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Disclosing Directors

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Abstract

Is there a correlation between the composition of the board of directors and the quantity and quality of information disclosed to the market, and in particular with respect to the disclosure of privileged, price-sensitive information? Our work examines this question with respect to the Italian Stock Exchange, also considering the role of minority-appointed directors in light of the Italian rules on slate voting that facilitate the election of directors by institutional investors and other minority shareholders. Based on a unique dataset of hand-picked data, we answer the basic research question in the affirmative. Independent directors and minority-appointed directors appear to have a positive impact on the amount and, to some extent, quality of disclosure, in particular if they have specific professional and educational qualifications (‘highly skilled directors’). We also tested if the market reacts to the information that is made public in order to consider the possible objection that outside directors simply require more disclosure of unimportant information. The event studies we conducted, however, indicate abnormal returns in the correspondence on the announcements we considered. The study sheds light on the role of independent and minority-appointed directors suggesting that they foster corporate transparency.

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Fig. 1

Source Consob (2018)

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Source Consob (2018)

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Source Consob (2018)

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Notes

  1. Marchetti et al. (2017).

  2. Marchetti et al. (2017).

  3. Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC [2014] OJ L 173/1–61.

  4. Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014 on criminal sanctions for market abuse (market abuse directive) [2014] OJ L 173/179–189.

  5. Aside from the well-known ‘co-determination’ system (Mitbestimmung) in Germany, that mandates the representation of employees on the board of supervisors of larger corporations, several jurisdictions, both in Europe and abroad, promote board diversity by providing for the appointment of independent and minority directors. Just to mention a few examples: in the UK, for premium listed companies, Listing Rule 9.2.2.ER requires that the election of any independent director must be approved by the ‘independent shareholders’ (i.e., shareholders different from the controlling shareholder). In Spain, Art. 243 of the Real Decreto Legislativo 1/2010 allows (minority) shareholders of sociedades anónimas to group together in order to appoint one or more directors. As for the US, independent directors have gained particular prominence in listed corporations, as stock listing standards, in conjunction with the Sarbanes–Oxley Act and the Dodd-Frank Act, require a majority of the board to be independent. Additionally, case law and regulatory evolution have facilitated proxy access, making it easier for small shareholders to indicate candidates for the board of directors. Other interesting examples are offered by Brazil and Israel: Art. 141 of the Brazilian Corporate Law provides for cumulative voting to ensure board representation for minority shareholders (voto múltiplo) and also reserves to minority shareholders that hold a minimum threshold of voting rights the appointment of a minority director, while in Israel the appointment of outside directors requires approval by the majority of the minority shareholders (see Art. 239, Israeli Corporate Law). For further references, see Davies and Hopt (2013); Davies et al. (2013); Gordon (2007); Recalde Castells et al. (2013); Salam and Prado (2011); OECD (2012).

  6. Ex multis, Fama and Jensen (1983).

  7. Beasley (1996).

  8. Brickley and James (1987); Weisbach (1988); Kosnik (1990); Lee et al. (1992); Bushee and Noe (2000); Erhardt et al. (2003).

  9. See, on the topic, Courtis (1979); Chow and Wong-Boren (1987); Wallace et al. (1994); Hossain, Perera and Rahman (1995); Meek et al. (1995); Raffournier (1995); Depoers (2000).

  10. Chen and Jaggi (2000).

  11. Ho and Wong (2001).

  12. Haniffa and Cooke (2002).

  13. Eng and Mak (2003).

  14. Armstrong et al. (2014).

  15. Wang et al. (2015).

  16. Schipper (1989) defines earnings management as ‘a purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain (as opposed to, say, merely facilitating the neutral operation of the process) […].’ (emphasis added).

  17. Quan and Li (2017).

  18. Cao et al. (2014).

  19. See Hoskin et al. (1986); Francis et al. (2002).

  20. Inter alia, see Francis et al. (2002).

  21. Regoli (2006), pp 407–414; Belcredi and Caprio (2015), pp 20–24.

  22. The Code requires the board of directors to evaluate the independence of its non-executive members ‘having regard more to the substance than to the form’ and provides an illustrative and non-exhaustive list of independence criteria. In particular, a director is normally not considered independent if (i) she controls, directly or indirectly, the issuer or is able to exercise a dominant influence over the issuer, or participates in a shareholders’ agreement through which one or more persons can exercise a control or dominant influence over the issuer; (ii) she is, or has been in the previous three fiscal years, a significant representative of the issuer, of a subsidiary having strategic relevance or of a company under common control with the issuer, or of a company controlling the issuer or able to exercise a considerable influence over the issuer, also jointly with others through a shareholders’ agreement; (iii) if she has, or has had in the previous fiscal year, directly or indirectly, a significant commercial, financial or professional relationship with the issuer, one of its subsidiaries, or any of its significant representatives, or with a subject who controls the issuer, or if she is, or has been in the previous three fiscal years, an employee of the above-mentioned subjects; (iv) if she receives, or has received in the previous three fiscal years, from the issuer or a subsidiary or holding company of the issuer, a significant additional remuneration compared to its fixed remuneration, also in the form of participation in incentive plans linked to the company’s performance, including stock option plans; (v) if she was a director of the issuer for more than 9 years in the last twelve years; (vi) if she is an executive director of another company in which an executive director of the issuer holds the office of director; (vii) if she is shareholder or quotaholder or director of a legal entity belonging to the same network as the company appointed for the auditing of the issuer; (viii) if she is a close relative of a person who is in any of the positions mentioned above. See generally Regoli (2008).

  23. Assonime, Emittenti Titoli S.p.A. (2018), pp 34–35, 185, Table 51. The criterion that is more frequently not applied is the 9-year limit to the tenure of a director as a condition to be qualified as independent (considering that, under Italian law, the board is generally appointed every 3 years).

  24. See Richter (2016); Alvaro et al. (2012); Belcredi et al. (2013).

  25. See Calvosa and Rossi (2013), pp 13 et seq.

  26. See also Cerved (2018).

  27. See Linciano et al. (2017).

  28. See Linciano et al. (2017).

  29. See, e.g., Macrì (2010); Enriques and Gilotta (2015).

  30. Montalenti (2013); Gilotta (2012).

  31. See Marchetti (2007), pp 143 et seq.

  32. Guglielmetti (2018); Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili (2017).

  33. See, e.g., Ventoruzzo (2012).

  34. Ventoruzzo (2017), p 14.

  35. To be more precise, additional limitations might apply to primary insiders and might derive from contractual obligations, but the general framework is the one briefly described in the text.

  36. Art. 17(4) MAR. See Moloney (2014), pp 730 et seq.

  37. The definition of inside information has been the focus of several cases decided by the European Court of Justice. See infra in the text for a discussion of the relevant decisions. For a discussion of the notion of inside information, also in a comparative perspective, see Ventoruzzo (2014).

  38. See Moloney (2014), pp 718 et seq.; Ventoruzzo and Picciau (2017), pp 186 et seq; Hansen (2016), pp 3 et seq. See also Di Noia and Gargantini 2012), pp 485 et seq.

  39. See generally Moloney (2014), pp 722–723.

  40. See in particular ESMA (2017); ESMA (2016).

  41. Consob (2017).

  42. ECJ Case C-45/08 Spector Photo Group NV v. CBFA, ECLI:EU:C:2009:806. For a discussion of this case, see, e.g., Klöhn (2010); Hansen (2010).

  43. ECJ Case C-19/11 Gelt v. Daimler, ECLI:EU:2012:397. See Krause and Brellochs (2013); Hellgardt (2013).

  44. The rationale might be that the mere knowledge of an event affecting volatility might allow to speculate in derivative instruments: see ECJ Case C-628/13 Lafonta v. Autorité des marchés financiers, ECLI:EU:C:2015:162. On this decision see Klöhn (2015).

  45. Cass. 16 October 2017, no. 24310.

  46. Cass. 14 February 2018, no. 3577.

  47. Key Developments provides structured summaries of material news and events that may affect the market value of securities. It monitors over 100 types of disclosures including executive changes, M&A rumours, changes in corporate guidance, delayed filing. This database is also used by Cao et al. (2017) as a source of a firm’s disclosure.

  48. Glaum et al. (2013).

  49. Inter alia, see Cooke (1989); Wallace et al. (1994); Welker (1995); Leuz and Verrecchia (2000); Heflin et al. (2005); Lapointe-Antunes et al. (2006).

  50. Lang et al. (2006); Leuz (2006).

  51. Leuz et al. (2003); Leuz (2006).

  52. See Haw et al. (2004).

  53. Lang and Lundholm (1996).

  54. Kothari et al. (2009).

  55. Petersen (2009).

  56. See Fan and Wong (2002); Healy and Palepu (2001).

  57. Jiang et al. (2013).

  58. Matsunaga and Yeung (2008).

  59. Jiang, Wan and Zhao (2015).

  60. The reader should be aware that in no way do we believe that a more formally educated and/or professionally qualified individual is a ‘better’ director. We have no doubts, to speak about our own profession, that a very successful and accomplished academic can be an utterly awful director, and a person who started working early cutting her teeth ‘on the street’, without a long formal education and lacking any specific professional qualification, can be an excellent board member. More simply, our aim is to test whether those personal characteristics might have an impact on disclosure. We hope that the labels we picked for short, ‘high skilled’ and ‘low skilled’, do not detract the reader from the substance of our hypothesis or are not interpreted as expressing a value judgment.

  61. The two SDIRs we use to collect privileged disclosures are emarketstorage and 1info.

  62. See Francis et al. (2002).

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Acknowledgements

We would like to thank Angelo Borselli and Maria Lucia Passador for excellent research assistance. We also thank Alessandro Delledonne for providing institutional details about privileged information. Massimo Menchini read an earlier draft of this work and offered useful comments; while Duccio Regoli shared several ideas on the role of independent directors with the authors.

Author information

Authors and Affiliations

  1. Professor of Law, Department of Legal Studies, Bocconi University, Milan, Italy

    Marco Ventoruzzo

  2. External Scientific Member, Max Planck Institute, Luxembourg, Luxembourg

    Marco Ventoruzzo

  3. Research Associate, ECGI, Brussels, Belgium

    Marco Ventoruzzo

  4. Emeritus Professor of Law, Department of Legal Studies, Bocconi University, Milan, Italy

    Piergaetano Marchetti

  5. Assistant Professor of Accounting, China Europe International Business School, Shanghai, People’s Republic of China

    Gianfranco Siciliano

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  1. Piergaetano Marchetti
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  2. Gianfranco Siciliano
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  3. Marco Ventoruzzo
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Appendix: Empirical Definition of the Variables and Sources

Appendix: Empirical Definition of the Variables and Sources

Variables

Definition

Sources

disclosure

Natural log of one plus the total number of press releases for firm i at year t

KeyDevelopment

ind_dir

Natural log of one plus independent directors over board members for firm i at year t

Corporate Governance Report

for_sales

Percentage of foreign sales over total sales for firm i at year t

Datastream

us_listed

1 if firm i in year t has shares listed on United States stock markets

Datastream

concentration

Natural log one plus of HH index using relevant ownerships data of firm i at year t

Consob

size

Natural log of one plus total assets for firm i at year t

Compustat Global

roa

Natural log of one plus return on assets for firm i at year t

Compustat Global

ret_vol

Natural log of one plus standard deviation of firm i’s daily returns in year t

Datastream

min_dir

Natural log of one plus  % minority independent directors for firm i at year t

Corporate Governance Relation

pages

Natural log of one plus pages in privileged information for firm i at year t

SDIR (1info, emarketstorage)

info_priv

1 if firm i reports privileged information

SDIR (1info, emarketstorage)

Year

Fiscal years end as reported in Compustat Global

Compustat Global

Industry

2-digit sic codes

Compustat Global

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Marchetti, P., Siciliano, G. & Ventoruzzo, M. Disclosing Directors. Eur Bus Org Law Rev 21, 219–251 (2020). https://doi.org/10.1007/s40804-019-00172-w

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  • DOI: https://doi.org/10.1007/s40804-019-00172-w

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