corporate governance mechanisms and corporate...
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경영학박사학위논문
Corporate Governance Mechanisms and Corporate Behavior
2013년 8월
서울대학교 대학원
경영학과 경영학 전공
이 다 영
Corporate Governance Mechanisms and Corporate Behavior
지도교수 송 재 용
이 논문을 경영학박사학위 논문으로 제출함 2013년 5월
서울대학교 대학원
경영학과 경영학 전공
이 다 영
이다영의 경영학박사 학위논문을 인준함 2013년 6월
위 원 장 (인)
부위원장 (인)
위 원 (인)
위 원 (인)
위 원 (인)
i
Abstract
Corporate Governance Mechanisms and
Corporate Behaviors
Diane Y. Lee College of Business Administration
Seoul National University
This thesis explores the relationship between corporate governance
mechanisms and corporate behaviors such as exploration, R&D spending and
corporate social responsibilities. The first article explores the relationship between
corporate governance institutions and exploration in North American electronics,
communications and semi - conductor industries. The significance of the first
article is that while there is ample research done on the relationship between
corporate governance mechanisms and innovation in total, there is not enough
research done on corporate governance institutions and exploration. Thus in this
article, the effect of corporate governance mechanisms on exploration, which is
based on agency theory, is investigated. The second article researches the
relationship between corporate governance tools and R&D intensity in Korean
ii
manufacturing firms listed on the stock market. The significance of the second
article is that it investigates the effects of large family shareholders, affiliates,
domestics and foreign institutional investors on R&D investment, especially in the
Korean setting where the conflicts of interests between majority and minority
shareholders are much more salient than in the North American setting. The third
article discusses the relationship between corporate governance mechanisms and
Corporate Social Responsibilities (CSR) which is based on stakeholder theory and
is observed in Korean manufacturing firms listed on the stock market and are in
the top 200 KEJI (Korean Economic Justice Institute) index (Choi et al., 2010).
The significance of the third article is that it investigates the Korean market with
the composite KEJI index.
Keyword: Corporate Governance, Corporate Social Responsibilities, Exploration, Agency Theory, Stakeholder Theory
Student ID number: 2007-30792
iii
Contents
OVERALL INTRODUCTION ………………….………………………… ….1
STUDY I. THE CORPORATE GOVERNANCE MECHANISMS AND THEIR EFFECTS ON FIRMS’ EXPLORATION ….……..…………………………….5
Abstract …………………………………………………… .……………………7
1. Introduction……………………………………………………………………8
1.1 Introduction for Corporate Governance. ……………………………………..8
1.2 Introduction for Exploration …………………………………………………9
1.3 Exploration and Exploitation ……….………………………………………11
2. Background Theory ……………………………………………………..……13
2.1 Definition ……………………………………………………..…………….13
2.2 Agency Theory …………………………………………………… .……….15
2.3 Agency theory, Entrepreneurship and Exploration………………………….17
2.4 Corporate Governance and Exploration…………...………………………...18
iv
2.5 Resource Based View and Explorative Investment………………………….21
2.6 Strategic Control and Financial control ……………………………………..22
2.7 Corporate Governance Mechanisms ….…………………………………….23
3. Hypotheses ………………...…………………………………………………24
3. 1 Outside Director Ratio - positive influence on exploration…………………25
3. 2. Institutional Controlling Ownership – positive influence on exploration…..29
3.2 a) Agency Theory and Institutional Investors………………………………..29
3.2 b) Institutional Ownership– positive influence on exploration………………30
3. 3. Block Ownership – positive influence on exploration … .…………………34
4. Method …………………………………………………… .………………...38
4.1 Sample ……………………....……………………………………………...38
4.2 Dependent Variable………………………………………………..………..39
4.2 a) Diversity of Technological Search ……..………………………………..39
4.2b) Sampson’s Measure (Sampson 2007)…. …………………………………40
4.3 Independent Variables ………………………………………………………43
4.4 Control Variables …………………………………………………… .…….44
5. Data Treatment and Results ....……………………………………………….49
6. Conclusion and Discussion ……….………………………………………….49
v
STUDY II. CORPORATE GOVERNANCE MECHANISM AND R&D STRATEGIES IN KOREAN FIRMS………………………………………......53
Abstract…………………………………………………… .…..……………….55
1. Introduction…….………………………………………… .…..………......56
2. Literature Review Ownership Categories…………………………………..58
3. Hypotheses……………………... ………………………………..………..59
3.1 Family Ownership….……………………………………………… .……..59
3.1 a) Family Ownership - negative influence on R&D investment….………59
3.1 b) Family Ownership - positive influence on R&D investment….…….....66
3.2 Affiliate Ownership – moderating influence………………….……………68
3.3 Institutional Controlling Ownership………………………………………..72
3.3a) Domestic Institutional Controlling Ownership – positive influence on
R&D investment………………………………………………… .…….………73
3.3b) Foreign Controlling Institutional Ownership - negative influence on R&D
investment ….……… ………..…………………………………………………75
4. Method……...………………………………………… .……..……………..80
4.1 Sample………………………………………………..……………………..80
4.2 Dependent Variable….…………………………………….…..……………80
vi
4.3 Independent Variables…… …………….…………………………………...81
4.4 Control Variables……..……………………………… .…..……………….82
5. Data Treatment and Results.……………………..………………………… 83
6. Conclusion and Discussion.……………………….……………………..…87
Study III. CORPORATE GOVERNACE AND CORPORATE SOCIAL RESPONSIBILITIES IN THE KOREAN FIRMS…………….......……………91
Abstract…………………………………………………… .…..…………….....93
1. Introduction……………………………………………… .…..……………..94
2. Literature Review……………………………………… .…..……………….96
2.1 The stakeholder Definition. ………………………………………………...96
2.2 Stakeholder Management…………………………………………………...97
2.3 Corporate Governance and Stakeholder Management………………………97
2.4 Corporate Governance, Stakeholder Theory and CSR………………………99
2.5 CSR definition…………………………………………………… .….……100
2.6 The Cases against CSR ……………………………………………………101
2.7 The Cases for CSR ..…………………………………………………… .…101
3. Hypotheses ……………………………………………….…………… .…..103 3.1 Outside Independent Member on the Board – positive influence on CSR …………………………………………………………………………………103
3.2 Family Ownership– positive influence on CSR ...………………… .……106
3.3 Institutional Ownership– positive influence on CSR………………...…...108
4. Methods………….………………………….………………… .………...109
4.1 Sample……………………………………………………………...……...109
vii
4.2 Dependent Variable……….……………………………………………....110
4.3 Independent Variables.………………………………………………….…110
4.4 Control Variables……………………………………… .…..…………….111
5. Data Treatment and Results……………….………………………..…….112
6. Conclusion…….……………….………………………..…..………….....115
Overall Conclusion……………………………………………… .…..……….117
REFERENCES………………………………………………………………...123
국문초록………………………………………………………………………149
viii
Tables I. Summary statistics and correlations…………………………………………46
II. Statistical findings from random effects tobit estimates……………………47
III. Statistical findings from random effects tobit estimates…………………...48
IV. Summary statistics and correlations………………………………………..85
V Statistical findings from random effects tobit estimates…………………….86
VI Summary statistics and correlations……………………………………….113
VII Statistical findings from random effects Generalized Least Squares estimates………………………………………………………………………114
1
Overall Introduction
3
The process of exploration is central to the performance of firms in
dynamic economies (O’Sullivan 2000). This process is controlled by various
corporate governance functions such as outside members on the board of directors,
institutional ownership, and concentrated external ownership (block ownership).
The productive resources obtained through corporate performance are utilized and
put into development processes through corporate governance mechanisms, which
may result in exploration, and the first piece of this thesis investigates this
relationship. Also, the relationship between corporate governance variables and
R&D investment strategies in Korea differ somewhat from that of western
economies, the conflicts of interests between majority and minority shareholders
being much more salient in the former than in the latter where the separation of
management and ownership defined by agency theory is the norm. Thus, in the
second piece of this article, the relationships between family ownership, affiliate
shareholding, domestic institutional controlling investors, foreign institutional
controlling investors and R&D investment strategies are investigated under the
emerging economy framework. The topic of Corporate Social Responsibility
(CSR) comes under the light as the society evolves to endow upon business
organizations not only financial responsibilities but also social responsibilities. To
put it shortly, a broad sense of good corporate governance, stakeholder
management including secondary stakeholders, and Corporate Social
4
Responsibilities accountable to diverse stakeholders all share the same spirit. In
the third part of this thesis, the relationships among the governance mechanisms
(outside directors of the board of directors, family ownership and institutional
ownership) and their effects on corporate social responsibilities are investigated in
the Korean setting in manufacturing firms filed on the stock market and are in the
top 200 KEJI (Korea Economic Justice Institute) (Choi et al., 2010) index
companies.
5
STUDY I. THE CORPORATE
GOVERNANCE MECHANISMS AND
THEIR EFFECTS ON FIRMS’
EXPLORATION
7
Study I. Corporate governance factors and their effects on firms’ exploration
Abstract for Part I
The process of exploration is central to the performance of firms in
dynamic economies (O’Sullivan 2000). This process is controlled by various
corporate governance functions. Corporate governance functions control
important parts of corporate activities and provide an overarching structure to the
corporation’s productive activities - more specifically, those of exploration. The
productive resources obtained through corporate performance are utilized and put
into development processes through corporate governance mechanisms, which
may result in exploration. Corporate governance functions that affect exploration
are, outside members on the board of directors, institutional ownership, and
concentrated external ownership (block ownership).
8
1. Introduction
1.1 Introduction of Corporate Governance
Understanding of the corporate governance and its effect on exploration of
a firm is crucial for firms to survive in this era of hyper competition, dynamic
evolution and creative destruction in knowledge economies (Balkin et al., 2000).
Also, understanding the process of exploration is central to the performance of
dynamic economies (O’Sullivan 2000). Lastly, Agency Theory, the main
framework of this paper, is about protecting the agents’ interests in gaining a good
return on their investment in the presence of conflicts of interests among the agents
and principals. (Morck et al., 2005)
While some studies have been done on the connection between the
corporate governance structure and search behaviors in general, there has not been
enough research on defining the relationship between corporate governance and
exploration. In other words, the whole processes among of corporate governance
– resource allocation, risk taking and exploration, are reviewed under the
overarching framework of agency theory and entrepreneurial risk taking tendency.
The corporate governance mechanisms explored in this article are the
board structure (the ratio of outside members on the board), ownership structure
9
such as institutional ownerships, and concentrated shareholding (block owners VS
dispersed owners). Depending on the empirical results, we can conclude that we
may formulate the board structure, ownership structure such as institutional
ownership, and block (or concentrated) ownership to influence a firm’s
exploration.
1.2 Introduction for Exploration
When a company engages in innovative search, it is not restricted to a
single type of search. While the total amount of output of innovative search in
terms of quantity matters a great deal, the different types of innovation the firm
engages in are also important. Innovation can be divided into two types -
explorative innovation (exploration) and exploitative innovation (exploitation).
The two different types of innovative search are both needed by a firm to
some extent, the two types of innovative search differing from each other in terms
of the risk and uncertainty they entail. They also differ in their effects on the
overall performance of the company - corporate productive and innovative
activities. Exploration tends to stimulate more corporate innovation in the long run
than exploitation - in other words, the time horizons differ. Particularly,
exploration is crucial for the firm’s long term success (McDermott and O’Connor
10
2002) as it is more oriented towards the future. (Germain 1996). Also according
to March (1991), exploration includes things captured by terms such as search,
variation, risk taking, experimentation, play, flexibility, discovery, innovation.
While some study has been done on connecting corporate governance and
total amount of innovative search, the two types of innovative search has not been
distinguished from each other, and as a result there has not been enough research
done on explaining the relationship between corporate governance and exploration.
This research also sets out to provide theoretical foundation to the studies done
between corporate governance and innovative search, specifically the explorative
one, by incorporating agency theory and entrepreneurial risk taking framework.
In this article, the relationship between corporate governance and
exploration will be clarified and examined at the firm level. In order to do so,
evidence regarding risk taking tendencies and different informational treatment
such as strategic and financial control that are associated with particular features
of corporate governance attributes need to be investigated (Miozzo and Dewick
2002). These controls will be discussed about in the below.
11
1.3 Exploration and Exploitation
Distinguishing these two types of innovative search (Herbig 1994 Koberg
et al., 2003) is very important in understanding the innovative behaviors of the
firms and their investment time horizons. Exploration and exploitation can be
stratified into two contrasting concepts in the following such as variation
(exploitation) and reorientation (exploration) (Normann 1971), routine
(exploitation) and radical (exploration) (Nord and Tucker 1987), Ultimate
(exploration) and instrumental (exploitation) (Grossman 1970).
Exploration requires the ability of managers to move quickly and smoothly
from one project to another. In other words, in order for exploration to take place,
a momentum for change and improvement of the capability of the firm to react
quickly to a changing environment are needed. (Koberg et al., 2003). Such
momentum may be created by promoting the managerial behavior that is favorable
to exploration, such as risk taking. Building the mechanisms to encourage
employees to take risks that aid exploration is also considered to be an important
organizational characteristic for promoting creativity. (Amabile et al., 1996).
Creating corporate governance that promotes such risk taking is vital for the
exploration and the firms’ long term success.
12
Related to risks with the type of innovative search such as exploration and
exploitation, we may refer to Kaluzny et al., (1974). According to them, low risk
services mean low in initial and continuing costs and high in payoff, social
approval, clarity of results, association with major activities of the enterprise and
pervasiveness. This description fits with the definition of exploitation. In contrast,
high risk services mean high initial and continuing costs, low payoff, low clarity
of results, low association with the major activities of the enterprise and low
pervasiveness. This description fits with the definition of exploration. To put it
shortly, exploration involves high costs and high risks (Germain 1996, March 1991)
while exploitation involves low costs and low risks. Exploration would
incorporate greater procedural complexity and technological uncertainty (Raz et
al., 2002) thus entailing more risk. In other words, higher risk is needed to bring
higher exploration. (Kaluzny et al., 1974)
To incorporate the above discussion to risk taking tendencies, higher risk
taking tendency by a company’s management leads to more frequent modes of
exploration than exploitation in the firm.
The understanding of complex and deep knowledge, as well as uncertain
technology, is important for exploration rather than exploitation (Dewar and
Dutton 1986). Additionally, Strategic alliances, external contracts and other types
13
of inter-organizational relationships may accelerate exploratory search (Kessler
and Chakrabarti, 1996) because they span organizational boundaries and this aids
exploration. Also, the absorptive capacity that helps to understand complex
technology and form inter organizational relationship building would be important
for the firms in promoting reasonable risk taking and exploration.
2. Background Theory
2.1 Definition
Before starting the discussion, the definition of important terms in this
article are reviewed in order to build the coherency in the logic of the following
arguments and aid in the understanding of such arguments.
First, corporate governance mechanism in the traditional sense refers to the
institutions that influence how business corporations distribute to the relevant
interested parties the resources and returns that are the fruits of economically
productive activities and make risky investment decisions. The investment
14
decisions include investments into explorative innovation projects which
necessarily entail risk taking (O’Sullivan and Lacetera 2000) and affect innovation.
More specifically, corporate governance acts as incentive measure,
monitoring cap, and disciplining device in terms of managing different actors to
cooperate as shown in the first section of this article, mostly in relation to their
risk taking tendencies and degree of exploration. In short, corporate governance is
applied through multilateral negotiations among a number of different internal and
external agents ((O’Sullivan and Lacetera 2000) and principals. The process of
political bargaining among internal and external agents as well as principals is
sometimes accentuated in the procedure of negotiation, and the corporate
governance function is employed when dealing with this friction. Thus, the agency
theory alludes to this power game among multiple actors, and sound corporate
governance is called for in managing this game successfully.
Secondly, According to Zahra (1996), “entrepreneurship is about risk
taking innovation aimed at business creation of a venturing, and strategic renewal”.
This concept is necessarily connected to the risk taking tendencies of the managers.
It will be important to note that the risk taking tendencies brought about by
different degrees of entrepreneurship follow different patterns of risk taking in
different actors such as managers and investors. But the minimum level of risk
15
taking that is common among entrepreneurial actors is crucial in building the
foundation for exploration.
2.2 Agency Theory
To briefly explain agency theory, one should start by noticing that conflicts
of interest exist between managers and shareholders. Separation of ownership and
control (management and finance) to deal with this conflict is recognized as an
economically efficient mode of management in “large modern and open
corporation despite the noted potential for conflicts of interests” (Fama and Jensen
1983). The managers act as agents who carry out decision making functions while
the shareholders are the principals who provide capital and bear residual risks. The
corporate governance mechanisms shift residual risk from managers to
shareholders who can bear it at the minimum cost by holding a portfolio of
diversified stocks in an efficient stock market, and endow the decision making to
the managers.
This principal –agent framework plays a central role in encouraging the
management who has a different set of interests from the shareholders on risk
16
taking, being accountable to the shareholders as well as having to protect the
shareholders’ interests in relation with, for example, the R&D strategies which is
connected to exploration. (Miozzo and Dewick 2002)
Shareholders are viewed as ‘the only voluntary constituency whose
relation with the corporation does not come up for periodic renewal (Williamson
1985) such as the management and employees’. Thus their interests must be
protected by corporate governance institutions such as the Board of Directors
(Baysinger and Hoskisson 1990) since their interests are not covered by contracts.
For example, the BOD becomes responsible for decision control through critical
information processing and influencing managerial decisions on behalf of the
shareholders. In agency theory, management, decision control, and monitoring of
decision making are all taken care of by different actors who are segregated.
Management is carried out by the managers and TMT, decision control by the
board in general, while monitoring is done by the outside directors on the Board.
In sum, agency theory is about protecting the agents’ interests in gaining a
good return on their investment through, for example, more risk taking that may
result in exploration in the presence of conflicts of interests among principals and
agents.
17
2.3 Agency Theory, Entrepreneurship and Exploration
There are costs associated with the separation of ownership and control in
the corporation; such as measuring and evaluating managers’ long term
performance (control on the firm) (Jensen and Meckling 1976) including
exploration. This evaluation is part of an agency cost. In other words, agency cost
decreased by corporate ownership and governance system can, through monitoring,
positively affect managers’ willingness to take risks (Jones and Butler 1992) that
determine the firm’s long term - exploratory - performance.
Closely aligned interests among management and shareholders through
corporate governance mechanism reduce agency cost, which increases risk taking
on the part of managers and promote innovation. (B. Holmstrom 1989) Also, firms
with outsider block ownership show higher tendencies for innovation due to the
strengthened monitoring that comes from reduced management monitoring
costs(Francis and Smith 1995) by block holders. This tightened monitoring brings
forth more risk taking and exploration on the part of the management.
In sum, it may be argued that corporate governance affects corporate
entrepreneurship. Increasing outside directors (or their ownership) on the board,
block ownership (Jacob 1991, Zahra1996, Zahra and Pearce 1989) and
institutional ownership favorably support the entrepreneurial tendencies towards
18
risk taking activities in the management, as these corporate governance
mechanisms affect the corporations’ entrepreneurial risk taking tendency which in
turn affect exploration.
2.4 Corporate Governance and Exploration
In this article, the relationship between corporate governance and
exploration will be examined at the firm level. Specifically, in previously existing
research there is a lack of investigation about the relationship between risk taking
tendencies, exploration and certain particular features of corporate governance
such as the outsiders on BOD, institutional ownership, and block ownership
(Miozzo and Dewick 2002). For example, the corporate governance shapes the
extent to which strategic control that promotes risk taking is in the hands of the
block holders.. The block holders will have the incentives and abilities to make
the firms to invest in (Miozzo and Dewick 2002) exploration or push the
management to behave in such a way, and thus can significantly affect innovation
procedures.
Corporate governance mechanisms employed under the setting of agency
theory ( in separation of ownership and management) affect the corporations’ risk
19
taking patterns among the principals and agents(Lazonick and O’Sullivan 1996,
Lehrer et al., 1999), and accordingly the exploration, which is the main focus of
this paper.
According to Lehrer et al., 1999, corporate governance, if they contribute
to the visibility (whether the parties who are not directly involved in the product
development process can easily tell how well the resources are being spent),
novelty (how radically different the product development processes or marketing
methodologies are) and appropriability (whether the firms can straight forwardly
ensure that the residuals from innovations accrue to the shareholders and do not
involve large spill-overs to the other stake holders), can promote exploratory
innovation. Also, both inside and outside systems may have positive factors in
influencing exploration. For example, in France, large amounts of patient capital
made innovation possible. Outsider systems on the other hand, have the ability to
increase novelty by being able to force changes which employees might otherwise
resist, through their power and thus, exploration.
In a similar manner, according to Lazonick and O’ Sullivan 1996,
corporate governance determines organizational integration (which provides the
incentive and ability on the part of the people to develop and utilize productive
resources) and financial commitment (which provides continuous control over the
20
supply of funds required to develop and utilize productive resources) of the
interested parties, which contributes to exploration.
Also, corporate governance institutions affect how resources and the
residuals of corporate activities – the profits – are put into the development and
utilization processes in order to create innovation, particularly into exploration
activities that determine the firm’s long term performance.
Innovation is good and more innovation is better (Kimberly and Evanisko
1981). However not only the quantity of innovation but the quality (type) of
innovative search, such as exploration, significantly influences the firm’s long
term performance. This type of innovative search – termed as exploration in this
paper- affects the relationship between corporate governance, risk taking and long
term performance. Thus corporate governance mechanisms may be evaluated in
the way they affect the type of innovation – exploration.
21
2.5 Resource Based View and Explorative Investment
Corporate governance deals with the resources allocation and investment
into innovation, and this relationship can be clarified through the resource based
view which defines the basis of the firm’s resources and determines how the firm
uses its resources. (Wernerfelt 1984) This determination and clarification of
resource allocation through the resource based view in turn affects the firm’s
pertinent investment behavior about how the resources may be invested into
exploratory innovation.
The resource based view lays out the grounds for resource distribution and
resource allocation through irreversible investment commitment that affects
innovation. (Miozzo and Dewick 2002) Irreversible investment affects
exploration more than exploitation because investments into exploration entail
more uncertainty and risk, and are unlikely to recoup returns. And in order to
overcome this characteristic, the irreversibility of resource commitment to
exploration should be more emphasized
22
2.6 Strategic Control and Financial control
Different types of information processing and control determine the
relationship between insider/outsider (agents and principals) and innovation due
to various characteristics associated with the different types of information
treatment. The differences in information processing also affect different types of
innovative search, i.e. exploitation and exploration. Thus the concepts of the
different types of information processing need to be clarified.
According to Baysinger and Hoskisson 1990, Strategic control can be
specified as: A) a liberal relationship between higher level and lower level
managers, and B) the managers’ willingness to depend on subjective information
in the evaluation of the lower level managers’ performance. This information
processing takes place ex ante, meaning the evaluation will be focused on how
strategically desirable their decisions were before implementation. This brings
more exploration.
According to Hitt et al., 1996, in contrast, financial control is specified
as :A) a more short term focused, replying on information that is more objective,
quantitative and visible, and B) outsiders depend on this type of information. This
information processing takes place ex post, meaning, (Baysinger and Hoskisson
23
1990) whether they make sense financially after decisions are implemented. This
type of information processing entails less risk and more short-term payoff which
brings about exploitation.
2.7 Corporate Governance Mechanisms
Decision management is the responsibility of the senior management while
outside members on the board act as monitoring actors. The BOD as a whole unit
is responsible for decision control (Baysinger and Hoskisson 1990). Institutional
owners are typically more sophisticated, deal with sophisticated financial
instruments, and tend to be financial companies. Block owners 1) allocate scarce
resources among competing investments on the basis of their evaluation of relative
fields, and 2) police the efficiency of poorly performing investments by pressuring
the management to do better through exit or voice (Hoskisson et al., 2002)
For example, block ownership under the agency theory determines a
company’s (management’s) relationship with its shareholders. When concentrated
ownerships (block ownerships) exist, they are likely to police executives’
decisions on behalf of the shareholders, take stance against free riding problems
of minority shareholders, and ensure that managers pay attention to
24
entrepreneurial risk taking which helps exploration, through bridging the gap
between the management and shareholders and aligning their interests. (Zahra
1996)
3. Hypotheses.
Ownership structure (Brickley et al., 1988) such as blockholding,
institutional ownership and outside members on the board of directors (Daily and
Dalton 1994) are potential monitoring mechanism. For example, concentrated
ownership structure and block owners may provide monitoring functions through
active participation in voting procedures.
In this article, organizational structure refers to 1. Outside members on
BOD, while shareholding structure, the external principal, refers to 2. Institutional
ownership,3. Block ownership
Outsiders on the BOD are hypothesized to affect the management’s
behavior towards in favor of risk taking, as will the institutional investor. Block
ownership, according to the agency theory, is also hypothesized to encourage risk
taking by the management and (consequently) exploration in turn,
25
3. 1 Outside Director Ratio - positive influence on exploration..
A board’s outside directors, as guardians of corporate stockholders, are
encouraged to aid in increasing strategic orientation by the management that
benefit stockholders’ wealth, (Kosnik, 1987, 1990) such as more risk taking which
leads to more exploration and long term innovation. Agency theory ascribes a legal
representative role to outside board members who are expected to promote
shareholders’ interests through encouraging higher entrepreneurship by the
management (Jensen and Meckling 1976) which may result in more exploration.
In other words, outsiders on the board act as monitors of the management and
increase their entrepreneurial tendencies.
Again, managers have shorter time horizon than the shareholders
(Narayanan 1985) preferring short term certain return from their inputs, and this
encourages them to pursue less risk compared to the shareholders. Shareholders
have a longer time horizon, therefore prefer more risk taking that requires longer
time periods in realizing profits but also provide higher potential for growth in the
long run such as exploration. Aside from the issue of time horizons, shareholders
can sell their stocks through the organized securities exchange (Baysinger and
Hoskisson 1990) and individual shareholders may minimize their losses by
26
holding small amounts of shares in many unrelated firms. (Copeland and Weston
1979) This causes the shareholders to pursue more risk in each individual firms as
their risk is diversified among different firms on the stock exchange. In contrast,
managers cannot easily diversify their employment risk (Baysinger and Hoskisson
1990) for the reasons referred to in the above, which causes them to seek protection
from risk taking.
This higher risk taking tendency by the shareholders caused from
investment portfolio diversification may be better protected by the outside
members on the board who bring more exploration into the firm, than the dominant
inside management in the board who will act in accordance with the managers’
preference for shorter time horizons and less risk taking.
According to the Agency theorists, the board, especially the outside
members on the board, with its legal authority to hire, fire and compensate the
managers, safeguards funds invested in the firm by the shareholders against the
managers’ selfish behaviors and thus plays as an important element of corporate
governance (Williamson 1985) as the main point of the agency theory is to protect
the capital invested in the firm.
The outside members on the board serve to resolve conflicts of interests
among decision makers and residual risk bearers (Baysinger and Butler 1985), act
27
as arbiters of negotiation in disagreements among internal, external managers and
principal, such as the ones surrounding different preferences of risk taking and
accordingly, explorative long term innovation. The outside board members align
managers’ behaviors with the shareholders’ interests and police them (Baysinger
and Burtler 1985) accordingly.
As the board performs the control function which is composed of decision
management and monitoring potential (Baysinger and Hoskisson 1990), and as
the monitoring role is carried out by the outside directors, it is important to
conceptualize that the monitoring component is composed of obviously "outside"
or “independent” directors: corporations with higher properties of independent
monitoring components will better serve shareholder objectives such as risk taking
than corporations with boards with smaller properties of independent monitoring
component. (Baysinger and Butler 1985)
Thus, board composition such as the ratio of outside members on the board
is an important control mechanism in dealing with conflict of interests among
principals and agents endemic to open corporations such as risk taking and
innovation, particularly exploration which entails more risk. Again, monitoring
potential of the board is measured by the ratio of outside directors over a
percentage of all directors. (Baysinger and Butler 1985, Rediker and Seth 1995)
28
Higher monitoring potential will provide a check against the inside board members’
reign in the board in terms of risk averse behaviors and refrainment from
exploration by the management.
Having a presence of outside representation on the board provides access
to valuable inside resources and information to external members, usable in
strategic control and promotion of risk taking and exploration by the management
who will be guarded against the negative consequences of their management
decisions that is beyond their control at the time of decision making. This is in
contrast to financial control which places importance only on the financial
performance after the decision making process, the results of which may be
somewhat unforeseeable before the financial gains materialize. Strategic control
helps the management to take reasonable risks in decision making.
The last evidence of effective monitoring by outside members on the board
can be found in Kosnik’s study (1987) about green mail resisting companies.
According to his study, higher proportions of outside directors were found on the
boards of green mail resisting companies (green mail: a private stock repurchase
with premiums against the interests of minority shareholders.). Thus, it may be
inferred that the outside directors act as guardians for the minority shareholders
and promote risk taking, which results in exploration.
29
In sum, outsider dominated boards tend to positively influence
entrepreneurial risk taking, leading to higher exploration.
Hypothesis 3.1. Outside members on the BOD positively influence on exploration
3. 2. Institutional controlling ownership – positive influence on exploration.
3.2 a) Agency Theory and Institutional Investors
The literature also recognizes that external monitors, such as institutional
investors, can serve a useful role in limiting agency problems in the firm.
(Chenchuramaiah et al., 1994) There is an agency relationship between the
institutional investors and managers. Also, the concentration of control in the
institutional representatives’ hands supports agency theorists’ demand for
shareholder action through aligning managerial and owner interests and promotes
risk taking (Ryan and Schneider 2002) on the part of managers.
The recent agency theory model argues for a two-tier agency structure,
with individual owners as principals, with institutional investors as agents to their
beneficiaries and as principals to corporate managers, and with corporate
managers as agents (Bricker and Chandar 2000). Institutional investors influence,
30
discipline and monitor the corporate managers (Del Guercio and Hawkins 1999)
and drives them towards more risk taking and exploration.
3.2 b) Institutional Ownership– positive influence on exploration.
In order to include only the institutional shareholding that is large enough
to influence the firm behavior, institutional controlling ownership is measured.
Here, institutional controlling ownership means institutional shareholding that is
larger than 5 %.
There are findings that show that the strength of institutional investors
increases R&D intensity (Bushee 1998 ) and risk taking (Tihanyi et al., 2003), and
this may lead to higher levels of exploration. The focus of discussion in this section
may be specified to the relationship between the strength of institutional investor
and risk taking, R&D intensity and exploration.
Controlling institutional investors are typically sophisticated financial
institutions with block holding that provide monitoring, discipline and influences
on corporate managers (Del Guercio and Hawkins 1999) that drive the
management toward more risk taking and exploration which has more long term
31
prospects. Institutional shareholders again act as coordinators among internal,
external shareholders and the management due to their expertise in corporate
management and negotiation, (Choi et al., 2011) which may result in the
negotiation concluding in favor of the shareholders’ interests. These characteristics
of institutional ownership ensure that managers choose investment levels to
maximize long run value favoring risk taking and exploration.
In a similar way, the concept of efficient monitoring hypothesis (Pound
1988) builds around the phenomena that institutional ownerships are low in the
target companies of control initiative in the market for corporate control. This
means that there is an absence of efficient monitoring in the target firm that
initially lacks institutional ownership (which has precipitated the need for control
challenge.). Thus the lack of institutional investors means a lack of efficient
monitoring. The institutional investors drive the firm towards higher degrees of
risk taking and exploration in to their role as efficient monitors:
In their ability to evaluate management, institutional controlling investors
have easier access to insider information, strategic control and the ability to push
the management to take more risks. This motivates the institutional shareholders
to coordinate more risk taking inducing actions among the shareholders and to
bring about more exploration by the managers, because the characteristics of
32
strategic control which they have access to enables more risk taking.
Institutional investors also act as regulators and researchers of corporate
governance and have the ability to provide access to capital through financial
markets as well as to affect the managers’ reputation in the labor market.
Institutional investors affect managers’ reputations based on their governance and
investment behaviors in both financial and labor markets, affecting the managers’
investment decisions and behaviors in a way that causes the management to work
in favor of risky and explorative search, which is good for the firm and the
shareholders in the long term and is against their short term selfish interests (Choi
et al., 2011)
In a similar manner, higher institutional ownership may reduce the career
concerns of the risk averse managers and provide greater incentive to innovate.
This is caused by the fact that when institutional ownership is higher, CEOs are
less exposed to the threat of firing that is precipitated by profit reduction. (Aghion
et al., 2009) This drives the management toward more risk taking and exploration
even though that may bring decrease in current profits.
Also, less manipulation of earnings and R&D occur when undifferentiated
institutions in total hold a large fraction of shares, leading to more stable, long
term and positive R&D spending (Bang and De Bondt 1997). This brings the
33
protection of the resource base to be invested in more exploration. Lastly, a
regression of R&D spending as a percentage of sales against undifferentiated
institutional ownership in total showed a positive statistically significant
relationship which implies that institutional ownership encourages long term R&D
spending (Jarrel and Lehn 1985) that is crucial for exploration to take place.
Interestingly, institutional investors are legally required to diversify their
holdings, (Barclay and Holderness 1989), allowing them to bear more risk taking
as their interests may be in alignment with other minority portfolio stock holders
and to encourage the management to pursue more exploration in individual
companies whose stocks they own.
Hypothesis 3.2. Institutional controlling ownership positively influences
exploration
34
3. 3. Block Ownership – – positive influence on exploration
In this article, block holders mean outside members (outside block holders)
who are neither executives nor board directors but own more than 5% of total
shares. In other words, they include individual block holders, corporate block
holders, institutional block holders and foreign block holders. (Park et al., 2004)
Block Ownership is the percentage of shares held by block holders.
Block holders have the concentrated voting power to oust the management
when the management fails to behave in a profit maximizing way. They also
overcome the free riding problems of minority investors by having the interests
and power to collect information and provide monitoring, and have enough control
over the assets of the firm to have their interests protected and receive a fair return
on their investments. (Shleifer and Vishny 1996) This resolves the agency
problems caused by the separation of control and ownership.
Large shareholders have the incentive to force the firm to take risks
because they share the upside payoffs of risk taking and innovation while other
investors (who may be creditors) bear the cost of failure (Jensen and Meckling
1976). This leads block owners to encourage risk taking and exploration in the
firms.
35
Dispersed owners rely on financial criteria to measure a firm’s success as
that is the only information available to them. This discourages risk taking,
(Hoskisson and Turk 1990) because financial control brings conservatism in
management, and the firm is encouraged to improve only financial earnings which
leads to less strategic investment in R&D and exploration. Block owners (patient
capital) in contrast may have an access to and rely on strategic data they control
and let the management afford risk taking, (Hoskisson and Turk 1990) in other
words, allow the management to take reasonable risks. When strategic control is
emphasized, higher emphasis is placed on the stable supply of R&D ( Baysinger
and Hoskisson 1990, Hoskisson et al., 1993) as a basis for reasonable risk taking.
This positively influences innovative search, especially the explorative type that
relies on the stable source of investment that does not fluctuate with the firm’s or
the project’s uncertain financial performance. Fluctuating sources of funds may be
too volatile to fully support exploration and prove to be an inefficient supply for
such activities.
Shareholders prefer management to adopt risky investments as they are
residual risk bearers while the management prefers less risky projects that enables
certain recovery of the value of their contribution in the short - term (Ortega-
Argiles et al., 2005), which reduces the managerial incentive for exploration. Thus
the protection of block shareholders’ interests is strongly required for exploration
36
in the face of the contrasting interests of the managers. However, concentrated
ownership may reduce managerial pressures for short term profits by shielding
them from market for corporate control that requires the firm to produce financial
earnings, positively affecting the risk taking propensity of the managers.
In particular, block shareholding alleviates agency costs associated with
innovation that arise due to the separation of ownership and control. This
alleviation of agency costs encourages the management to pursue long term risky
innovation by aligning the interests between owners and controllers (Francis and
Smith 1995, Shleifer and Vishny 1996) allowing more risky, long term exploration
on the part of the managers. In other words, block ownership may act as a catalyst
that aligns manager and shareholder interests (Wruck 1989) in favor of
shareholders’ interests such as risk taking and long term exploration.
Managers may resist investment in exploration since they cannot
accurately foretell the costs and benefits of innovation which may conflict with
existing policies and procedures, meaning that they may threaten the status quo.
Investment in exploration may also be resisted by subunits in the firm because
exploration is brought about as the result of investment in explorative innovation
and this investment means channeling of profits away from existing usage such as
employment risk or private benefits of control. This may cause the subunits to lose
37
power and resources or force them to change their own internal processes which
they are comfortable with. (Kanter 1988, Staw and Cummings 1980)
Block owners have the power to overcome this resistance because they can
provide incentive and support for the management to take higher risks by giving
them the authority to overcome resistance against exploration (higher risk) in the
organization through voting processes or inside company politics. This ability to
overcome e resistance against innovative investment has a positive effect on a
firm’s risky investments such as R&D investment. This pressures the management
to work for the interests of shareholders in the longer term – more risk taking and
exploration.
Also, concentrated ownership provides effective monitoring mechanism
(Belloc 2009), by owning the incentive and capacity to monitor and influence
managerial decision making. For example, they can exert a voting control pressure
on or change in the management – (Choi et al., 2011) so that management may
take more risk on behalf of the shareholders and allow more exploration to take
place.
The reason why block owners are able to provide monitoring is because
they are large shareholders. Dispersed shareholders have decreased monitoring
abilities because they are unable to bear the cost of monitoring and gathering
38
information (Grossman and Hart 1980), resulting in the so-called free riding
problem. Dispersed investors allow the managers to reduce risk taking and
eventually exploration due to their lack of power and incentive for monitoring
(John et al., 2008) while block owners increase the managers’ tendency for risk
taking and eventually exploration as they have the ability and incentive for
monitoring.
Block owners positively influence entrepreneurial risk taking, leading to
higher degrees of exploration
Hypothesis 3.3 block ownership positively influences exploration
4. Method
4.1 Sample: The industries chosen are confined to electronics, communication,
and semiconductor industries ( SIC: 3571, 3573, 3600, 3612, 3613, 3620, 3621,
3630, 3634, 3640, 3651, 3652, 3661, 3663, 3669, 3670, 3672, 3674, 3677, 3678,
3679, 3690) In this article, there is a time lag of 1 to 2 years between the
independent variable (governance mechanism proxy) and technological
39
distribution measure in year i. (i=1,2) The independent variable ranges from the
year 1996-2000. The dependent variable ranges from 1. 1997-2001 and 1998-2002.
The total number of observation is 295. The number of groups is 88. Independent
variables are collected from the proxies and WRDS.
4.2 Dependent Variables
4.2 a) Diversity of technological search
Technological diversity can be a measure for exploration. In other words,
diversity of technological search can serve as a proxy for the degree of exploration.
Firstly, Technological diversification has been found to have a positive
effect on innovative competence. More specifically, a diverse and broad
technology base has a more powerful and positive influence on radical innovation
that is based on exploration, than on incremental innovation based on exploitation. (Quintana-Garc´ıa and Benavides-Velasco 2008) Dewar and Dutton (1986) found
that, in the innovation of the footwear industry, investing in broad areas of
technological disciplines benefits both exploration and exploitation, but more
strongly exploration. Such tendency of technological diversity enhancing
40
exploration is also observed in the pharmaceutical industry (Wuyts et al., 2004)
Secondly, Ettlie et al., (1984) (Goodman and Abernathy 1978) state that
“diversification is likely to preoccupy the organization with unique new products”
– meaning that a diversity of technology is required for exploration.
Thirdly, Almeida and Kogut (1997) emphasize that the firms that better
exploit diversity are better equipped to explore new technological opportunities.
This means that having a diverse capacity allows the firm to pursue exploration.
Fourthly, adoption of exploratory processes means that the firm needs to
move toward more organizational generalists. This means that exploration process
requires more diverse technological bases. (Ettlie et al., 1984)
4.4b) Sampson’s measure (Sampson 2007)
Sampson measures the diversity of partner technological search in
alliances by examining the extent to which partners file patents in the same
technology classes. (Jaffe 1986). In this paper, this diversity of partner technology
is substituted by the diversity of technology in different years (one year gap) of a
single firm. This is measured by the extent to which the firm patents in the same
41
technology in different years, and this measure allows the comparison of
technological distribution in different years in the same firm. The data looks at the
distribution of technological classes and patents and compare the data in year i and
the previous year (year .i-1). To rephrase, the measure of technological diversity
effectively captures the technological position of a firm in year i relative to the
preceding year (year i -1).
To construct this variable, the technological portfolio of a single firm was
generated for each year by measuring the distribution of its patents across patent
classifications, year by year. This distribution is captured by a multidimensional
vector, Fi =( . . . ), where represents the number of patents filed by a firm
in year i in patent class s. Diversity of a firm in technological capabilities is then:
Technological diversity =1 – ’()() Technological diversity varies from 0 to 1, with a value of 1 indicating the
greatest possible technological diversity between two consecutive years in a single
firm– meaning the greatest explorative change. A simple numerical example
illustrates how the measure works. Assume that for a certain firm in year i-1 and
i, the count of patents in four patent classes, A, B, C, and D, is as follows:
42
Technological class In year i-1 In year i
This measure calculates diversity between two consecutive (one year
difference) years in a firm
43
4.2 Independent Variable
1. Outsider director ratio
: Number of outside directors (affiliated and independent outside
directors)/ number of board members
: (Outside director is defined as one who is not in the direct employ of the
corporation on whose board she or he sits ( Kesner and Johnson 1990, Kesner et
al., 1986, Singh and Harianto 1989))
2. Institutional controlling ownership
In order to include only the institutional shareholding that is large enough
to influence firm behavior, institutional controlling ownership is measured. Here,
institutional controlling ownership means the institutional shareholding which is
larger than 5 %.
: What percentage of the shares the institutional controlling shareholders
own.
: Total shareholding by controlling institutional investors/ total outstanding
shares
: (institutional investors= mutual pension retirement funds, investment
44
bankers and private funds, SIC 6000-6099 6200-6282)
: No individuals, mostly represented as block holders on the proxy
Ins ownership
3. Block ownership: total stock holding by block stock holders/ total number of
outstanding shares
: What percentage of the shares the block shareholders own.
: (block stock holders= shareholders who have more than 5% of total
shares, excluding executives and board directors)
4.3 Control Variables : size, R&D intensity, age,
1. Employees (Size= Log (number of employees) )
Larger firm size permits more risk taking, a necessary condition for the
consideration and adoption of more exploration. Also economies of scale and more
45
financial risk are entailed in size when considering changes of the firms’ technical
processes. Larger firms can afford larger numbers of engineers to experiment with
and absorb innovation containing new knowledge components. (Dewar and
Dutton 1986 ) Firm size has been shown to influence R&D expenditures
(Baysinger and Hoskisson 1989) and new product introductions (Chaney and
Devinney 1992).
2. Age
(Christine et al., 2003)
Younger firms dedicated more resources to innovation (Molero and Buesa
1996)
3. R&D intensity= consolidated R&D expense divided by net sales revenue
R&D intensity may serve as a surrogate for risk aversion. (Used by Baysinger
and Hoskisson 1989, Hambrick and MacMillan 1985, Hoskisson and HItt 1988,
Mc Eachern and Romeo 1978, Miller and Bromiley 1990, Scherer 1967, )
46
Tabl
e I.
Sum
mar
y st
atis
tics a
nd c
orre
latio
n
Var
iable
M
ean
SD
1
2 3
4 5
6 7
8
1. E
xplo
ratio
n 1
year
afte
r 0.
37
0.35
1.
00
2. E
xplo
ratio
n 2
year
afte
r 0.
36
0.35
0.
77
1.00
3. o
utsider
on
BOD
0.
79
0.37
-0
.03
-0.0
3 1.
00
4. Ins
t Sh
areh
old
ing
0.17
0.
17
0.08
0.
07
-0.0
3 1.
00
5. b
lock
hold
ing
0.2
0.16
0.
16
0.12
* -0
.05
0.68
**
1.00
6. E
mplo
yees
12
.39
20.3
6 -0
.17*
* -0
.15*
0.
03
-0.1
5**
-0.1
8**
1.00
7. A
ge
35.8
7 36
.1
-0.3
6 -0
.01
0.04
0.
07
0.00
0.
47**
1.
00
8. R
&D Int
0.
17
1.09
-0
.07
-0.0
7 -0
.04
-0.0
7 0.
02
-0.5
8 -0
.07
1.00
*Sig
nific
ance
at
p< 0
.05
leve
l , *
* p<0.
01
47
Table II. Statistical findings from random effects tobit estimates
1 Year later Base Model Model 1
_cons 0.4152*** 0.3553***
0.0494 (0.0611)
Employees -0.0013 -0.0009
(0.0016) (0.0016)
Age -0.0001 -0.0003
(0.0011) 0.0011
R&D Int -0.0072 -0.0087
(0.0126) (0.0126)
1. Outside director ratio 0.0215
(0.0344)
2. Inst ownership -0.0358
(0.1161)
3. Block ownership 0.2368*
(0.1307)
*Significance at p<0.1 level, ** p< 0.05, *** p<0.01
48
Table III. Statistical findings from random effects tobit estimates
2 Years later Base Model Model 1
_cons 0.4004*** 0.3770***
(0.4737) (0.0629)
Employees -0.0025 -0.0023
(0.0016) (0.0016)
Age 0.0002 0.0002
(0.0011) (0.0011)
R&D Int -0.0101 -0.0129
(0.0144) (0.0145)
1. Outside director
ratio
-0.0124
(0.0398)
2. Inst controlling
ownership
-0.1208
(0.1327)
3. Block ownership 0.2635*
(0.1478)
*Significance at p<0.1 level, ** p< 0.05, *** p<0.01
49
5. Data treatment and Results
According to the correlation table, there are no multicolinearity problems.
Tobit regression is used because the dependent variable ranges from 0 to
1.However, in Stata, tobit regression allows only the random effects model. Also
i in the Sampson measure counts as 1 or 2.
Hypotheses one and two proved insignificant. Hypothesis three proved
significant in a positive direction.
6. Conclusion and Discussion
In short, in this article the relationship between the corporate governance
and exploration is investigated. The guesses are that faulty corporate governance
will bring dysfunctional management behavior and not enough exploration
activities. In contrast, sound corporate governance will bring much exploration
which will have positive effects on the company in the long run.
Hypotheses one and two turned out to be insignificant while the third
hypothesis was supported in a positive direction. Hypothesis one may not have
proved significant because of conflicting effects that the outsiders on the board
50
have on the risk taking of the management. The senior management are the ones
who recommend and hire the outsiders on the board. Thus the outside directors on
the board may seek to please the senior management for the sake of keeping their
posts, proving to be only a rubber stamp to the senior management’s risk taking
tendencies and decision making. This provides contradictory affects on the outside
directors’ influence on exploration who also have to care for their reputation as a
representative of shareholders’ interests in favor of risk taking and exploration. In
other words, one may question the effectiveness of the outside directors due to
their employment process that brings conflicting motivations- being hired through
the recommendation of the senior management and reputation building as a
shareholder representative. The effects work both directions, negating each other
and thus providing insignificant relationships as a whole.
Hypothesis two has also proved to be insignificant, possibly due to the
opposing effects different kinds of institutional investors have on managerial risk
taking tendencies. Institutional investors do not perform any significant role on the
exploration activities of the company because there are different kinds of
institutional investors, muting a certain consistent effect on exploration. Pension
funds and public funds have longer time horizons and therefore promote
exploratory investment and affect positively on the innovation of the company in
the long run (exploration), while investment funds have shorter time horizons and
51
therefore negatively affect long term innovation (exploration). Thus investment
funds reduce exploratory investment in companies they influence while pension
funds and other investors increase exploratory investment (with longer time
horizons). (Hoskisson 2002)
The third hypothesis was proved positively significant. Block holding
policy can affect the quality of innovation (exploration) of a company in a positive
way. This may have implications to the policy makers who have the authority to
allow and promote block holding by principals in the stock market. In other words,
ownership structure can be considered a viable tool in promoting exploration. Thus
policy makers, through increasing block shareholding, may improve exploratory
activities of companies.
Last, there is considerable research done on the relationship between
governance systems and R&D expenditure or innovation, but not enough on
corporate governance and exploration in this respect. Also, this paper is set against
a background of North American semiconductor, electronics and communications
industries, and thus the generality of the research may be limited geographically
and industrially.
53
STUDY II. CORPORATE GOVERNANCE MECHANISM AND R&D STRATEGIES IN
KOREAN FIRMS
55
Study II. Corporate Governance Mechanism and R&D strategy in Korean Firms.
Abstract
The relationship between corporate governance variables and R&D
investment strategies in Korea differ somewhat from that of western economies,
the conflicts of interests between majority and minority shareholders being much
more salient in the former than in the latter where the separation of management
and ownership defined by agency theory is the norm. The relationships between
family ownership, domestic institutional controlling investors, foreign
institutional controlling investors and R&D investment strategies are investigated
under the emerging economy framework as they account for home bias and
liability of foreignness. In firms belonging to business groups controlled by family
owners, affiliate shareholding is conjectured to moderate the relationship between
family shareholding and R&D investment.
56
1. Introduction
Innovation is important in this era of hyper competition and it can be
conjectured that corporate governance has influence on the innovative
performance of the firm. Innovation is a long term and uncertain procedure, and
the R&D investment which is the foundation for innovation depends on the
management and shareholders’ risk taking tendency and strategic inclination.
R&D investment is centrally related to a firm’s long term performance that is
based on innovation, and thus understanding the relationship between corporate
governance and its R&D strategy is crucial in understanding the firm’s
performance.
Especially Korea, considered a role model for other developing countries
regarding the magnitude of its economic development, has implications in terms
of its corporate governance and innovative investment strategies such as R&D
investment.
Under the traditional agency theory, agency costs arise from the separation
of ownership and management. However, rather than the agency cost between the
managers and owners where dispersed shareholders and professional management
are the norms, the discrepancy of interests among the major shareholders and
57
minority shareholders is more relevant to the discussion in this article – especially
in the Korean setting where the major business groups are controlled by founding
families and owner managers whose interests are not necessarily in alignment with
the interests of the minority individual shareholders. In Korea, separation of
management from ownership is rare, and about 60% of firms that are not widely
held have top management who are related to large family shareholders in Korea.
(Classens et al., 2000) Thus rather than agency costs arising from the separation
of management and ownership, there are different costs between the owner-
manager (family owners) shareholders and minority shareholders.
The conflicts of interests between large and small shareholders can be
numerous, including dominant shareholders enriching themselves by transferring
profits to other companies they control to the detriment of the minority
shareholders. (Claessens et al., 1999)
Regarding affiliate companies, the affiliate ownerships support business
groups which is unique to Korea. Also, as the stock market was opened to foreign
shareholders after the Asian financial crisis in the late 1990s, there are active
investment behaviors among foreign and domestic institutional investors in the
Korean stock market, and thus the Korean stock market became an interesting field
58
to explore the relationships among domestic and foreign institutional shareholders
and their effect on R&D investment.
Here, the relationships among family ownership, affiliate shareholdings
and the domestic and foreign institutional controlling shareholding and R&D
investment are explored.
2. Literature Review- Ownership Categories
Ultimate owners are further divided into four categories: families including
individuals who have large stakes, the state, financial institutions such as banks
and insurance companies, and corporations. (Claessens et al., 1999) In a different
paper, large shareholders include individuals, corporations, institutional investors
and foreign investors (Park et al., 2004 )
When we refer to an actor who exercises actual control over the
management, (having more than 5% of the shares in the Korean setting) we
generally use the term ‘controlling shareholder’ rather than majority shareholder.
(Park et al., 2004 )
59
3. Hypotheses
3.1 Family Ownership
“Family shareholders” in this article refers to the owners who participate
as president or CEO, corporate shareholders who hold either the largest stake in
the company, or are controlling shareholders and their families. (Kim.and Song,
2011). Thus the “family ownership” is the percentage of shares held by the
“family shareholders.”
We do not distinguish among individual family members and use the
family group as a unit of analysis. (Claessens et al., 1999)
The information about family shareholders and owner managers in Korean
companies can be found in the annual reports of the corporations in FASS DART
website. (Cho and Sul 2006)
Here the focus of the first analysis will be the family shareholders.
3.1 a). Family ownership - negative influence on R&D investment
Family shareholders of corporations have more on-going concerns and
care about how their company may last. This conservative behavior may lead to
60
less risk taking (Yun 2008) because they may look only at safe survival and not
profit maximization. In an uncertain environment like Korea, the tendency of the
management to pursue less risk in order to survive may be heightened. Also in this
context, a family’s assets are tied to one company which makes them more risk
averse in those specific companies preferring safer returns on their investment.
This has a negative effect on R&D investment.
The family owner shareholders may enjoy private benefits that come from
the stable cash flow of their holdings. (Barclay and Holderness 1991)This may
make the family shareholders become passive to high risk investments which may
reduce the cash flow that can be a basis for such private benefits. Thus they, rather
than taking risks and investing in R&D, retain cash and power and become
conservative, thereby deriving private benefits of control. This phenomenon of
family owners deriving private benefits of control at the expense of minority
shareholders is even more acute in the countries that do not have corporate
governance institutions that well protect minority shareholders (Nenova 2003,
Dyck and Zingales 2004) such as Korea.
In order to maintain and prolong their control over the company, the family
owners tend to become risk averse and become satisfied with conservative and
61
safe control over the company and the business groups.(Thomsen and Petersen
2000)
Dispersed owners may prefer risk taking because they can reduce risks
through diversified portfolio stock holding, which would lead to more pressure in
favor of risk taking and R&D investment in the individual firms they invest in,
while large family shareholders may prefer to avoid risk taking due to their
disproportionate exposures to the risk of an individual company’s innovative and
financial performance. In other words, their wealth is disproportionately tied to
the firm, meaning that a large portion of their wealth is tied to the company, which
leads to conservative behaviors on the part of family shareholders in order to avoid
risks and support for such conservatism naturally comes from the management
who inherently prefer less risk taking. To put it differently, one can say that
increased risk is borne by the family shareholders ((Ortega-Argiles et al., 2005) in
this case, which will lead to decreases in investment in R&D to reduce such
exposure of the family shareholders.
The family shareholders may pursue strategies that are to their own
preferences such as less risk taking in the face of resource allocation within the
company (Morck et al., 1988) and private benefits such as pecuniary interests
which results in less investment in R&D. In other words, poor governance against
62
family shareholders allows them to derive private benefits of control, and these
private benefits come from distortion of other investment activities such as R&D
investment. (Morck et al., 2004). Expropriation of firm assets, misuse of
authority, transfer of income to the family shareholders and cronyism by the
family shareholders all occur at the cost of R&D investment which has more
uncertain prospects of return. (Morck et al., 2004, Li et al., 2010)
The family shareholders may derive private benefits from the control of
the company such as shirking and nonpecuniary control amenities ( Demsetz and
Lehn 1985, Barclay and Hodlerness 1989) at the expense of dispersed shareholders.
To rephrase, large family shareholders may dislike risk taking that may require
increase in R&D investment (Morck et al., 1988) and bring reduction in the short-
term cash flow which can be a basis for private benefits of control.
Shareholding above 50% by the family shareholders, for example, creates
an effective barrier against external corporate governance mechanisms such as
hostile takeover and monitoring by market for corporate control, leading to the
owner managers’ lessened sensitivity to the minority shareholders’ interests such
as risk taking which can be protected through hostile takeover market and the
market for corporate control monitoring (Barclay and Holderness 1989, Stulz
1988). The managers in the end may get to cater only to the interests of the family
63
shareholders who have discretionary power over the management, which may lead
to less risk taking and investment in R&D.
To put it in the context of centralization and decentralization,
decentralization leads to higher risk taking and higher innovative investment
(Singh 1986)- especially R&D investment. This means that the centralization
brought about by dominant family shareholders has the opposite influence, that is,
lower risk and lower R&D investment. To summarize the above competing
argument, dispersed owners bring decentralization and consider entrepreneurial
risk taking positively, leading to higher innovative investment while the dominant
family shareholders bring centralization and consider entrepreneurial risk taking
negatively, leading to lower R&D investment. Lastly, family ownership acts as a
break on business growth and R&D investment. (Ortega-Argiles et al., 2005).
As mentioned above, different principals are entities with different
interests, and there are conflicts of interests between minority shareholders and
large family shareholders. As the power of family owner shareholders increase
and become influential on the managers, their interests entrench (Li et al., 2010)
at the expense of minority shareholders and may suppress risk taking such as R&D
investments.
64
Also, the families’ investment decisions are made on the basis of
maintaining their control over the business groups. While maintaining that control,
the family shareholders may prefer less risk taking and less R&D investment
because prolonging that control may require conservatism. (Yun 2008). In other
words, their desire to leave an enduring legacy for their succeeding generation
leads to conservative and safe management practices. ( Fernandez and Nieto 2006)
Viewed from another perspective, when higher dividend payments become
a method of transferring wealth to the families’ descendants, such practice will
result in less R&D investment as funds are paid out as dividends at the expense of
R&D investment. (Yun 2008). R&D investment threatens the status quo as the
funds are derived from some other usage that the family shareholders are more
comfortable with and thus the family owner managers may come to dislike R&D
investment. As a result, the family shareholders may seek to limit investments in
risky R&D projects and secure the funds used for their personal benefits. (Wu et
al., 2005).
Family shareholder objectives such as maintaining family employment and
control may drive out qualified professional managers, which will result in less
risk taking tendencies in the management as professional risk taking is an attribute
of more competent managers. (Chen and Hsu 2009). In other words, family
65
shareholders’ attempts to maximize the family wealth lead to the sacrifice of
business interests (Jaffe 2005) including sound R&D investment that leads to
higher innovative performance.
Also, family shareholders wish to maintain their control over the firm,
rendering them unwilling to dilute family ownership with external capital
therefore relying mainly on firm generated internal capital. Limited cash flow that
comes from this practice may constrain R&D investment. (Fernandez and Nieto
2006)
In a contrasting logic, because the family shareholders make business
decisions with their own personal wealth, they tend to seek careful conservation
of the resources and efficient usage of such resources. Thus they may need less
R&D investment to produce the same amount of innovation and performance
enhancement. (Chen and Hsu 2009). This may lead to reduction in R&D
investment.
In addition, the Schumpeterian “creative destruction” creates new wealth
for entrepreneurs, while destroying the value of old capital that is owned by family
shareholders. Thus the family shareholders are reluctant to back any innovation
(Mork and Yeung 2005) that may destroy their old capital in this era of hyper
competition.
66
Finally, the family owners may place the welfare of the family before that
of the company, lack discipline about performance, become secretive and lack
preparation for succession. (Danco 1992, Deniz and Suarez 2005, Donnelly 1964,
Handler and Kram 1988, Lansberg 1988.) This leads to less R&D investment.
• Hypothesis 3.1 a) Family ownership negatively influences R&D investment.
3.1 b) Family Ownership - positive influence on R&D investment.
Family shareholders have substantial economic incentives to maximize
firm value (Anderson and Reeb 2003, 2004). Family shareholders also tend to be
long term investors (Anderson et al., 2003) who more often than not hope to pass
the wealth to their descendants rather than to consume the corporate wealth during
their lifetime (Casson 1999). Thus family shareholders have longer investment
time horizons than other shareholders who do not consider the future of the firm
in the long term to be crucial, suggesting a willingness to invest in long-term
projects such as investments into R&D (Kim et al., 2008). They are also less likely
to forgo R&D investment to boost current earnings (Stein 1988, 1989) because
their time horizon is long term rather than myopic.
67
Family shareholders often have inside information to evaluate and monitor
R&D projects, therefore they feel safer and have more tendencies to invest in and
back up R&D projects that require strategic decision making and monitoring (Kim
et al., 2008) over the managers.
Family shareholders are more likely to cut dividends when cuts are needed
compared to other majority shareholders such as the state. This means they are
most likely to reduce dividend payments and increase cash flows which may
possibly be invested in long term project like R&D investment. (Gugler 2003).
Also, there is evidence that family shareholders drive to invest larger portions of
financial slack in R&D in Korea (Kim et al., 2008) than minority unrelated
individual shareholders. To summarize, family owners have the tendency to
increase R&D investments. (Morck et al., 1988). ( Chang 2003)
Family shareholders care about their reputation, which brings long term
perspective into their relationships with external bodies (suppliers, capital
providers) and performance. This has the effect of increasing R&D investment
(Anderson and Reeb 2003) because this R&D knowhow will positively affect the
firm’s long term performance and long term assets, as well as the firm’s (and the
families’) reputation to the external entities.
68
Family managers tend to be careful stewards of the firm’s resources which
reduces the downside risk of R&D investment. This, in return, encourages further
R&D investment (Chen and Hsu 2009) by the firm’s management because the
management knows that R&D investment strictly monitored by the family
shareholders will lead to more chances of increased performance which will be to
their benefit as well in the long run.
Hypothesis 3.1 b) Family ownership positively influences R&D investment.
3.2 Affiliate Ownership – moderating influence
Large Korean business groups in general can be considered as belonging
to the common organizational field which the founder families and their
descendants continue to manage and control. ( Chang 2003, Yun 2008) Here, the
presence of affiliate companies may be considered as a part of unique Korean
business phenomena.
Various researches consider the business group as a unique corporate form
distinct from other independent individual firms, and the Korean government also
69
considers the Korean business groups as a unique distinct organizational form
(Orrù et al., 1996). The process of foundation of the business groups by the early
founders and common history of development within business groups interacting
externally with the government through certain procedures and internally with the
members of same business groups prove that various institutional factors
functioning inside and outside the organizational field of business groups make
the ownership structure of Korean business groups similar to each other (Chang
and Hong 2000, DiMaggio and Powell 1983). Such business group structures are
similar in that the business groups are controlled by family shareholders and that
their affiliates interact very closely with one another within the business groups.
In fact, the presence of the affiliates prevalent in Korea may cause the clash
of interests between major shareholders and minority shareholders to become
more severe as the affiliate holdings in the related companies may be used by the
major shareholders to their own benefit and against the interests of the minority
shareholders. (Park et al., 2004) This may inflate the control the family owner
managers have over the affiliates and entire business group.
The degree of Korean business groups’ centrality may be understood by
the relationships among the affiliates such as internal transactions and the
hierarchy among the affiliates which are largely determined by the owners’ and
70
their families’ ownership structures.
In Korea, families of owner managers maintain their control over the entire
business group through the affiliates’ cross ownership and pyramid structure, and
this ownership structure is prevalent in the business groups (Yoon and Hyun 2010).
Voting rights frequently exceed cash flow rights via pyramid structures and cross-
holdings and the families exercise inflated control through such structure of
affiliated companies (Claessens et al., 2000). To summarize, family owners use
affiliate ownership to maintain control (Chang 2003) over the entire business
group, which inflates their power in a particular business group.
In Korean business groups, the members’ corporate identity is stronger on
the level of the entire business group rather than on the individual affiliate level.
Also the success or the failure of a business group is determined on the entire
business group level and not on the individual affiliate level (Shin and Kwon 1998).
Thus the identity of business group carries more weight for their own rather than
the individual units. This means that the existence of the entire business group
carries more weight than that of the individual firms (Frank 1999, Shin and Kwon
1998), and the performance of each company is understood on the entire group
level and not on the individual level. Thus the family owner managers who have
their influence on the entire group level carry more significance.
71
More than four out of five company groups in Indonesia, Korea, Malaysia,
and Taiwan have managers who are related to the owners of controlling companies
in the business groups. In other words, managers of closely held firms tend to be
relatives of the family shareholders in East Asia. Thus the affiliate companies in
general can be considered to be under the control of the family shareholders
(Claessen, et al., 2000) and are used to increase the family’s influence on the
business groups.
Large family shareholders pursue private benefits through non market
price transactions through affiliates’ indirect shareholdings and pyramid structures
involving affiliates, reduction of private costs through siphoning the corporate
asset and easier protection of the management (Yeh et al., 2001). Thus the
presence of affiliate companies brings increased private benefits of control to the
family shareholders and strengthens their control. For example, La Porta et al.,
(1999) examine the means through which control is enhanced. The research shows
that owners extend their resources through the use of management appointments,
pyramid structures as well as through cross-ownership and the (infrequent) use of
shares that have more votes in the business groups composed of affiliates.
72
Hypothesis 3. 2 In sum of the above arguments, affiliate ownership inflates the
controlling family shareholders’ influence on R&D investment in the business
groups.
Affiliate ownership strengthens the controlling shareholders’ positive influence on
R&D investment.
Affiliate ownership strengthens the controlling shareholders’ negative influence
on R&D investment.
3.3. Institutional Controlling Ownership
Controlling shareholders are the individual and corporate shareholders
who possess more than a certain level (for example 5%) of shares and can exercise
actual influence on the corporation they invest in. In Korea, for example, those
who own more than 5% of the outstanding shares in a company can exercise actual
monitoring over the management by calling stockholders’ meetings or suggest
firing of the directors. ( Cho and Sul 2006.) Thus in this part of the article, the
author seeks to establish relationships among domestic and foreign institutional
controlling shareholders and R&D investment. Controlling institutional investors
73
instead of simple institutional shareholding is used in order to filter out small
holdings that do not have actual influence on the overall institutional shareholder’s
effect on the R&D investment strategies of the firms.
Investment by certain funds such as domestic and foreign controlling
institutional shareholders affecting the stock price means that they affect the
decision making of the corporations, leading to effects on investment decisions for
innovation such as R&D investment.
3. 3 a) Domestic Institutional Controlling Ownership – positive influence
on R&D investment
In Korea, during and after the Asian financial crisis of the late 1990’s, large
proportions of domestic banks’ debt investments in those firms who were on the
brink of bankruptcy were converted into equity. At the same time there was a large
influx of public funds to these companies, through domestic institutional investors
for restructuring and work–out of these companies. In other words, the
government intervened and turned the financial institutions’ investments in these
companies from short term ones to long term ones. This had the influence of
74
turning the domestic institutional investors from short term investors into long
term investors – having a positive effect on R&D spending.
Domestic institutional investors also have superiority over the
information about the firms and the home country they invest in, thus are at a
comfortable position in investing long term (Kim and Chung 2003) and taking
risks. This has the effect of leading to more R&D investment which is a long term
investment. Most of the domestic institutional majority investors’ behaviors and
their influences on R&D investment may be explained by “Home bias.”
(Dahlquist and Robertsson 2001)
Home bias is not a bias of only foreign investors but also that of
institutional investors (Jeon 2003). This may lead to more R&D investment by
domestic institutional investors than foreign institutional investors as the
domestic institutional investors have home bias (investing more and longer term
in home country) and the foreign institutional investors do not invest in the long
term in that particular foreign country.
According to Tesar and Werner (1995), the share of foreign assets in
investment portfolios is still considerably smaller than standard theories would
predict. This means that there is existence of home bias in equity markets, meaning
equity investors invest more in domestic markets and in the longer term.
Also, investors are more optimistic about their own market (Shiller et al.,
75
1990). Because their forecast on performance is optimistic, their evaluation on
resources available for R&D investment is also optimistic, leading to an increase
in R&D investments.
Foreign investors’ share of stock is significantly positively related to the
stock turnover ratio, but Korean domestic institutional investors’ share showed
significantly negative relation to the stock turnover ratio. This means that domestic
institutional investors tend to invest in the longer term compared to the foreign
institutional investors whose investments are more liquid. (Kim and Chung 2004)
Hypothesis 3.3 a) Domestic controlling institutional ownership positively
influences R&D investment.
3.3 b) Foreign Controlling Institutional Ownership – negative influence on
R&D investment
Nonresidential institutional investors have shorter time horizons in
investing in the context of Korean Stock Market. (Kim and Wei 1999) They also
display such behaviors as herding and tend to be positive feedback traders. This
means that foreign controlling institutional investors are short term oriented and
76
liquid, compared to domestic controlling institutional investors.
Foreign institutional investors, as they face expropriation hazard by family
or controlling shareholders especially in the emerging economies where
institutional protection against such expropriation hazard is not sound enough,
may prefer to acquire immediate gains through dividend payments from the
financial slack of the company over long term gains such as those which can be
obtained as a return of R&D investments. (Easterbrook 1984, Jensen 1989, La
Porta et al. 2000, Shefrin and Statman 1984)
In theory, institutional investors have the fiduciary obligation to watch
over the managers’ behaviors on behalf of the shareholders and maximize the
firm’s long term value (David et al., 2001, Davis and Thompson 1994) such as the
one that can be obtained through R&D investment. But in reality, their behaviors
are constrained by the financial market – especially when investing abroad. To
attract investment from outside institutions such as foreign institutional funds and
maintain high stock value, firms tend to act in accordance with the short term goals
and financial expectations of the foreign institutional investors. In other words, in
accordance with the short term constraints of the financial market which the
foreign institutional investors come from (the short term tendency is accentuated
when the institutional investors invest in foreign countries), less long term
investment such as R&D is made.
77
Frequent trading and short-term focus of foreign institutional investors
encourage myopic behavior (Bushee 1998) because institutional money managers’
performance is evaluated frequently especially when they invest abroad, leading
to pursuit of short term performance and less long term investment such as R&D
investment.
Also, foreign institutional investors are easily influenced by earnings news
when trading (Bushee 1998), because the courts or fund sponsors use earnings as
the objective criterion to judge the soundness of an investment (Badrinath et al.,
1989) made in a foreign country. Thus managers have incentives to cut R&D
spending due to the pressure for intense short term earning in the presence of
foreign institutional investors who lack the long term view. This takes place in
order to avoid earnings reduction which may lead to large scale selling by foreign
investors and misevaluation of stock price (Graves and Waddock 1990) which
may distort the capital market evaluation of the firm that can be influenced by
foreign controlling institutional shareholders. In order to heighten earnings, the
management will invest less in R&D and divert the resources away from long term
investment and put them into financial measures of earnings (Bushee 1998).
In other words, the institutional ownership of foreign origins negatively
affects R&D spending of the company. In short, institutional investors become
78
short term oriented when they invest abroad. This is because when they invest
abroad, they tend to be less dedicated to the long term success of the companies
they invest in as they have other options of investment in different countries.
This means that foreign institutional investors in Korea tend to be short term, risk
averse, and financial earnings oriented (Yun 2008). In other words, foreign
institutional investors have substitutes for their investment in a foreign country
because when the stocks in a foreign country are not performing well, they can
move to another country rather than being dedicated to and staying in a specific
country. This means an easier escape from being tied to a certain country and a
certain firm (Kim and Chung 2004). This leads to a short term focus in the firms
with foreign institutional investment. The foreign controlling institutional
investors also react with sizeable and frequent changes in their portfolio to
macroeconomic changes in the foreign company, promoting the liquidity of the
funds they operate.
When foreign controlling institutional investors have more stock holding,
dividends payment increases while plant and equipment investment decreases.
This means that the funds available for R&D investment decreases as the
dividends are paid out of the R&D investment resources and the firm’s tendency
to invest in long term projects such as R&D investment also decreases. Thus the
managers, in the presence of foreign institutional controlling investors, become
79
risk averse, short term performance oriented, meaning less R&D spending, and
more retention. (Cho and Sul 2006)
To put it differently, increased dividends payment associated with higher
foreign institutional holding means that foreign institutional investors focus on
short term performance because dividends payment is related to short term
distribution, and have a tendency to decrease long term investments such as the
ones in machinery infrastructure which may be used for long term growth
potential. (Sul and Kim 2006). This means that higher foreign institutional
holding limits corporate investments such as payment on infrastructure or
equipment and end in less long term investment such as R&D investment.
As foreign institutional investors rise to be one of the main investors in the
Korean market, the possibility of hostile M&A also increases which pressures the
domestic management to decrease long term investment such as R&D and retain
cash in order to protect the control over the management. Also, high activity ratio
and efficiency ratio associated with foreign institutional investors lead to high
liquidity, short term bias and less R&D spending.
Also, herding is induced by information asymmetry (Kim and Wei 1999).
Thus foreign institutional investors investing in Korea who lack information
80
compared to domestic investors tend to herd more and act in a short term oriented
way. This is a part of liabilities of foreignness.
Hypothesis 3.3b Foreign controlling institutional ownership negatively influences
R&D investment.
4. Method
4.1 Sample
The total number of observations is 1233. The number of groups is 347.
The setting is the Korean market of manufacturing firms that are listed on the stock
exchange and end their fiscal year in December. The independent variable ranges
from the year 2002 to 2006. The dependent variable has 1 year gap from the
independent variable. The data are collected from the annual reports, KISVALUE-
III and TS2000.
4.2 Dependent Variable: R&D intensity
One year lag from the independent variables: From year 2003 to 2007
81
R&D Intensity: total research and development activity expense recorded
on the corporation’s annual report and not on the balance sheet or income
statement. [Total research and development activity expense/total sales*100]
In many cases, the corporations treat R&D expense not as a research
expense or ordinary development expense but as selling and administrative
expenses on the income statement. Thus in order to correctly reflect R&D focus-
the actual amount of expenses used on research and development - the author used
R&D expense recorded on the annual report.
R&D=α+βCS+γAS+δ(CS-CSm)(AS-ASm)+εDomestic+ζForeign…
The reason the moderating term is specified as (CS-CSm)(AS-ASm) and not
CS*AS is to avoid (none essential) correlation among CS, AS, and the moderating
term.
4.3 Independent variable: (Year 2002 to 2006)
1. What percentage of shares family shareholders own (CS) (Family
Ownership)
Family shareholders mean the owners who participate as president or CEO
and corporate shareholders who hold either the largest stake in the company or are
82
controlling shareholders, and their families. (Kim and Song 2011)
2. What percentage of shares affiliate companies own (AS) (Affiliate Ownership)
3. How affiliate shareholding moderates controlling shareholders’ effect on R&D
intensity (Moderation) (Int) (CS-CSm)(AS-ASm)
4. What percentage of the shares domestic controlling institutional shareholders
own. (Domestic Controlling Inst Ownership)
5. What percentage of the shares foreign controlling institutional shareholders
own (Foreign Controlling Inst Ownership)
4.4 Control variables
Listed age: Older firms tend to have longer investment time horizons
Asset_Log, (size): Larger sizes allow resources for more R&D
Debt to equity ratio: Higher debt ratio reduces the firms’ ability to stand long time
for the return of an investment, leading to low R&D investment. (Total debts /
total equity) *100 (Kim and Song2011)
Current ratio: High liquid ratio allows the firms to endure long term horizons for
83
the return on an investment, leading to higher R&D investment. (Current
assets/current debts)*100 (Kim and Song2011)
Tobin’s Q: (Market value of common stock and preferred stock + book value of
debt / book value of total asset)*100
Return on common equity: High profit is positively related to R&D investment
(Hoskisson et al. 2002) (Net profit/total equity)*100
Company beta: the market’s objective appraisal on the firm’s risk
Number of directors: The size of BOD affects the management’s risk taking
tendency.
Outside director ratio: High outside director ratio increases the management’s
preference for risk taking and R&D investment
Industry: Dummies were counted
Year: Dummies (from 2002 to 2006) were counted.
5. Data Treatment and Results
According to the correlation table, there are no multicolinearity problems.
84
Tobit regression is used because the dependent variables (R&D intensity) range
from 0 to 100. Also 0 included both missing and 0 values. Also, in Stata, Tobit
regression allows only the random effects model. Hypothesis one, the influence of
family ownership on R&D spending, proved insignificant. The moderating effect
of affiliate ownership on the relationship between family ownership and R&D
spending proved insignificant. The third hypothesis, positive effect of domestic
majority institutional investors on R&D spending, also proved insignificant. The
last hypothesis, the negative effect of foreign majority institutional investors on
R&D spending, proved significant.
85
Tabl
e IV
. Sum
mar
y st
atis
tics a
nd c
orre
latio
ns
Var
iable
M
ean
SD
1
2 3
4 5
6 7
8 9
10
11
12
13
14
15
1. R
&D
yea
r la
g 1
1.
46
2.04
1
2. F
amily
ow
ner
ship
(CS)
24
.98
17.2
-0
.05
1
3. A
ffili
ate
ow
ner
ship
(AS)
15
.07
18.4
-0
.07*
* -0
.62*
* 1
4. (
CS-
CSm
)*(A
S-ASm
) -1
96.2
1 31
9.32
0.
01
0.2*
* -0
.65*
* 1
5.
Dom
estic
Inst
ow
ner
ship
2.
51
6.83
-0
.04
-0.1
4**
0.09
**
- 0.08
**
1
6. F
ore
ign
Inst
ow
ner
shp
1.36
4.
06
-0.0
1 -0
.08*
* 0.
04
-0.0
2 -0
.04
1
7. L
iste
d a
ge
17.1
5 10
.15
-0.0
9**
-0.1
0**
0 0.
16**
0.
00
0.07
**
1
8. A
sset
_Log
19.1
8 1.
34
0.02
-0
.26*
* 0.
22**
-0
.06*
0.
05*
0.21
**
0.32
**
1
9. D
ebt
ratio
97.2
93
.54
-0.0
8**
-0.1
0**
-0.0
2 0.
02
0.06
* 0.
03
0.08
**
0.14
**
1
10. Curr
ent
ratio
197.
03
174.
24
0.08
**
0.08
**
-0.0
1 -0
.05*
-0
.07*
* 0.
02
-0.1
2**
-0.2
1**
-0.4
2**
1
11. To
bin
Q
0.88
0.
44
0.31
**
-0.2
**
0.07
**
-0.0
4 0.
01
0.10
**
-0.0
5*
0.14
**
0.15
**
-0.0
6*
1
12.
Ret
urn
onco
mm
oneq
uity
4.61
18
.91
-0.0
4 0.
04
0.03
-0
.04
0.02
0.
06*
-0.0
6*
0.20
**
-0.3
5**
0.09
**
0.02
1
13. Com
pan
y bet
a 0.
73
0.37
0.
15**
-0
.21*
* 0.
07**
-0
.01
-0.0
1 0.
05
0.01
0.
34**
0.
17**
-0
.14*
* 0.
30**
-0
.03
1
14. N
um
ber
of
direc
tors
5.
99
2.27
0.
05*
-0.1
3**
0.01
0.
08**
0
0.14
**
0.27
**
0.52
**
0.08
**
-0.1
1**
0.12
**
0.09
**
0.14
**
1
15. O
uts
ide
direc
tor
ratio
31.6
5 10
.27
0.15
**
-0.2
0**
0.09
**
-0.0
6*
0.04
0.
06*
0.11
**
0.43
**
0.18
**
-0.1
1**
0.19
**
0.01
0.
28**
0.
30**
1
*Sig
nific
ance
at
p<
0.0
5 le
vel , **
p<
0.01
86
Table V. Statistical findings from random effects tobit estimates
R&D year lag 1 Base Model Model 1 Model 2
_cons -1.9563 -2.0626 -2.0627
(1.2280) (1.2729) (1.2720)
Listed age -0.0166** -0.0195** -0.0193**
(0.0082) (0.0083) (0.0084)
Asset _ Log 0.1783*** 0.2094*** 0.2097***
(0.0666) (0.0685) (0.0685)
Debt ratio -0.0012** -0.0013** -0.0013**
(0.0006) (0.0006) (0.0006)
Current ratio 0.0003 0.0003 0.0003
(0.0002) (0.0002) (0.0002)
Tobin Q 0.0690 0.0533 0.0541
(0.0986) (0.0992) (0.0993)
Return on common equity -0.0031* -0.0031* -0.0031*
(0.0018) (0.0018) (0.0018)
Company beta 0.0438 0.0339 0.0328
(0.1083) (0.1084) (0.1086)
Number of directors 0.0283 0.0245 0.0247
(0.0283) (0.0239) (0.0239)
Outside director ratio -0.0008 -0.0012 -0.0012
(0.0042) (0.0042) (0.0042)
Family Ownership (CS) -0.0064 -0.0066
(0.0048) (0.0050)
Affiliate Ownership (AS) -0.0097** -0.0104*
(0.0044) (0.0060)
Domestic controlling inst Ownership -0.0008 -0.0009
(0.0060) (0.0060)
Foreign controlling inst Ownership -0.0151* -0.0150*
(0.0089) (0.0089)
(CS-CSm)*(AS-Asm) -0.0000
(0.0002)
*Significance at p<0.1 level, ** p< 0.05, *** p<0.01
87
6. Conclusion and Discussion
According to the traditional agency theory, the presence of large family
shareholders was supposed to bring reduced cost of monitoring and agency costs
and increased alignment of interests among the manager and family shareholders.
This may be conjectured to bring increased risk taking and R&D investment on
the part of management. However, the empirical analysis in this article shows that
the family shareholders have an insignificant effect on managerial risk taking and
R&D investment propensities. This may prove that the relationships among
ownership and managerial behaviors such as R&D investments can be understood
in a different light in an emerging economy such as Korea when compared to the
developed economies where traditional agency theory carries more weight and
better explanation.
In other words, light should be shed on the conflicts of interests between
minority shareholders and dominant family shareholders who are risk averse
because of their disproportionate exposure to the risk of a company and influential
on (or are themselves) the management. This risk averseness may lead to less R&D
investment. They also pursue private benefits of control that come from the cash
that may have been invested in R&D investment, resulting in R&D investment
88
distortion. They also seek safe succession of the control over the firm to following
generations, and this leads to conservative behaviors on the part of the family
managers. On the other hand, the families also seek to promote R&D intensity due
to their interests in the long term performance of the companies. They also have
more inside information that provides incentives and abilities on the part of the
family managers to seek more risk taking and consequently, R&D investment.
These conflicting interests may cause the effects of the families’ overall influence
on R&D intensity to become insignificant.
Also, the foreign controlling institutional investors negatively influence
R&D spending through their investment behaviors. In other words, they end up
decreasing R&D investment in the foreign market by having a myopic financial
earning focus due to liabilities of foreignness such as lack of information and
commitment, especially when the institutional investors from advanced economies
invest in an emerging economy such as Korea.
The effect of domestic controlling institutional investors proved to be
insignificant. The moderating influence of the affiliates on the families’ effect on
R&D intensity also proved insignificant. To conclude, corporate governance
mechanisms influential in the Korean setting such as foreign controlling
89
institutional shareholding tend to influence the R&D strategies of a firms in a
manner that is different from the domestic institutional investors.
91
Study III. CORPORATE GOVERNACE AND CORPORATE SOCIAL
RESPONSIBILITES IN THE KOREAN FIRMS
93
Study III. Corporate Governance and Corporate Social Responsibilities in Korean
Firms.
Abstract
The topic of Corporate Social Responsibility (CSR) comes under the light
as the society evolves to endow upon business organizations not only financial
responsibilities but also social responsibilities, especially in a country like Korea
where the economic system is changing rapidly. To put it shortly, a broad sense of
good corporate governance, stakeholder management including secondary
stakeholders, and Corporate Social Responsibilities accountable to diverse
stakeholders all share the same spirit. In this article, the relationships among the
governance mechanisms (outside directors of the board of directors, family
ownership and institutional ownership) and their effect on corporate social
responsibilities are investigated in the Korean setting in manufacturing firms filed
on the stock market and in the top 200 KEJI (Korea Economic Justice Institute)
index companies.
94
1. Introduction
Corporate Social Responsibility (CSR) is a blooming topic as capitalism
matures and increasingly confers upon businesses the roles which go beyond those
of financial performance. This topic comes into the spotlight especially in Korea
as the Korean business society evolves to include expectations and responsibilities
that have social underpinnings in considering corporate performance. When
considering the social responsibilities of firms, good corporate governance
practice is called for in the sense that corporate governance should serve the
interests of not only the capital providers but also of other stakeholders.
The Korean business sector underwent significant changes after the Asian
Financial Crisis in the late 1990s. Light was beginning to be shed on corporate
social responsibilities before the Asian Financial Crisis as the Korean firms,
especially the large Cheabol business groups controlled by the families, started to
take interests in the social responsibilities of corporation and their effects on the
firm’s reputation as well as its image. The interests decreased during the period of
Asian Financial Crisis due to lagging performance and reduction of resources
usable for such socially responsible activities (Lee and Choi 2002), but resurfaced
in due time as the large business groups recovered from the economic downturn.
95
Around the same time, more activities by the outside members on the board of
directors and institutional owners regarding corporate social responsibilities were
called for by the society at large due to economic democratization.
When corporate governance incorporates stakeholder management in
various senses, good formulation of corporate social responsibility policies and
their implementation become possible. In short, good corporate governance,
stakeholder management and corporate social responsibilities all share the same
spirit. In this article, the relationships among the governance mechanisms (outside
directors of the board of directors, family ownership and institutional ownership)
and their effects on corporate social responsibilities are investigated. The corporate
social responsibilities of Korean firms are found from the top 200 firms in the
KEJI (Korea Economic Justice Institute) index.
In order to start the discussion in this paper, it will be worthwhile to explore
the relations among corporate governance, stakeholder theory and corporate social
responsibility.
96
2. Literature Review
2.1 The Definitions of Stakeholders
In the narrow sense, stakeholders may mean “those groups without whose
support the organization would cease to exist” (1963 Stanford Research Institute,
quoted in Freeman,1984). In a broad sense, however, stakeholders mean any
related parties who affect or are affected by the process of the corporations
achieving its objectives. (Freeman 1984). Also, Dill (1975) states that stakeholders
mean people outside and inside the corporation who have ideas about what the
economic and social performance of the corporation should include.
In addition, the concept of primary stakeholders includes those groups with
direct and sound legal claims on organizational resources. (Clarckson 1995) In
contrast, the concept of secondary stakeholders alludes to those parties whose
claims on the organizational resources are less soundly established in law and thus
are less entitled to protection, or are protected through non binding criteria such
as ethical obligation or community loyalty. (Garriage and Mele 2004)
97
2.2 Stakeholder Management
When managing the stakeholder relations, it will be important to take into
account that all stakeholders participate in a corporation to benefit, and there is no
priority of one set of interests and benefits over another ( Mitchell et al., 1997)
such as the shareholders referred to in the agency theory. In other words,
stakeholder management refers to the distribution of organizational resources in
such a way as to consider the impact of such distribution on various groups within
and outside the firm (Freeman 1984)
Also, according to conservative instrumental stakeholder theory, the
primary reason to be socially responsible is because it maximizes the long term
value (Donaldson and Preston 1995, Jensen 2001) of a firm. Neglecting the
stakeholders could hurt the firm performance in the long run. (Luo 2005)
2.3 Corporate Governance and Stakeholder Management
Corporate governance in the narrow sense means the processes by which
the finance suppliers are guaranteed of their return on their investment (Shleifer
and Vishny 1996). Corporate governance in the broad sense means maximization
98
of the stakeholder objective (Charreaux and Desbrieres 2001). In another sense,
“Cadbury” corporate governance, a broader concept of corporate governance, is
concerned about holding the balance between social and economic goals and
between communal and individual goals (Claessens 2003). This broader concept
of corporate governance is more relevant to Corporate Social Responsibility.
Corporate Governance that relates to stakeholders in a different angle than
just an economic one points to the relationships between the corporation and the
stakeholders (Luo, 2005a) and encompasses the issue of corporate social
responsibility, dealing with culture and environment (Classens 2003) as well.
A broader concept of corporate governance that goes beyond being
accountable to solely the providers of capital and serving a wider spectrum of
stakeholders (Kolk and Pinkse 2010) as referred to above is burgeoning. In other
words, good governance entails responsibilities and due regards to the wishes of
all key stakeholders (Kendall 1999) and ensures that firms are answerable to all
stakeholders (Dunlop 1998)
Lastly, corporate governance defines a set of relationships among its board,
managers, shareholders and stakeholders. When considering the stakeholders, the
company should attempt to manage the firm’s influence on society and
environment in a responsible manner. (Maier 2005)
99
2.4 Corporate Governance, Stakeholder Theory and CSR
The broadening of the scope of corporate governance to include secondary
stakeholders resonates with CSR concept that is composed of many different
stakeholders. In other words, the notions of corporate governance and CSR are
intricately intertwined, defining the interaction between organization and its
internal/ external stakeholders (sociopolitical environment), with both being
increasingly considered as complementary prerequisites. (Jamali et al., 2008).
For example, the CSR may be construed as an outward expression of a Board’s
CG policies, invariably framed in the context of sound and effective CG policies.
(Jamali et al., 2008). Corporate governance may be the basis upon which sound
CSR policies are built, but good corporate governance has a lot to learn from key
principles of good CSR.
The conservative literature in this sense states that seeking shareholder
supremacy only is counter to stakeholder value maximization and in the end may
be counter to the shareholder value maximization itself (Charreaux and Desbrieres
2001). In other words, again, there is a trend of broadening of the concept of
corporate governance beyond accountability to the capital suppliers to a wider
audience of stakeholders (Kolk and Pinkse 2010).
100
Lastly, (McWilliams and Siegle 2002) corporate social performance is
often used as a synonym for CSR.
2.5 CSR Definition: There are a few definitions of social corporate responsibility.
(Jones 1999, Lee 2013)
1. Davis (1967): Business activities should not only seek the traditional
economic gains but also accomplish social benefits
2. Carroll (1979): The social responsibility of corporation includes the
economic, legal, ethical and discretionary expectations that a society has of
business at a given point in time.
3. Frederick (1986): The fundamental idea of ‘corporate social responsibility’
is that a business organization have an obligation to contribute to social betterment.
4. Wood (1991): the basic idea of corporate social responsibility is that
business and society are interrelated rather than remaining separate entities. Thus,
society naturally has certain expectations on appropriate business behavior and
consequences.
101
2.6 The Cases against CSR (Jones 1999, Lee 2013)
First, institutional perspective perceives that other institutions exist to
perform the type of functions required by CSR. The managers simply do not have
the resources or skills to implement public policy
Second, the logic of classical capitalism states that the sole objective of
corporations is to improve shareholder value only. To do otherwise would breach
the managers’ moral, legal and fiduciary responsibility.
2.7 The Cases for CSR (Garriga and Mele 2004, Lee 2013)
First, Instrumental Arguments camp considers that socially responsible
behavior will aid the creation of wealth for the company (Jones 1995). CSR is only
a means to achieve financial gains, considered a strategy to achieve competitive
advantage in the long term.
Second, Ethical Approach sees that corporations should promote CSR
because it is the morally right thing to do. This view thinks that the ethical
102
obligations should be considered above any other responsibilities including
economic ones. (Garriga and Mele 2004)
Third, under the Political theories, there are Corporate Constitutionalism
and Corporate Citizenship arguments. Corporate Constitutionalism means that
(Davis 1967) social responsibility of corporations rises from the amount of power
they have, and if they fail to exercise that power in a socially responsible manner,
other groups will step in to take those responsibilities. Corporate Citizenship, on
the other hand, endows strong sense of corporate responsibility towards the local
community and partners on the corporations (Garriga and Mele 2004). They
sometimes may take actions that is required of the government in case of
government failure.
Lastly, integrative theories mean that businesses rely on society for their
very existence, continuity and growth (Garriga and Mele 2004). These views
highlight the importance of public process rather than a few selected interested
groups which narrowly define the scope of corporate responsibility (Preston and
Post 1981)
103
3. Hypotheses
3.1 Outside Independent Member on the Board – positive influence on CSR
The Board of directors decides what are to count as the affairs of the
corporation. This involves assessing the stake and the power of each stakeholder
group (Freeman and Reed 1983 ). Thus the board composition affects stakeholder
relations and CSR.
The outside directors on the board serve as representatives and protectors
of a broad range of stakeholders. Their role is not only to improve the financial
performance of a company but also, more importantly, corporate social
performance (Wang and Dewhirst 1992). Pfeffer (1973) also states that the outside
board members have non profit goals (stakeholder theory) as well as profit goals
(Agency Theory) and maintain the balance between financial sustainability and
constituent legitimacy, enhancing CSR activities in the firm.
The board, especially the outside directors, no longer believe that the
shareholders are the only constituents they are responsible to. They recognize that
the targets of their responsibilities includes more than stockholders, and are
104
conscious about the needs and expectations of different constituents of their
company. (Wang and Dewhirst 1992)
Good corporate governance, also, may translate into assuring a good
number of outside independent directors on the board who are accountable to all
shareholders and stakeholders, thus eagerly formulating CSR activities themselves.
(Welford 2007) In fact, positive evidence of relationship exists between non-
executive directors and corporate performance and CSR. ( Ho 2005)
The outside directors on the company board increase racial, ethnic and
gender diversity within the firm, increasing minority employees’ representation
(Zahra et al., 1993). This improves the local community’s and employees’ welfare.
Outside directors who represent many different constituencies and are
knowledgeable about them and the local community, culture and environment may
help the firm to comply with the environmental standards in the local community
that they represent because they know it well, or increase CSR to avoid a loss of
reputation due to negative media exposure (Johnson and Greening 1999) which
they are very well aware could possibly hurt the firms’ public image and long term
performance.
The outside directors are hired to manage external constituencies in order
to build their reputation as decision control experts and protectors of a broad range
105
of stakeholders. They may also think that investments in the CSR areas, especially
in product and service quality, are in the best interests of the shareholders
themselves (Fama and Jensen 1983, Pfeffer 1973) as they necessarily consider the
firm’s service to the shareholders in relation to the social performance of the firm.
The presence of stakeholder representation on the corporate board through
outside directors may improve stakeholder welfare through direct means of
incorporating broader corporate governance definition and policy decision making
in the board activities, which improves CSR. (Jones and Goldberg 1982) The
representation of stakeholders on corporate boards through outside directors helps
the board to achieve its legitimacy as a means of promoting CSR by virtue of
formally incorporating non economic considerations into board decision making.
Outside directors’ presence also nurtures more open governance processes that
again insures formal representation of stakeholders, and this improves CSR (Jones
and Goldberg 1982). Stakeholder representation through outside directors on the
board is a good way to enhance perceived legitimacy with critical constituencies
and assure better CSR. (Luoma and Goodstein 1999)
Independent boards are representative of a larger number of constituencies
(Kesner 1987). Also it is becoming increasingly crucial to have sufficient non
executive independent outside directors to make the board trustworthy, and to be
106
independent of controlling shareholders in order to represent the broader spectrum
of stakeholders.
Hypothesis 3.1 Outside directors on the board of directors positively influence
corporate social responsibility of a firm
3.2 Family Ownership – positive influence on CSR
The presence of large family shareholders in Asia leads to a very different
situation compared to other regions. The interactions and prominence of various
stakeholders differ depending on the ownership structure (Kolk and Pinkse 2010)
such as dominant family shareholding.
Family shareholders treasure values such as product quality, protection of
and respect for the employees, involvement with the community, continuity and
integrity in the management policy, family sacrifice to financially support the
company and mostly, concern for long term orientation. These values enable the
family shareholders to bring more CSR activities into the company (Deniz and
Suarez 2005). For example, the employees are considered valuable resources that
107
the firm is interested in developing as the families attach more personal values to
the employees. They are also attached to the consumers. These factors influence
the family to dedicate more personal commitment to the firm’s success and the
employees’ well-being which becomes more congruent with a longer and a more
modern vision of CSR (Deniz and De Saa 2003). Also, corporate philanthropic
activities have social and interpersonal rewards and not only of a financial
character, and as the family shareholders are able to closely associate with these
personal values (Deniz and Suarez 2005), they have the tendency to increase CSR.
Family shareholders have a broad vision of CSR, possibly showing some
concern for society in general and not only in serving the family’s interests (Chua
et al., 1999). Graafland (2002) concludes that family shareholders assume long-
term added values in the firm they manage. Thus they may show more concern for
CSR than non family owned firms as the family has long term orientation.
Family shareholders care more about their reputation, thus fostering
special long term relationships with and a sense of responsibility towards
employees, suppliers and clients, which improves the stakeholders’ well- being. In
other words, they seek better reputation and greater legitimacy related to their
firms in the eyes of the public (Dyer and Whetten 2006). Also, the stronger the
determinants for cohesiveness of the company the families own, such as more
108
ownership, the more firms are likely to report having special relationships with
various parties external to the company (Uhlaner et al., 2004). The families also
exhibit broader stakeholder approach in managing their firms and approaching
CSR ( Uhlaner et al., 2004). These all have the tendency to bring increased CSR.
Lastly, the financial returns from social corporate performance accrue in
the long run while social performance initiatives may require the firms to make
sizable investments in the short run (Cox et al., 2004). In other words, family
shareholders who have a longer term perspective may seek increased investment
into corporate social performance that has a long term payoff structure.
Hypothesis 3.2 The family ownership in the firm positively influences corporate
social responsibility of a firm
3.3 Institutional Ownership – positive influence on CSR
Institutional investors have come under increasing external pressure to
include social performance in their investment selection (Cox et al., 2004). In other
words, institutional investors are subject to social, regulatory and institutional
109
factors (Ryan and Schneider 2002) which may influence the amount of importance
they attach to CSR. This means that they try to positively influence the CSR
activities of the firms they have invested in. Also, these external pressures for CSR
activities decrease the risks associated with investments in socially responsible
firms (Cox et al., 2004). Thus, as the institutional investors try to decrease the risks
associated with their investments, they again invest more in the socially
responsible firms and influence the firms they invested in to promote CSR.
Hypothesis 3.3 Institutional ownership positively influences corporate social
responsibilities of a firm.
4. Methods
4.1 Sample:
The total number of observations is 587. The number of groups is 211.
Independent Variables range from the year 2002 to 2006. The dependent variable
has a 3 year gap from the independent variable. The setting is the Korean Market
of manufacturing firms that are listed on the stock market, end their fiscal year in
110
December and are ranked among the top 200 in the KEJI index. Independent
variables and control variables are collected from the annual reports, KISVALUE-
III and TS2000
4.2 Dependent Variables
CSR 3 year gap from independent variables.
Korea Economic Justice Institute (KEJI) Index.
The top 200 Korean companies among the Index
Total points (75) : soundness (20), Fairness (11) Social volunteer contribution (7),
Consumer protection satisfaction ( 7), Environmental protection satisfaction (10)
Employees satisfaction (10), Economic development contribution (10)
4.3 Independent Variables: (year2002-2006)
Outside director ratio: Outside director ratio on the BOD
Family Ownership.: What percentage of shares the family shareholders own
Institutional Ownership: What percentage of shares institutional controlling
shareholders own
111
4.4 Control Variables
Listed age: Older firms tend to have longer investment time horizons
Asset_Log, (size): Larger corporations are more visible, thus subject to greater
external pressure for responsibility, and need to respond more openly to
stakeholder demands which brings increased CSR ( Luoma and Goodstein 1999)
Debt ratio: Higher debt ratio reduces the firms’ ability to stand long time for the
return of an investment, leading to low CSR investment. (Total debts / total
equity)*100 (Kim and Song 2011)
Current ratio: High liquid ratio allows the firms to endure long term horizons for
the return on an investment, leading to higher CSR investment. (Current
assets/current debts)*100 (Kim and Song 2011)
Tobin’s Q : (Market value of common stock and preferred stock + book value of
debt / book value of total asset)*100
Return on common equity: High profit is positively related to CSR (Hoskisson et
al., 2002) (Net profit/total equity) *100 .Profitability: More profitable firms
receive more pressure from the investment community (Kolk and Pinkse 2010 )
Number of directors: The size of BOD affects the management’s tendency for CSR.
112
Foreign: Foreign ownership affects CSR.
Industry: Dummies were counted
Year: Dummies (from year 2002 to 2006) were counted
5. Data Treatment and Results
According to the correlation table, there are no multicolinearity problems.
According to the Hausman test, unobservable time-invariant individual effects in
our error term and other explanatory variables are not significantly correlated. The
Hausman result suggests that there is no statistically significant difference in the
estimation method between the fixed effects and the random effects model. Thus
the hypotheses in this article were tested using the random effects model
(Generalized Least Square) and not the fixed effects model.
113
Tabl
e V
I. Su
mm
ary
stat
istic
s and
cor
rela
tions
Var
iable
Mea
n SD
1
2 3
4 5
6 7
8 9
10
11
12
1. C
SR 3
yea
rs g
ap
47
.48
2.38
1
2. o
utside
dire
ctor ra
tio
31
.65
10.2
7 0.
258*
* 1
3. F
amily
Ow
ners
hip,
24.9
7 17
.2
-0.3
02**
-0
.2**
1
4.
Inst
itutio
nal
Ow
ners
hip
3.
85
7.79
0.
047
0.06
9**
-0.1
63**
1
5. L
iste
d a
ge
17
.15
10.1
5 0.
053
0.11
1**
-0.0
95**
0.
037
1
6. A
sset
_Log
19
.18
1.34
0.
306*
* 0.
432*
* -0
.263
**
0.15
8**
0.32
2**
1
7. D
ebt ra
tio
97
.2
93.5
4 0.
02
0.18
4**
-0.0
97**
0.
065*
* 0.
077*
* 0.
136*
* 1
8. C
urre
nt rat
io
19
7.03
17
4.24
0.
057
-0.1
11**
0.
077*
* -0
.05*
-0
.115
**
-0.2
12**
-0
.423
**
1
9. T
obin
Q
0.
88
0.44
0.
296*
* 0.
187*
* -0
.199
**
0.05
8*
-0.0
5*
0.13
9**
0.14
8**
-0.0
64*
1
10.
Ret
urn
on
com
mon
equi
ty
4.
61
18.9
1 0.
073
0.01
4 0.
039
0.05
1*
-0.0
57*
0.19
6**
-0.3
45**
0.
088*
* 0.
022
1
11. N
umber
of direc
tors
5.99
2.
27
0.15
2**
0.29
9**
-0.1
25**
0.
072*
* 0.
267*
* 0.
519*
* 0.
075*
* -0
.108
**
0.11
8**
0.09
**
1
12. F
ore
igne
r ow
ners
hip
10
.22
15.2
4 0.
183*
* 0.
183*
* -0
.281
**
0.15
1**
0.10
5**
0.49
9**
-0.0
96**
0.
133*
* 0.
32**
0.
184*
* 0.
404*
* 1
*S
igni
fican
ce a
t p< 0
.05
leve
l , *
* p<0.
01
114
Table VII. Statistical findings from random effects Generalized Least Squares
estimates
CSR 3 year gap Base Model Model 1
_cons 32.8919*** 35.2260***
(2.2549) (2.3163)
Listed age -0.0051 -0.0070
(0.0130) (0.0127)
Asset _ Log 0.7426*** 0.6253***
(0.1204) (0.1243)
Debt ratio -0.0021 -0.0026
(0.0020) (0.0020)
Current ratio 0.0016** 0.0017**
(0.0007) (0.0007)
Tobin Q 0.9107*** 0.8624***
(0.3030) (0.2994)
Return on common equity -0.0063 -0.0047
(0.0068) (0.0068)
Number of directors -0.0210 -0.0215
(0.0513) (0.0511)
Foreign -0.0140 -0.0165*
(0.0088) (0.0086)
Outside director ratio 0.0210**
(0.0106)
Family ownership -0.0236***
(0.0076)
Institutional ownership -0.0090
(0.0111)
*Significance at p<0.1 level, ** p< 0.05, *** p<0.01
115
6.Conclusion
The fact that hypothesis two proved significant in an opposite direction
may mean that the family shareholders in Korea, rather than being responsible to
the stakeholders and taking a long term view in CSR, act with short term interests
that sacrifice a broad range of stakeholders’ interests (act against CSR). They care
less about their firms’ contribution to society as the system that checks the family
shareholders’ behaviors in the large Korean business groups is still somewhat
weak.
It may be acknowledged that although Korean family shareholders
contributed a great deal to the development of business groups that significantly
helped the Korean economy to grow spectacularly in the last half century, they are
not acting responsibly in the process of the evolution of the expectation on the
business sector by society. This means that as the role the society confers upon
the business sector evolves from that of simply supplying good quality products at
affordable prices and helping the country to economically overcome the
devastation of the Korean war through exports (Lee and Choi 2002, Lee 2013) to
that of contributing to the society and different constituencies by playing a social
role that is beyond solely the economic one, the family may not be living up to
expectations. However, the fact that outside directors are exhibiting a positive
116
influence on the corporate social performance of the firms proves that they may
play a counter acting role to the family’s policy over the firm’s corporate social
responsibility.
The fact that the hypothesis three proved insignificant may mean that the
concept of socially responsible investment may not yet have been firmly
established in Korea among investors and policy makers.
Finally, how these three actors may play out their roles in the upcoming
decades will be an interesting topic to follow academically.
117
Overall Conclusion
119
The first piece of this paper is based on agency theory and entrepreneurial
risk taking framework. The setting is North American semiconductor, electronics
and communications industries. The second piece of this paper is based on the
phenomena that is particular to the Korean economy (emerging) such as the
conflicts of interests between majority (family) and minority shareholders, affiliate
companies that are under the business group’s influence, and active investment
behaviors of domestic and foreign institutional shareholders in the stock market.
Lastly, the third piece of this paper is based on stakeholder theory which connects
the broad concept of corporate governance mechanisms with Corporate Social
Responsibilities (CSR).
The important point to notice in this paper is that the economic settings in
North America (NA) and Korea may be different in some sense and similar in
another sense. While the block holders in NA act as a police against the
management and reduce agency costs and promote risk taking and exploration-,
which phenomenon is congruent to agency theory, the family block holders in
Korea have insignificant effect over R&D intensity that is supposed to have
positive effect - based on risk taking increased by the family block holders, and
this is unlike how the agency theory dictates. Rather, this can be understood in
light of emerging economy setting where there is little separation of ownership
and management and where there are substantial conflicts of interests between
120
family block shareholders and minority shareholders, and the family shareholders
having long term perspective whose effect is in contrast to the presence of conflicts
of interests between the majority shareholders and minority shareholders . Also,
the influence of the family shareholders on CSR appears to be negative, which is
the opposite to where the prior literature points to, and this could come from the
fact that the most of the prior literatures studying the relationship between family
shareholding and CSR come from the advanced economy setting and thus may
require different interpretation in the emerging economy setting.
However, foreign institutional investors, who are mostly based in the
advanced economies and investing in the emerging economies, act in accordance
with how the classic literatures forecast such as the ones based on liabilities of
foreignness, resulting in short term financial earnings driven investment
tendencies and bringing reduction in R&D investment. The role of outside board
members on CSR in the emerging economy such as Korea also acts in accordance
with the prior literature developed in the advanced economy setting, thus carrying
the same effect in both the advanced economies and emerging economies. Thus it
will be an interesting academic task to carry out the investigation that either
distinguishes the phenomena that are different in the developed economy setting
(such as NA) and emerging economy setting (such as Korea) and require different
interpretation such as block shareholders in NA or family block shareholders in
121
Korea, or have the same effects and similar interpretations in the developed
economies and the emerging economies such as the role of board of directors on
CSR or the role of foreign institutional investors on R&D investment.
123
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국문초록
기업지배구조와 기업 활동
이다영
서울대학교 대학원
경영학과 경영학 전공
본 논문은 기업 지배구조 메커니즘과 탐사, 연구개발지출 및 기업의
사회적 책임과 같은 기업 행동과의 상관관계를 연구하는 것을
목적으로 한다. 제 1장은 북미 전자, 통신 및 반도체 산업을 대상으로
기업지배구조가 탐사에 미치는 영향을 연구한다. 제 1장은 기존
연구가 기업지배구조 메커니즘과 혁신에 관한 일반적인 상관관계는
충분히 연구하고 있지만, 기업지배구조와 탐사에 관한 연구는 충분히
하고 있지 않아 그 연결고리를 잊는다는데 그 의미가 있다. 그리하여
본 장에서는, 대리인 이론을 기반으로 하여 기업 지배구조가 탐사에
미치는 효과에 대해 연구한다.
제 2장에서는 한국의 상장제조기업을 대상으로 기업지배구조 툴과
연구개발 강도 간의 상관관계에 대해 조사한다. 특히, 제 2장에서는
150
소액주주와 지배주주간의 이해상충이 북미보다 훨씬 두드러지게
나타나는 한국에서 가족 지분율, 관계회사, 국내외 기관투자자가
연구개발 투자에 미치는 영향들에 대해 연구하여 의미가 깊다.
제 3장에서는 이해 당사자 이론을 기반으로 한 기업지배 메커니즘과
기업의 사회적 책임의 상관관계에 대해 논의하며, 한국의
경제정의지수(Korea Economic Justice Institute - KEJI) (Choi et al., 2010) 상위
200위에 해당하는 상장제조기업들에 대해 관찰한다. 제 3장은
종합경제지수(KEJI)와 한국시장에 관해 연구하는데 그 의의를 둔다.
표제어: 기업 지배구조, 기업의 사회활동, 탐사, 대리인 이론,
이해 당사자 이론
학번: 2007-30792