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orategovernance to the company include enhancingoperating performance and preventing fraud. According to the research of Black,Jang, and Kan (2002), companies withbetter corporate governance have better operating performance than companies with poor corporate governance. A soundcorporate governance structure not only provides useful information to investors and creditors to reduce information
asymmetry but also helps the company to improve operations. According to related literature, major corporate governance
indicators include the structure of the board of directors, the structure of ownership, and information transparency. These
indicators are discussed in detail below.Structure of the Board of DirectorsThe board of directors is the top executive unit of a company and is charged with the responsibility of supervisingoperations of the company’s management. Indicators to evaluate the governance function of this structure are as follows.The Journal of American Academy of Business, Cambridge * March 2005 95Proportion of Independent DirectorsInside directors generally have a greater understanding of the company’s operations; therefore, they canenhance the efficiency of the board of directors and the precision oftheir decisions (Yermack, 1996; Lang,1999). However, independent directors are more professional in business operations and can moreeasily achieve the supervising function, reduce the possibility of collusion of top executives, andprevent the abuse of company resources, thus improving operating performance.
Size of Board of DirectorsThe optimal number of directors is a dilemma for companies. Efficiency is reduced if the number of directors is
too large because there is an increased difficulty in achieving agreement concerning decisions. On the other hand,decision-making precision is reduced if the number of directors is too small because there may not be adequatediscussion of issues involved.
President of the Board of Directors is concurrently the CEO
In Taiwanese companies, it may be common for the president of the board of directors to concurrently serve asthe CEO. In this situation, the supervising function of the board of directors is diminished because of this lack ofindependence (Patton and Baker, 1987). However, Anderson and Anthony (1996) argue that the operatingperformance may be improved as a result of less conflict between the board of directors and the CEO.
Structure of OwnershipJensen and Warner’s (1988) research states that there is a relationship between the ownership structureand operating performance. Hill and Snell (1989) also indicate that a company with a highlyconcentrated ownership structure has superior performance.
Proportion of Management ShareholdingAccording to Jensen and Melking’s (1976) convergence-of-interest hypothesis, conflict between
management and the goals of the company, that is, the agency problem, isreduced as management shareholding isincreased. However, Jensen and Ruback’s (1983) entrenchment hypothesis has a different point of view. Theystate that the more shares management holds, the higher the possibility that manager decision-making is overlyconservative due to security of their positions.Proportion of Institutional Shareholding
Pound (1988) develops the following hypotheses about institutional shareholders.a. Efficient monitoring hypothesis: This hypothesis states that institutional shareholders are more professional than common
shareholders. Therefor