Board Structure, Minority Shareholders Protection and Foreign Block Ownership
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Using a panel sample of firms in large business conglomerates during 2005-2009, this study investigates the impact of structural characteristics of the board and the protection of minority shareholders voting rights on foreign block investment. The empirical findings are as follows. First, the proportion of outside directors is not significantly related to foreign block investment, whereas the presence of compensation committee has a significantly positive impact on foreign block investment. This result suggests that foreign investors have a preference for firms with enhanced management accountability and take into account in selecting stocks for their block investment whether a firm has board structure to provide fair performance evaluation and appropriate compensation. Second, adoption of cumulative voting and voting in writing is positively related to foreign block investment when foreign investors are intending management control. However, foreign portfolio investors uninterested in management control are likely to avoid investing in firms with cumulative voting and voting in writing adopted. These different preferences may be explained that foreign shareholders whose investment purpose is to control management prefer cumulative voting and voting in writing in order to facilitate exercising their voting rights and enhancing their influences on management, while foreign portfolio investors recognize that the adoption of shareholder voting rights protection may be a potential cost factor rather than a profit driver. This paper suggests the implication that firm-level corporate governance characteristics such as board structure and shareholder protection has an impact on foreign block investors' decision-making.
Abstract
Using a panel sample of firms in large business conglomerates during 2005-2009, this study investigates the impact of structural characteristics of the board and the protection of minority shareholders voting rights on foreign block investment. The empirical findings are as follows. First, the proportion of outside directors is not significantly related to foreign block investment, whereas the presence of compensation committee has a significantly positive impact on foreign block investment. This result suggests that foreign investors have a preference for firms with enhanced management accountability and take into account in selecting stocks for their block investment whether a firm has board structure to provide fair performance evaluation and appropriate compensation. Second, adoption of cumulative voting and voting in writing is positively related to foreign block investment when foreign investors are intending management control. However, foreign portfolio investors uninterested in management control are likely to avoid investing in firms with cumulative voting and voting in writing adopted. These different preferences may be explained that foreign shareholders whose investment purpose is to control management prefer cumulative voting and voting in writing in order to facilitate exercising their voting rights and enhancing their influences on management, while foreign portfolio investors recognize that the adoption of shareholder voting rights protection may be a potential cost factor rather than a profit driver. This paper suggests the implication that firm-level corporate governance characteristics such as board structure and shareholder protection has an impact on foreign block investors' decision-making.
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