A
CCOUNTING
R
ESEARCH
J
OURNAL
V
OLUME
18 N
O
1 (2005)
34
Putting Their Money Where Their Mouth Is:
The Importance of Shareholder Directors
Post Listing
William Dimovski
School of Accounting, Economics and Finance
Deakin University
and
Robert Brooks
Department of Economics and Business Statistics
Monash University
Abstract
While Luoma and Goodstein (1999) find
increased stakeholder representation on the
boards of American companies, Dimovski and
Brooks (2004) provide evidence that the
Australian initial public offering (IPO) market
does not require non equity stakeholder
representation on their boards. This paper
analyses the change in composition of the
boards of large Australian companies post
listing. We find a substantial increase in the
number of directors holding equity capital in
the firms in which they hold their directorships.
We also find a decrease in the number of non
equity stakeholder directors post listing. This
suggests that directors putting their money into
the firms in which they have a stewardship
function is an important element in the
Australian capital market.
1. Introduction
In recent years there has been considerable
discussion in the management literature on
the accountability of companies. While
the traditional finance theory focused on
corporate accountability to shareholders,
some management theory has argued for
accountability to a wider set of interest groups.
By recognition of the wider variety of
Acknowledgments: The authors wish to thank an
anonymous referee for their helpful comments on previous
versions of this paper. The authors also wish to thank Tim
Fry for his helpful comments and advice.
stakeholders, such as employees, suppliers,
customers and public representatives, that are
associated with their organizations it is
claimed that companies will produce better
performance against a range of indicators. Agle,
Mitchell and Sonnenfeld (1999) argue that
understanding the needs and expectations of a
broader range of stakeholders than the
traditional equity shareholders is useful to profit
seeking organisations. As companies recognise
a wider range of stakeholders and increase their
aspirations for better corporate governance, the
question arises as to how companies can more
appropriately safeguard the interests of non
equity stakeholders. Evan and Freeman (1993),
Freeman and Evan (1990) and Jones and
Goldberg (1982) suggest direct stakeholder
representation on the board.
If direct stakeholder representation on
corporate boards is indeed useful, then as
Luoma and Goodstein (1999) suggest, there is
likely to be an increased representation.
Companies can simply add new stakeholder
directors to their boards or replace retiring
directors with stakeholder directors. In their
study of 224 NYSE companies over the period
1984 to 1994 they find increased stakeholder
board representation.
Dimovski and Brooks (2004) investigate
270 new issues in Australia over the period
1994 to 1997 to determine the level of non
equity stakeholder representation on the boards
of initial public offerings (IPOs). While
suppliers, suppliers with options to purchase