Corporate Governance Rating System in Taiwan with Multi-Criteria Decision Making Methods
Su, Hsin-An, Hsieh, Chin Hsien, Chang, Chih-Yang, Lin, Fengyi, Contemporary Management Research
Corporate governance has been the subject of extensive research due to high-profile scandals associated in well-known companies. Examining the existed governance rating system in Taiwan, we find that little attention has been paid to the role of corporate governance rating systems and the rating scores are poor predictors in predicting the multiple dimensions of firm performance. This study proposes to use multi-criteria decision-making methods, notably SAW, TOPSIS, and VIKOR, as refined scoring models for a corporate governance rating system. The results show that VIKOR, for its ability to obtain more precise scores, outperforms both the existing methodologies and the other two MCDM approaches.
Keywords: Corporate Governance, Multi-Criteria Decision Method, Related-Party Transaction
(ProQuest: ... denotes formulae omitted.)
In the wake of recent corporate embezzlement scandals and the resulting public focus on firm's corporate governance, managers have been pressured by their clients to incorporate corporate governance mechanism. In recent years, healthy corporate governance mechanisms have become the trend in international asset markets. There have been numerous recent attempts by rating services to quantify the quality of corporate governance in firms with commercially available ratings. A study by Ying-hua Ye et. al. (2002) was based on corporate governance theory and used quantitative methods, evaluating the positive incentive effects and negative occupation effects of major investors in order to evaluate the corporate governance of Taiwan's listed companies. The governance scores have become increasingly popular among retail investors, supply vendors and regulators since the corporate scandals erupted. Surprisingly, there is little systematic study of the value of these third-party governance ratings in assessing firm performance. This study utilized the multi-criteria decision-making models for corporate governance and compared them with traditional weighted average scoring methods, aiming to provide more precise rating systems.
Related Literature Corporate Governance and Ratings
The Organization for Economic Cooperation and Development (2004) defined corporate governance as "a system for managing and supervising enterprises". Corporate governance describes in detail the responsibilities and corresponding power distribution relationships of participants in the enterprise (e.g. board of directors, management levels, investors, and other stakeholders) and lays out the regulations and procedures that should be incorporated into company policy (Ertugrul&Hedge,2009). Recently, several papers have examined the relationship between firm performance and a composite measure of corporate governance. Brown and Caylor (2006) construct a governance score using Institutional Shareholder Services governance factors. They find that firms with lower governance scores have a higher return on equity and higher profit margins. Gompers, Ishii, and Metrick (2003) find that firms with fewer shareholder rights have lower stock returns and firm valuation.
The CLSA corporate governance rating (2001) involves use of the survey design rating method, utilizing clear yes or no answers in order to reduce the subjective influence of analysts. Standard and Poor's strengthened its corporate governance rating services in 2001 by utilizing survey questionnaire design methods. Deviating from the survey questionnaire methods of CLSA and Standard and Poor's, Ye et al. (2002), adopted corporate governance theory as a basis and attempted to use quantitative methods to evaluate positive incentive effects and negative occupation effects of major investors, incorporating considerations such as Taiwanese stock ownership frameworks, board compositions and major shareholder behavior. The corporate governance rating systems may not be performed sufficiently and exactly, because the available data and information are vague, inexact, imprecise and uncertain by nature. …