Attendance of board meetings and company performance: Evidence from Taiwan

Highlights

• Board meeting attendance is affected by factors such as director type and qualification.

• Ownership concentration is likely to reduce board meeting attendance by outside directors.

• Board meeting attendance by directors themselves is positive to firm performance.

• Authorized meeting attendance is negatively related to firm performance.

Abstract

This paper empirically investigates board meeting attendance and its effects on the performance of Taiwanese listed corporations. Directors with higher qualifications attend board meetings more often by themselves. The ownership of the largest shareholder of a company also has a positive effect on director’s own meeting attendance. High meeting attendance by directors themselves can enhance a firm’s performance but high attendance by their representatives has an adverse effect. Independence of directors or a board is also positively associated with firm performance. These results largely hold even when the sample is decomposed to count for different ownership structures and director types.

Introduction

The board of directors of a company has three main functions: monitoring, advising and contracting. It has the legal authority to ratify and monitor managerial initiatives, evaluate the performance of top managers, and reward or penalize that performance (Fama and Jensen, 1983a, Fama and Jensen, 1983b). The inside directors (executives of the company) provide valuable information about a firm’s activities, while outside directors may provide both strategic input and objectivity in evaluating the top executives’ decisions. Hence, it is important to understand the behavior and work effort of directors and the behavioral difference between different directors. One of major duties of directors, especially for outside directors, is to attend board meetings because board meeting is the main vehicle for directors to collect information, make decisions and monitor the management (Adams and Ferreira, 2008). Moreover, it is quite difficult to measure director work effort completely and directly in empirical studies. A straightforward way to partially identify director behavior and work effort is to investigate their board meeting attendance (Chou et al., 2010), which is the focus of this paper.

Existing empirical studies of board member activities are concentrated on board meeting attendance by outside directors and most studies are restricted to US companies. However, the data of board meeting attendance by the directors of US firms are not precise because the available data source only records whether a director attends more than 75% board meetings or not (e.g., Adams and Ferreira, 2008, Adams and Ferreira, 2012, Lawler and Finegold, 2006). This paper intends to overcome this shortcoming of the existing empirical literature by using a more comprehensive data set of board meeting attendance of Taiwanese companies. In contrast to the US companies, companies listed in the Taiwan Stock Exchange must provide detailed information of board meeting attendance of all directors in their annual reports. It includes board meetings attended by directors themselves and attended by the representatives authorized by a director. With this more accurate information, we can have a closer look on board member activities. Particularly, we can empirically test the determinants of board meeting attendance with considerable accuracy. It is found that manager directors attend much more board meetings by themselves than outside directors (inducting both independent and gray directors), while the attendance of family directors is between them.¹ Gray and family directors are also more likely to authorize a representative to attend board meetings on their behalf than other directors.

Another new feature of our database is that it contains comprehensive information of the qualification of each director. We include three proxies for the quality of a director in our analysis and find that all three measures are positively and significantly related to directors’ own meeting attendance but negatively related to meeting attendance by their representatives. A more capable director seems more involving and is keener to play the director role by him/herself rather than to delegate the job to his/her representative. We also find that directors attend more board meetings by themselves and delegate fewer to their representatives if the largest shareholder of the firm has a greater proportion of cash flow rights. For other determinants of meeting attendance by directors themselves, our findings are consistent with the existing literature. Moreover, a determinant usually generates opposite effects on a director’s own meeting attendance and authorized meeting attendance.

As an innovation, this study further explores work effort, or more specifically board meeting attendance, of various types of directors under different ownership structures. Concentrated ownerships in the forms of companies with a controlling family and/or a controlling ultimate shareholder are quite common in East Asia (e.g., Claessens et al., 2000, Claessens and Fan, 2002). To our knowledge, there is no literature to examine how directors play their roles differently due to ownership variation. According to the reality of the Taiwanese economy, this study considers five types of ownership structures. Our attention is on the contrast between widely dispersed firms and family/ultimate shareholder controlled firms. Both independent and gray directors tend to attend more meetings by themselves if they seat on the board of a widely dispersed firm but fewer meetings if they are on the board of a family firm, although not all of these results are statistically significant. On the other hand, manager directors attend fewer board meetings if they are employed by a widely dispersed firm or by a firm with less divergence between the ultimate shareholder’s voting rights and cash flow rights. But this divergence makes family directors more likely reduce their own meeting attendance.

Whether the directors of a company properly play their monitoring, advising and contract roles is ultimately testified by whether their work improving the company’s performance. With the relatively accurate information of board meeting attendance in our database, we can directly test the impact of directors’ meeting attendance on firm performance. To our knowledge, this is the first in the literature to quantitatively examine this relation.² Our findings indicate that the frequency of board meetings attended by directors themselves has a positive and significant effect on a firm’s profitability. However, the authorized meeting attendance is negatively correlated with performance. This negative effect is statistically significant and economically comparable to the positive effect of directors’ own attendance.

While the typical agency problem of a widely dispersed firm is the conflict of interest between managers and shareholders, the main agency problem of a firm with concentrated ownership is the conflict of interest between controlling shareholders and minority shareholders. We study the director’s role in resolving these agency problems and improving performance by considering further the attendance of board meetings by different types of directors in these firms separately. Independent directors seem to play a more profound role in family or ultimate shareholder controlled companies than in widely dispersed firms, as evidenced by the findings that the effect of their own attendance to board meetings is significant on the profitability of family/ultimate controlled companies but insignificant on widely dispersed firms. The presence of family directors and ultimate directors in board meetings also has a significant impact on these firms’ performance.

The remainder of the paper is organized as follows. Section 2 specifies the motivations and research questions of this paper. It also presents the regression models for testing. Section 3 describes the statistics of our sample and reports the main empirical results using firm-level and director-level data. The final section concludes the paper.