기업지배구조가 임원배상책임보험료에 미치는 영향 -외부전문가(보험사)에 의한 기업지배구조 평가 = An Outside Assessment of the Corporate Governance Quality: The Directors` and Officers` Insurance Premium

다국어 초록 (Multilingual Abstract)

In the aftermath of the 1997 financial crisis, Korean corporations have tried to improve transparency by making a better governance structure. In spite of the government`s lead to reform the regimes and each corporations` endeavor to make a better governance system, the results have not turned out the way that was intended. Large social costs ensued and stakeholders faced heavy losses. Even though a few prior empirical researches attempted to analyze the relation between reformed governance structures and their effectiveness, the results were not promising. This paper investigates the effects of reformed governance structures looking from a different viewpoint. It focuses on how outside experts judge each firm`s efforts on governance structure and how much they reflect their judgements on firms when it comes to decision-making. In this paper, we observe insurance companies in particular as one example of outside experts. Therefore, their decision-making will determine the Directors` and Officers` Premiums (D&O Premiums) in the way they can maximize their profits. We empirically examine the relationship between governance structures and insurance premiums using data on Korean manufacturing firms. The sample period runs from 2000 to 2003. Insurance companies are one of various specialist groups which evaluate the risk of firms and award a grade to each one of them. In the procedure of the assessment, they have an incentive to consider a firm`s governance quality. Because firms having good governance structures are less exposed to litigation risks, an insurer could mark up low insurance premiums(D&O premiums) to them. Therefore insurance premiums reflect firms` business risks and governance quality. Consequently, by controlling business risks that firms are facing, we examine whether governance quality is used by insurers. We find in this paper that there is a significant negative relationship between D&O insurance premiums and governance quality, which means firms with good corporate governance pay low insurance premiums (managerial ownership, foreign investors ownership and establishment of audit committee are used as a proxy of governance quality). The overall results suggest that outside specialist groups such as insurance companies seem to use the information of each firm`s corporate governance structures. It also provides evidence that firms which have good governance structures could lessen their potential litigation risks.

참고문헌 (Reference)

1 Patton, A, "Why won’t Directors rock the Board?" (65) : 10-18, 1987

2 Jones, Christopher L, "Why 10b-5 Litigation Risk is Higher for Technology and Financial Services Firms. working paper" George Washington University 1998

3 Griffith, Sean J, "Unleashing a Gatekeeper: Why the Sec Should Mandate Disclosure of Details Concerning Directors’ & Officers’ Liability Insurance Policies. working paper." SSRN 2005

4 Jensen, M. C, "Theory of the Firm: Managerial Behavior, Agency Cost and Ownership Structure" (3) : 305-360, 1976

5 Bhagat, S, "The Uncertain Relationship between Board Composition and Firm Performance." (54) : 921-963, 1999

6 Korean Listed Companies Association, "The State of Korean Listed Firms Insured Against the Directors’ and Officers’ Liability Insurance" KLCA Monthly Journal(Sangjang) June 2005

7 Romano, Roberta, "The Shareholder Suit: Litigation without Foundation?" (7) : 55-87, 1991

8 Beasley, M. S, "The Relationship between Board Characteristics and Voluntary Improvements in Audit Committee Com- position and Experience" (18) : 539-570, 2001

9 Berle, A. A, "The Modern Corporation and Private Property" New York, MacMillan. 1932

10 Park, Hun-Joon, "The Korean Firms ‘Agency Costs and Firm Value: Role of Foreign Investors’ Equity Ownership." (33) : 655-682, 2004

11 Kim, Young-Kyu, "The Effect of Characteristics of Board Structures on Firm Performance: Size, Com- position, and Operating Activities. Proceedings for the 1st Conference, Korean Securities Association" 2004

12 Core, John E, "The Directors’ and Officers’ Insurance Premium: An Outside Assessment of the Quality of Corporate Governance" 2000

13 Lee, Kyung-Tae, "The Characteristics of Korean Firms Purchasing Directors’ and Officers’ Insurance" (74) : 1-31, 2006

14 Waner, J. B, "Stock Prices and Top Management Changes." (20) : 461-492, 1988

15 Black, B, "Shareholder Suits and Outside Director Liability : The Case of Korea. working paper." SSRN 2005

16 Fama, E. F, "Separation of Ownership and Control." (26) : 301-325, 1983

17 Pound, J, "Proxy Contest and the Efficiency of Shareholder Oversight" (20) : 237-266, 1988

18 Jung, Koo-Yul, "Ownership Structure and Earnings Informativeness: Evidence form Korea, working paper" 2001

19 Shin, Hyun-Han, "Outside Monitors and Firm Value" (17) : 41-72, 2004

20 Weisbach. M, "Outside Directors and CEO Turnover" (20) : 413-460, 1988

21 Mayers, D, "On the Corporate Demand for Insurance" (55) : 281-296, 1982

22 Core, John E, "On the Corporate Demand for Directors’ and Officers’ Insurance" (64) : 63-87, 1997

23 Knepper, William E, "Liability of Corporate Officers and Directors" Charlottesville, VA: The Michie Company 1993

24 Shleifer, Andrei, "Large Shareholders and Corporate Control" (94) : 461-488, 1986

25 Coughlan. A. T, "Executive Compensation, Manage- ment Turnover and Firm Performance: An Empirical Investigation" (7) : 43-66, 1985

26 Alexander, Janet Cooper, "Do the Merits Matter? A Study of Settlements in Securities Class Actions" 497-598, 1991

27 Choi, J. J, "Do Outside Directors Enhance Firm Performance? Evidence from an Emerging Market. working paper." Temple University 2004

28 Choi, Byeong-Gyu, "Directors and Officers Liability Insurance" (54) : 21-45, 1999

29 The Wyatt Company, "Directors and Officer Liability Survey" Chicago, IL; Wyatt Company 1993

30 Defond, M, "Debt Covenant Violation and Manipulation of Accruals" (17) : 145-176, 1994

31 Zingales, L, "Corporate governance.(in The new Palgrave Dictionary of Economics and the Law)" New York; Stockton Press 1998

32 Nelson, James, "Corporate Governance Practices and Firm Performance: An Examination of an Endogenous Relationship. working paper" University of Arizona 1999

33 Dechow, P, "Causes and Consequences of Earnings Manipulations: An Analysis of Firms Subject to Enforcement Actions by the SEC" (13) : 1-36, 1996

34 Finkelstein, S, "CEO Duality as a Double-Edged Sword: How Board of Directors Balance Entrenchment Avoidance and Utility of Command" (3) : 1079-1108, 1994

35 Park, Jong-Il, "Board Composition and Firm Value" 2004

36 DeAngelo. L, "Auditor Size and Auditor Quality." (3) : 183-199, 1981

37 Abbott, L, "Auditor Selection and Audit Committee Characteristics" (19) : 47-66, 2000

38 McMullen, D, "Audit Committee Performance: An Investigation of the Consequence Associated with Audit Committee, Auditing" (16) : 87-103, 1996

39 Beasley, M. S, "An Empirical Investigation of the Relation between Board of Directors, Composition, and Financial Statement Fraud." (71) : 443-465, 1996

40 Park, Kyung-Suh, "An Analysis of the Operation of Outside Directors System by KOSPI firms" 2003

41 Klein, A, "Affiliated Directors: Puppets of Management or Effective Directors?. working paper." New York University Center for Law and Business. 1998

42 Shleifer, Andrei, "A Survey of Corporate Governance" (52) : 737-783, 1997