18 Corporate Governance: An International Review, 2010, 18(1): 1831

Board Supervision Capability and Information Transparency

Hsiang-Tsai Chiang* and Li-Jen He
ABSTRACT Manuscript Type: Empirical Research Question/Issue: Board members are charged with the responsibility of supervising company operation and rm value cannot only be inuenced by managers actions, but also by those of boards of directors. Furthermore, transparency has always played an important role in corporate governance, but few studies related it to the capacity of boards of directors. Consequently, this study focuses on the capacity, compensation, and structure of boards of directors and how they relate to company transparency. Research Findings/Insights: Using both primary and archival data from Taiwan, we nd that compensation can encourage company board of directors to act in the best interests of shareholders when there is greater board independence. Among all board supervision capabilities, continuing education is the most important factor in enhancing the transparency of a rm. Theoretical/Academic Implications: This study considers the importance of directors compensation in corporate governance while the majority of prior studies only consider the role of management compensation. Further, the results provide additional evidence to demonstrate that board supervision capabilities may complement strong governance. Practitioner/Policy Implications: This study offers deeper insights for policy makers to understand the inuence of board of directors impact on corporate governance. In addition, it provides evidence to recommend further consideration of director compensation and continuing education to enhance board effectiveness. Keywords: Corporate Governance, Board Compensation, Independent Director, Transparency

INTRODUCTION
ompanies that are supervised under sound corporate governance mechanisms in terms of board and ownership structures as well as transparency requirements are demonstrably better able to protect the rights of stakeholders. Healy and Palepu (2001) nd that where there is information asymmetry in the market, there must be unbiased communication protocol in order to retain a solid relationship between a company and its investors. Information transparency then becomes a fundamental method of communicating a companys operating results to stakeholders. The role of the board of directors has been widely discussed since the 1980s (e.g., Beasley, 1996; Beasley & Salterio, 2001; Carcello & Neal, 2003; Fama & Jensen, 1983; Jensen 1993; Klein, 1998; Solomon, Lin, Norton, & Solomon, 2003), and recent accounting scandals have drawn attention
*Address for correspondence: Department of Accounting, Feng Chia University, Taiwan. Tel: 886-4-24517250 ext. 4230; Fax: 886 424510666; E-mail: htchiang@ mail.fcu.edu.tw

to boards of directors and audit committees once again (e.g., Braswell & Mauldin, 2004; Bronson, Carcello, Hollingsworth, & Neal, 2009; Defond, Hann, & Hu, 2005; Goh, 2009; Krishnan & Visvanathan, 2008). Section 407 of the SarbanesOxley Act (SOX 407),1 enacted in 2003, places a great deal of emphasis on committee members expertise and independence by acknowledging that board structure, independence, and the board member capabilities of supervision play important roles in operational decisions, and that information transparency is a key reection of proper governance. According to agency theory, compensation motivates managers to act in the best interests of shareholders. Thus, most prior studies focus on the association between manager actions and shareholder interests. While management decisions may affect rm value, board members are charged with the responsibility of supervising company operations. In practice, most strategic decisions of the rm must be reviewed by its board, so compensation can inuence not only manager actions but also those of its board of directors. Although a good deal of the literature examines
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the governance role of manager compensation (e.g., Gaver & Gaver, 1993; Hartzell & Starks, 2003; Kin, Lev, & Yeo, 2008; Laux & Laux, 2009; Mehran, 1995; Morgan & Poulsen, 2002; Riahi-Belkaoui, 1992; Sethi & Namiki, 1987; Smith & Watts, 1992), only rarely do studies mention the governance role of director compensation (e.g., Adjaoud, Zeghal, & Andaleeb, 2007; Hempel & Fay, 1994). Further, transparency plays an important role in corporate governance throughout time, yet few studies related to the capabilities of the boards of directors examine this phenomenon. Since 2003, the Taiwan Securities and Futures Institute (Taiwan SFI) is entrusted by the Taiwan Stock Exchange Corporation (TSEC) to rank the information transparency of listed companies and to disclose its rankings. Since 2005, the system has ranked the 630 TSEC-listed companies that meet its grading-standards requirements into ve categories; the government expects these rankings to encourage TSEC-listed companies to become more responsible to the public via increased transparency.2 Consequently, the present study focuses on the capability, compensation, and structure of company boards of directors and how these elements relate to company transparency. The results indicate that continuing education improves the capabilities of directors and that better capability, higher compensation, and greater independence of board members are positively related to a higher degree of transparency. As the results of sensitivity analysis, which tests the association between board governance mechanisms and transparency in companies of different sizes, compensation factors are found to be more important to large companies, while structural factors are more crucial for small companies. On the other hand, no matter how large or small the company, the continuing education of directors is the key factor that enhances transparency. Our ndings contribute to the literature rst by examining the association between board of directors compensation and information transparency as we consider the importance of director compensation in corporate governance while most prior studies only consider the role of management compensation. Further, by nding that information transparency is conned to rms with high board supervision capabilities, our results also provide evidence to demonstrate that board supervision capabilities may complement strong governance. In addition, this study combines the independence and capability effects of boards of directors to suggest that boards whose members receive greater compensation are not necessarily bad and that high compensation has a negative effect on transparency only when it harms the independence of directors. This study also has the following policy implications. With regard to compensation policy regulation, the ndings of this study suggest that in addition to managers, board of director compensation plays an important role in the corporate governance structure and directors compensation policies should be carefully considered by regulators as well. Further, to improve board effectiveness, our results suggest that companies should be required to maintain independent directors and offer continuing education for all board members. The rest of this paper reviews the literature and develops the research hypotheses related to board characteristics and

information transparency, empirically testing the hypotheses and providing conclusions regarding the results.

LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT

Prior studies on corporate governance come to the unanimous conclusion that improved outside governance mechanisms are capable of inuencing the inside behaviors of companies while protecting the rights and benets of stakeholders (e.g., Defond & Hung, 2004; Healy & Palepu, 2001; Verrecchia, 1983). Transparency enables governments and corporate investors to understand company operations and governance while, from the companys standpoint, it helps reduce the agency problem and thus attracts investment while lowering the cost of capital. Therefore, transparency is the expected standard for corporate communication with public stakeholders.

Corporate Governance and Information Transparency in Taiwan

At the end of 2005, 691 rms are listed on the TSEC, 471 companies are listed on the GreTai Security Market (GTSM),3 and 968 public companies are not yet listed on either the TSEC or the GTSM exchanges. Most listed companies are family owned and controlled and the great majority of investors are individuals. Board members4 in these enterprises tend to be family members, so important decisions are often made by the family board. In Taiwan, the standard governance structure of corporations includes a two-tier (dual board) structure that comprises the board of supervisors and the board of directors. Shareholders, as the corporations owners, elect directors, and supervisors at annual shareholders meetings. According to Article 218 of the Taiwan Company Act, Supervisors shall supervise the execution of business operations of the company and may at any time or from time to time investigate the business and nancial conditions of the company, examine the accounting books and documents, and request the board of directors or managerial personnel to make reports thereon. Article 202 states, Business operations of a company shall be executed pursuant to the resolutions to be adopted by the board of directors. Thus, a rms supervisory board oversees its board of directors in a governance structure that differs from those of US and other countries. In the Taiwanese system, the supervisory board, which holds discretionary power from the shareholders, supervises the CEO and executive managers, while supervisors also monitor directors and, when there is no separate audit committee, audit the managerial execution of business activities. Regular disclosure documents in Taiwanese trading markets include nancial reporting, nancial forecasts (not mandatory), annual reports, statements of total operating revenues, internal auditing operations, and insider trading information. The Taiwan Financial Supervisory Commission (FSC) requires that semi-annual nancial statements be produced and that forward-looking statements be reviewed by a certied public accountant.5

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Board Independence and Information Transparency

Since a series of accounting scandals in the 1980s, the role of a rms board and its members is widely discussed. The audit committee is also extensively explored in recent studies (e.g., Braswell & Mauldin, 2004; Bronson, Carcello, Hollingsworth, & Neal, 2009; Carcello & Neal, 2003; Defond, Hann, & Hu, 2005; Solomon, Lin, Norton, & Solomon, 2003). Currently, an audit committee is not legally required in Taiwan, although some companies voluntarily devise an audit committee. According to the Taiwan Company Act, in the absence of such a committee, supervisors can perform the auditing function on behalf of the rm. The board of directors and board of supervisors are charged with the responsibility of efcient governance and supervision, which should enhance the governance effect and improve the companys transparency and the quality of its information. It is difcult to dene or evaluate the level of a persons or boards independence, so accounting studies to date use the ratio of outside directors as a proxy to measure independence (e.g., Ajinkya, Bhojraj, & Sengupta, 2005; Beasley & Salterio, 2001). In comparison with inside or executive directors, outside directors are assumed to be more independent and better able to fulll the independence requirement as an outside director. Most recent studies on board governance effect emphasize independence based on the idea that outside directors can lower the likelihood of fraud (e.g., Beasley, 1996; Klein, 2002). Osterland (2004) also points out that the board of directors plays an important role in the supervision of company decisions related to voluntary disclosures since, if the board takes public interest seriously, its members will promote transparency. Moreover, the purpose of setting up outside directors is to charge them with supervision in the interest of the public, so their independence should be greater than that of other directors. Prior studies on audit committees also indicate that the independence of a rms audit committee can enhance the effect of governance while improving information quality (e.g., Abbott, Parker, & Peters, 2004; Carcello & Neal, 2000). Thus, independent boards and audit committees can ensure that relevant information is disclosed properly and promptly to stakeholders, even if such information may be harmful to the companys operations or reputation. Thus, the present study develops the following hypothesis: Hypothesis 1. A company with higher levels of board independence will be more transparent.

vision role of directors, Ong and Wan (2008) refer to the abilities of directors in terms of legitimacy, experience, and abilities to link the rm to key stakeholders or other important parties. Raghunandan, Read, and Rama (2001) state that better governance results when directors have professional accounting and nancial expertise. Carcello and Neal (2000) also indicate that companies with directors who have nancial expertise will report nancial and operating conditions in a more straightforward manner. Thus, board members and audit committees with enhanced supervisory capabilities are also better able to ensure fair and proper disclosure of company information. SOX 407 denes a nancial expert as someone with experience in preparing or auditing nancial statements, as well as top managers from other companies, investment bankers, and venture capitalists, among others. Likewise, the denition of expertise in the Taiwan Company Act includes both rm-specic (referred to as professional expertise in Taiwan) and nancial expertise. According to Taiwanese Regulations Governing Appointment of Independent Directors and Compliance Matters for Public Companies Article 2, expertise requirements for directors include senior general work experience, outstanding business knowledge or experience and continuing education.6 Therefore, directors with higher-level educational degrees are expected to have better general knowledge while those who hold dual jobs are similarly assumed to have better business knowledge and experience and those who participate in more continuing education courses are expected to have enhanced supervisory abilities, and consequently, able to ensure more disclosure of company information. Accordingly, the second hypothesis is developed as: Hypothesis 2. The collective supervisory ability of the board will be positively related to the level of the rms information transparency. Hoskisson, Castleton, and Withers (2009) suggest that increased monitoring intensity shifts risk to managers, who require greater pay to compensate them for the increasingly intense employment risk required. Sahlman (1990) also suggests that higher compensation levels are necessary to compensate directors for the increased demands and risks associated with board service and the time directors spend preparing for corporate monitoring. Moreover, prior studies suggest that boards of directors bear signicant employment risk as monitors of corporate performance (e.g., Carcello & Neal, 2003; Fama & Jensen, 1983; Kaplan & Reishus, 1990). Consequently, high compensation may indicate that such increased monitoring intensity shifts risk to the board of directors, who then require greater compensation to offset their increased employment and career risk. In addition, the amount of compensation afforded to board members may inuence the level of their independence from managers, but higher compensation may also arise from the amount of time and effort a board member must invest in supervising the company. Boards of directors that include individuals with a higher level of education, more experience, and better reputation in the industry also generally receive greater compensation.

Board Supervision Capability and Transparency

Prior studies indicate that directors and managers with professional expertise are better at supervision (e.g., Carcello & Neal, 2003; Fama & Jensen, 1983; Klein, 1998). Klein (1998) suggests that a directors professional expertise is indicated by his or her rm-specic operational and management expertise. According to Nicholson and Kiel (2004), the supervision abilities of a board to adequately monitor a large and complex organization depend on its directors knowledge, skills, and experience. Likewise, based on the resource pro-

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Therefore, a higher level of board compensation may represent the fact that the director has better supervision ability and monitor quality. Thus, we expect that, along with independence, board and audit committee members who receive higher compensation will likely ensure proper and fair disclosure of company information. Therefore, the third hypothesis is developed as: Hypothesis 3. The level of director compensation will be positively related to the level of the rms information transparency.

RESEARCH METHODOLOGY
Source of Data
Taiwan SFI, a committee that comprises academics, government ofcials, and SFI research workers, ranks listed companies transparency levels since 2003 by referring to other countries ranking indices and relating Taiwans law and regulations. The rst two years of the ranking are a probationary period for the ranking system, so it separates listed companies into only two groups more transparent and others. Beginning in 2005, the system ranks listed companies into ve categories A+, A, B, C, C- where A+ is awarded to the most transparent companies and C- to the least transparent. The present study uses transparency ranking results from 2005 (published in 2006) as the sample, which includes major industries of the Taiwan stock market. Additional data are gathered from the Taiwan Economic Journal (TEJ) database and the Taiwan MOPS.

policy does not eliminate the agency problem and is even harmful to company performance (e.g., Core, Holthausen, & Larcker, 1999; Stewart, 2003) because when director compensation is too high, directors may conspire with company management for their own benet. In practice, there are two methods of determining total board compensation. One of them involves use of a percentage of net sales or net income while the other uses a xed amount not related to sales or prot. This study uses average director compensation (ACOM), which uses a companys total director compensation as a xed (absolute) amount divided by its total number of directors to test the association between director compensation and transparency. In addition, abnormal director compensation is used to test whether a company that pays its board members higher compensation than the industry average also has greater transparency. We use the indicator variable COMAB to measure whether a company pays its board members more (as a percentage of the companys net income before taxes) than the industry average. Board Structure and Composition. Prior study results reveal that board structure and composition are highly related to corporate governance effectiveness (e.g., Ajinkya, Bhojraj, & Sengupta, 2005; Beasley & Salterio, 2001; Jensen, 1993). According to Articles 2027 and 2188 of the Taiwan Company Act, by law board members are charged with supervision and control, including the supervision and control of important company operating decisions. Therefore, the structure and composition of a rms board should affect the degree of its transparency. This study uses the following variables to test the hypotheses: Board size (BN), measured by the number of board of directors and supervisors; board share-holdings ratio (BH), measured by the percentage of director and supervisor stockholdings; ratio of shares pledged (BL), measured by the percentage of shares pledged by board members; ratio of family-controlled directors and supervisors9 (FB), measured by the percentage of family-controlled director and supervisor members to the total number of directors and supervisors; ratio of outside directors and supervisors (OB),10 measured by the percentage of outside director and supervisor stockholdings; and the ratio of independent directors and supervisors11 (IB), measured by the percentage of independent directors and supervisors to the total number of directors and supervisors. Supervision Capability of the Board.12 A signicant amount of extant literature in this eld indicates that directors with professional expertise (i.e., rm-specic expertise) provide better company supervision (Carcello & Neal, 2003; Fama & Jensen, 1983; Klein, 1998). Further, continuing education is also shown to be effective in increasing professional knowledge. Thus, the continuing education of boards of directors and supervisors, including training as to recent governance requirements, such as transparency requirements and improvements, should improve supervision capabilities. However, this study shows a lagging effect; that is, the effect of education is not reected in decision quality until the year following the date the education is received. Thus, we expect that directors and supervisors with more

Variable Denitions and Measurement

The dependent variable in this study is the ranking of information transparency, while the independent variables include director compensation, board structure, supervision capability of the board, and control variables.

Dependent Variable
Information Tansparency. Taiwan SFIs transparency ranking system includes ve categories of criteria: disclosure of compliance with laws and regulation; timeliness of the disclosure; disclosure of forecasted nancial information; disclosure of information in the annual report (including nancial and operating information and board and ownership structure); and disclosure on the company Web page. In SFIs 2005 ranking, no company is ranked as C-. For statistical purposes, we translate A+ to 4, A to 3, B to 2, and C to 1.

Independent Variable
Director Compensation. Prior literature reveals that director compensation may affect board of director performance such that higher compensation leads to higher effort in supervising the company (e.g., Adjaoud, Zeghal, & Andaleeb, 2007; Becher, Campbell, & Frye, 2005; Fich & Shivdasani, 2005; Linn & Park, 2005; Yermack 2004). On the other hand, some studies nd that an ineffective compensation

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continuing education hours will improve company transparency in the year following the education. The following variables are used to test the hypotheses: average academic degree of board (DEGREE) (Doctoral degree = 5, masters degree = 4, bachelors degree = 3, high school diploma = 2; other, 1); board of director and supervisor average continuing education hours (EDU); and an indicator variable DUAL to measure whether or not the companys CEO simultaneously serves as the board chairperson. Control Variables. In addition to board-related variables, the literature of corporate governance indicates that ownership structure, audit quality, industry, and company size may affect a rms degree of transparency (e.g., Bushman, Piotroski, & Smith, 2004; Faccio & Lang, 2002; Healy, Hutton, & Palepu, 1999). Thus, we include: the ratio of institutional shareholdings (IH); an indicator variable for electronic industry (TEC); an indicator variable for Big 4 auditing (AUD); and company size (SIZE), measured by the logarithm of year-end market value of equity in the regressions.

inuence a companys information transparency, we decide not to exclude any variables.13

Results of Transparency and Board Governance Mechanism

Since the index of transparency is a polytomous response variable that is measured as an ordinal, we use ordinal logit regression to analyze the relationship between information transparency and board-related variables. Fundamental Ordinal Logit Regression Analysis. As shown in Panel A of Table 3, ordinal logit regression results of transparency and board-related variables indicate that the adjusted Cox and Snell R2 and Negelkerke R2 of the model are 23 per cent and 26 per cent, respectively. For H1, the results of board structure variables indicate that, consistent with Klein (2002) research, a large BN is related to higher transparency (z = 3.68; p < .05); however, this positive relationship is not signicant in the regression of the full sample. However, IB is signicantly positively related to transparency in all three groups (full: z = 4.08, p < .01; high: z = 2.93, p < .05; low: z = 7.13, p < .01), which suggests that independent directors are more capable of supervising disclosures based on public interest, so an increase in the ratio of independent directors increases transparency. The variables FB (full: z = 3.71, p < .05; low: z = 2.99, p < .01) and BL (full: z = 7.06, p < .01; low: z = 14.72, p < .001) are signicantly negatively related to transparency in both the full sample and the low-transparent subsample, as predicted, which suggests that familycontrolled companies are likely to be less transparent. Further, board members to whom more shares are pledged may tend to hold back information about their behavior and thereby decrease the rms degree of transparency. The variables EDU (full: z = 38.43, p < .001; high: z = 2.96, p < .05; low: z = 7.46, p < .001) and DUAL (full: z = 2.85, p < .05) are signicantly positively related to transparency, which indicates that continuing education improves the capabilities of directors. These results comply with H2; the collective supervisory ability of the board will be positively related to the level of the rms information transparency. Further, the coefcients of EDU are signicantly positive in all three regressions, which suggest that board members continuing education is a key factor that improves company transparency. For H3, we nd that ACOM is signicantly positively related to transparency in the full sample (z = 3.70; p < .01), which suggests that director compensation is likely to reect board member efforts while better efforts lead to enhanced corporate governance and improved transparency. Among the control variables, results suggest that, in addition to board-related variables, audit quality is the most important governance mechanism for information transparency. Tests of Different Governance Structure Strengths. In order to address the different impacts of the governance variables on high- and low-transparency groups, we separate the results into two groups, where A+ and A companies are high-transparent and the others are low-transparent. The

Research Models
The research model of the present study is developed as follows:

IT = 1 ACOM + 2 COMAB + 3 BN + 4 BH + 5 BL + 6 FB + 7 OB + 8 IB + 9 DEGREE + 10 EDU + 11DUAL (1) + 12 IH + 13 TEC + 14 AUD + 15 SIZE + IT = 1 ACOM + 2 COMAB + 3 BN + 4 BH + 5 BL + 6 FB + 7 OB + 8 IB + 9 COMAB IB + 10 DEGREE + 11EDU + 12 DUAL + 13 IH + 14 TEC + 15 AUD + 15 AUD + 16 SIZE + I (2)

RESULTS AND ANALYSIS

Descriptive Statistical Analysis
Table 1 shows that the average transparency scores of the 584-sample companies is 2.04, which indicates that the sample companies are medium-transparent. Less than 2 per cent of companies are ranked A+ while over 52 per cent of companies are rated B and the remaining companies are ranked A or C. About 29 per cent of the sample companies have abnormal director compensations, and the ratio of family-controlled directors is high. On average, board members of the sample companies hold degrees above the bachelors level while nearly 84 per cent of the sample companies are audited by a Big 4 accounting rm.

Correlation Between Variables

Panel A of Table 2 shows that some independent variables are signicantly correlated, but the VIF values in Panel B of Table 2 do not suggest a collinearity problem. Since the purpose of this study is to locate all variables that may

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TABLE 1 Descriptive Statistics Panel A: Summary Statistics of Variables Mean IT ACOM COMAB BN BH(%) BL(%) FB(%) OB(%) IB(%) DEGREE EDU DUAL IH(%) TEC AUD SIZE 2.04 1.04 .29 9.97 22.68 13.03 52.53 37.92 11.00 3.36 3.85 .29 38.33 .43 .84 15.77 S.D. .73 3.05 .45 3.35 13.47 21.65 24.66 21.54 15.30 .62 5.10 .45 23.48 .50 .37 1.18 Q1 2.00 .00 .00 8.00 12.71 .00 33.33 22.22 .00 1.00 .12 .00 18.53 .00 1.00 14.96 Median 2.00 .00 .00 9.00 18.92 .00 50.00 41.67 .00 2.00 2.00 .00 37.33 .00 1.00 15.59 Q3 2.00 1.00 1.00 11.00 29.75 19.32 70.00 50.00 25.00 4.11 5.40 1.00 56.33 1.00 1.00 16.32

Panel B: Transparency Ranking Distribution Ranking 1 2 3 4 Total Number of samples 131 309 133 11 584 Percentage 22.43 52.91 22.77 1.88 100.00 Accumulative percentage 22.43 75.34 98.12 100.00

IT: Information Transparency; ACOM: the directors total compensation divided by the total number of directors; COMAB: an dummy variable that equal to 1 if a company paid more to board members (as a percentage to companies net income before tax) than the industry average; BN: the number of board of directors and supervisors; BH: the ratio of the directors and supervisors stockholdings; BL: the ratio of shares pledged by board members; FB: the ratio of the number family-controlled directors and supervisors members to total number of directors and supervisors members; OB: the ratio of outside directors and supervisors stockholdings; IB: the ratio of number of independent directors and supervisors to total number of directors and supervisors.; DEGREE: Average academic degree of board. Doctoral degree = 5, masters degree = 4, bachelors degree = 3, high school diploma = 2; other, 1; EDU: average board of directors and supervisors continuing education hours; DUAL: dummy variable equal to 1if CEO who simultaneously serves as chairperson; IH: Ratio of institutional shareholdings; TEC: a dummy variable that equal to 1 if the sample company is in the electronics industry; AUD: a dummy variable that equal to 1 if audited by a big 4 accounting rm; otherwise, 0; SIZE: logarithm of year-end market value of equity.

grouped regression results in Table 3 indicate that, in the high-transparent group, the explanatory power (14 per cent) is lower than it is in the full sample (23 per cent), and board compensation variables are not key transparency factors in the high-transparent group. Among the board structure variables, FB and BL are not signicantly related to transparency in the high-transparent sample, while the relationship of the rest of the variables remains similar. However, the positive relationship between BN and transparency becomes signicant in the high-transparent subsample (z = 3.68; p < .05), while the positive relationship between IB (full: z = 4.08, p < .01; high: z = 2.93, p < .05; low: z = 7.13, p < .01) and

transparency remains signicant. However, we nd conicted results of ACOM between the full sample and the low-transparent subsample. The coefcient of ACOM is signicantly negative in the low-transparent subsample (z = 2.98; p < .05) while it is signicantly positive in the full sample (z = 3.70; p < .01); this nding is tested further in Model Two. Another major difference between the low-transparent subsample and the full sample is that the positive relationship between information transparency and TEC becomes signicant in the low-transparent subsample (z = 7.41; p < .001). Overall, the full sample and grouped results show

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TABLE 2 Correlation Matrix Panel A: Spearman Correlation BN .11** .02 -.03** .12*** -.02 .09** -.01 .07 -.06 1.00 .08 .09 1.00 -.14*** 1.00 .02 .11 -.01 .04 -.00 .03 .04 -.02 .09 1.00 .32*** .13*** -.00 .01 .07 .01 -.01 -.03 .13 .04*** 1.00 .09** -.13*** .06 -.21*** -.06 -.10 -.11 .10** .10** .02 -.01 1.00 -.08** .01 .13 -.03 -.04 -.04 -.09* .06 .08 -.14*** .10** .03 .01 .03 .08* .21*** -.19*** -.22*** 1.00 -.83*** -.40*** 1.00 .43*** 1.00 .16*** .28*** -.18*** .15*** .23*** .05 .14*** -.13*** .00 -.02** .10** -.13*** 1.00 BH BL FB OB IB DEGREE EDU DUAL IH TEC .14*** .03 .03 -.07 -.06 -.21*** -.40*** .27*** .43*** -.05* .08 .14*** -.12*** 1.00 AUD .20*** .20*** -.03*** .04*** .02 -.05 -.07 .04 .12*** -.08** .10** .02 .10** .24*** 1.00 SIZE .27*** .41*** -.31*** .24*** -.15*** .30*** .21*** -.27*** -.15*** -.03 .08* -.16*** .38*** -.06 .09** 1.00 Panel B: VIF Value BN 1.17 1.24 1.20 1.14 BH BL FB OB 1.37 IB 1.44 DEGREE 1.02 EDU 1.04 DUAL 1.09 IH 1.37 TEC 1.43 AUD 1.10 SIZE 1.64 1.24

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ACOM COMAB

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IT 1.00 ACOM COMAB BN BH BL FB OB IB DEGREE EDU DUAL IH TEC AUD SIZE

.20*** 1.00

-.03 -.19*** 1.00

ACOM COMAB

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All variables are dened in Table 1. Statistical signicance: *p < .05; **p < .01; ***p < .001.

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TABLE 3 Ordinal Logit Analysis of Transparency and Board Characteristic Variables

IT = 1 ACOM + 2 COMAB + 3 BN + 4 BH + 5 BL + 6 FB + 7 OB + 8 IB + 9 DEGREE + 10 EDU + 11DUAL + 12 IH + 13 TEC + 14 AUD + 15SIZE +

Panel A Full sample Coefcient Compensation Variables ACOM .06 COMAB .20 Structure Variables BN .03 BH .00 BL -.01 FB -.47 OB .17 IB 1.31 Capability of Supervision Variables DEGREE .14 EDU .11 DUAL .32 Control Variables IH .00 TEC .25 AUD .67 SIZE .55 Pseudo R-Square Cox and Snell Nagelkerke Wald Panel B High transparency Coefcient Wald Panel C Low transparency Coefcient Wald

3.70** 1.03 1.39 .04 7.06** 3.71* .29 4.08** 1.01 38.43*** 2.85* 3.12* 1.39 8.20*** 35.62*** .23 .26

.12 -.89 .05 .01 .00 4.90 7.79 .89 .16 .10 .53 -.02 -.41 1.57 .79

.46 .47 3.68* .16 .06 1.51 2.60 2.93* .18 2.96* .19 .94 .15 8.92*** 4.95 .14 .32

-.03 .05 .03 .00 -.02 -1.75 1.64 1.41 -.12 .08 -.21 .01 .79 .51 .51

2.98* .04 .43 .12 14.72*** 2.99** 1.60 7.13** .34 7.46*** .66 5.32** 7.41*** 3.34* 10.38*** .15 .22

All variables are dened in Table 1. Statistical signicance: *p < .05; **p < .01; ***p < .001.

that the full-sample result is primarily affected by lowtransparent (B and C grade) companies, which comprise about 75 per cent of the group. Further Analysis of Compensation and Independence. Prior literature reveals that compensation may affect the independence and performance of a rms board of directors (e.g., Adjaoud, Zeghal, & Andaleeb, 2007; Becher, Campbell, & Frye, 2005; Fich & Shivdasani, 2005; Linn & Park, 2005; Yermack, 2004). However, some researchers nd that particular compensation policies do not eliminate the agency problem and are even harmful to companies (Core, Holthausen, & Larcker, 1999; Stewart, 2003). The effect of board member supervision capabilities depends on their independence, capabilities, and effort, so companies may pay more for board members with enhanced professional expertise and substantial industry experience, as well as increased effort levels (e.g., the time and fre-

quency of meeting attendance), which may also lead to higher compensation. The present investigation of compensation reveals that, to some degree, the more effort board members devote to supervision of company operations, the higher the governance effect and the greater the company transparency. On the other hand, excessively high compensation may entice board members to relinquish independence in order to retain their board position and compensation. Therefore, higher board compensation can positively relate to transparency when it compensates board members for their efforts and devotion, but negatively relates to transparency when compensation is excessive and board members abandon their independence in order to retain their board compensation. Although the independent variables show a positive effect on transparency, the results of the effect of compensation on transparency are inconsistent. As shown in Table 3, board compensation and independence are

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TABLE 4 Ordinal Logit Analysis of Transparency and Board Characteristic Variables with Interaction COMB IB

IT UP DOWN = 1 ACOM + 2 COMAB + 3 BN + 4 BH + 5 BL + 6 FB + 7 OB + 8 IB + 9 COMAB IB + 10 DEGREE + 11EDU + 12 DUAL + 13 IH + 14 TEC + 15 AUD + 16 SIZE +
Panel A IT Coefcient Compensation Variables ACOM .06 COMAB -.13 Structure Variables BN .03 BH .01 BL -.01 FB -.52 OB -.21 IB .46 COMAB IB 2.63 Capability of Supervision Variables DEGREE .13 EDU .11 DUAL .29 Control Variables IH .01 TEC .25 AUD .69 SIZE .55 Pseudo R-Square Cox and Snell Nagelkerke Wald Panel B UPGRADE Coefcient Wald Panel C DOWNGRADE Coefcient Wald

3.48* .28 .97 .14 6.70** .53 .07 .37 5.13** .92 37.82*** 2.31 .41 1.44 8.61*** 35.82*** .24 .27

.01 -1.19 -.01 -.01 -.01 -1.62 -1.12 1.72 5.64 -.07 .05 .83 .01 -.25 .34 .12

.08 2.72* .03 .74 .00 3.24* .46 .86 3.98** .06 2.33 2.60 .14 .27 .35 .40 .03 .07

-.02 -.02 .06 .01 -.01 -.46 -.22 -.30 .05 -.38 -.01 -.67 .01 .36 .18 .01

.10 .01 2.22 .01 1.07 .20 .04 .07 .01 2.41 .12 4.52** .27 1.31 .24 .00 .03 .05

All variables are dened in Table 1. Statistical signicance: *p < .05; **p < .01; ***p < .001.

addressed separately, which may lead to the inconsistent result among compensation in the full sample and the lowtransparent subsample. We add an interaction variable here, COMABIB, in order to investigate further these three variables correlation with transparency. As shown in Panel A of Table 4, b9 is signicantly positively related to transparency, indicating that, when high levels of board compensation and board independence exist together, greater transparency exists as well. Combining the results shown in Tables 3 and 4, when the interaction variable COMAB IB is not considered, there is no obvious effect of higher board compensation on transparency. However, when the interaction variable is considered, the result reveals that as independence increases, the likelihood that higher board compensation relates to higher transparency also increases. This result indicates that board member independence and efforts increase transparency, although the interactions of

greater independence and high supervision capability have a more signicant effect. Results also suggest that higher compensation is not necessarily bad; board compensation has a negative effect on transparency only when it harms the independence of directors. Effect of Board Governance Mechanisms on Transparency Ratings. Taiwans SFI announces the names of only those companies that are most transparent (the rst onethird among graded companies) in 2003 and 2004 and does not begin to offer transparency rankings for all listed companies until 2005.14 As a result, we compare transparency between 2004 (SFIs list published in 2005) and 2005 (SFIs list published in 2006) to address further the impact of board governance mechanisms on company transparency. We use the following logistic regression model to examine the association between governance mechanisms and

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changes in company transparency rankings from year to year:

UP DOWN = 1COMIV + 2 ACOM + 3 COMAB + 4 BN + 5 BH + 6 BL + 7 FB + 8 OB + 8 IB + 9 COMAB IB + 10 DEGREE + 11EDU + 12 DUAL + 13 IH + 14 TEC + 15 AUD (3) + 16 SIZE +
where UP is an indicator of an upgraded company while UP is 1 if the transparency ratings of a company improve from 2004 to 2005; DOWN is an indicator of a downgraded company while DOWN is 1 if the transparency ratings of a company worsen from 2004 to 2005. Panel B and Panel C of Table 4 indicate that when considering the effect of the interaction between board independence and abnormal compensation, the association between information transparency and COMAB are signicantly negative (z = 2.72; p < .05), while only two governance mechanism variables are signicantly related to the upgrade of company transparency ratings: FB (z = 3.24; p < .05) and the interaction variable COMABIB (z = 3.98; p < .01). The signicantly negative relationship between FB and UP suggests that family-controlled companies see signicantly fewer upgrades, possibly because they make most decisions within their families and thus may have skewed market perceptions. The signicantly positive relationship between the interaction variable COMABIB and UP suggests that companies whose board members are more independent and whose directors put more effort into supervising are signicantly more likely to be upgraded in the following year. Moreover, the signicantly negatively association between COMAB and UP suggest that comparing highly compensated directors with greater independence to highly compensated directors with low independence, there may be additional negative impacts on company information transparency. Further, the logistic regression of the downgrade model on board governance mechanisms shows that EDU is negatively associated with DOWN. Consequently, board member independence and efforts are highly related to the level of transparency, as expected.

transparency, while board structure variables are key factors in the transparency of small rms. No matter whether large or small, continuing education of directors is the key factor that enhances company transparency. Furthermore, the ndings indicate that corporate governance is not necessarily useful or required for every company. However, for small companies with less board independence and more family board members, transparency helps attract investment, but it also may creates misgivings about too much transparency not being good for rm competitiveness or company management. Therefore, the benet of board independence and the numbers of family board members for small companies is not as obvious as it is for large companies. Effect of separate analysis of boards of directors and supervisors. While Taiwanese companies are not legally required to create audit committees, the Taiwan Company Act requires that, if they do not, they have supervisors that act as an audit committee. All of our primary tests combine the data of board members and supervisors to simulate the effect of an audit committee, which is a useful mechanism because board members and supervisors may have different interests, even though both are charged with similar supervisory tasks. We further separate the data of board members and supervisors for the purposes of robustness and sensitivity results are very similar to the rst model result. The number of supervisors is not signicantly related to transparency. The result of ACOM and EDU are also similar to the result in the rst model and are signicantly related to transparency.

CONCLUDING REMARKS
For some time, corporate governance has been a critically important consideration for both governments and businesses. Strong corporate governance structures both protect the interests of stakeholders and help ensure that companies are operated appropriately. Information transparency allows stakeholders to determine the strength of corporate governance; when stakeholders can see information related to governance, companies are supervised via market forces. According to agency theory, compensation incentivizes managers to act in the best interests of shareholders. Board and the audit committees are charged with the responsibility of supervising company operations and, in practice, most important decisions require board review, so company compensation can inuence not only manager actions but also those of its boards of directors. However, while a great deal of the literature discusses the governance role of management compensation, the governance role of director compensation is rarely mentioned. In addition, transparency plays a critically important role in corporate governance, but while prior studies address the importance of the rms board of directors in corporate governance, few studies examine the association between director capacity and company transparency in terms of how they affect shareholder interests. Consequently, while the majority of extant studies on voluntary disclosure are premised on the alignment of shareholder and managerial interests, we focus specically on the capability and interests of the rms board of directors. The results indicate that large board size relates to high transparency, although this positive relationship is signi-

Sensitivity Analysis
Effect of Company Size on Governance Mechanisms. Past corporate governance research documents that company size affects the governance mechanism and the effects of that governance so that the relationship between governance mechanisms and transparency may differ in companies of different sizes. While previous models use company size as a control variable, we also use average size to distinguish large and small companies and to explore the correlation between governance mechanisms and transparency. Table 5 shows that ACOM is signicantly related to transparency only in large companies (z = 5.69; p < .01), while BL (z = 4.58; p < .05) and IB (z = 8.43; p < .001) are signicantly related to transparency only in small companies. In addition, EDU is positively correlated with transparency in both large (z = 24.24; p < .001) and small (z = 13.40; p < .001) companies. Company size sensitivity analysis reveals that board compensation variables are key factors in large companies

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TABLE 5 Ordinal Logit Analysis of Transparency and Board Characteristic Variables under Different Firm Size

IT = 1 ACOM + 2 COMAB + 3 BN + 4 BH + 5 BL + 6 FB + 7 OB + 8 IB + 9 DEGREE + 10 EDU + 11DUAL + 12 IH + 13 TEC + 14 AUD +

Panel A Large rms Coefcient Compensation Variables ACOM COMAB Structure Variables BN BH BL FB OB IB Capability of Supervision Variables DEGREE EDU DUAL Control Variables IH TEC AUD Pseudo R-Square Cox and Snell Nagelkerke Wald Coefcient Panel B Small rms Wald

.07 -.22 .08 .01 -.01 -.79 .53 -.60 .19 .14 .53 .01 .58 1.03

5.69** .02 .06 .90 1.36 .05 .20 .34 .94 24.24*** 2.28 1.63 3.21* 8.41*** .25 .28

.11 .18 .02 -.01 -.01 -.28 -.39 2.51 .02 .08 -.15 .00 .28 .31

.29 .58 .26 .80 4.58* .07 .12 8.43*** .01 13.40*** .34 .58 1.04 1.01 .13 .16

All variables are dened in Table 1. Statistical signicance: *p < .05; **p < .01; ***p < .001.

cant in the high-transparent subsample only. Moreover, a rms ratio of independent directors and supervisors is signicantly positively related to its transparency as well as to the likelihood that transparency ratings will be upgraded from one year to the next. This suggests that board independence is a key factor that improves company transparency. Further, the ratio of family-controlled directors and supervisors is negatively related to transparency and to upgrades in transparency ratings, which suggests that familycontrolled rms are less likely to be transparent. The signicantly negative relationship between the ratio of board members pledged shares and transparency suggests that board members to whom more company shares are pledged may tend to hold back information and thereby decrease company transparency. Ordinal logistic regression of the full sample suggests that average director compensation is signicantly positively related to transparency. Then, we suggest that director compensation is a reection of his or her effort, while greater effort is related to higher governance effects, so greater com-

pensation indicates higher transparency. Although a conicting result is shown in the low-transparent sub-sample, further testing suggests that the negative impact of high compensation may be diminished by independence of the board of directors. The variable for the average board of directors and supervisors continuing education hours is signicantly positively related to transparency and negatively related to a downgrade in transparency ranking, indicating that continuing education raises the capabilities of directors. These results suggesting that, in addition to the independence of directors, continuing education is an important factor that enhances board effectiveness. We also nd that board independence and effort increase transparency and that higher compensation is not necessarily bad if it does not harm board member independence. Results from the large-size and small-size subsamples suggest that compensation factors are important to large companies, while structure factors are more important to small ones. On the other hand, no matter whether large or

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small, the continuing education of a companys board of directors and supervisors is the key factor that enhances transparency. This study has the following limitations, some of which may provide avenues for future research. First, the study uses the results of the Taiwanese SFIs Disclosure Rating Report to measure company transparency and, although the report includes most listed companies in Taiwan and therefore can be generalized to most companies, it does not examine those companies not contained in the report. Next, the TSEC does not require all public companies to have independent directors; instead, only companies rst listed on the Taiwan Stock Exchange Corporation after 2002 are so compelled for companies listed prior to 2002, only outside directors are required. While using archival data has some inextricable problem and may distort the original data features, future research could examine related issues by primary data collection to overcome this limitation. In addition, this data is primarily archival in nature and board processes are inferred from these proxies. As such, we need eld data to conrm these assumptions. In addition, the study combines the data of board members and supervisors to simulate the effect of an audit committee because of the institutional setting in Taiwan. However, board members and supervisors may act differently since they may have different interests, so further research might extend the examination to study the effects of board members and supervisors separately. Finally, for director compensation, the present study provides only total compensation amounts as evidence. However, unique director compositions and compensations may have distinct impacts, so an understanding of how director compensation systems work to enhance corporate governance mechanisms is also an interesting issue for examination by future research. Our ndings contribute to extant literature in the following ways. By examining the association between board of director compensation and information transparency, we consider the importance of director compensation in corporate governance while the majority of prior studies consider only the role of management compensation. Moreover, by nding that information transparency is conned to rms with high board supervision capabilities, our results provide evidence to demonstrate that board supervision capabilities may complement strong corporate governance, which is consistent with the intent of SOX 407. Further, our study combines the independent and capability effects of boards of directors, and results suggest that highly compensated boards of directors are not necessarily detrimental to rm transparency but rather will have a negative effect on transparency only when excessive compensation motivates directors to act in their own interests or those of managers. The present study also has several practical implications. First, we provide evidence to demonstrate that in addition to management compensation, board compensation also plays a critically important role in corporate governance, and consequently, regulations governing company compensation policies require careful attention not only to compensation paid to managers, but also to that of its board of directors. Second, we suggest that governments of countries with weaker institutions, like Taiwan, should require that every

company have independent directors in order to increase the quality of corporate governance. Finally, from the viewpoint of disclosure, the present study nds that, in addition to the independence of directors, continuing education should be implemented for the board members of all companies due to its ability to enhancing the effectiveness of the board.

ACKNOWLEDGEMENTS
We thank the conference participants at the 2007 International Symposium on Audit Research (ISAR) in Shanghai, China; the 2007 American Accounting Association Ohio Region Meeting at Ohio, USA; the 2006 Accounting Theory and Practice Conference (Taiwan Accounting Association Annual Meeting) in Taipei, Taiwan; two anonymous referees; and especially the editor, William Judge, and associate editor for their valuable comments and suggestions.

NOTES
1. According to SOX 407, nancial expertise is accounting-related experience. 2. According to the Taiwan SFIs Disclosure Rating Report, companies not included in the ranking comprise those that: (1) have been listed less than one year or; (2) have changed transaction rules; (3) have ceased doing business; (4) have become unlisted; (5) have had core managers sued due to honesty problems; (6) have received going-concern opinions: or (7) have materially decient or controversial issues of disclosure. 3. There are two stock markets in Taiwan TSEC and GTSM the major difference being what is the paid-in capital of listed companies. A company can be listed on the TSEC if its paid-in capital is greater than 100 million NT dollars or on the GTSM if its paid-in capital is greater than 30 million NT dollars. Companies used for this studys sample are those listed on the TSEC. 4. References to the board in our study include boards of directors and supervisors. According to the Taiwan Company Act, Articles 198 and 216, boards of directors and supervisors shall be elected by a meeting of shareholders. 5. According to the Taiwan Securities and Exchange Law, there are 23 categories of information that publicly-held companies should announce to the public or report to the FSC. All of this information should be freely viewable or downloadable from the FSCs web site as well as via the TSECs Market Observation Post System (MOPS). 6. Similar to SOX 407, the Taiwanese Regulations Governing Appointment of Independent Directors and Compliance Matters for Public Companies Article 2 enforced that: An independent director of a public company shall meet one of the following professional qualication requirements, together with at least ve years work experience: 1. An instructor or higher in a department of commerce, law, nance, accounting, or other academic department related to the business needs of the company in a public or private junior college, college, or university; 2. A judge, public prosecutor, attorney, certied public accountant, or other professional or technical specialist who has passed a national examination and been awarded a certicate in a profession necessary for the business of the company. 3. Have work experience in the area of commerce, law, nance, or accounting, or otherwise necessary for the business of the company. Moreover, Article 3 of the Regulations of Board of Drectors Continuing Education for Public Companies also enforced

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7.

8.

9.

10. 11.

12.

13.

14.

that all directors need to take continuing education courses every year. The purpose of these regulations is to improve the directors supervision ability by proclaimed their qualication in writing. Taiwan Company Act Article 202: Business operations of a company shall be executed pursuant to the resolutions to be adopted by the board of directors, except for the matters the execution of which shall be affected pursuant to the resolutions of the shareholders meeting as required by this law or the articles of incorporation of the company. Taiwan Company Act Article 218: Supervisors shall supervise the execution of business operations of the company, and may at any time or from time to time investigate the business and nancial conditions of the company, examine the accounting books and documents, and request the board of directors or managerial personnel to make reports thereon. Family control is a dominant characteristic of large corporations in Taiwan. In many companies, families hold more than half of the rms board seats. Companies that meet one of three criteria are classied as family-controlled rms in Taiwan: (1) major shareholders (top-10 shareholders or shareholders who own 5 per cent or more of the total outstanding shares of the company) come from the same family; or (2) at least a third of the board members come from the same family; or (3) the chairperson and CEO come from the same family. A director who is not a current employee of the company is dened as an outside director. Listed companies in Taiwan are required to elect at least two independent directors in order to be listed on the TSE/GTSM. However, there is no clear denition in the TSE/GTSM Listing Rules for independence, which regulates only situations that constitute lack of independence. Lack of Independence in the TSEs denition, refers to a board of directors with fewer than ve directors, more than two-thirds of whom have an afliation. Afliation exists between: (1) spouses; (2) linear relatives by blood within the second degree of relationship; (3) collateral relatives within the third degree of relationship; (4) representatives serving the same corporate shareholder; or (5) afliates. Because other information as to the capabilities of supervision is hard to obtain, supervision capability here means only nancial supervision rather than supervision with regard to other aspects of business; other supervisory skill areas are purposely eliminated. Although the VIF values in Panel B of Table 2 do not suggest a collinearity problem, the variable SIZE is signicantly correlated to most of variables of this study. To address the collinerarity concern, we re-run all tests that omit the SIZE variable and nd similar results for our main hypotheses while most variables become more signicant, especially the other three control variables. For instance, assume that Company X receives a B in year 2004. Therefore, its name would not be announced in 2004 and we dene X as a below median transparent company. If Company X receives an A or A+ (above average) in 2005, we dene X as an upgrade company. On the other hand, assume that Company Y receives an A or A+ in year 2004, its name is announced in 2004, and we dene Y as an above-median transparent company. If Company Y receives an A or A+ (above average) in 2005, we dene X as an upgrade company.

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Hsiang-Tsai Chiang is an associate professor of the Department of Accounting and the Director of the Accounting Ofce of Feng Chia University, Taiwan. He has served as an independent director in the Taiwan Stock Exchange Corporation (TWSE) and the Hong Kong Exchanges and Clearing Limited (HKEx) listed companies. His research interests include corporate governance, auditing, and international nancial management. Li-Jen He is a Ph.D. candidate in the Department of Accounting, National Chengchi University, Taiwan. She is an adjunct lecturer in the Department of Accounting, Feng Chia University. Her research interests include corporate governance, auditing, and international accounting.

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