Journal of Corporate Finance 7 Ž2001.

235–256
www.elsevier.comrlocatereconbase

Determinants of corporate ownership and board

structure: evidence from Singapore
Y.T. Mak ) , Yuan Li
Department of Finance and Accounting, Faculty of Business Administration, National UniÕersity of
Singapore, FBA2 17 Law Link, Singapore 117591, Singapore

Accepted 22 June 2001

Abstract

This study examines the determinants and interrelationships among corporate ownership
and board structure characteristics using a sample of Singapore listed firms. The institu-
tional environment in Singapore differs from that in many developed Western economies in
several important respects, including a weak market for corporate control, more concen-
trated stock ownership, and significant government ownership in many private sector firms.
Three characteristics—board composition, board leadership structure and board size—are
used to capture the monitoring ability of the board. These board characteristics are assumed
to be endogenously determined, together with two ownership characteristics, managerial
ownership and blockholder ownership. We use two-stage least squares regression to
estimate the determinants of board and ownership characteristics. Our findings indicate that
corporate ownership and board structures are related, and that there are significant interrela-
tionships among board structure characteristics. The proportion of outside directors is
negatively related to managerial ownership, board size and government ownership. The use
of a dual leadership structure is positively related to blockholder ownership, and negatively
related to regulation and to CEO tenure. q 2001 Elsevier Science B.V. All rights reserved.

JEL classification: G32; D23

Keywords: Corporate governance; Board of directors; Corporate ownership; Simultaneous equations

)
Corresponding author. Tel.: q65-874-3032; fax: q65-779-2083.
E-mail address: fbamakyt@nus.edu.sg ŽY.T. Mak..

0929-1199r01r$ - see front matter q 2001 Elsevier Science B.V. All rights reserved.
PII: S 0 9 2 9 - 1 1 9 9 Ž 0 1 . 0 0 0 2 1 - 9
236 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256

1. Introduction

The separation of ownership and control in publicly owned firms induces

potential conflicts between the interests of managers and stockholders ŽBerle and
Means, 1932.. Stockholders are interested in maximizing the value of the firm, but
managers’ objectives may also include enhancing personal wealth, job security,
and prestige. Managerial ownership ŽJensen and Meckling, 1976. and blockholder
ownership ŽKaplan and Minton, 1994. are two major governance mechanisms that
help control agency problems. In addition, Fama Ž1980. argues that the board of
directors is the central internal control mechanism for monitoring managers. Three
characteristics that affect the monitoring potential of a board are board size, board
composition and board leadership structure ŽJensen, 1993..
The role of corporate ownership and the board of directors as governance
mechanisms has been subject to considerable empirical analysis. One line of
research examines the empirical relationship between ownership structure and firm
value. For example, Morck et al. Ž1988. examine the relationship between inside
equity ownership and firm value, while McConnell and Servaes Ž1990. consider
the impact of both inside equity ownership and blockholder ownership on firm
value. While both studies find significant relationships between inside ownership
and firm value, the nature of the relationships are different. McConnell and
Servaes find a positive and significant relationship between inside ownership and
firm value for ownership between 0% and 5%, a positive but generally insignifi-
cant relationship for ownership between 0% and 25%, and no relationship between
25% and 100%. In contrast, Morck et al. find a positive and significant relation-
ship between 0% and 5%, a negative and significant relationship between 5% and
25%, and a positive and significant relationship between 25% and 100%. Another
line of research has examined the association between board characteristics and
firm performance Že.g., Baysinger and Butler, 1985; Rechner and Dalton, 1991.,
with mixed results. Underlying these studies on ownership structure and board
structure is the assumption that certain ownership or board structures are optimal
for all firms, and that firms that do not possess these characteristics will have
lower value or performance.
An alternative view is that ownership structure and board structure are endoge-
nously determined and that the costs and benefits of different ownership and board
structures vary across firms. Under this perspective, the corporate governance
mechanisms of a particular firm reflect the tradeoffs between costs and benefits for
that particular firm. Consequently, appropriate corporate governance mechanisms
vary systematically across firms. Under this view, there is likely to be no empirical
relationship between ownership or board structure and firm value. Studies that
have adopted this view include Demsetz and Lehn’s Ž1985. study of the structure
of corporate ownership, and Hermalin and Weisbach’s Ž1988. study of board
composition. However, in general, these studies only consider one or two gover-
nance characteristics, such as the proportion of outside directors or corporate
 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256 237

ownership. An exception is the recent study by Agrawal and Knoeber Ž1996.

which considers multiple monitoring mechanisms.
The present study is similar in spirit to the second group of studies in that we
assume that ownership and board structures are endogenously determined by
particular firm characteristics. Using a sample of 147 Singapore listed firms, we
use a simultaneous equations framework to examine the determinants of corporate
ownership and board structure of firms.
The major contribution of this study is that it uses a data set from an
institutional environment that is very different from that of more developed
Western economies, where most previous research has been conducted. These
differences include a weak market for corporate control, more concentrated stock
ownership, and significant government ownership in many private sector firms.
According to Shleifer and Vishny Ž1997, p. 740.: AMost of the available empirical
evidence won corporate governancex . . . comes from the United States . . . More
recently, there has been a great surge of work on Japan, and to a lesser extent on
Germany, Italy and Sweden . . . Unfortunately, except for the countries just men-
tioned, there has been extremely little research done on corporate governance
around the world . . . B The results from this study can enhance the understanding
as to how these institutional differences affect corporate governance.
Our findings indicate that corporate ownership and board structures are related,
and that there are significant interrelationships among board structure character-
istics. Firms with higher managerial ownership tend to have lower proportion of
outside directors. Where a board has a high proportion of outside directors, it is
more likely to be a small board. We also find that companies that are controlled by
the government Žreferred to in Singapore as government-linked companies, or
GLCs in short. tend to employ fewer outside directors. A dual leadership structure
is more likely to be employed by firms with higher blockholder ownership,
unregulated firms, and where the CEO has shorter tenure.
The remainder of the paper is structured as follows. Section 2 discusses the
institutional environment in Singapore, as it relates to corporate governance.
Following that, we briefly review theoretical arguments on how various ownership
and board characteristics affect corporate governance. In Section 4, we develop the
system of equations underlying the empirical analysis. Section 5 discusses the
sample and data used in the study. This is followed by the empirical findings and
discussion in Section 6. Section 7 concludes the paper.

2. Institutional environment

The institutional environment in Singapore, as it pertains to corporate gover-

nance, is fundamentally different from that of the developed Western economies,
such as the US and UK. The regulation of takeovers in Singapore involves a
mixture of self-regulation and legislative intervention. Similar to other East Asian
238 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256

economies, hostile takeovers whereby inefficient management teams are replaced,

are relatively rare. According to Chandrasegar Ž1995., there are two reasons for
this. First, the Asian way of doing business is different, with an avoidance of
aggression, confrontation and bitterness. Second, unlike their counterparts in
London and New York who are inclined to test the limits of the takeover laws and
regulations, merchant bankers are generally more cautious about involvement in
takeovers in Singapore, and they generally do not do so without first obtaining
prior clearance with the government agency charged with administering the
Takeover Code in Singapore, the Securities Industry Council ŽSIC.. Therefore, an
important external control mechanism in developed Western economies is gener-
ally not used for controlling managerial behaviour.
Another important difference between Singapore and other East Asian
economies, compared to developed Western economies, is the ownership struc-
tures of firms. In East Asian countries, blockholder ownership tends to be much
higher 1 and protection of minority stockholders’ rights weaker ŽLa Porta et al.,
1996..2
An important blockholder in the Singapore context is the government. In
Singapore, significant government ownership of private sector firms is relatively
common. For example, the government has more than 20% ownership of more
than 10% of listed Singapore firms. Unlike the market-based corporate governance
in countries such as US, the bank-based corporate governance in Japan and
Germany, and the family-based corporate governance in Hong Kong, corporate
governance in Singapore may best be described as a mix between family-based
and government-based. High ownership concentration in Singapore, especially
among government and family shareholders, also makes it difficult to mount

1
Table 1 shows that the mean and median total ownership by blockholders Ždefined as those owing
5% or more of the voting stock. in Singapore is more than 60%, a figure that is very high. High
blockholder ownership is typical of firms in East Asia. La Porta et al. Ž1996. reported that, on average,
the three largest stockholders own 49% of the voting stock of the 10 largest companies in Singapore,
54% in the case of Malaysia, and 46% for Thailand. These compare with 20% for the US, 22% for UK,
and 22% for Japan. In his study of the impact of board structure and ownership structure on hostile
takeovers, Shivdasani Ž1993. reports that the mean Žmedian. holdings of all blockholders Žthose who
own 5% or more of voting stock. is 14.11% Ž11.36%. for the hostile takeover targets, and 12.87%
Ž7.73%. for a control group of nontargets.
2
La Porta et al. Ž1996. compare stockholders’ rights across different countries. They use six
measures of stockholders’ rights—the existence of one-share-one-vote rules, whether proxy by mail is
allowed, whether shares are blocked before the annual general meeting, whether cumulative voting for
directors is permitted, whether legal mechanisms against perceived oppression by directors are
available, and the percentage of share capital required to call an extraordinary stockholders’ meeting.
The last five measures are termed Aanti-director rightsB. They find that US is the only country with a
perfect anti-director rights score of 5. In contrast, while anti-director rights for East Asian countries
such as Singapore, Malaysia and Thailand are better than in many other countries, the score of 3 for
each of these countries indicates that there are fewer stockholders’ rights in these East Asian countries
compared to the US.
 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256 239

takeover attempts without the support of these shareholders. This also helps
explain why hostile takeovers are so rare in Singapore.

3. Corporate ownership, board structure and corporate governance

The extent of managerial ownership affects the degree of congruence between
the interests of owners and management. The greater the percentage of stocks
owned by top managers, the more likely they will make decisions consistent with
maximizing stockholders’ wealth ŽJensen and Meckling, 1976. since that will
maximize their own wealth. Therefore, managerial ownership serves as an impor-
tant means of controlling agency problems.
Previous studies suggest that blockholder ownership improves corporate gover-
nance by facilitating takeovers Že.g., Shivdasani, 1993., removing managers who
do not maximise stockholders’ wealth Že.g., Kaplan and Minton, 1994., or
acquiring better information on managerial performance ŽBerle and Means, 1932..
If blockholders facilitate takeovers, then increased blockholder ownership may
lead to a decrease in other forms of monitoring, such as board monitoring. While
previous studies tend to suggest that blockholder ownership improves the monitor-
ing of managers and corporate governance Že.g., Kaplan and Minton, 1994;
Shivdasani, 1993., these studies are based on blockholder ownership that is
substantially lower than in East Asian countries. However, as Shleifer and Vishny
Ž1997. note, blockholder ownership has benefits as well as costs. It is possible that
previous findings on the positive impact of blockholder ownership on corporate
governance may not be generalisable to an environment with very high block-
holder ownership.
Further, since hostile takeovers are practically non-existent in Singapore,
blockholders are unlikely to improve corporate governance by facilitating
takeovers. Therefore, blockholders are more likely to improve monitoring by
increasing the ability to remove managers who do not maximise stockholders’
wealth or by acquiring better information about managerial performance. It can be
argued that the most direct and cost-effective manner for blockholders to do so is
to increase board independence, for example, by putting their own Žoutside.
directors on the board or by ensuring that the CEO does not also hold the
chairperson position. Indeed, Bathala and Rao Ž1995. argue that, even where there
is a strong market for corporate control, the costliness of takeovers suggests that
institutional investors will enhance managerial accountability through addition of
outside members to the board.
Traditionally, corporate ownership has been operationalised along two dimen-
sions—managerial ownership Že.g., Jensen and Meckling, 1976. and institutionalr
blockholder ownership Že.g., Shivdasani, 1993.. In this study, we include govern-
ment ownership as an ownership characteristic.
In Singapore, companies that are controlled by the government are incorporated
under the Companies Act and are run like any private commercial enterprises.
240 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256

These companies are referred to as government-linked companies ŽGLCs.. An

interesting issue is: Since GLCs are supposed to be run like other private
enterprises, to what extent does their governance, such as board structure, mimic
that of other private enterprises?
There are a number of possible reasons why GLCs may have weaker gover-
nance compared to non-GLCs. GLCs must respond to a Aset of signals from the
government to which private managers are less alert. These signals are not related
to profits but to goals associated with the well-being of the nation. These goals
may be in conflict with the commercial objectives of the enterpriseB ŽVernon,
1981.. Further, GLCs receive government funding but face less pressure in paying
dividends. GLCs are also likely to have easier access to different sources of
finance compared to non-GLCs.3 In addition, the government is expected to be the
more long-term investors in these GLCs, and is unlikely to support unsolicited
takeover offers for GLCs. The government is also likely to be less active in
monitoring their investment in GLCs. The weaker accountability for financial
performance, easier access to financing, lack of exposure to a market for corporate
control, and weaker monitoring by shareholders are likely to reduce the incentives
for GLCs to adopt strong governance.4 There is anecdotal evidence that board
appointments for GLCs are not based entirely on commercial considerations. It is
relatively common to have Permanent Secretaries Žthe highest ranking in the civil
service. or other senior government officers appointed as CEOs or directors of
GLCs.5

3
According to the Business Times Ž4 March, 1997.: AThe fact that wGLCsx are part-owned Žor
managed. by the Singapore government enables them to raise funds much more cheaply—by up to 4
percentage points lower—than othersB. The Minister of Finance ŽBusiness Times, 23 August, 1997.
noted that GLCs, being largely cash-rich, usually do not need to resort to raising bonds or bank
borrowings.
4
We lean towards the view that GLCs have different board structures because they have less
incentive to solve agency problems, rather than because they are subjected to other forms of monitoring
by the government. While direct evidence on this issue is difficult to obtain, indirect evidence appears
to support the argument that GLCs Žat least during the time of this study. are less efficient and face
greater agency problems compared to non-GLCs. For example, compared to non-GLCs, GLCs have
lower Tobin’s Q ŽPhan and Mak, 1999. and greater unrelated diversification ŽMak and Lim, 1999.. In a
recent interview ŽThe Straits Times, June 25, 1999, p. 1., the Chairman of Temasek Holdings, the
major government investment vehicle through which the government owns shares in GLCs, indicated
that Temasek Holdings will become more active in monitoring GLCs in future. The article states Žp. 1.:
ATemasek Holdings will take a more proactive approach in managing its sprawling group of
companies . . . No more will it take a passive, hands-off approachB wemphasis addedx. The article goes
on to list the following planned major changes to be adopted by Temasek Holdings in managing GLCs:
Ž1. closer monitoring of diversification plans, Ž2. specifying performance benchmarks, Ž3. limiting the
terms of chairmen and directors, and Ž4. keeping separate the appointments of the chairmen and the
chief executive officers.
5
For instance, there are four Permanent Secretaries sitting on the board of the Development Bank of
Singapore.
 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256 241

Boardman et al. Ž1986. examine the impact of government control on the value
of a Canadian pulp and paper firm. They find that the announcement of the
acquisition of control by the government resulted in a 25% reduction in the firm’s
equity value. Kole and Mulherin Ž1997. study the performance of 17 US corpora-
tions in which the US federal government held 35–100% of the common stock for
between 1 and 213 years during and following the Second World War. In contrast
to Boardman et al.’s finding, they do not find significant performance differences
between these government-controlled firms and other private sector firms in the
same industry. However, as Kole and Mulherin note, their sample firms were
subject to temporary ownership by the government resulting from the seizure of
enemy-owned assets, rather than full-fledged government ownership. Therefore,
their sample of government-controlled firms is somewhat different from the firms
used in Boardman et al.’s study, where the government purchased common stock
in the firm. Kole and Mulherin’s sample firms are also different from GLCs in
Singapore, which are actually established by the government, either directly as
private sector firms or through the privatisation of previous government depart-
ments and state-owned enterprises.
Previous studies have identified three main characteristics of the board that
affect its effectiveness in corporate governance—board composition, board leader-
ship structure, and board size. Fama and Jensen Ž1983. argue that outside directors
can arbitrate in disagreements among internal managers and perform tasks involv-
ing serious agency problems between managers and residual claimants, such as
setting executive compensation or searching for replacements for top managers.
When a single individual wears the AhatsB of both the CEO and chairman of the
board Žunitary leadership structure., managerial dominance is greatly enhanced
since that individual is more aligned with management than with stockholders.
Having separate persons holding the CEO and chairperson positions Ždual leader-
ship. enhances the monitoring ability of the board ŽJensen, 1993.. Further, large
boards are Aless likely to function effectively and are easier for the CEO to
controlB ŽJensen, 1993, p. 865.. Therefore, a board that is effective for monitoring
has relatively more outside directors, a dual leadership structure and is small
ŽJensen, 1993.. According to Brickley and James Ž1987., the market for takeovers
and boards of directors are substitute mechanisms for monitoring managerial
behavior and they suggest that more independent boards will be adopted where the
takeover market is weak. Jensen Ž1986. also argues that the external takeover
market serves as a last resort in protecting stockholders when the corporation’s
internal controls and board level control mechanisms are ineffective. In contrast, in
an environment where the market for corporate control is weak, internal controls
such as the board of directors become more important for corporate governance.
In this study, we argue that managerial ownership, blockholder ownership and
the structure of the board are endogenously determined because there are tradeoffs
between different ownership and board structure characteristics ŽDemsetz and
Lehn, 1985; Hermalin and Weisbach, 1988.. However, we treat government
242 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256

ownership as exogenous because we believe it is driven by factors outside the

system of equations. Many government-linked companies, such Singapore Air-
lines, Neptune Orient Lines, Development Bank of Singapore and Sembawang
Shipyard, were created as part of the development strategy of the Singapore
government. These new companies were established in areas where it was felt that
the private sector lacked capital or expertise.6 According to Singh and Ang Ž1999.,
GLCs were established to offset the dominance of multinational corporations,
compensate for the inability or unwillingness of local firms to undertake some
activities, and to guide the development of the economy.

4. Sample and data sources

In selecting the sample for the study, the following criteria are used:

1. The firms must be listed on the Stock Exchange of Singapore ŽSES. Main
Board or Second Board as at the end of 1995 .
2. Stocks of the firms must have been listed on the SES for at least 2 years as
of the end of 1995.
3. Annual reports for the firms are available.
4. The firms must not have negative profit before taxation for more than three
continuous years;
5. The identity of the chairman and CEO Žor equivalent position such as
managing director, general manager, or president. should be reported in the
annual reports.

In 1995, there were a total of 259 firms listed on the SES Main Board and
Second Board. Complete data for all the study variables were available for 147 of
these firms and they comprised the sample for the study. Fig. 1 summarises the
process of selecting the final sample of 147 firms for the study.
The data are obtained from several sources, including:

1. Annual reports of companies;

2. Financial Highlights of Companies on the Stock Exchange of Singapore
Ž1991–1995.; and
3. Datastream.

Due to the need to hand-collect detailed data on board characteristics and

ownership structure, the measurement of these variables is based on the 1995–1996
annual reports. For the other variables, average annual data for the 1991–1995

6
See the Ministry of Trade and Industry webpage, http:rrwww.gov.sgrmtirmti4.html.
 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256 243

Fig. 1. Sample selection.

period are used, with a minimum 2 years’ data used to calculate these variables
where firms were listed for less than 5 years.
The study variables were measured as follows:

Managerial ownership ŽMOWN.: percentage of ordinary shares held directly

by executive directors and shares in which they are deemed to have interests
244 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256

Blockholder ownership ŽBLOCK.: percentage of ordinary shares held by

shareholders who own 5% or more of these shares
Proportion of outside directors ŽOUTDIR.: number of outside directors on the
board divided by total number of directors7
Leadership structure ŽLEADER.: equals to 0 where chairman is also the
CEO, affiliate director, or grey director, and 1 otherwise
Board size ŽBSIZE.: total number of directors on board
Government ownership ŽGLC.: equals to 1 where a company is a govern-
ment-linked company with significant government stockholdings Ž20% or
more ownership., and 0 when it is a non-government-linked company 8
Regulation ŽREG.: equals to 1 for financial firm, and 0 for non-financial firm
Volatility ŽSD.: standard deviation of monthly returns calculated over 12
months immediately preceding the date of the annual report
Growth ŽAVCHTA.: average change in total assets between 1991 and 1995
Profitability ŽAVROE.: average return on equity between 1991 and 1995
Firm size ŽFSIZE.: natural log of sum of market value of equity plus book
value of preference and debt capital
Diversification ŽDIV.: percentage of subsidiaries and associates in industries
outside primary two-digit SIC code
Age of firm ŽAGE.: number of years firm has been in existence
Number of insiders ŽNID.: number of inside directors on the board
CEO tenure ŽTENURE.: number of years served by current CEO
Tobin’s Q ŽTOBINQ.: sum of market value of ordinary shares issued, the
total book value of debt and the book value of preference shares, divided by
book value of assets.

7
Outside directors are defined as directors other than executive directors, affiliated directors
Žfamily-related, former executive, inter-corporate directors., and grey directors Žbankers who make
loans or have other interests in the firm, firm lawyers, firm consultants or auditors, officers or directors
of firm’s suppliers and customers, civil servants in the case of government-linked companies.. In
Singapore, disclosure of directors’ background and qualifications is often not sufficiently detailed for
us to identify whether a director is truly independent. While we could clearly identify the non-executive
directors, it is much more difficult to determine whether a non-executive director is truly independent.
We used disclosure of shareholdings and related party transactions in annual reports, information on
directors and management in past and current annual reports of companies and their affiliates, and other
sources of information to try to identify independent outside directors. However, misclassification
errors are likely to remain. We expect these errors to be unsystematic, which would reduce the power
of our tests.
8
The identification of GLCs is based on the publication AFinancial Highlights of Companies on the
Stock Exchange of Singapore: 1991–1995B. In these GLCs, the government is the largest controlling
shareholder and is able to influence its governance, including its board of directors. We use a dummy
variable because we are interested in differences in boards between those companies where the
government is the controlling shareholder ŽGLCs. and those in which the government is not the
controlling shareholder Žnon-GLCs.. As explained in footnote 17, the use of alternative thresholds does
not significantly affect the results.
 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256 245

5. Empirical analysis

The choice of any of the five ownership and board variables may depend on the
choices of other ownership and board variables, and other factors, such as
government ownership, growth opportunities, firm size, and regulation. These
other factors are treated as exogenous variables. To develop the system of
equations, we draw on previous studies that have examined the determinants of
ownership and board structures of firms Že.g., Demsetz and Lehn, 1985; Agrawal
and Knoeber, 1996; Cho, 1998.. To estimate the system of simultaneous equations
empirically, we employ the two-stage least squares Ž2SLS. procedure ŽAgrawal
and Knoeber, 1996..
The endogenous variables in our system of equations are managerial ownership
ŽMOWN., blockholder ownership ŽBLOCK., proportion of outside directors
ŽOUTDIR., board leadership ŽLEADER., and board size ŽBSIZE.. Under our
system of equations, corporate ownership and board structure are dependent on
each other, and also on other exogenous variables, such as government ownership.
In developing the equations, we argue that firms that are subject to competitive
equity markets have incentives to adopt appropriate governance mechanisms to
control agency problems ŽJensen and Meckling, 1976.. Therefore, where agency
problems are significant, firms will adopt governance structures that are better at
controlling these problems. However, where firms are subject to less discipline
from the equity markets, such as where the government is a significant shareholder
or where the industry is highly regulated, they are likely to adopt weaker
governance structures. We define weaker governance to exist where managerial
ownership,9 blockholder ownership or the proportion of outside directors is low,
where the board has unitary board leadership, or where the board is large.
There are five equations in our system of equations for ownership and board
structure. In estimating the system of equations, we use the following variables as
instruments: GLC, REG, SD, AVCHTA, AVROE, FSIZE, DIV, AGE, NID,
TENURE, and TOBINQ. In order to satisfy the order condition to ensure that the
equations in the system are identified, each equation must exclude at least four of
the exogenous variables since each equation includes four endogenous variables as
regressors ŽKennedy, 1998.. The specification of Eqs. Ž1. – Ž5. below is partly
driven by the need to satisfy this order condition. Although, as far as possible, we
rely on theory or prior research to determine the exogenous variables to be
included or excluded in each of the equations, it should be recognised that the
results obtained may be sensitive to what exogenous variables are included.

9
Following Morck et al. Ž1988., we also consider the possibility that high levels of managerial
ownership may lead to managerial entrenchment and therefore weaken governance. We do this by
allowing for a non-linear relationship between managerial ownership and other governance mecha-
nisms in our sensitivity analysis ŽSection 6.3..
246 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256

The first equation relates to managerial ownership, which we measure as the

percentage of shares held by inside directors. Following the approach of Agrawal
and Knoeber Ž1996., we include the other four ownership and board variables as
explanatory variables. Based on Demsetz and Lehn Ž1985., Agrawal and Knoeber
Ž1996. and Cho Ž1998., we include SD, FSIZE, REG, TOBINQ and NID as
exogenous variables.10,11 We define regulated firms as those operating in the
financial sector.12 We also include a new explanatory variable—government
ownership. We expect managerial ownership to be negatively related to GLC, SD,
FSIZE and REG, and to be positively related to TOBINQ and NID. Therefore, we
have:
MOWNs b 0 q b 1 BLOCKq b 2 OUTDIRq b 3 LEADERq b4 BSIZE
q b5 GLC q b6 SD q b 7 FSIZEq b 8 REG
q b 9TOBINQq b 10 NID Ž 1.
The second equation relates to blockholder ownership. For blockholder ownership,
we include the same set of exogenous variables as managerial ownership, except
for NID. The directions of our predictions are similar to those for MOWN. We
have:
BLOCKs b 0 q b 1 MOWNq b 2 OUTDIRq b 3 LEADERq b4 BSIZE
q b5 GLC q b6 SD q b 7 FSIZEq b 8 REG q b 9TOBINQ Ž 2.
For proportion of outside directors, we expect it to be negatively related to GLC
and REG because increased government ownership and regulation reduce the
exposure of the firm to competitive equity markets, and therefore the incentives to
control agency problems. We also expect the proportion of outside directors to be

10
Agrawal and Knoeber Ž1996. use number of officers and directors, while we use number of inside
directors. The difference reflects the definition of the managerial ownership variable. While Agrawal
and Knoeber measure managerial ownership as ownership by all officers and directors, we measure it
as ownership by inside directors only.
11
The inclusion of NID as an exogenous variable is consistent with Agrawal and Knoeber Ž1996..
This recognises that more inside directors should be associated with greater managerial ownership.
However, it can be argued that NID should be endogenous because board size and proportion of
outside directors are endogenous. We rerun the analysis by averaging managerial ownership Ži.e.,
dividing ownership by number of inside directors. and excluding NID from the right-hand side. Our
results are not affected by this alternative specification of the managerial ownership equation. We thank
a reviewer for raising this point.
12
In Singapore, there are significant barriers to entry of foreign firms in the financial sector.
According to the Economist ŽThe Straits Times, September 15, 1998, p. 31.: ABefore the wAsian
economicx crisis, the ex-tigers wa term used to describe Asian economiesx all restricted the entry of
foreign-owned banks. They may have been open or semi-open to capital flows, but from an
institutional point of view, their financial systems were comparatively closed.B Consequently, these
firms are likely to be subject to lower product market competition, which may in turn affect corporate
governance for these firms ŽShleifer and Vishny, 1997..
 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256 247

positively related to growth, as measured by AVCHTA. Firms with growth

opportunities have greater information asymmetry and greater agency problems
ŽSmith and Watts, 1992., making strong boards more valuable. Therefore, we
have:
OUTDIRs b 0 q b 1 MOWNq b 2 BLOCKq b 3 LEADERq b4 BSIZE
q b5 GLC q b6 REG q b 7 AVCHTA Ž 3.
Similar to board composition, we expect the use of a dual leadership structure
ŽLEADER. to be negatively related to GLC and REG. A dual leadership structure
refers to the situation where the Chairman position is not held by the CEO, an
affiliate director or a grey director. We also expect dual leadership to be negatively
related to profitability, as measured by AVROE because CEOs are more likely to
also hold the chairperson’s position if the firm performs well ŽBrickley et al.,
1997.. We also expect dual leadership to be negatively related to TENURE
because a CEO is more likely to also become chairperson where he has served a
longer period ŽBrickley et al., 1997..13 Therefore, we have:
LEADERs b 0 q b 1 MOWNq b 2 BLOCKq b 3 OUTDIRq b4 BSIZE
q b5 GLC q b6 REG q b 7 AVROEq b 8TENURE Ž 4.
The last endogenous variable is board size. Recent studies ŽJensen, 1993; Yer-
mack, 1996. suggest that larger boards are less effective in monitoring managers.
We predict that board size is positively related to GLC, REG and FSIZE. We also
predict that diversified firms will have larger boards because of the need for more
directors with expertise in different areas of business, and that as firms become
more established, managers are promoted to directors and as a result, boards
become larger.14
BSIZEs b 0 q b 1 MOWNq b 2 BLOCKq b 3 OUTDIRq b4 LEADER
q b5 GLC q b6 FSIZEq b 7 REG q b 8 DIV q b 9 AGE Ž 5.

6. Empirical findings and discussion

6.1. DescriptiÕe statistics

The descriptive statistics for the study variables are shown in Table 1. Table 1
shows that managerial ownership ranges from 0% to 87.5%, with a mean Žmedian.

13
Strictly speaking, the logit specification should be used for the LEADER variable because it is
dichotomous. However, the 2SLS procedure included in standard statistical software packages assumes
that all the dependent variables are continuous. We do not use the logit specification for LEADER
because OLS is generally robust to the inclusion of limited dependent variables ŽGreene, 1997..
14
Mak and Ong Ž1999. find that 5 years after the initial public offering by firms, mean board size
increases from 6.84 to 7.31. The increase in mean board size is statistically significant Ž p- 0.05..
248 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256

Table 1
Descriptive statistics for study variables Žsample sizes147.
Variables Min Median Mean Max SD
Managerial ownership ŽMOWN. 0.00 0.04 0.22 0.88 0.26
Blockholder ownership ŽBLOCK. 0.20 0.63 0.62 0.98 0.15
Proportion of outside directors 0.10 0.57 0.57 1.00 0.21
ŽOUTDIR.
Leadership structure ŽLEADER. a 0 – 0.48 1 –
Board size ŽBRDSIZE. 4 8 8.04 14 2.08
Government ownership ŽGLC. a 0 – 0.190 1 –
Standard deviation of returns ŽSD. 0.00 0.08 0.10 0.55 0.08
Firm size ŽSIZE. ŽS$M. 40 386 10,433 126,944 10,467
Log of firm size ŽLNSIZE. 17.51 20.00 20.18 27.87 1.55
Regulation ŽREG. a 0 – 0.16 1 –
Number of inside directors ŽNID. 0 3 3.52 10 2.20
Average change in total assets y0.15 0.18 0.23 1.74 0.25
ŽAVCHTA.
Average return on equity ŽAVROE. y0.04 0.09 0.12 3.42 0.28
Firm diversification ŽDIV. 0.00 0.49 0.47 1.00 0.26
CEO tenure ŽTENURE. Žyears. 0 5 6.73 31 5.94
Age of firm ŽAGE. Žyears. 2 9 12.83 43 9.22
Tobin’s Q ŽTOBINQ. 0.63 1.27 1.85 18.79 2.24
a
For the binary variables, the mean represents the proportion of firm with value equals to 1 for the
variable.

of 21.7% Ž4%.. Blockholder ownership has a mean and median of over 60%. This
is much higher than for US firms Že.g., Shivdasani, 1993.. The proportion of
outside directors ranges from 10% to 100%, with a mean and median of around
57%. Therefore, on average, firms tend to have a slight majority of outside
directors. For board leadership, 48% of firms have a dual leadership structure.
Board size ranges from 4 to 14 board members, with a mean and median of around
8 members. In addition, 28 Ž19%. of the firms are GLCs. Firm size ranged from
S$40.3 million ŽUS$24 million. to S$127 billion ŽUS$75 billion., with a median
of S$386 million ŽUS$227 million.. Twenty four Ž16%. of the firms are financial
firms. An analysis of the sample by industrial sector codes used in theA Financial
Highlights of Companies on the Stock Exchange of SingaporeB Ž1991–1995.
reveals that all the industries are represented in the sample.

6.2. 2SLS regressions

Table 2 reports the results of the 2SLS regression analysis for the ownership
and board structure variables. For Eq. Ž1. relating to managerial ownership, the
direction of the relationship for the other ownership and board variables is
consistent with these mechanisms being substitutes for corporate governance. In
addition, the direction of the relationship for the other exogenous variables is
Table 2
Results of two-stage least squares Ž2SLS. regressions of ownership and board structure characteristics Ž ns147. a

Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256

MOWN BLOCK OUTDIR LEADER BSIZE
ŽManagerial ŽBlockholder ŽBoard ŽLeadership ŽBoard size.
ownership. ownership. composition. structure.
MOWN ŽManagerial ownership. 0.0740 w0.84x y1.1544 w0.02x 0.8728 w0.64x y5.4011 w0.40x
BLOCK ŽBlockholder ownership. y0.9991 w0.77x y0.0863 w0.92x 2.7563 w0.09x 0.4952 w0.95x
OUTDIR ŽProportion of outside directors. y16.2052 w0.58x y0.1201 w0.54x 1.5850 w0.18x y5.1112 w0.02x
LEADER ŽLeadership structure. y0.6243 w0.52x y0.0475 w0.82x y0.1440 w0.52x y1.3199 w0.49x
BSIZE ŽBoard size. 0.8147 w0.62x y0.0656 w0.22x y0.1121 w0.01x 0.1690 w0.26x
GLC ŽGovernment ownership. y0.1863 w0.50x 0.0661 w0.42x y0.2618 w0.06x 0.0775 w0.84x y1.3175 w0.44x
SD ŽVolatility. y0.0007 w0.80x y0.0000 w0.98x
FSIZE ŽFirm size. y0.0634 w0.60x 0.0140 w0.56x 0.1284 w0.62x
REG ŽFinancial vs. non-financial institutions. y0.2526 w0.66x 0.0272 w0.62x 0.1081 w0.24x y0.5552 w0.08x 0.8346 w0.22x
TOBINQ ŽCorporate value. 0.0215 w0.84x 0.0188 w0.30x
NID ŽNumber of inside directors. y1.8578 w0.60x
AVCHTA ŽGrowth in total assets. y0.0094 w0.94x
AVROE ŽProfitability. 0.3268 w0.13x
TENURE ŽCEO tenure. y0.0411 w0.07x
DIV ŽDiversification. 1.2219 w0.44x
AGE ŽAge of firm. 0.0131 w0.59x
R-squared 0.02 0.05 0.20 0.15 0.22
F-value Ž p . 0.304 Ž0.98. 0.878 Ž0.55. 4.834 Ž0.0001. 2.969 Ž0.005. 4.200 Ž0.0001.
a
Coefficients are showed for each variable, together with two-tailed probabilities in square brackets.

249
250 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256

generally consistent with predictions. However, none of the variables is statisti-

cally significant. The results for Eq. Ž2. relating to blockholder ownership are
generally similar to those for managerial ownership, with none of the variables
being significant. The weak findings for managerial and blockholder ownership
are consistent with those of Agrawal and Knoeber Ž1996. but conflict with the
findings of Demsetz and Lehn Ž1985..
For the proportion of outside directors ŽEq. Ž3.., we find that it increases with
decreasing managerial ownership Ž p - 0.05., smaller board size Ž p - 0.01., and
lower government ownership Ž p - 0.10.. The relationship between managerial
ownership and outside directors is consistent with these two governance mecha-
nisms being substitutes. However, an alternative interpretation is that an increase
in managerial ownership increases the ability to influence board appointments,
thereby reducing the presence of outside directors. Since smaller board size and
outside directors are both seen to enhance governance ŽJensen, 1993., the tendency
for smaller board size to co-exist with more outside directors is consistent with
these board attributes being complements. The presence of fewer outside directors
for government-linked companies is consistent with weak monitoring for these
companies, which may be attributable to weaker accountability for financial
performance, easier access to financing, lack of exposure to a market for corporate
control, and weaker monitoring by shareholders.
In the case of board leadership structure ŽEq. Ž4.., we find that a dual leader-
ship structure is associated with higher blockholder ownership Ž p - 0.10., unregu-
lated firms Ž p - 0.10., and shorter CEO tenure Ž p - 0.10.. The findings suggest
that blockholders improve the monitoring capacity of the board by requiring firms
to separate the CEO and chairperson roles.15 Regulated firms, defined as financial
firms in this study, are subject to lower product market competition. These firms
are more likely to have one person holding both the CEO and chairperson
positions, and therefore to have weaker boards.16 The finding that CEOs with
longer tenures are more likely to also hold the chairperson role is consistent with
Brickley et al.’s Ž1997. argument that dual leadership is a consequence of the
Apassing the batonB process in managerial succession. Finally, for Eq. Ž5., we find
that smaller board size is associated with more outside directors Ž p - 0.05., again

15
As indicated in footnote 4, one of the planned major changes to be adopted by Temasek Holdings
in managing GLCs is to keep separate the appointments of the chairmen and the chief executive
officers.
16
The Singapore Government has recently expressed concern with the corporate governance prac-
tices of banks, and especially the manner in which board members are appointed. As a result, it has
introduced new measures that require local banks to create a five-member Nomination Committee
ŽNC.. The function of the NC is to nominate all major appointments and reappointments , from board
members down to chief financial officer. This is to ensure that Athe best candidates get the jobs with
the mandate to make professional management decisions without being beholden to or hampered by
relationships with substantial shareholdersB ŽThe Straits Times, May 18, 1999, p. 1.. Members of the
NCs have to approved by the Monetary Authority of Singapore ŽMAS., the central bank in Singapore.
 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256 251

supporting the complementary nature of the relationship between board size and
outside directors.17

6.3. Non-linearities

To allow for possible non-linear relationship between managerial ownership

and the other ownership and board structure variables, we rerun the 2SLS
regressions in Table 2 by including a squared term for managerial ownership in
Eqs. Ž2. – Ž5.. The introduction of squared managerial ownership does not signifi-
cantly affect the results. All the variables that are significant in Table 2 remain
significant. The squared managerial ownership term is not significant for ŽEqs. Ž2.,
Ž3. and Ž5.. However, it is negative and significant Ž p - 0.01. for Eq. Ž4. relating
to leadership structure. This indicates that at higher levels of managerial owner-
ship, an increase in managerial ownership reduces the probability of a dual
leadership structure. This relationship may reflect the case of a founder-manager
having very higher managerial ownership and being able to dominate the board by
holding joint appointments of CEO and chairperson.

6.4. Corporate goÕernance and firm Õalue

The theoretical arguments in this paper assume that the corporate governance
mechanisms of corporate ownership and board structures are endogenously deter-
mined, have costs and benefits that differ systematically across firms, and are
therefore likely to be unrelated to firm value. In other words, if firms choose
monitoring mechanisms to maximise their value, then these choices should not be
related to firm value. The results previously shown in Table 2, which show that
ownership is related to board characteristics, support the endogeneity of corporate
governance mechanisms, especially board structures.
Agrawal and Knoeber Ž1996. found that once the endogeneity of corporate
governance mechanisms is recognised in the empirical analysis, monitoring mech-
anisms do not affect firm value. In this section, we conduct a similar analysis to
Agrawal and Knoeber Ž1996., by running OLS and 2SLS regressions of firm value
on various corporate governance mechanisms. The purpose of this analysis is
purely to provide further evidence as to whether the corporate governance
mechanisms are indeed endogenously determined, and therefore do not affect firm
value. For the 2SLS regression of firm value, we estimate it by adding Eq. Ž6. to
Eqs. Ž1. – Ž5., and including TOBINQ as an additional endogenous variable. Again,
as discussed before, the inclusion of variables in Eq. Ž6. is driven partly by the

17
We also rerun our analysis by using 30%, 40% and 50% as the threshold for determining whether a
company is a GLC. Our results are not sensitive to these alternative specifications for the GLC
variable.
252 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256

Table 3
Results of OLS and 2SLS regressions of firm value on ownership and board structure characteristics
Ž ns147. a
OLS regression 2SLS regression
MOWN ŽManagerial ownership. 0.8643 w0.76x 3.7337 w0.66x
MOWN 2 ŽSquared managerial ownership. y1.5420 w0.71x y1.5893 w0.24x
BLOCK ŽBlockholder ownership. 1.1338 w0.36x 4.5898 w0.82x
OUTDIR ŽProportion of outside directors. y1.0716 w0.25x y3.3345 w0.64x
LEADER ŽLeadership structure. 1.0530 w0.02x 1.6916 w0.74x
BSIZE ŽBoard size. 0.2194 w0.02x y0.2227 w0.92x
GLC ŽGovernment ownership. y0.7805 w0.13x y0.7275 w0.57x
FSIZE ŽFirm size. 0.2764 w0.04x 0.5520 w0.33x
AVCHTA ŽGrowth in total assets. y0.5515 w0.45x y1.6113 w0.37x
REG ŽFinancial vs. non-financial institutions. y0.7760 w0.13x y0.3752 w0.62x
R-squared 0.18 0.11
F-value Ž p . 2.905 Ž0.003. 1.665 Ž0.09.
a
Coefficients are showed for each variable, together with two-tailed probabilities in square brackets.

need to satisfy the order condition and partly by theory. We include the five
ownership and board variables that constitute the corporate governance mecha-
nisms being examined in this study. Following Agrawal and Knoeber Ž1996., we
also include squared managerial ownership. We also include GLC as an explana-
tory variable because Phan and Mak Ž1999. report that GLCs have lower Tobin’s
Q compared to non-GLCs. Agrawal and Knoeber also include firm R & D and
advertising expenditure to capture growth opportunities. Since Singapore firms
generally do not disclose R & D and advertising expenditures, we use AVCHTA as
a measure of growth opportunities. Consistent with Agrawal and Knoeber, we also
include FSIZE and REG in the Tobin’s Q equation.
TOBINQs b 0 q b 1 MOWNq b 2 MOWN 2 q b 3 BLOCKq b4 OUTDIR
q b5 LEADERq b6 BSIZEq b 7 GLC q b 8 AVCHTA
q b 9 FSIZEq b 10 REG Ž 6.
Therefore, the system of equations in this section treats the five corporate
ownership and board structure characteristics, as well as firm value, as endoge-
nous.18 In estimating this system of equations, we use the following variables as
instruments: GLC, REG, SD, AVCHTA, AVROE, FSIZE, DIV, AGE, NID, and
TENURE. The results of the OLS and 2SLS estimates for Eq. Ž6. are shown in
Table 3.

18
The use of a squared managerial ownership term is consistent with Agrawal and Knoeber Ž1996..
We did not include more complex specifications of the managerial ownership variable, such as the
piecewise specification used by Morck et al. Ž1988., because in regressions of Tobin’s Q against
managerial ownership, we could not detect any obvious turning points in this relationship.
 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256 253

The OLS regression shows that firm value is correlated with leadership
structure, board size and firm size. However, the 2SLS regression shows that none
of the corporate ownership and board variables are significantly associated with
firm value. This supports the argument that the ownership and board structure are
endogenously determined.19

7. Concluding comments

This study examines the determinants and interrelationships among corporate

ownership and board structure characteristics using a sample of Singapore listed
firms. The institutional environment in Singapore differs from that in many
developed Western economies in several important respects, including a weak
market for corporate control, more concentrated stock ownership, and significant
government ownership for many firms.
Our findings indicate that corporate ownership and board structures are related,
and that there are significant interrelationships among board structure character-
istics. Firms with higher managerial ownership tend to have lower proportion of
outside directors. This is consistent with a substitute relationship between manage-
rial ownership and the use of outsiders on the board. Where a board has a high
proportion of outside directors, it is more likely to be a small board. Since both
outside directors and a small board are indicative of stronger board monitoring
ŽJensen, 1993., this result supports a complementary relationship between the two
board attributes. However, we find that board leadership is not related to other
board attributes. Government-linked companies tend to employ fewer outside
directors. We interpret this finding as being indicative of government-linked
companies having less incentive to control agency problems because they have
weaker accountability for financial performance, easier access to financing, lack of
exposure to a market for corporate control, and weaker monitoring by sharehold-
ers.
We find that a dual leadership structure is more likely to be employed by firms
with higher blockholder ownership, unregulated firms, and where the CEO has
longer tenure. This relationship between blockholder ownership and board leader-
ship is consistent with blockholders influencing firms to separate the appointments
of CEO and chairperson, to increase board independence. Therefore, even though
there is a concern that blockholders in Singapore may be affiliated with manage-
ment or passive, we find that they have a positive influence on board indepen-

19
We experimented with alternative specifications of Eqs. Ž1. – Ž6., and find that the general
conclusion that corporate governance mechanisms do not affect firm value holds.
254 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256

dence. Regulated firms, which face weaker product market competition, have less
incentive to control agency problems. Our finding on the relationship between
regulation and board leadership is consistent with this argument because regulated
firms are more likely to have one person holding both the CEO and chairperson
positions. We also find that CEOs with longer tenures are more likely to also hold
the chairperson’s position. This is consistent with Brickley et al.’s Ž1997. argu-
ment that CEOs who Apass the testB eventually earn the additional title of
chairperson of the board.
Overall, the results of the study show that corporate ownership and board
structures are inextricably linked, and that board characteristics are interdependent.
Models that consider single ownership or board characteristics Žsuch as the
proportion of outside directors. may therefore be misspecified.
The major limitation in this study is the possible misspecification of the system
of equations estimated. The problem of model specification is complex if simul-
taneity is to be accommodated because, strictly speaking, Ž1. all relevant depen-
dencies for the predictor variables in the equation of interest have to be recog-
nised, and Ž2. correct model specification must be available for each equation
ŽWittink, 1998.. Unfortunately, existing theory on the determinants of corporate
governance mechanisms is not sufficiently complete to allow these conditions to
be satisfied.
The results of this study suggest possible avenues for future research. One
possibility is to replicate the present study in institutional environments having
characteristics similar to that in the present study. For example, features such as a
weak market for corporate control, high blockholder ownership, and government
ownership also exist in other East Asian economies such as Thailand and
Malaysia. A multi-country study that incorporate a larger sample of firms from
across different countries can provide more powerful tests of the relationships
examined in this study. Another interesting issue that can be explored is the extent
to which differences in legal environments, such as protection of minority
stockholders’ rights and restrictions on takeovers, affect corporate governance in
different countries.

Acknowledgements

We would like to acknowledge helpful comments from the two anonymous

reviewers, the editor ŽHarold Mulherin., Michael Bradbury, John Sequeira, and
seminar participants in the Department of Finance and Accounting, The NUS
Business School, National University of Singapore. The first author thanks the
National University of Singapore Academic Research Fund, while the second
author thanks the National University of Singapore Research Scholarship Fund for
financial support.
 Y.T. Mak, Y. Li r Journal of Corporate Finance 7 (2001) 235–256 255

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