The effectiveness of board of directors’ characteristics in mandatory disclosure compliance
| Date | 09 May 2016 |
| Pages | 154-176 |
| DOI | https://doi.org/10.1108/JFRC-07-2015-0035 |
| Published date | 09 May 2016 |
| Author | Mishari M. Alfraih |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
The effectiveness of board of
directors’ characteristics in
mandatory disclosure compliance
Mishari M. Alfraih
Department of Accounting, The Public Authority for Applied Education
and Training, Kuwait, Kuwait
Abstract
Purpose – The purpose of this paper is to investigate the relationship between the characteristics of
the board of directors and mandatory disclosure compliance (measured by International Financial
Reporting Standards requirements) in rms listed on the Kuwait Stock Exchange (KSE) in 2010.
Design/methodology/approach – Several characteristics are used to assess the effectiveness of the
board of directors: number of members, gender diversity, CEO duality, multiple directorships, the
proportion of family members on the board and the presence of a member of the ruling family of Kuwait.
Mandatory disclosure compliance is measured using a self-constructed, item-based index. A regression
model tested the paper’s hypotheses.
Findings – After controlling for rm-specic characteristics, it was found that board size, gender
diversity and multiple directorships were positively correlated with compliance, while CEO duality and
the proportion of family members on the board were negatively correlated with compliance.
Research limitations/implications – Potential limitations stem from both the nature of the sample
and the dataset. The small sample reects the size of the KSE and the limited timeframe (a one-year
period). Nevertheless, this paper provides some interesting insights. A longitudinal study would
provide more comprehensive insights into the relationship between the characteristics of the board of
directors and mandatory disclosure compliance over time.
Practical implications – The ndings highlight the effectiveness of board of directors’
characteristics in promoting mandatory accounting compliance. As disclosure is fundamental for the
effective functioning of capital markets and sound investments, a direct implication is that the quality
of nancial reporting can be improved by taking these characteristics into account.
Originality/value – The paper contributes to the literature on the determinants of mandatory
accounting compliance. The ndings highlight the importance of the board of directors’ role in
enhancing transparency and ensuring the quality of nancial reporting. The ndings will be
particularly valuable to those involved in the appointment of directors, who should be aware of the
inuence of the conguration and characteristics of the board on compliance.
Keywords Boards of directors, Boards characteristics, Mandatory disclosure compliance
Paper type Research paper
1. Introduction
A global investor opinion survey conducted by McKinsey & Company reveals that
corporate governance, dened as an effective board of directors, broad disclosure and
clear powers and equal treatment for shareholders, remains a concern for investors and
that improving the quality of accounting disclosure should be the top priority for
policymakers (McKinsey & Company, 2002). Interestingly, the survey highlights that
governance is particularly important (compared to, for example, nancial indicators) in
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JFRC
24,2
154
Journalof Financial Regulation
andCompliance
Vol.24 No. 2, 2016
pp.154-176
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-07-2015-0035
emerging markets and that investors are willing to pay a premium for companies with
high standards. Such premiums averaged 12-14 per cent in North America and Western
Europe; 20-25 per cent in Asia and Latin America; and over 30 per cent in Eastern
Europe and Africa. Furthermore, 71 per cent of respondents identify disclosure as the
most important factor in their investment decisions, while 52 per cent identify the
quality of nancial reporting as a top priority for reform. Similarly, the Institute of
Certied Financial Analysts (ICFA) – a global association of investment professionals
with more than 100,000 members in over 135 countries – supports improved accounting
disclosure, arguing that high-quality reporting is essential for investors to understand
and analyze a company’s nancial performance (CFA, 2013).
An effective board of directors is at the heart of corporate governance structures in
healthy companies, and it plays a critical role in efcient capital markets. Its oversight
role and the experience it provides to management teams can help them to capitalize on
opportunities, operate efciently and provide timely, reliable nancial information to
investors (Quigley, 2009). Hashim and Devi (2008) claim that one of the most important
functions of the board is to ensure the quality of nancial reporting. It has therefore
received a great deal of attention in empirical research (Beattie, 2005). For example,
Albassam (2014) shows that corporate governance mechanisms are the main
determinants of differences in the level and quality of disclosure.
The board has the power to hire, re and compensate top-level managers; it also
raties and monitors important decisions. Fama and Jensen (1983) argue that the
exercise of these rights helps to ensure the separation of decision-making and control
powers at the highest level. Agency theory suggests that an effective board can lead to
a net decrease in agency costs, mitigate monitoring and bonding costs and thereby lead
to overall improvements in accounting disclosure (Fama and Jensen, 1983). In their
review of the literature, Hashim and Devi (2008) nd that its role in improving the
quality of nancial reporting is widely acknowledged. Finally, empirical studies use
structural characteristics (e.g. size, diversity, CEO duality, cross directorship, skills,
ethnicity, nationality and qualications) as appropriate and adequate proxies for
understanding its effectiveness (Ujunwa, 2012).
Although Kuwait was an early adopter of International Financial Reporting
Standards (IFRS), an investigation by Alfraih and Alanezi (2012) reveals that rms
listed on the Kuwait Stock Exchange (KSE) do not fully comply with mandatory
disclosure requirements. Signicant differences are observed between companies and
across accounting standards. In an investigation of the underlying factors, Alanezi and
Albuloushi (2011) document a signicant positive correlation between the existence of
an audit committee and compliance. Furthermore, Alfraih and Alanezi (2012) highlight
that audit quality can be an effective proxy for corporate governance.
Given these ndings, it is interesting to examine the inuence of other corporate
governance mechanisms on compliance. Therefore, this study examines the inuence of
various characteristics of the board of directors in KSE-listed companies. The following
characteristics are used: board size, gender diversity, CEO duality, multiple
directorships, the proportion of family members on the board and the presence of a
member of the ruling family of Kuwait (the House of Al-Sabah). Consistent with prior
research, compliance is measured using a self-constructed, item-based index. The index
is developed from the applicable IFRS for Kuwait in the year 2010. The ofcial
International Financial Reporting Standard Bound Volume for the year 2010 issued by
155
Mandatory
disclosure
compliance
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