Is There a Relationship between Firm Performance, Corporate Governance, and a Firm's Decision to Form a Technology Committee?

• DOI: http://doi.org/10.1111/j.1467-8683.2007.00645.x
• Author: Somnath Bhattacharya,Ronald F. Premuroso
• Published date: 01 November 2007
• Date: 01 November 2007

Is There a Relationship between Firm

Performance, Corporate Governance,

and a Firm’s Decision to Form a

Technology Committee?

Ronald F. Premuroso* and Somnath Bhattacharya

Some S&P 500 f‌irms have recently formed technology committees at the board-level. This

study investigates the corporate governance and f‌irm f‌inancial performance implications of the

voluntary formation of technology committees by members of the S&P 500. Using f‌inancial

performance and structure-related variables, the results of the study suggest that f‌irms’ cor-

porate governance ratings are signif‌icantly and positively related to their decisions to volun-

tarily form technology committees. Specif‌ically, f‌irm performance ratios such as return on

assets, return on equity, and net prof‌it margin appear to be associated with f‌irms’ decisions to

form board-level technology committees. These f‌indings have post Sarbanes-Oxley corporate

governance and performance implications and should be relevant for stakeholders such as the

SEC, various stock exchanges, and the f‌irms themselves.

Keywords: Board committees, board composition, board of directors, board quality measure-

ment, board structure, corporate governance, f‌irm f‌inancial performance, information technol-

ogy, intellectual property, research and development, science and technology

1. Introduction

The multitude of high-prof‌ile US corporate

scandals over the past decade have

increased both public and shareholder scru-

tiny of corporations. The regulatory reforms

mandated by the Sarbanes-Oxley Act of 2002

(SOX hereafter) and adopted by the Securities

and Exchange Commission (SEC hereafter)

represent “the most important securities legis-

lation since the original federal securities laws

of the 1930s” (then SEC Chairman William H.

Donaldson, September 17, 2003). “One of

SOX’s objectives is to enhance corporate gov-

ernance by promoting board independence

and imposing new obligations and responsi-

bilities on the audit committee” (Linck et al.,

2005, 30). The provisions of Sections 401 (Dis-

closures in periodic reports), 404 (External

auditor’s attestation of management’s report

regarding internal controls) and 409 (Real time

issuer disclosures) of SOX have also increased

the pressure on boards of directors of

US-traded f‌irms to improve overall corporate

governance.

While all US f‌irms have formed audit and

compensation committees to comply with

SOX and stock exchange regulations, some US

f‌irms have also voluntarily formed board-level

committees termed “technology committees.”

According to the Spencer Stuart Board Index

(2005), about 5 per cent of the S&P 500 boards

now have technology committees, up from

none in 2000.1Technology committees are

being formed to assist board members in the

areas of information technology, science and

technology-driven f‌irm issues. If a f‌irm has

signif‌icant changes relating to or affecting

intellectual property or technology, such

changes may have a material impact on a

f‌irm’s net worth (which would require a SOX

Section 409 disclosure) (DeCarlo, 2005). Also,

Section 404 of SOX requires f‌irms to detail

the adequacy of their internal controls over

*Address for correspondence:

Florida Atlantic University,777

Glades Road, Boca Raton, FL

33431-0991, USA. Tel: 1-561-

212-0766. E-mail: premuros@

fau.edu

1260 CORPORATE GOVERNANCE

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

technology systems (Murti, 2005). “Directors

who are bankers or f‌inancial experts aren’t

comfortable with complicated scientif‌ic and

technology issues...thetechnology commit-

tee is a relative newcomer to the corporate

governance scene” (Feldman and Potamianos,

2005, 14). If a company’s intellectual property

assets are material, the f‌irm is required to

provide detailed disclosure and discussion

in the business section of the annual report

regarding such intellectual property assets

such as patents, copyrights, trademarks, and

trade secrets; the existence of material risks or

litigation related to this intellectual property

also requires disclosure and the failure to

provide adequate disclosure of such informa-

tion may be a violationof SOX (DeCarlo, 2005).

In addition, Statement of Financial Accounting

Standards No. 142 requires f‌irms to regularly

evaluate all intangible assets to determine if

impairment in their value has occurred. Since

such assets often involve technology and

future value of technological innovations –

technology committees and their deliberations

and resulting actions may have corporate gov-

ernance and f‌irm performance implications.2

In this paper we attempt to determine the

corporate governance and f‌irm performance

implications of f‌irms forming technology

committees. These committees essentially re-

present a new type of voluntary board

committee, and as the formation of other

voluntary board committees continues to

grow, the results obtained here may well also

apply to other voluntary board committees

appointed by f‌irms in the post-SOX era.

Our results suggest that corporate gover-

nance is signif‌icantly and positively related

to f‌irms’ decisions to voluntarily form tech-

nology committees. Additionally, f‌irm perfor-

mance ratios such as returns on assets, returns

on equity,and net prof‌it margins are also asso-

ciated with f‌irms’ decisions to form technol-

ogy committees.

The rest of this paperis organised as follows:

Section 2 contains the literature review. The

research hypotheses and variable measure-

ments are developed in Section 3. Section 4

describes the research methodology, including

the statistical analyses performed on the data.

Section 5 presents the results of the various

statistical analyses. Section 6 presents the con-

clusions, limitations of the study, and related

areas for future research.

2. Literature review

This section reviews the evolution of corporate

governance guidelines; discusses potential

incentives for the formation of board sub-

committees; describes how the quest for f‌irst-

mover advantages may motivate the voluntary

formation of technology committees; and

explores the potential relationship of board

composition to corporate governance and f‌irm

performance.

2.1. The evolution of corporate

governance guidelines

Corporate governance guidelines, including

the development by f‌irms of codes of best gov-

ernance practices, began to develop strongly

in the US in the early 1990s (Gregory, 1999).

These guidelines were developed in response

to the perception that boards of directors had

been ineffective in their oversight of manage-

ment. This lack of adequate oversight was seen

as contributing to f‌irm under-performance

(Jensen and Meckling, 1979; Rubach and

Picou, 2005). Firms began to issue numerous

guidelines related to corporate governance

themselves in order to resolve potential con-

f‌licts between shareholders and management

(Core et al., 1999). Additionally, corporate gov-

ernance and best board practices have also

been issued or recommended by many organi-

sations, including the American Bar Associa-

tion (Gregory, 1999).

Late in 2003, the SEC approved several

governance-related reforms suggested by

the three major US stock exchanges.3These

reforms required corporate boards to develop

independent processes for nominating direc-

tors that would ultimately lead to a majority of

outside independent directors. The New York

Stock Exchange, for instance, requires f‌irms to

have independent nominating committees, to

establish compensation committees consisting

of independent directors, and to disclose cor-

porate governance guidelines. The NASDAQ

and AMEX similarly require that nominations

be made and compensation be set by at least

a majority of independent board directors.

Board-level technology committees maythere-

fore be part of a natural evolution of the cor-

porate governance process for publicly-listed

f‌irms in the post-SOX era.

2.2. Incentives for the development of

board sub-committees

As recently as 2004, Spira and Bender (2004)

stated that the establishment of board sub-

committees had been strongly recommended

as a potential mechanism for improving cor-

porate governance. Specif‌ic tasks can be del-

egated by the main board to a smaller group

of board members, thereby maximising the

contributions and talents of individual board

IS THERE A RELATIONSHIP BETWEEN FIRM PERFORMANCE, CORPORATE GOVERNANCE, AND A FIRM’S DECISION? 1261

Volume 15 Number 6 November 2007© 2007 TheAuthors

Journal compilation © BlackwellPublishing Ltd. 2007