lei - determinants of cg and the link between cg and performance - evidence from the uk using a corporate governance scorecard

The Determinants of Corporate Governance and the Link
between Corporate Governance and Performance: Evidence
from the U.K. Using a Corporate Governance Scorecard







Thesis Proposal by

Luo Lei





School of Business

National University of Singapore

1. Introduction

1.1 Introduction
Corporate governance practices in the U.K. have received increasing attention since
the 1990s, with influential reports issued by the Cadbury Committee (1992), Greenbury
Committee (1995), Hampel Committee (1998), and Turnbull Committee (2003) and Sir
Derek Higgs (2003). These reports resulted in various corporate governance codes and
recommendations, the most recent being the Combined Code on Corporate Governance,
July 2003 (hereafter U.K. Code).
In this study, we use a scorecard developed by Standard & Poor’s to assess the
corporate governance of U.K. listed companies. It provides a comprehensive measure of
the extent to which a company has adopted international best practices in corporate
governance, as disclosed in their corporate governance disclosures.
The evidence on whether there is a link between governance structure and
performance remains weak. We argue that one possible reason could be due to the
research methodology. Earlier research has examined subsets of governance mechanisms,
usually one or two governance variables only. As the firms can choose and modify the
structure of their governance system to suit their circumstances, we argue that we should
examine a number of governance variables and over a longer time period.

1.2 Motivation of Study
Some recent studies have used a broader measure of corporate governance through a
composite corporate governance rating, including Gompers et al. (2003) for the U.S.,
Klapper and Love (2004) for fourteen emerging markets, Durnev and Kim (2002) for
twenty seven countries, Bauer et al. (2003) for the EMU and the U.K These studies
generally find a positive relationship between governance standards and firm value.

Baure et al. (2003) and other studies are based on ratings of one or two years only,
assuming that governance ratings should remain constant for a number of years. However
our data shows otherwise — there is a significant upward trend for the corporate
governance scores over the time. Without time series data, researchers cannot study how
firms adjust their governance structure over time, or analyze the causality between
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governance and firm performance found in Black et al. (2005). A recent study by Leora,
Klapper and Love (2004) find that differences in firm-level contracting environment
would affect a firm’s choice of governance mechanisms, in line with arguments put forth
in Himmelberg et al. (1999). However because their governance data have no time
variation, they are not able to control the fixed effects and to test the causality.
Our study can make a potential contribution in this area by analyzing a number of
corporate governance mechanisms based on time-varying firm-specific data. Using the
methodology in Agrawal and Knoeber (1996), we examine the four mechanisms used in
controlling agency problems — insider shareholdings, blockholdings, institutional
shareholdings and leverage status of the firm. In addition, we also include a
comprehensive measure of governance using a corporate governance scorecard and
measuring governance over a longer time period.
Our findings reveal an interesting relationship between governance and performance.
It is the change of governance that determines performance rather than the governance
level. We form an investment strategy that buys firms with greatest improvement in
governance and sells firms with largest deterioration in governance. It yields 70.4 percent
excess returns over the sample period. Contrary to the findings in Bauer et al. (2003), we
find that investors will lose money if they buy firms ranking highest and sell firms
ranking lowest.

1.3 Objective of Study
This is an empirical study on whether better corporate governance leads to higher
valuation through lower expected rate of return. We investigate the interdependence of
various governance practices, the change of governance structure and the impact on the

firm value. We look into the boxes of the aggregate governance index in order to find
“key factors” associated with firm performance. We conduct a series of tests to
differentiate the risk and mispricing explanations to excess returns resulting from
governance improvement.

1.4 Potential Contributions of Study
This study includes a more complete set of governance mechanisms including the
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composite governance scorecard as well as ownership and firm leverage. We deal the
unobserved firm heterogeneity with a fixed effects estimator and firm endogeneity with
the simultaneous equation system. The margin effect of governance improvement is also
a new finding in research on corporate governance.

1.5 Organization of Study
The remainder of this study is organized as follows: Section 2 reviews the literature
concerning to firm level corporate governance. Section 3 describes the sample and data.
In Section 4 to 10, respectively, we present empirical evidence on the determinants of
corporate governance, on the relationship between corporate governance and firm
performance, its relationship with stock returns and distinguish between the risk and
mispricing explanation of excess returns. Section 11 concludes.

2. Literature Review

2.1 The Interaction of Different Governance Mechanisms
Corporate governance comprises many dimensions. Based on the U.K. Code, it can
be divided broadly into the role of directors, directors’ remuneration, the role of
shareholders, and accountability and audit.
Some of the structures are complements while others are substitutes to certain extent.
The previous research has found different governance patterns. For example, Peasnell et
al. (2001) find evidence of a convex association between the proportion of outside board

members and the level of insider ownership in the U.K. corporate control process.
Shivdasani and Yermack (1999) observe, using U.S. data, that when the CEO serves on
the nominating committee or no nominating committee exists, firms usually appoint
fewer independent outside directors and more grey outsiders. Similarly, Vafeas (1999)
discover that the likelihood of engaging a nominating committee is related to board
characteristics such as inside ownership, number and quality of outsider directors for U.S.
firms.
Board structure is an important governance mechanism. Kenneth et al. (1995) note
the substitution effects between outside directors, blockholders, and incentives to insiders
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using eighty one U.S. bank-holding companies in his study. Both Dedman and Elisabeth
(2002) and Young (2000) investigate the board structure determinants before and after
Cadbury Report. They either find managerial entrenchment is reduced or non executive
directors are increased following the imposition of new standards of “best practice”
regarding board structure.

2.2 The Relationship between Governance Mechanism and Firm Performance
Our study builds on Himmelberg et al. (1999) who use panel data to show that
managerial ownership is explained by key variables in the contracting environment. A
large fraction of the cross-sectional variation in managerial ownership is explained by
unobserved firm heterogeneity. Moreover, after controlling for both observed firm
characteristics and firm fixed effects, changes in managerial ownership do not affect firm
performance statistically.
Many other researchers have examined the relationship between variety of
governance mechanisms and firm performance. However, the results are mixed. Some
examine only the impact of one governance mechanism on performance as Himmelberg
et al. did, while others investigate the influence of several mechanisms together on
performance. None of them covers a complete set of governance mechanisms. Below, we
will briefly review some of previous studies on the governance-performance relationship.
(1) Board Composition

It is suggested that higher proportion of non-executive directors in the board helps to
reduce the agency cost. Kee et al. (2003) and Hutchinson and Gul (2003) support this
view by showing that that higher levels of non-executive directors on the board weaken
the negative relationship between the firm’s investment opportunities and firm’s
performance. However, de Jong et al. (2002), Coles et al. (2001), and Weir et al. (2002)
dispute it by stating that there is no significant relationship between non-executive
directors’ representation and performance. In contrast, in the U.K., Weir and Laing (2000)
find a negative relationship between non-executive director representation and
performance. In addition, Yermack (1996) present that small board has a higher market
valuation.
Stronger support for the positive impact of non-executive directors comes from event
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study analysis. The studies by Rosenstein and Wyatt (1990 and 1997) and Shivdasani and
Yermack (1999) show that the appointment of non-executive directors increases company
value.
(2) Leadership Structure
Although U.K. Code regards separation of the role of CEO and chairman as a sign of
good governance, previous empirical analyses do not support it. For example, Coles et al.
(2001), Weir et al. (2002), and Weir and Laing (2000) do not find any significant
relationship between CEO duality and performance. Brickley et al. (1997) observe that
costs of separation are larger than benefits for most large U.S. firms.
(3) Board Ownership
The findings of the primarily U.S. based literature suggest that management is
aligned at low or possibly high levels of ownership but is entrenched at intermediate
ownership levels (e.g., Morck et al., 1988; McConnell and Servaes, 1990). U.K. evidence
confirms that U.K. management becomes entrenched at higher levels of ownership than
their U.S. counterparts (e.g. Faccio et al., 1999; Short and Keasey, 1999). Hutchinson and
Gul (2003) report that management share ownership and managers’ remuneration weaken
the negative relationship between the firm’s investment opportunities and firm’s
performance. In contrast, Coles et al. (2001) do not find any contribution to performance

by managerial ownership.
(4) Institutional Holdings
As the U.K. Code encourages institutions to take an active role in governance, we
may expect a positive relationship between institutional holdings and firm performance.
Unfortunately, empirical evidence is not supportive of this recommendation. Both Faccio
and Lasfer (1999, 2000) fail to find such a significant relationship for U.K. firms. Besides,
de Jong et al. (2002) find that major outside and industrial shareholders negatively
influence the firm value.
(5) Committee Composition
For U.K. companies, Conyon (1997) provides a thorough review of the workings of
remuneration committees and shows that firms with remuneration committees pay
directors less remuneration. Conyon & Mallin (1997) observe that U.K. firms have been
slow in adopting nominating committees, a symptom of failure of the corporate
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governance system. By contrast, audit committee use in the U.K. has been widespread
(e.g. Conyon, 1994; Collier, 1993). The results in Forker’s (1992) study suggest that the
quality of disclosure is only weakly related with audit committees and non-executive
directors.
(6) Managers’ Remuneration
The empirical work shows that the role of managers’ remuneration in coordinating
managers’ and investors’ interests is limited. Hutchinson and Gul (2003) find a positive
role for managers’ remuneration, while Coles et al. (2001) do not.

2.3 Endogeneity of Corporate Governance Mechanisms in Firm Valuation
Bhagat and Black (2002) find evidence that firms suffering from low profitability
respond by increasing the independence of their board of directors, but no evidence that
firms with more independent boards achieve improved profitability. Vafeas (1999)
observes that the annual number of board meetings increases following share price
declines. He further finds that operating performance improves following years of
abnormal board activity.

Some other studies are in the ownership area. None of them provides support to the
governance-performance relationship. Oyvind and Bernt (2001) discover that qualitative
conclusions are sensitive to choice of instruments. Demsetz and Villalonga (2001) fail to
find significant relationship between ownership and performance. What is more, Cho
(1998) concludes that investment affects corporate value and in turn corporate value
affects ownership but not vice versa.
Agrawal and Knoeber (1996) examine the use of seven mechanisms to control
agency problems between managers and shareholders. These mechanisms are:
shareholdings of insiders, institutions, and large blockholders; use of outside directors;
debt policy; the managerial labor market; and the market for corporate control. The
findings are consistent with optimal use of each control mechanism except outside
directors. Closely following their approach, we construct a simultaneous equation system
to investigate the influence of corporate governance scorecard on firm performance.
Barnhart and Rosenstein (1998) investigate the combined effect of ownership structure
and board composition on corporate performance. The results indicate that managerial
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ownership, board composition, and Tobin’s Q are jointly determined. Vafeas and
Theodorou (1998) examine a broad group of board structure variables for U.K. firms.
Contrary to expectations, the results reveal an insignificant relationship between board
structure (percentage of non-executive directors, leadership structure, board ownership
and committee composition) and firm performance.

2.4 Corporate Governance Scorecard in Examining Stock return, Firm value and
Performance
Other than focusing on one or two separate variables for corporate control, recently
there have been an increasing number of studies that employ corporate governance
scorecard as a comprehensive measure to examine the agency problem. It has the
advantage to implicitly incorporate either the substitutive or complementary effect of
variety of governance practices into one study. The empirical literature on the
relationship between firm value and corporate governance scorecard usually analyzes

either inter-country difference or inter-firm variation within a country. The most
prominent example of studies on inter-country difference is LaPorta et al. (2002), who
investigate differences in governance standards among twenty seven countries. Their
evidence shows that firms incorporated in countries with better governance standards
tend to have higher valuations. Examples of studies investigating inter-firm variation
within one country are Drobetz et al. (2003) for Germany, Gompers et al. (2003) and
Marry and Stangeland (2003) for the U.S., Klapper and Love (2004) for fourteen
emerging markets, Durnev and Kim (2002) for twenty seven countries, Bauer et al. (2003)
for the EMU and the U.K., Black et al. (2005) for Korea, Black (2001) for Russia, and
Callahan et al. (2003) for Fortune 1000 firms. The results appear to confirm a positive
relationship between governance standards and firm value. More importantly, the
relationship seems to be stronger in countries with less developed standards.
To the best of our knowledge, only Klapper and Love (2004), Durnev and Kim (2002)
and Black et al. (2005) investigate the determinants of corporate governance scorecard.
Overall Klapper and Love (2004) find that firm-level governance is correlated with firm
size, sales growth and assets composition. Moreover, they report that good governance is
positively correlated with market valuation and operating performance. Simliarly, Durnev
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and Kim (2002) report higher disclosure level and in turn higher market valuation for
firms with greater growth opportunities, greater needs for external financing, and more
concentrated cash flow rights. Black et al. (2005) document size and firm risk as
important factors affecting firms’ corporate governance practices. Our study differs from
theirs in the following ways: Firstly, we use time-varying governance scorecard to
control unobserved firm heterogeneity with fixed effects. Secondly, we broaden
governance measurements with governance scorecard as well as shareholding variables.
Finally, we explicitly put governance mechanisms into a simultaneous equation system to
address the endogeneity problem.
Among the inter-firm variation studies, Gompers et al. (2003), Marry and Stangeland
(2003), Klapper and Love (2004), and Bauer et al. (2003) examine the impact of the
governance standards on firm performance approximated by profitability ratios as well.

All of them document a positive relationship between governance scorecard and
performance except for Bauer et al. (2003) who surprisingly detect a significant negative
relationship.
When set up a zero investment portfolio, investors can earn abnormal returns by
buying firms from higher level corporate governance group and short-selling those from
lower level corporate governance group (Gompers et al., 2003; Drobetz et al., 2003;
Bauer et al., 2003).
Drobetz et al. (2003) and Chen et al. (2003) investigate the influence of governance
scorecard on cost of equity capital for Germany and nine Asia markets respectively. Their
findings show that good corporate governance helps to reduce such cost.
Creamers et al. (2003) find that external and internal governance mechanisms are
strong complements in association with long term abnormal returns and accounting
measures of profitability. Besides, Q’s of firms with both high takeover vulnerability and
high public pension fund ownership are high, but lower than the Q’s of firms where only
one of the two governance mechanisms is high.

3. The Data
The starting point of our sample is the set of firms listed in Index Constituent
Rankings FTSE 100 and Index Constituent Rankings FTSE 250 from FTSE European
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Monthly Review, January 2001 issue. It will be denoted FTSE 350 hereafter. We exclude
financial firms as they have different financial reporting formats and many of the key
variables needed in our study are not available in COMPUSTAT database. For each of
the remaining industrial and commercial firms, with at least three years of annual reports
containing the relevant corporate governance information over the time-period 1999 till
2003, we calculate its corporate governance score using the corporate governance
disclosure scorecard provided by the S&P. In this study, scorecard will be used
interchangeably with score, rating, ranking and/or index.
S&P’s corporate governance disclosure scorecard is a methodology based on a
synthesis of governance codes and guidelines of global best practices, as well as its own

experience in reviewing individual companies. With the information extracted from
company annual report, we answered 119 questions on governance practices for each
company each year. It enabled us to construct a time-varying corporate governance
scorecard for our study.
Ninety three of the questions are binary questions and one point is given for each
best practice complied with and zero otherwise or if the company did not disclose
whether it had or not complied with such best practice. The remaining questions were
answered with specific integers such as “number of members in the remuneration
committee”. Since for a few questions, the answer corresponded to more than one score
item, there are altogether 136 best practice items for the scorecard. Four out of the 136
items can score up to a maximum two points instead of one. Therefore, the maximum
possible score for one company with the 136 score items is 140. After filling in the
answers to these 119 questions, the formula automatically computes the total score for the
company of interests. Generally such measure assigns an equal weightage to each
disclosed item with the exception of the four items which can attain a maximum score of
two. These four items carry slightly higher weightage.
Scores on the 119 questions are grouped into five categories of corporate governance:
Board Matters, Nomination Matters, Remuneration Matters, Audit Matters and
Communication. We compute the composite governance scorecard by summing up the
scores for each group.
The financial data employed in our analysis are obtained from COMPUTSTAT
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Global Industrial/Commercial file from 1999 to 2003 (as for previous growth, profit
measures, we use the corresponding earlier period data). We obtain the following data
from DataStream: total stock return index for individual firm, FTSE all share total return
index, U.K. Treasury Bill interest rates and market capitalization.
The 2-digit SIC codes are from COMPUSTAT (global) database. Average number of
institutional shareholders for 2-digit SIC industry of a firm is collected from Shareworld.
The dummy variable indicating if a firm trades American Depositary Receipts (ADRs) on
a major exchange (NYSE, AMEX, or NASDAQ) in the U.S. is identified using the JP

Morgan website:
. The ownership data are collected manually from
annual reports.
Our final sample includes 206 firms with 3 to 5 years of data. The scores cover
between 105 and 195 firms over the time-period 1999 till 2003. When the scores are
supplemented with ownership and accounting data to perform analysis, the firm-year
observations vary in the range of 837 to 962 with respect to different model
specifications.

Table 1: Summary statistics of composite governance scorecard
1999 2000 2001 2002 2003 1999-2000 2000-2001 2001-2002 2002-2003
Mean 56.71 58.18 60.70 63.05 69.60 2.76 2.77 2.19 6.61
Median 57.00 58.00 61.00 63.00 69.00 2.00 2.00 1.00 4.50
St. Dev. 9.31 8.45 7.96 8.08 11.05 5.57 3.89 4.47 7.74
Min 29.00 33.00 37.00 41.00 45.50 -7.00 -10.00 -11.00 -4.00
Max 79.00 82.00 86.00 85.00 105.00 25.00 21.00 25.00 41.55
No. of firms 105 157 185 195 194 100 154 184 193

Table 1 provides summary statistics by year for corporate governance scorecard.
This table reports the mean, median, standard deviation, minimum, and maximum of
corporate governance scores for the sample year 1999-2003. In addition, we present the
statistics for the changes of scores each year. The last row of Table 1 shows that the
number of firms increases from 105 in 1999 to 194 in 2003. Also, the score is increasing
from 1999 to 2003, changing from a mean (median) of 56.71 (57.00) in 1999 to a mean
(median) of 69.60 (69.00) in 2003. Overall, there exists an upward trend for the
governance scorecard, as can be detected from the average score change that is positive
for all the sample years. However some firms’ corporate governance disclosure
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deteriorates during the sample period. For example, the firm with the most score decrease
loses 11 points in 2002. From both the range between minimum and maximum scores

and the standard deviation of scores, we can see a certain degree of dispersion for our
sample across firms and years. The sample is not skewed as the mean and median is very
close.
Our sample spans many sectors of the economy. Table 2 lists the distribution of firms
according to their division and major groups. SIC includes ten divisions in total. Our
sample represents nine of them. The absentee is the division of Agriculture, Forestry, and
Fishing.

Table 2: Industry composition
Division/Major Group Number
Percent
of
Sample
Mean
SCORE
Median
SCORE
Mean
SCORE
Change
Median
SCORE
Change
Mining 12 1.4% 62.47 57.00 3.74 1.00
10: Metal Mining 12 1.4% 62.47 57.00 3.74 1.00
Construction 36 4.3% 58.25 57.50 2.96 2.00
15: Building Construction General Contractors And Operative
Builders
31 3.7% 59.71 59.00 2.53 2.00
16: Heavy Construction Other Than Building Construction

Contractors
5 0.6% 49.20 45.00 5.00 1.00
Manufacturing 335 40.4% 61.80 61.70 3.63 2.00
20: Food And Kindred Products 51 6.2% 60.35 62.00 4.37 3.00
21: Tobacco Products 11 1.3% 62.77 60.00 3.50 2.50
22: Textile Mill Products 2 0.2% 72.00 72.00 2.00 2.00
26: Paper And Allied Products 6 0.7% 60.33 61.00 4.25 4.00
27: Printing, Publishing, And Allied Industries 38 4.6% 57.26 58.00 2.40 2.00
28: Chemicals And Allied Products 60 7.2% 61.72 62.00 4.57 2.00
29: Petroleum Refining And Related Industries 9 1.1% 51.05 45.50 3.65 4.50
30: Rubber And Miscellaneous Plastics Products 2 0.2% 72.00 72.00 -2.00 -2.00
32: Stone, Clay, Glass, And Concrete Products 24 2.9% 63.29 62.00 4.42 3.00
33: Primary Metal Industries 16 1.9% 63.81 61.00 4.83 2.50
34: Fabricated Metal Products, Except Machinery And Transportation
Equipment
7 0.8% 60.22 64.00 2.71 4.55
35: Industrial And Commercial Machinery And Computer Equipment 23 2.8% 62.59 62.00 3.31 1.00
36: Electronic And Other Electrical Equipment And Components,
Except Computer Equipment
44 5.3% 65.63 61.75 2.81 2.50
37: Transportation Equipment 21 2.5% 61.91 61.00 4.47 3.00
38: Measuring, Analyzing, And Controlling Instruments;
Photographic, Medical And Optical Goods; Watches And Clocks
21 2.5% 64.60 67.00 1.42 0.50
Transportation, Communications, Electric, Gas, And Sanitary
Services
159 19.2% 63.41 63.00 4.16 2.75
40: Railroad Transportation 3 0.4% 66.67 66.00 2.00 2.00
41: Local And Suburban Transit And Interurban Highway Passenger
Transportation

18 2.2% 58.33 62.00 5.10 3.00
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42: Motor Freight Transportation And Warehousing 3 0.4% 54.67 59.00 7.50 7.50
44: Water Transportation 8 1.0% 63.25 61.50 5.33 5.50
45: Transportation By Air 17 2.1% 66.54 69.00 1.99 2.00
47: Transportation Services 10 1.2% 57.70 54.50 -0.14 1.00
48: Communications 40 4.8% 63.36 61.00 5.38 3.00
49: Electric, Gas, And Sanitary Services 60 7.2% 65.33 63.50 4.25 2.00
Wholesale Trade 35 4.2% 63.22 63.00 2.99 2.00
50: Wholesale Trade-durable Goods 17 2.1% 65.10 66.00 1.13 1.00
51: Wholesale Trade-non-durable Goods 18 2.2% 61.44 58.50 4.84 2.00
Retail Trade 96 11.6% 65.36 65.00 4.15 3.00
52: Building Materials, Hardware, Garden Supply, And Mobile Home
Dealers
8 1.0% 71.57 69.00 5.76 3.00
53: General Merchandise Stores 12 1.4% 70.28 71.00 3.24 3.00
54: Food Stores 21 2.5% 62.94 63.00 5.05 2.00
56: Apparel And Accessory Stores 11 1.3% 61.27 62.00 1.29 1.00
57: Home Furniture, Furnishings, And Equipment Stores 8 1.0% 69.63 69.00 4.00 2.50
58: Eating And Drinking Places 12 1.4% 62.25 59.50 3.89 3.00
59: Miscellaneous Retail 24 2.9% 64.97 64.50 4.61 5.15
Finance, Insurance, And Real Estate 24 2.9% 60.05 58.50 5.67 4.00
62: Security And Commodity Brokers, Dealers, Exchanges, And
Services
3 0.4% 78.00 71.00 10.83 11.50
64: Insurance Agents, Brokers, And Service 4 0.5% 44.75 44.00 3.00 3.00
65: Real Estate 3 0.4% 67.00 62.00 8.50 8.50
67: Holding And Other Investment Offices 14 1.7% 59.09 57.50 4.47 4.00
Services 126 15.2% 61.53 61.00 3.48 2.00
70: Hotels, Rooming Houses, Camps, And Other Lodging Places 10 1.2% 63.86 62.80 3.95 3.00

72: Personal Services 3 0.4% 56.33 56.00 1.50 1.50
73: Business Services 62 7.5% 59.89 58.00 4.46 3.00
75: Automotive Repair, Services, And Parking 5 0.6% 53.00 51.00 2.50 3.00
78: Motion Pictures 4 0.5% 60.40 60.50 4.87 7.60
79: Amusement And Recreation Services 7 0.8% 69.43 72.00 0.60 0.00
80: Health Services 3 0.4% 63.67 64.00 0.50 0.50
87: Engineering, Accounting, Research, Management, And Related
Services
27 3.3% 63.11 62.00 2.71 1.00
89: Miscellaneous Services 5 0.6% 68.79 68.67 0.73 0.92
Public Administration 6 0.7% 60.67 60.50 2.50 1.50
99: Nonclassifiable Establishments 6 0.7% 60.67 60.50 2.50 1.50

Manufacturing, the largest firm size class accounts for 40.4% of the whole sample.
The other major divisions are Transportation, Communications, Electric, Gas, and
Sanitary Services (19.2%); Services (15.2%); and Retail Trade (11.6%). The corporate
governance disclosure does not vary much across industries. The highest mean SCORE is
65.36 for Wholesale Trade; while the lowest mean SCORE is 58.25 for Construction. The
difference is not huge. There lacks a clear pattern whether high-scoring firms are
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clustered at the new or mature industries. As to be mentioned in the later part of the thesis,
our focus is on the changes of corporate governance by controlling firm fixed effects,
industry effects is less important for this purpose.
Besides aggregated corporate governance index, we construct index for each of the
five categories, namely Board Matters; Nomination Matters, Remuneration Matters,
Audit Matters, and Communication. The results reported in Tables 3 are the subindices
computed by simply summing up all the points for each element within the same category.
This construction weighs each element equally.
As an alternative, we follow Black et al. (2005) to standardize the subindices and
then combine subindices into a standardized overall index. Such approach weighs each

subindex equally rather than weighs each element equally. Specifically, to compute
subindices, we sum a firm’s score on the elements of a subindex, divide by the number of
elements, and multiply this ratio by 20. Thus, each subindex has a value between 0 and
20. We define the overall standardized score as the sum of all the five subindices. As the
correlation between SCORE and standardized SCORE is 0.963 and significant at 0.01,
we employ only SCORE for all of our investigations.

Table 3: Summary statistics of subindices

1999 2000 2001 2002 2003 1999-2000 2000-2001 2001-2002 2002-2003
Panel A: Board Matters (43 elements)
Mean 18.10 19.06 19.37 19.98 21.57 1.16 0.48 0.53 1.63
Median 18.00 19.00 19.00 20.00 22.00 0.00 0.00 0.00 1.00
St. Dev. 4.57 4.10 4.13 4.01 4.68 3.09 2.27 2.08 2.87
Min 6.00 7.00 7.00 8.00 9.00 -5.00 -8.00 -8.00 -4.00
Max 32.00 29.00 31.00 30.00 35.00 12.00 12.00 9.00 13.00
No. of firms 105 157 185 195 194 100 154 184 193
Panel B: Nomination Matters (25 elements)
Mean 5.57 5.90 6.03 6.31 7.27 0.55 0.18 0.27 0.94
Median 6.00 6.00 6.00 6.00 7.00 0.00 0.00 0.00 0.00
St. Dev. 2.38 2.08 1.99 2.07 2.86 1.53 1.00 1.26 2.22
Min 0.00 1.00 0.00 0.00 1.00 -2.00 -2.00 -3.00 -5.00
Max 12.00 13.00 13.00 16.00 20.00 6.00 8.00 8.00 12.00
No. of firms 105 157 185 195 194 100 154 184 193
Panel C: Remuneration Matters (34 elements)
Mean 20.99 20.82 20.98 21.46 23.74 0.02 0.12 0.50 2.29
Median 21.00 21.00 21.00 21.00 23.00 0.00 0.00 0.00 2.00
St. Dev. 2.10 2.10 2.01 2.23 3.03 1.52 0.98 1.53 2.47
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Min 15.00 15.00 15.00 16.00 17.00 -4.00 -3.00 -4.00 -3.00

Max 26.00 26.00 27.00 28.00 33.60 7.30 4.00 7.00 10.60
No. of firms 105 157 185 195 194 100 154 184 193
Panel D: Audit Matters (29 elements)
Mean 9.41 9.72 11.65 12.57 14.26 0.89 1.99 0.83 1.70
Median 9.00 10.00 12.00 13.00 14.00 0.00 2.00 0.00 1.00
St. Dev. 3.20 3.04 2.95 2.87 3.28 1.85 1.82 1.75 2.81
Min 2.00 2.00 3.00 5.00 5.00 -2.00 -4.00 -4.00 -3.00
Max 18.00 18.00 18.00 20.00 24.00 9.00 8.00 10.00 14.00
No. of firms 105 157 185 195 194 100 154 184 193
Panel E: Communication (5 elements)
Mean 2.64 2.68 2.66 2.73 2.77 0.14 0.01 0.06 0.04
Median 3.00 3.00 3.00 3.00 3.00 0.00 0.00 0.00 0.00
St. Dev. 0.59 0.59 0.56 0.57 0.59 0.42 0.29 0.32 0.34
Min 2.00 2.00 2.00 2.00 2.00 -1.00 -1.00 -1.00 -1.00
Max 4.00 4.00 4.00 4.00 4.00 2.00 1.00 1.00 1.00
No. of firms 105 157 185 195 194 100 154 184 193

Table 3 provides summary statistics for each subindex. As our construction is for
equal weight of elements, categories with more elements are potentially likely to have
high score. For example subindex for Communication has only five elements and thus
obtains the lowest mean score. Board Matters group is the largest group in terms of
elements inclusion. Although it has more variation in corporate governance than other
groups, its mean score is not the highest. All of the subindices contribute to the
improvement of overall index over time. As it can be seen that every subindex has an
upward trend for corporate governance as the aggregate index does. The average firms
have positive score changes for each subindex. Year 2003 observes the highest score
increase for most of the categories.
Table 4 shows a correlation matrix for overall SCORE and each subindex for the
entire sample period. All correlations are positive and significant. Except for
Communication, all the other subindices have high correlations with overall score,

ranging from 0.684 to 0.801. As the low weights assigned for the subindex of
Communication, this group has a lower correlation (0.339) with overall score. The
correlation between many of the subindices is high. Compared with others, the
Communication subindex is less correlated with other categories. The lowest correlation
(0.145) is between Communication and Audit Matters. The significant correlation
14
between scores of different categories indicates that firms that disclose more in one
category tend to disclose more in other categories.
Table 4: Correlation matrix for corporate governance index and subindices

SCORE
Board
Matters
Nomination
Matters
Remuneration
Matters
Audit
Matters
Communication
SCORE 1.00
Board Matters .801** 1.00
Nomination Matters .684** .367** 1.00
Remuneration
Matters
.757** .437** .479** 1.00
Audit Matters .779** .422** .442** .513** 1.00
Communication .339** .282** .176** .254** .145** 1.00

Sample size is 836. ** Correlation is significant at the 0.01 level (two-tailed).

There are totally 136 corporate governance elements divided into five subindices.:
Board Matters (43 elements); Nomination Matters (25 elements); Remuneration Matters
(34 elements); Audit Matters (29 elements); and Communication (5 elements). Table 5
lists each governance element, and percentage of firm meeting the governance criteria for
our 136 corporate governance elements over time.

Table 5: Incidence of individual elements of corporate governance
1999 2000 2001 2002 2003

Board Matters

A1 Is the frequency of board meetings disclosed? 72.4% 80.9% 80.0% 81.0% 86.6%
A2 Did the board meet more than 4 times in the year? 66.7% 73.9% 73.5% 77.4% 83.0%
A3 Did the board meet more than 6 times in the year? 55.2% 56.7% 58.9% 59.5% 64.9%
A4 Did the board meet more than 8 times in the year? 39.0% 37.6% 36.2% 37.4% 39.2%
A5 Did the board meet 12 times or more in the year? 18.1% 13.4% 13.0% 10.8% 12.4%
A6 Is the aggregate board attendance disclosed? 1.0% 1.9% 2.7% 3.6% 16.5%
A7 Are directors attending over 60% of the board meetings? 1.0% 1.9% 2.7% 3.6% 16.0%
A8 Are directors attending over 80% of the board meetings? 1.0% 1.9% 2.7% 3.6% 16.0%
A9 Are directors attending 100% of the board meetings? 0.0% 0.6% 0.0% 1.5% 2.1%
A10 Do independent directors constitute more than 1/3 of the board? 78.1% 83.4% 89.2% 90.8% 92.3%
A11 Do independent directors constitute more than 1/2 of the board? 30.5% 27.4% 36.8% 36.9% 39.7%
A12 Do independent directors constitute more than 2/3 of the board? 3.8% 3.2% 5.9% 6.2% 7.2%
A13 Is attendance of individual directors at board meetings disclosed? 0.0% 0.0% 0.5% 1.5% 10.3%
A14
Does the company’s M&A allow for telephonic or videoconference
meetings?
1.0% 1.3% 1.6% 1.0% 3.6%
A15

Is there disclosure of company’s guidelines of matters that require
approval by the board?
80.0% 82.2% 83.2% 86.7% 88.7%
A16
Do the guidelines disclose the type of material transactions that
must be approved by the board?
46.7% 47.1% 47.6% 51.3% 54.1%
A17 Does the company have a training program for all of its directors? 22.9% 33.1% 37.3% 43.6% 49.5%
15
A18
Are the details of training provided to directors disclosed? (like
number of directors sent for training, where did they receive the
training etc)
0.0% 0.6% 0.5% 1.5% 2.6%
A19 Is there an orientation program for all new directors? 28.6% 36.9% 39.5% 46.7% 53.1%
A20
Does the orientation program cover the company’s business and
governance practices?
11.4% 15.3% 17.3% 18.5% 25.3%
A21
Does the company provide ongoing training on new laws,
regulations and changing commercial risks?
12.4% 15.3% 18.4% 24.6% 28.4%
A22 Is the complete list of board members disclosed? 100.0% 100.0% 100.0% 100.0% 100.0%
A23
If answer to #15 is yes, is detailed information on each director
disclosed?
98.1% 98.7% 99.5% 99.5% 100.0%
A24
If answer to #15 is yes, does it include details of previous

employment?
99.0% 98.7% 98.9% 99.5% 99.5%
A25
If answer to #15 is yes, are educational qualifications of directors
disclosed?
30.5% 25.5% 24.3% 25.6% 25.3%
A26
If answer to #15 is yes, are other directorships of directors
disclosed?
99.0% 99.4% 100.0% 100.0% 100.0%
A27 Is each director is classed as independent or not by name? 89.5% 96.2% 97.3% 97.4% 97.4%
A28 Has the board reviewed the size of the board? 5.7% 5.7% 4.9% 6.7% 11.9%
A29
Has disclosure been made of the factors and criteria in determining
the size of the board?
0.0% 0.0% 0.0% 0.5% 1.0%
A30
Are the chairman and CEO positions held by
same(S)/related(R)/unrelated(U) persons? - Score 2 if U, 1 if R
and 0 for S or ND
85.7% 89.2% 91.4% 90.3% 91.2%
A31
Are the chairman’s responsibilities with respect to board
proceedings disclosed?
6.7% 8.9% 7.0% 9.2% 12.9%
A32
If answer to #24 is yes, do they include matters such as scheduling
board meetings, preparation of agenda for board meetings, control
over information flows between management and the board, and
compliance with company’s guidelines on corporate governance?

3.8% 4.5% 2.7% 3.1% 5.7%
A33
Are all directors required to seek nomination and re-election at
regular intervals (at least once every 3 years)?
41.9% 63.1% 72.4% 75.9% 78.4%
A34 Are directors’ service contracts for periods not more than 3 years? 99.0% 97.5% 95.7% 97.4% 97.9%
A35
Does the board have separate and independent access to company’s
senior management?
16.2% 18.5% 17.8% 19.0% 25.8%
A36
Is the board provided with supporting background or explanatory
information for matters brought before the board?
69.5% 78.3% 80.0% 81.0% 85.6%
A37
Does the board receive explanation of variances between
projections (budgets) and results?
79.0% 70.7% 60.0% 59.0% 58.8%
A38
Does the board have separate and independent access to the
company secretary?
60.0% 65.6% 67.0% 69.2% 73.7%
A39 Is the role of the company secretary defined? 21.9% 26.1% 25.9% 27.2% 35.1%
A40
If answer to #32 is yes, does it include responsibility for ensuring
that board procedures are followed and compliance of applicable
rules and regulations?
20.0% 23.6% 23.8% 25.6% 33.5%
A41 Does the company secretary attend all board meetings? 3.8% 1.9% 1.6% 2.6% 3.1%
A42

Does the company have an agreed procedure for directors to take
independent professional advice?
62.9% 73.2% 73.0% 76.9% 83.5%
A43
Does the management provide the board with monthly
management accounts?
62.9% 57.3% 55.1% 54.4% 54.1%

Nomination Matters

B1 Does the company have a nominating committee? 88.6% 93.6% 94.1% 95.9% 96.9%
B2 Is the list of members of the nominating committee disclosed? 86.7% 90.4% 91.4% 92.8% 94.8%
B3 Is the majority of nominating committee independent? 72.4% 77.7% 80.5% 80.0% 85.6%
B4 Are all members of the nominating committee independent? 13.3% 14.0% 17.8% 22.6% 24.2%
16
B5 Is the chairman of the nominating committee independent? 54.3% 54.8% 60.5% 66.2% 66.0%
B6
Does the nominating committee make recommendations on all
board appointments?
77.1% 84.1% 83.2% 86.2% 87.1%
B7 Are the nominating committee’s terms of reference in writing? 40.0% 41.4% 43.8% 47.7% 57.7%
B8
If answer to #43 is yes, do these describe responsibilities of the
nominating committee’s members?
10.5% 10.2% 9.7% 10.3% 18.6%
B9
Does the nominating committee review, at least annually, whether
or not a director is independent?
2.9% 2.5% 2.2% 2.6% 4.1%
B10

Does the nominating committee review adequacy of time spent by
directors, who have multiple directorships, on affairs of each
company?
0.0% 0.0% 0.0% 0.0% 3.1%
B11
Is disclosure made of directors’ particulars where their names are
submitted for election/re-election?
89.5% 91.1% 92.4% 93.3% 95.4%
B12
Is disclosure made of individual member's attendance at the
nomination committee meetings:
0.0% 0.0% 0.0% 0.5% 6.2%
B13 Is the frequency of NC meetings disclosed? 6.7% 9.6% 9.7% 13.3% 21.6%
B14 Did the NC meet more than 2 times in the year? 0.0% 2.5% 2.2% 2.1% 7.7%
B15 Did the NC meet more than 4 times in the year? 0.0% 1.3% 0.5% 0.5% 2.6%
B16 Was the attendance at NC meetings more than 60%? 0.0% 0.0% 0.0% 0.5% 6.7%
B17 Was the attendance at NC meetings more than 80%? 0.0% 0.0% 0.0% 0.5% 6.2%
B18 Was the attendance at NC meetings 100%? 0.0% 0.0% 0.0% 0.5% 3.6%
B19 Is appraisal of board performance conducted? 3.8% 3.8% 3.2% 3.6% 11.3%
B20
Has the nominating committee established criteria for evaluation of
performance of the board?
0.0% 0.0% 0.0% 0.0% 4.6%
B21
Is disclosure made of the process of board evaluation? (e.g.
conducted by external party, conducted by NC, by shareholders
etc.)
1.9% 1.9% 1.6% 2.1% 7.2%
B22
Is criteria for evaluating board performance disclosed? e.g.

Company’s share price performance over past years; Return on
assets; Return on equity; Return on investment; Economic value
added; Profitability on capital employed
0.0% 0.0% 0.0% 0.5% 2.1%
B23 Is individual performance of board members evaluated? 6.7% 7.0% 5.9% 5.6% 7.7%
B24
If the answer to #56 is yes, is criteria for individual director
performance evaluation disclosed?
0.0% 0.0% 0.0% 0.0% 0.5%
B25
Is disclosure made of the process of director evaluation? (e.g.
conducted by external party, conducted by NC, by shareholders
etc.)
2.9% 3.8% 3.8% 3.6% 5.2%

Remuneration Matters

C1 Does the company have a remuneration committee? 100.0% 100.0% 100.0% 100.0% 100.0%
C2 Is the list of remuneration committee members disclosed? 100.0% 100.0% 99.5% 99.5% 99.5%
C3 Is the majority of RC independent? 89.5% 92.4% 95.1% 95.4% 96.4%
C4 Are all members of the RC independent? 81.9% 80.3% 81.6% 83.1% 84.5%
C5
Is the remuneration committee chaired by an independent
non-executive director?
89.5% 89.2% 94.1% 92.8% 93.3%
C6
Is disclosure made of individual member's attendance at the
remuneration committee meetings
0.0% 0.0% 0.0% 1.0% 9.3%
C7 Is the frequency of RC meetings disclosed? 38.1% 34.4% 34.6% 42.1% 58.8%

C8 Did the RC meet more than 2 times in the year? 23.8% 19.7% 18.4% 24.6% 44.3%
C9 Did the RC meet more than 4 times in the year? 14.3% 5.1% 5.9% 7.7% 20.1%
C10 Was the attendance at the RC meetings more than 60%? 0.0% 0.6% 0.5% 1.5% 10.3%
C11 Was the attendance at the RC meetings more than 80%? 0.0% 0.6% 0.5% 1.5% 9.8%
C12 Was the attendance at the RC meetings 100%? 0.0% 0.0% 0.0% 1.0% 3.1%
C13
Is at least one remuneration committee member knowledgeable
about executive compensation?
1.9% 1.3% 1.1% 1.0% 1.0%
C14
Does the remuneration committee recommend to the board a
framework of remuneration for the board and key executives?
65.7% 67.5% 68.1% 70.3% 69.6%
17
C15
Does the remuneration committee determine specific remuneration
packages for executive directors and the CEO?
100.0% 100.0% 100.0% 100.0% 100.0%
C16
Are the remuneration committee’s recommendations submitted for
endorsement by the entire board?
11.4% 14.6% 14.6% 18.5% 44.8%
C17
Does the remuneration committee’s review include all aspects of
remuneration (such as salaries, fees, allowances, bonuses and
options)?
100.0% 100.0% 100.0% 100.0% 100.0%
C18
Is disclosure made of the remuneration committee’s processes (e.g.
external compensation specialists hired) to ascertain industry

practices and salary levels for pay and employment conditions?
79.0% 78.3% 78.9% 82.6% 88.7%
C19
Is executive director compensation linked to industry, company
and/or individual performance?
100.0% 100.0% 100.0% 100.0% 100.0%
C20
Is the Percentage of performance-related elements of executive
directors’ remuneration > 50%?
0.0% 0.0% 0.0% 0.0% 0.0%
C21
Is compensation of non-executive directors linked to their level of
contribution and responsibilities, and time spent and effort?
39.0% 34.4% 38.4% 35.9% 53.6%
C22
Were industry experts consulted on the remuneration of
non-executive directors?
13.3% 14.0% 11.4% 11.8% 23.2%
C23
Has the board recommended all components of non-executive
director compensation for approval at the annual general meetings?
6.7% 7.0% 7.6% 16.4% 56.7%
C24
Do service contracts for directors contain onerous removal clauses?
(Score 1 of No and 0 if Yes)
99.0% 99.4% 99.5% 99.5% 99.5%
C25
Did the remuneration committee consider the appropriateness of
compensation commitments for early termination of directors?
68.6% 63.1% 62.7% 62.6% 90.7%

C26 Are directors prevented from deciding on their own remuneration? 51.4% 49.7% 54.6% 63.6% 69.6%
C27
Does director remuneration include long term incentives? E.g.
bonuses payable after 12 months and/or share option with a vesting
period > 12 months
99.0% 98.7% 98.9% 100.0% 99.5%
C28
Is disclosure made to shareholders of remuneration of executive
directors? (E if in exact amount & B if in bands of $250K) - Score
2 if E, 1 if B and 0 if ND)
99.0% 100.0% 100.0% 100.0% 100.0%
C29
Is disclosure made to shareholders of remuneration of
non-executive directors? (E if in exact amount & B if in bands of
$250K) - Score 2 if E, 1 if B and 0 if ND)
99.0% 100.0% 100.0% 100.0% 100.0%
C30
Is disclosure made to shareholders of remuneration of top 5
executives who are not directors? (E if in exact amount & B if in
bands of $250K) - Score 2 if E, 1 if B and 0 if ND)
1.9% 1.3% 0.5% 0.5% 1.0%
C31
Is disclosure made of components of remuneration analyzed by
salaries, variable bonuses, options and long-term incentives?
100.0% 99.4% 99.5% 100.0% 100.0%
C32 Is full disclosure made of remuneration of each director by name? 99.0% 100.0% 100.0% 100.0% 100.0%
C33
Is disclosure made of remuneration to an employee who is an
immediate family member of a director or the CEO, and whose
own remuneration exceeds $150,000? If there are no such an

employees is this disclosed?
27.6% 27.4% 29.7% 30.3% 32.5%
C34
If the company has any shares/options for employees/directors, are
the details of these disclosed (shares issued to employees or options
granted)? If it does not have such schemes is this fact disclosed?
98.1% 100.0% 100.0% 100.0% 99.5%

Audit Matters

D1 Is the list of audit committee members disclosed 100.0% 100.0% 100.0% 100.0% 100.0%
D2 Is the majority of audit committee independent? 89.5% 91.7% 94.6% 95.4% 97.4%
D3 Is the entire audit committee independent? 71.4% 72.0% 74.6% 74.9% 75.3%
18
D4 Is the chairman of the audit committee independent? 88.6% 93.0% 96.2% 96.4% 97.9%
D5
Is disclosure made of the basis of selection of audit committee
members?
0.0% 0.0% 0.5% 0.5% 1.0%
D6
Do at least 2 members of the audit committee have accounting
experience or related financial management expertise or
experience? (this could either be an accounting or financial
qualification or previous work experience in financial or
investment positions)
44.8% 52.2% 54.1% 59.0% 62.9%
D7
Is disclosure made of individual AC members attendance at AC
meetings?
0.0% 0.6% 0.5% 1.0% 10.8%

D8 Is the frequency of audit committee disclosed? 66.7% 63.7% 64.9% 70.8% 80.9%
D9 Did the audit committee meet more than 2 times in the year? 38.1% 38.9% 37.3% 44.6% 60.8%
D10 Did the audit committee meet more than 4 times in the year? 1.0% 0.6% 1.6% 2.1% 6.7%
D11 Did the audit committee meet more than 6 times in the year? 0.0% 0.0% 0.0% 0.5% 2.1%
D12 Did the audit committee meet more than 8 times in the year? 0.0% 0.0% 0.0% 0.0% 1.0%
D13 Was the attendance at AC meetings more than 60%? 1.0% 0.6% 0.5% 1.5% 10.8%
D14 Was the attendance at AC meetings more than 80%? 1.0% 0.6% 0.5% 1.0% 10.3%
D15 Was the attendance at AC meetings 100%? 0.0% 0.0% 0.0% 0.5% 4.6%
D16 Does the audit committee have its terms of reference in writing? 59.0% 59.9% 64.3% 68.2% 75.8%
D17
Does the audit committee have authority to investigate any matter
within its terms of reference?
31.4% 38.9% 42.7% 42.1% 49.5%
D18
Does the audit committee have access to and cooperation of
management?
44.8% 42.7% 48.6% 49.7% 58.8%
D19
Does the audit committee meet with external auditors in the
absence of company management?
43.8% 40.1% 43.8% 47.7% 56.7%
D20
Does the audit committee review scope, results and effectiveness of
audits?
55.2% 51.6% 60.5% 64.6% 71.1%
D21
Does the audit committee meet with internal auditors at least
annually?
41.0% 43.9% 44.3% 45.6% 58.2%
D22

Does the audit committee meet with external auditors at least
annually?
68.6% 65.6% 69.2% 70.3% 77.3%
D23
Does the audit committee review independence of external auditors
annually?
27.6% 28.0% 27.6% 41.5% 68.0%
D24
Is an annual review conducted of company’s internal controls and
risk management?
1.9% 9.6% 83.2% 99.5% 100.0%
D25
Does the annual report include a statement by the board on
adequacy of internal controls?
1.0% 8.3% 76.8% 92.3% 94.8%
D26
Does the internal auditor report primarily to the chairman of the
audit committee?
5.7% 5.1% 4.9% 5.1% 8.2%
D27
Does the internal auditor meet standards set by recognized
professional bodies (e.g. Institute of Internal Auditors)?
4.8% 4.5% 4.9% 4.6% 5.2%
D28
Does the audit committee review adequacy of internal auditor’s
resources?
5.7% 8.9% 14.1% 17.9% 21.1%
D29
Does the audit committee annually review adequacy of internal
audit function?

48.6% 51.0% 55.1% 59.5% 58.8%

Communication

E1
Does the board provide shareholders with quarterly reports on the
business and prospects even if it is not mandatory?
10.5% 12.1% 9.2% 12.8% 14.4%
E2
Are the chairmen of all board committees existing present at the
AGM to answer shareholders’ questions?
54.3% 55.4% 57.3% 60.0% 61.9%
E3
Are external auditors present at annual general meetings to assist
responses to shareholders?
0.0% 0.0% 0.0% 0.0% 0.5%
E4
Are separate resolutions proposed at the AGM for each distinct
issue? i.e. no resolutions are bundled together
99.0% 100.0% 100.0% 100.0% 100.0%
E5
Does the company have its annual reports on its website? If the
company does not have a website please score zero.
100.0% 100.0% 100.0% 100.0% 100.0%

19
Max Possible Score = 140 (As Q30 & Q96-98 can score max 2 each)

All of sample firms meet the seven corporate governance criteria. These criteria are
specifically (1) complete list of board members is disclosed; (2) company has a

remuneration committee; (3) remuneration committee determines specific remuneration
packages for executive directors and the CEO; (4) remuneration committee’s review
includes all aspects of remuneration; (5) executive director compensation is linked to
industry, company and/or individual performance; (6) list of audit committee members is
disclosed; and (7) company has its annual reports on its website.
Other widely accepted (90% or more) governance elements include: (1) detailed
information on each director is disclosed; (2) detailed information of previous
employment on each director is disclosed; (3) other directorships of directors are
disclosed; (4) directors’ service contracts for periods are not more than 3 years; (5) list of
remuneration committee members is disclosed; (6) service contracts for directors do not
contain onerous removal clauses; (7) director remuneration includes long term incentives;
(8) disclosure is made to shareholders of remuneration of executive directors; (9)
disclosure is made to shareholders of remuneration of non-executive directors; (10)
disclosure is made of components of remuneration analyzed by salaries, variable bonuses,
options and long-term incentives; (11) full disclosure is made of remuneration of each
director by name; (12) If the company has any shares/options for employees/directors,
details of these are disclosed. If it does not have such schemes, this fact is disclosed; and
(13) separate resolutions are proposed at the AGM for each distinct issue.
In contrast, some of corporate governance criteria are seldom (less than 10%) met by
companies. The are list as follows: (1) aggregate board attendance is disclosed; (2)
directors are attending over 60% (80%; 100%) of the board meetings; (3) attendance of
individual directors at board meetings is disclosed; (4) company’s M&A allows for
telephonic or videoconference meetings; (5) details of training are provided to directors
disclosed; (6) disclosure has been made of the factors and criteria in determining the size
of the board; (7) chairman’s responsibility includes matters such as scheduling board
meetings, preparation of agenda for board meetings, control over information flows
between management and the board, and compliance with company’s guidelines on
corporate governance; (8) company secretary attends all board meetings; (9) nominating
20
committee reviews, at least annually, whether or not a director is independent; (10)

nominating committee reviews adequacy of time spent by directors; (11) disclosure is
made of individual member's attendance at the nomination committee meetings; (12)
nomination committee met more than two (four) times in the year; (13) attendance at
nomination committee meetings was more than 60% (80%; 100%); (14) nominating
committee has established criteria for evaluation of performance of the board; (15)
disclosure is made of the process of board evaluation; (16) criteria for evaluating board
performance is disclosed; (17) individual performance of board members is evaluated;
(18) criteria for individual director performance evaluation is disclosed; (19) disclosure is
made of the process of director evaluation; (20) disclosure is made of individual
member's attendance at the remuneration committee meetings; (21) attendance at the RC
meetings more than 60% (80%; 100%); (22) at least one remuneration committee
member is knowledgeable about executive compensation; (23) percentage of
performance-related elements of executive directors’ remuneration is greater than 50%;
(24) disclosure is made to shareholders of remuneration of top 5 executives who are not
directors; (25) disclosure is made of the basis of selection of audit committee members;
(26) audit committee met more than four (six; eight) times in the year; (27) attendance at
audit committee meetings was more than 60% (80%; 100%); (28) internal auditor reports
primarily to the chairman of the audit committee; (29) internal auditor meets standards
set by recognized professional bodies; and (30) external auditors are present at annual
general meetings to assist responses to shareholders.
As for each element, the acceptance rate is increasing over time. Rather than a single
element is accepted by more firms over time, almost all the governance elements are
moving upward together.
In order to address the question of whether the mean SCORE increasing are due to
entry of new firms, we further report some sample statistics in Tables 6 to 8. Table 6
shows the number of observations by fiscal year. The new comers are fifty seven for
2000, thirty one for 2001, eleven for 2002 and one for 2003. Except for year 2002, all the
mean scores for new firms are less than those for old firms. From this information,
corporate governance improvement for our sample is not wholly driven by new entries
with higher governance standards. Rather, firms adopt governance code longer are more

21
likely to improve their governance practices.
Table 6: Number of observations by fiscal year
2000 2001 2002 2003
No. of firms 157 185 195 194
No. of firms in previous year 105 157 185 195
No. of firms in both current and previous years 100 154 184 193
No. of new firms 57 31 11 1
Mean score of new firms 55.71 59.52 65.09 64.00
Mean score of firms in both current and previous
years
59.58 60.94 62.93 69.63

As a complement to Table 6, Table 7 lists the firms with the highest corporate
governance disclosure by fiscal year and provides some statistics. Column 1 is the firm
list. Column 2 and 3 report the SCORE and score change for the current year respectively.
Column 4 indicates whether the firm also lay among the top governance firms last year.
Column 5 shows whether the firm newly enters into our sample in the current year.

Table 7: List of top 10 corporate governance firms by fiscal year
Name SCORE SCORE_C
Top 10 in
Previous
Year
New
Firm
Panel A: 1999

MARCONI CORP 79.00 n.a. n.a. n.a.
BT GROUP 78.00 n.a. n.a. n.a.

SPIRENT 78.00 n.a. n.a. n.a.
AGA FOODSERVICE GROUP 73.00 n.a. n.a. n.a.
HILTON GROUP 72.00 n.a. n.a. n.a.
BBA GROUP 71.00 n.a. n.a. n.a.
CADBURY SCHWEPPES 70.00 n.a. n.a. n.a.
BOC GROUP 69.00 n.a. n.a. n.a.
BRITISH AIRWAYS 69.00 n.a. n.a. n.a.
DIXONS GROUP 69.00 n.a. n.a. n.a.
DE LA RUE 69.00 n.a. n.a. n.a.
Panel B: 2000

SPIRENT 82.00 4.00 Yes No
MARCONI CORP 81.00 2.00 Yes No
BT GROUP 77.00 -1.00 Yes No
DE LA RUE 73.00 4.00 Yes No
BBA GROUP 73.00 2.00 Yes No
HILTON GROUP 72.00 0.00 Yes No
VIRIDIAN GROUP 72.00 9.00 No No
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BOOTS GROUP 71.00 5.00 No No
SMITHS GROUP 71.00 19.00 No No
BAA 71.00 7.00 No No
AGA FOODSERVICE GROUP 71.00 -2.00 Yes No
Panel C: 2001

SPIRENT 86.00 4.00 Yes No
MARCONI CORP 80.00 -1.00 Yes No
BBA GROUP 77.00 4.00 Yes No
BT GROUP 76.00 -1.00 Yes No
KIDDE 76.00 10.00 No No

INCHCAPE 75.00 n.a. No Yes
SIGNET GROUP 74.00 4.00 No No
DE LA RUE 74.00 1.00 Yes No
WHITBREAD 73.00 3.00 No No
BOOTS GROUP 72.00 1.00 Yes No
SMITHS GROUP 72.00 1.00 Yes No
MARKS & SPENCER GROUP 72.00 6.00 No No
DIXONS GROUP 72.00 3.00 No No
HILTON GROUP 72.00 0.00 Yes No
INVENSYS 72.00 3.00 No No
VIRIDIAN GROUP 72.00 0.00 Yes No
UNIQ 72.00 n.a. No Yes
SHANKS GROUP 72.00 2.00 No No
Panel D: 2002

MARCONI CORP 85.00 5.00 Yes No
KIDDE 82.00 6.00 Yes No
YULE CATTO & CO 81.00 25.00 No No
DE LA RUE 81.00 7.00 Yes No
BHP BILLITON 79.00 n.a. No Yes
WHITBREAD 79.00 6.00 Yes No
SIGNET GROUP 79.00 5.00 Yes No
SABMILLER 77.00 10.00 No No
EXEL 77.00 n.a. No Yes
CRODA INTERNATIONAL 77.00 18.00 No No
Panel E: 2003

BHP BILLITON 105.00 26.00 Yes No
DE LA RUE 104.00 23.00 Yes No
SCOTTISH POWER 101.55 41.55 No No

PILKINGTON 98.00 27.00 No No
CORUS GROUP 96.00 33.00 No No
KINGFISHER 95.58 26.58 No No
KIDDE 95.00 13.00 Yes No
SCOTTISH & SOUTHERN
ENERGY
92.00 24.00 No No
MAN GROUP 92.00 21.00 No No
23
SMG 92.00 31.00 No No

Consistent with Table 6, the new entries are not a big concern for evaluating
governance improvement. However, there is some evidence of a mild sticky of firms over
corporate governance measure. About half of the best-governed firms are also lies among
the best-governed firms in the previous year. Although firms improve or deteriorate their
governance practices autonomously, their relative ranking on the governance disclosure
does not change quickly. This may result from the relatively small magnitude of the
changes. The effects of small changes on the absolute level value may not be markedly.
However, this does not mean the change is not important. If one focus on the ranking of
the change itself, some interesting results may be found.
Table 8 list the firms with the highest score change by fiscal year. The structures of
Columns 1, Column 2, and Column 3 are the same as Columns 1, Column 3, and Column
2 in Table 7. Column 4 presents whether the firm is among the highest governance
improvement group in previous year. Columns 5 and Column 6 indicate whether the firm
has the highest level of governance in current year and previous year respectively.

Table 8: List of top 10 score change firms by fiscal year
Name SCORE_C SCORE
Top 10
SCORE_C

in
Previous
Year
Top 10
SCORE
in
Current
Year
Top 10
SCORE
in
Previous
Year
Panel A: 2000

ALLIED DOMECQ 25.00 65.00 n.a. No No
SAGE GROUP 23.00 56.00 n.a. No No
SMITHS GROUP 19.00 71.00 n.a. Yes No
WETHERSPOON (JD) 16.00 54.00 n.a. No No
DIAGEO 15.00 61.00 n.a. No No
HAYS 14.00 59.00 n.a. No No
ASSOCIATED BRITISH FOODS 13.00 42.00 n.a. No No
BAE SYSTEMS 13.00 63.00 n.a. No No
EIDOS 10.00 56.00 n.a. No No
SAINSBURY (J) 10.00 59.00 n.a. No No
Panel B: 2001

SPIRAX-SARCO ENGINEERING 21.00 62.00 No No No
RECKITT BENCKISER 14.50 62.50 No No No
NOVAR 13.00 50.00 No No No

ATKINS (WS) 13.00 68.00 No No No
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