 0.01 0.43** 0.17** 0.08 0.10 -0.04 -0.09 -0.24**
1.00 -0.12* 0.19** -0.01 -0.18** 0.09 0.04 -0.10 0.01 -0.14** 0.34 0.20** 0.06 0.00 -0.12** -0.05 -0.11
1.00 -0.03 0.11 0.02 -0.14** -0.09 0.02 0.03 -0.07 0.01 -0.10 -0.03 0.17** 0.00 -0.05 0.01
1.00 0.06 -0.10 -0.08 0.08 0.02 0.08 -0.17** 0.12* 0.14* 0.15* 0.05 -0.08 -0.24** -0.03
1.00 0.01 0.01 0.02 -0.10 -0.06 0.01 -0.04 -0.16** 0.11* -0.01 -0.06 -0.03 0.14*
1.00 -0.38** -0.04 -0.15** -0.02 0.05 -0.23** 0.05 0.01 -0.03 0.00 -0.06 0.02
1.00 -0.04 -0.28** -0.05 0.09 0.18** 0.04 -0.10 -0.01 0.00 0.14* -0.06
1.00 -0.12* 0.00 0.08 -0.08 0.13 -0.03 -0.02 -0.02 0.02 -0.08
1.00 0.04 0.04 0.03 -0.13* -0.06 0.15** 0.02 -0.01 0.02
[10]
[11]
[12]
[13]
[14]
[15]
[16]
[17]
[18]
1.00 -0.10 0.16** 0.01 0.08 -0.02 0.11 -0.12** -0.06
1.00 0.03 -0.23** -0.08 0.14* 0.05 0.14* -0.02
1.00 0.00 0.00 0.05 0.16** 0.02 -0.24**
1.00 -0.21** -0.22** -0.20** -0.19** -0.19**
1.00 -0.22** -0.20** -0.20** -0.20**
1.00 -0.21** -0.20** -0.20**
1.00 -0.19** -0.19**
1.00 -0.18**
1.00
**Correlation is significant to a level 0.01 (bilateral). *Correlation is significant to a level 0.05 (bilateral).
conducted by Lim et al. (2007) and Mangena and Tauringana (2007) on Australian and Zimbabwean companies, respectively, showing that there is no difference between developed and developing countries, since the size of the board of directors is a
positive significant variable in voluntary disclosure. Regarding the variables related to ownership structure, the findings show that shareholding of institutional investors has a detrimental impact on voluntary disclosure (p < 1%).
Corporate Governance and Intellectual Capital Disclosure TABLE IV Univariate results Variable
Statistic
p
BoDsize BoDInd Audsize ManDirS FamS SC IIS Dual CEO
32.671 4.853 8.401 0.360 5.016 4.949 0.609 10,848.5
0.000 0.183 0.015 0.548 0.081 0.082 0.435 0.730
TABLE V Intellectual capital linear regression Independent variable BoDSize BoDInd Audsize DualCD ManDirS FamS SC IIS Prof Lev Size Year2005 Year2006 FoodS BldS IndS ComS TextS Adjusted R2 D-W
B
T
Sig.
0.306 0.037 0.271 1.021 -0.018 0.003 0.015 -0.043 0.027 1.534 1.522 -8.444 -1.017 3.998 2.364 4.421 0.796 0.708 0.515 2.217
3.076 0.024 1.27 1.545 -1.09 0.236 1.479 -2.646 0.067 1.024 6.98 -9.998 -1.226 3.252 2.068 3.847 0.676 1.182
0.002 0.981 0.205 0.124 0.277 0.813 0.14 0.009 0.946 0.307 0 0 0.221 0.001 0.04 0 0.5 0.549
Contrary to most of the previous research, the above findings indicate that an increase in the concentration of shares held by these companies hinders voluntary disclosure of intangibles, therefore, concluding that for Mexican companies, holding shares in institutional investors has a negative effect on the voluntary disclosure of intangibles. In this respect, the hypothesis of expropriation reveals opportunist
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actions by those in control, who act in their own benefit to the detriment of minority shareholders, which may have an adverse effect on opportunities for disclosure initiatives within the company. The results of the variables of board independence, the size of the audit committee, the shares held by managers and directors, by families, along with shareholder concentration, are not statistically significant; therefore, they have no bearing on voluntary IC disclosure in quoted Mexican companies. Regarding the lack of significance of board independence, the results are in line with those obtained by Leuz et al. (2003) and Garcı´a-Meca and Sa´nchezBallesta (2010), which suggest that board independence is associated with more voluntary disclosure only in those environments which are more proactive to disclosing information, that is, in countries with high anti-director (outside investor) rights and high legal enforcement. The size variable (Size) is significant at the 1% level. The positive coefficient indicates that larger companies disclose more IC information. This result is consistent with empirical evidence on voluntary disclosure (e.g. Garcı´a-Meca, 2005) and theoretical arguments including agency theory, signalling theory, capital market theory, and cost-benefit theory. The variance inflation factors of independent variables (VIF) are estimated as a check for multicollinearity. VIF values fall within acceptable levels consistent with limited, if any, collinearity problems. Analysis extension: testing nonlinearities Existing literature emphasises that an excessive number of board members may be detrimental for the company, as it increases coordination problems amongst members and hinders decision making, which may affect voluntary disclosure policy. This idea is consistent with the view that larger boards may be less participative, less cohesive, and less able to reach consensus (Dalton et al., 1999). Yermarck (1996) found empirical evidence related to this aspect. In this regard, we tried to evaluate the possibility of a nonlinear relationship between the size of the board of directors and the disclosure of intangibles which would verify if, from a certain size upwards, the benefits of size are outweighed by the problems originated by the same. In this respect, we have included a quadratic variable of the size of the board of directors (BoDSize2).
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492 ICit ¼ b0 þ b1 BoDSizeit þ b2 BoDSize2
þ b3 BoDIDit þ b4 AudSizeit þ b5 DualCEOit þ b6 ManDirSit þ b7 FamSit þ b8 SCit þ b9 IISit þ b10 Prof it þ b11 Levit þ b12 Sizeit þ b13 Year dummiesit þ b14 Industry dummiesit þ eit This model in Table VI assumes nonlinearity with the quadratic term in the size of the board of directors, and so, while the coefficient of the linear term is positive, which means that the larger the board of directors, the greater the disclosure of intangibles, the association with the quadratic term is negative, from which we can deduce that an excessive number of members hinders the disclosure of intangibles. These results determined the turning point for these two variables, thus concluding that for Mexican companies, board membership of up to 15 directors favours the disclosure of intangibles, but an excessive membership may give rise to conflicts, TABLE VI Model 2 intellectual capital regression with quadratic variable size of boards of directors Independent variable BodSize2 BoDSize BoDInd AudSize DualCEO ManDirS FamS SC IIS Prof Lev Size Year_2005 Year_2006 FoodS BldS IndS ComS TextS Adjusted R2 Durbin Watson
B
T
Sig.
-0.062 1.884 -0.349 0.216 1.134 -0.017 -0.004 0.015 -0.045 -0.017 1.36 1.589 -8.311 -1.073 4.484 2.455 4.596 1.386 1.038 0.533 2.232
-3.176 3.872 -0.23 1.022 1.746 -1.035 -0.399 1.546 -2.796 -0.043 0.927 7.414 -9.984 -1.313 3.655 2.201 4.115 1.201 1.165
0.002 0 0.818 0.308 0.082 0.302 0.69 0.123 0.006 0.965 0.355 0 0 0.19 0 0.029 0 0.231 0.374
discrepancies, tensions, amongst other aspects that cause disagreement in strategies that help companies achieve their objectives. This confirms what is laid out in the statutes of the Best Corporate Practices Code in Mexico, Practice 8, section IV.2, ‘Integration’ of which establishes that boards of directors should be consisting of between three and fifteen directors, to achieve effective and participative operation. With the new model proposed, the variable CEO duality is significant at 10%. For Mexican companies, these results appear to corroborate that when the same person occupies the position of both chairman and CEO, this strategy favours voluntary disclosure of intangibles. It is worth pointing out that while the separation of these roles is generally seen as positive in classic agency theory, it may also create an opportunity for communication. Brickley et al. (1997) offer evidence that the contrast of the costs of separating the posts of chairman and CEO may outweigh the benefits. Similarly, taking agency– stewardship theory as a reference, CEOs oriented as agents may take advantage of their authority to diversify and thus achieve their own aims of prestige; on the other hand, CEOs focused towards the server model, in the sense of commitment to the shareholders, will turn to diversification to create value (Fox and Hamilton, 1994; Ramaswamy et al., 2002). However, the significance of CEO duality variable only appears when we analyse nonlinear relationships, so that we should be cautious with this result.
Conclusions The purpose of this study is to analyse corporate governance factors on voluntary disclosure of intangibles during fiscal years 2005–2007. Our findings show that the size of the board of directors is a statistically significant factor in IC disclosure, i.e. the larger the board of directors, the greater its disclosure of intangibles. The discrepancy in the literature regarding the ideal number of members of boards of directors was one of the aspects we took into account to find out the prevailing situation in Mexican companies, which is why a second regression model was applied, in which the possibility of a nonlinear relationship between the size of the board of directors and disclosure of
Corporate Governance and Intellectual Capital Disclosure intangibles was analysed. The results obtained indicate that up to 15 board members, an increase in size has a beneficial effect on disclosure of intangibles. However, as this number increases, the effect is inverted and becomes adverse to improving the capacity for supervision and control in the decisionmaking process on the voluntary disclosure of intangibles. This nonlinear relationship between board size and voluntary disclosure on intangibles suggests that from certain levels, the benefits of large boards may be outweighed by the cost of poorer communication and increased decision-making time. The findings endorse the recommendation of the Mexican Corporate Governance Code regarding an advisable maximum of 15 members on a board to ensure its effectiveness and internal cohesion. Finally, we have shown how an increase in shareholder ownership by institutional investors is a hindrance to IC disclosure. This result indicates how excessive ownership held by institutional investors has a negative effect on voluntary disclosure in listed Mexican companies, thereby supporting the hypothesis of entrenchment, in which excessive shareholdings by these investors may have adverse effects on strategic disclosure decisions. This suggests that firms with institutional investor shareholding are expected to have less information asymmetry, because these shareholders have access to the information they need and, as a consequence of the lower informative pressure, firms disclose less information to the market. This study aims to contribute to the explanation of voluntary IC disclosure policy in Mexican companies according to their internal corporate governance mechanisms. As a result, this article tries to provide valuable input for regulators who are requesting continuous analytical work to know the implications of exceptionally poor governance for firm transparency. The specific characteristics of Mexican companies add different aspects to previous literature. In this sense, the findings offer new insights into these relationships in an institutional context that greatly differs from those of the countries considered in the previous literature on voluntary disclosure (particularly the US system). Nevertheless, it would be of interest for future research to broaden this study to include Latin American companies, to corroborate or to clarify if the performance of the internal corporate gover-
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nance mechanism is exclusive to Mexican companies or whether it occurs differently in other Latin American environments. Moreover, extending the sample to a period with greater number of years may favour the solidity of the results.
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Ruth L. Hidalgo Faculty of Business, Universidad Auto´noma del Estado de Hildalgo, Pachuca, Mexico Emma Garcı´a-Meca Faculty of Business, Technical University of Cartagena, Cartagena, Spain E-mail:
[email protected] Isabel Martı´nez Faculty of Business, University of Murcia, Murcia, Spain
