Governance Structures of Initial Public Offerings in Australia

• DOI: http://doi.org/10.1111/j.1467-8683.2007.00639.x
• Date: 01 November 2007
• Author: Chander Shekhar,Geof Stapledon
• Published date: 01 November 2007

Governance Structures of Initial

Public Offerings in Australia

Chander Shekhar and Geof Stapledon*

We study the relationship between venture capital f‌inancing, CEO ownership, compensation

structure, and board structures for a group of Australian IPO f‌irms. Results suggest that board

structures are inf‌luenced by the industry the f‌irm is in, and presence of venture capitalists

results in a larger board with a higher number of outside directors. CEOs in non VC-backed

f‌irms own a signif‌icantly higher fraction of f‌irm shares, and CEO ownership is negatively

related to both board size and outside blockholders. VC-backed f‌irms are signif‌icantly more

likely to disclose information about CEO compensation packages, but the relationship

between actual board size and structure and disclosure is insignif‌icant. Finally, we also f‌ind

that venture capital backing signif‌icantly decreases the time to change-in-status for f‌irms,

whereby f‌irms cease to exist as independent entities.

Keywords: IPO, board structure, corporate governance, monitoring

1. Introduction

Corporate boards are generally entrusted

with the responsibilities of advising and

monitoring the actions of senior management

of companies. They are also typically respon-

sible for setting compensation plans for senior

management, and represent an important

element of f‌irms’ overall corporate governance

structure (Jensen, 1993; Gillan, 2006). In addi-

tion, f‌irms’ need to access capital markets

highlights the separation of ownership and

control and creates external governance struc-

tures (Gillan, 2006). The presence of a large

(external) shareholder, who typically has in-

centives to closely monitor the management,

also therefore forms an important aspect of

f‌irm corporate governance (Holderness, 2003).

Several other external corporate governance

mechanisms have also been identif‌ied.Among

these are the market for corporate control,

managerial labor markets, and productmarket

competition to name a few (see Gillan 2006 for

an extensive survey).

Board structuresand their effectiveness have

been studied extensively by researchers. The

vast majority of this literature takes the view

that boardsdevelop and evolve in response to a

f‌irm’s growth in size and as the f‌irm’s opera-

tions become more complex (Bhagat and Black,

1999). Larger f‌irms may also require larger

boards populated with directors with knowl-

edge pertinent to the f‌irms’ diverse operations

and with the ability to oversee tasks such as

setting executive compensation and auditing

(Agrawal and Knoeber, 1996). Results reported

by Yermack (1996) suggest that board size is

indeed positivelyrelated to f‌irm size. Lehn et al.

(2004) present results that suggest that the

board evolves in conjunction with changes

in the f‌irm’s growth opportunities. Gillan,

Hartzell and Starks (2003) provide further

insight by reporting strong industry inf‌luence

on cross-sectional variation in f‌irm governance.

Using a large sample, Linck et al. (2005) also

f‌ind that board size and structure is related to

f‌irm’s growth opportunities, R&D expendi-

ture, and to its stock return volatility. They also

report results that suggest that f‌irms structure

their boards so that they are consistent with

costs and benef‌its of board monitoring and

advising. In earlier, but related work, Hermalin

and Weisbach (1991) and Baysinger and Butler

(1985) present empirical evidence suggesting a

positive association between boardmonitoring

and f‌irm performance.

*Address for correspondence:

School of Law, University of

Melbourne, Carlton, VIC 3010,

Australia. Tel: +613-9642-2062,

Fax: +613-9642-2092; E-mail:

geof.stapledon@issproxy.com

GOVERNANCE STRUCTURES OF INITIAL PUBLIC OFFERINGS IN AUSTRALIA 1177

Volume 15 Number 6 November 2007

© 2007 TheAuthors

Journal compilation © 2007 BlackwellPublishing Ltd, 9600 Garsington Road,

Oxford, OX4 2DQ, UK and 350 Main St,Malden, MA, 02148, USA