Abstract
Incorporating 27 governance-related variables, we construct a Corporate Governance Index （hereafter CGI）to measure the effectiveness of the board of directors. In addition to the variables discussed in La porta et al. (1999) and Claessens et al. (2000), we include the presence of a controlling shareholder, the average tenure of board members, and the percentage of shares owned by government. The presence of a controlling shareholder solves the classic agency problem resulting from the separation of ownership and control. Yet, the presence of a controlling shareholder introduces a new divergence of interest between the majority shareholder and the minority shareholders. We expect a negative relationship between the presence of a controlling shareholder and CGI, especially for Asian corporations.Conventionally and imperfectly, the number of outside directors is employed as an indicator of board independence. In addition, we examine if executives are also board members (and especially also on the compensation committee), and if some executives have interlocking board relationships with other board members. The average tenure of board members is another aspect of board independence. The conjecture is that the longer the members stay in the board, the more likely their decisions will be influenced by interpersonal relationship with executives. We anticipate that our expanded measures of board effectiveness will help shed some light on these controversial scandals.Overall, our contribution is threefold. First, we use a unique data set to investigate the board effectiveness from a cultural of Asian enterprise viewpoint. Secondly, unlike the previous literature, we include the cross shareholding by top conglomerates in Taiwan and other unique governance-related variables to construct a Corporate Governance Index. Finally, we investigate the relationship between corporate governance and credit rating. To our best knowledge, there is little research on examining the direct link between these two default probability-related measures in the literature.