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Role of
The role of corporate governance corporate
in intellectual capital disclosure governance
Mishari M. Alfraih
Department of Accounting, The Public Authority for Applied Education and
Training, Kuwait City, Kuwait 101

Abstract
Purpose – This paper aims to examine the influence of corporate governance mechanisms on the extent of
intellectual capital (IC) disclosure among companies listed on the Kuwait Stock Exchange (KSE).
Design/methodology/approach – A content analysis approach was used. The association between
dependent and independent variables was examined using multiple regression analysis.
Findings – The results suggest that corporate governance mechanisms strongly influence the quantity of IC
information disclosed in the annual reports of KSE-listed companies. Specifically, companies with larger
boards, higher proportions of external directors and higher blockholder ownership are associated with higher
levels of IC disclosure.
Practical implications – The findings highlight the effectiveness of corporate governance mechanisms
in promoting IC disclosure. They are a useful guideline for regulators, company management and
shareholders regarding corporate governance mechanisms that influence the extent of IC disclosure. Given
recent Kuwaiti Government initiatives to promote transparency and the informational efficiency of the stock
market, this research provides timely empirical evidence in support of these initiatives.
Originality/value – In the frontier market context, the study contributes to a theoretical understanding of
the corporate reporting of IC and the relationship between IC disclosure and corporate governance
mechanisms. The findings provide empirical support for the theoretical notion that effective corporate
governance plays an important role in increasing the extent of voluntary disclosure.
Keywords Financial reporting, Ownership structure, Corporate governance,
Intellectual capital disclosure, Board characteristics
Paper type Research paper

1. Introduction
Traditional corporate financial statements are fundamental to sound investment decision-
making. The well-being of markets, and of investors who entrust their financial present and
future to those markets, depends directly on the information provided in financial
statements (CFA, 2007). Nevertheless, despite their importance, these traditional statements
have major shortcomings from a capital market perspective (Schuster and O’Connell, 2006).
For example, many listed companies are driven by the creation and use of intangible assets,
such as intellectual capital (IC)[1]. These increasingly important assets contribute
significantly to a company’s competitiveness (OECD, 2012). Furthermore, Petty and Guthrie
(2000) argue that intangible assets, including IC, have the potential to improve the efficiency
of capital markets. However, despite the fact that much of the current economic growth is
attributed to them, traditional financial reporting does not provide a framework for their
disclosure (CFA, 2007). To compensate for these limitations, Petty and Cuganesan (2005) International Journal of Ethics and
Systems
suggest that this information be reported voluntarily by companies, to better address Vol. 34 No. 1, 2018
pp. 101-121
stakeholders’ informational needs. As a result, many companies, in an attempt to meet © Emerald Publishing Limited
2514-9369
market demands for more reliable information, have begun to voluntarily complement their DOI 10.1108/IJOES-02-2017-0026
IJOES traditional financial reporting with narrative, non-financial information (Abeysekera and
34,1 Guthrie, 2005; García-Meca and Martínez, 2005; Haji and Ghazali, 2013).
Despite the fact that IC disclosure has the potential to improve capital market efficiency
and company performance, and create value for companies, measuring, reporting and
managing it remains a problem (Appuhami and Bhuyan, 2015). The empirical literature
documents IC reporting practices worldwide. In general, these studies observe significant
102 variation in practices among companies and across countries (Abeysekera and Guthrie,
2005; Vandemaele et al., 2005; Kamath, 2008; Sonnier et al., 2008; Branswijck and Everaert,
2012; Haji and Ghazali, 2013; Abhayawansa and Azim, 2014; Rodrigues et al., 2016; Alfraih,
2017). Several studies have shown that managers exercise discretion in deciding whether to
voluntarily disclose corporate information, such as IC. In general, they find that voluntary
disclosure is motivated by a desire to reduce information asymmetry, thereby reducing the
company’s capital or debt cost (Healy and Palepu, 2001).
A significant body of literature documents that the monitoring function of corporate
governance significantly influences the extent and quality of voluntary disclosure
(Elshandidy and Neri, 2015). Corporate governance is a set of control mechanisms designed
to monitor and ratify managerial decisions and to ensure the efficient operation of a
company on behalf of its stakeholders (Donnelly and Mulcahy, 2008). In this context,
Kothari (2000) argues that the quality of corporate reporting is not influenced simply by the
quality of accounting standards but also by the nature and quality of corporate governance
mechanisms. Donnelly and Mulcahy (2008) also argue that effective corporate mechanisms
could voluntarily increase the level of corporate disclosure, over and above that which is
mandated by legislation or stock exchange rules. Similarly, Keenan and Aggestam (2001)
argue that corporate governance has a beneficial influence in directing and influencing the
development and management of company’s IC, seen as a system of business assets, and
ensuring that investors are informed about the deployment and performance of such assts.
Although previous studies have theorized that there is a positive association between the
effectiveness of corporate governance and the extent and quality of IC disclosure, few
empirical investigations have been undertaken (Haji and Ghazali, 2013). Appuhami and
Bhuyan (2015) agree, arguing that there is limited understanding of the association between
various corporate governance mechanisms and IC disclosure.
In this context, this study explores the role of corporate governance mechanisms on IC
disclosure in companies listed on the Kuwait Stock Exchange (KSE). Understanding factors
such as the characteristics of the board of directors and ownership structure on IC disclosure
makes it possible to assess both their effectiveness and opportunities for improvement. The
study begins with a review of the literature on voluntary disclosure and corporate
governance. Next, a research framework based on agency theory and resource dependency
theory is developed. Specifically, the extent of IC disclosure is expected to be influenced by
the quality of corporate governance mechanisms. Within this framework, five research
hypotheses are developed and tested. Specifically, the extent of IC disclosure is expected to
be positively associated with: (H1) board size; (H2) the proportion of external directors; (H4)
blockholder ownership; and (H5) government ownership. Furthermore, it is predicted that
the level of IC disclosure is negatively associated with the same person holding the positions
of chief executive officer (CEO) and chairman (H3).
To develop a quantitative measure of IC disclosure, the IC framework proposed by
Sveiby (1997) and modified by Guthrie et al. (2004) was adopted. The framework has been
successfully used in several IC studies, and it consists of 3 categories and 24 components.
The three categories are internal, external and human capital. Consistent with prior IC
research, the IC disclosure measure is calculated based on content analysis of corporate
annual reports. Once the level of IC disclosure had been determined, the association between Role of
it and corporate governance mechanisms was examined using a multiple regression corporate
analysis.
The results support three of the study’s hypotheses. A significant, positive correlation
governance
was found between IC disclosure and board size, external directors and blockholder
ownership. On the other hand, no significant correlation was found for government
ownership or CEO duality. This study contributes to our theoretical understanding of IC
reporting, and the association between IC disclosure and corporate governance mechanisms. 103
In particular, it finds a positive empirical relationship between effective corporate
governance mechanisms (namely, the board of directors and ownership structure) and IC
disclosure in a frontier capital market.
This paper is structured as follows. Section 2 briefly summarizes the theoretical and
empirical literature and posits the hypotheses to be tested. Section 3 discusses the research
model and data. Section 4 discusses the empirical findings. Section 5 concludes the paper
with a summary and discussion of results, an outline of the study’s major contributions and
implications, together with potential areas for future research.

2. Relevant literature and research hypotheses

2.1 Relevant literature
IC disclosure in annual reports is predominantly voluntary, as many aspects fail to meet the
criteria for inclusion in financial statements, or are not measured in financial terms (Whiting
and Miller, 2008). The Financial Accounting Standard Board (FASB, 2001) describes
voluntary disclosure as information that is primarily outside of the financial statements that
are not explicitly required by accounting rules or standards. A similar definition is provided
by the International Accounting Standard Board (IASB). Meek et al. (1995, p. 555) define
voluntary disclosure as:
Disclosures in excess of requirements, representing free choices on the part of company
management to provide accounting and other information deemed relevant to the decision needs
of users of their annual reports.
Its critical role in capital market efficiency means that voluntary disclosure and its
determinants are an important topic that has attracted the attention of both theoretical and
empirical researchers since the 1960s. Two research streams can be distinguished:
(1) the influence of company characteristics (such as age, profitability, listing, size,
growth, and leverage) on IC disclosure; and
(2) the influence of corporate governance structures including board characteristics
and ownership concentration (Huafang and Jianguo, 2007).

With respect to the first area, empirical evidence has found both a clear positive relationship
(size, foreign listing, internationality) and a mixed relationship (leverage, audit firm size,
profitability) between company characteristics and IC disclosure (Bozzolan et al., 2006). For
example, in examining the determinants of the decision to disclose IC information in the
annual reports of publicly listed companies in Australia, Brüggen et al. (2009) find that
industry classification and company size play a key role. Similarly, Ousama et al. (2012) find
that company size, profitability and industry classification are key determinants in the
annual reports of listed companies in Malaysia. White et al. (2007), in Australia, and Oliveira
et al. (2006), in Portugal, document the influence of company age, level of leverage, type of
auditor, listing status, industry classification and company size on IC disclosure. Like White
et al. (op. cit.), Whiting and Woodcock (2011) analyze a sample of Australian companies and
IJOES find that IC disclosure is more extensive in those that operate in high-tech or knowledge-
34,1 intensive industries and those audited by a Big Four firm. In Spain, Alcaniz et al. (2015)
analyze IC disclosure provided in initial public offerings (IPOs) prospectuses and company
characteristics. They find that companies that provide more IC information are larger, high-
tech companies and those in which existing shareholders do not retain their majority
following the IPO.
104 The second stream of research examines the influence of corporate governance
mechanisms on IC disclosure. Generally, the literature finds that there are differences
between companies, and that corporate governance mechanisms are main determinants of
these differences (Albassam, 2014). Several empirical studies have explored the relationship.
For example, based on a sample of listed companies in Malaysia, Haji and Ghazali (2013)
show that board size, independent directors, board effectiveness and the position of the
chairman play a positive and significant role in explaining the extent and quality of IC
disclosure. In addition, they find a negative relationship with director ownership and a
positive association with government ownership. Furthermore, they highlight the
effectiveness of corporate governance mechanisms in encouraging companies to increase IC
investment and hence disclosure. Similarly, Li et al. (2008) analyze a sample of companies in
the UK and find that board composition, ownership structure, audit committee size and
frequency of audit committee meetings play a significant role in IC disclosure.
Drawing on resource dependency theory, Abeysekera (2010) examines the effect of board
size on IC disclosure in a sample of Kenyan listed companies, and finds that more extensive
IC disclosure is associated with larger boards. Using a sample from Australia, White et al.
(2007) clearly highlight that IC disclosure is driven by both traditional agency theory and
contemporary corporate governance issues. They observe a strong positive association
between IC disclosure and board independence. Focusing on the effectiveness of the board,
Cerbioni and Parbonetti (2007) show that corporate governance plays a critical role in IC
disclosure in the annual reports of listed companies in Europe. They document that board
size, structure and leadership are negatively associated with IC disclosure, while the
proportion of independent directors is positively associated. In contrast, Rodrigues et al.
(2016) observe that IC disclosure increases with board size, but it tends to decrease with CEO
duality and a higher proportion of independent directors in their Portuguese sample.
Also in the Portuguese context, Oliveira et al. (2006) show empirically that companies
with a lower shareholder concentration tend to disclose more IC information. They explain
this finding by noting that agency costs increase as the ownership structure becomes more
diffuse due to the increased likelihood of conflict of interest. This motivates such companies
to voluntarily disclose information to reduce costs. Hidalgo et al. (2011) confirm these
findings. Based on a sample from Mexico, they empirically document a negative association
between institutional ownership and IC disclosure, supporting the hypothesis of
entrenchment. In the Singaporean context, Firer and Williams (2005) observe that
companies with a higher concentration of ownership, those with a high level of executive
director ownership, and those with a low level of government ownership are less motivated
to disclose IC information than their counterparts.
In summary, the literature on the determinants of IC disclosure documents significant
variation in the quantity and quality of disclosure across countries and among companies.
Studies show that these variations can be explained by company characteristics such as
industry, internationality, foreign listing, leverage, size, profitability and quality and rigor of
the audit. A second stream of research explains variation in IC disclosure in terms of
corporate governance mechanisms such as the characteristics of the board of directors and
ownership structure. Given that this study investigates the influence of corporate
governance mechanisms on IC disclosure in Kuwait, this study contributes to the latter Role of
category. corporate
governance
2.2 Hypotheses
There are many reasons why companies provide information beyond that which is legally
mandated (Oliveira et al., 2006). The theoretical literature on voluntary disclosure has drawn
upon agency theory (Jensen and Meckling, 1976), proprietary cost and competition theory
(Verrecchia, 1983), capital market theory (Choi, 1973), signaling theory (Akerlof, 1970) and
105
resource dependence theory (Pfeffer and Salancik, 1978), to provide theoretical explanations.
Generally, most are based on the idea of fundamental information asymmetries and agency
conflicts between insiders (management and majority shareholders) and outsiders (minority
shareholders, creditors and other stakeholders) (Healy and Palepu, 2001; Patel and Dallas,
2002). Corporate disclosure, and the institutions that are created to increase its credibility,
plays a crucial role in mitigating these conflicts (Healy and Palepu, 2001). More specifically,
Diamond and Verrecchia (1991) argue that increased disclosure mitigates information
asymmetries between companies and their investors. Managers recognize that economic
benefits can be derived from an effectively managed disclosure policy (Whiting and Miller,
2008).
In our knowledge-based economy, IC is regarded as a key driver of value, and this
information is sought after by shareholders (or investors) who must make decisions.
However, most disclosure is voluntary (An et al., 2011), while Petty and Cuganesan (2005)
argue that a lack of voluntary disclosure can adversely affect companies rich in IC that seek
to raise capital in debt and equity markets. In a similar vein, Zigan et al. (2007) claim that
investors tend to use voluntary disclosure to reduce uncertainty and predict future
performance.
Denis and McConnell (2003) define corporate governance as the set of mechanisms that
induce the self-interested controllers of a company (managers) to make decisions that
maximize the value of the company for its owners (shareholders). Its role is to establish a
framework for efficiency and probity, and to ensure transparency and accountability
(Abeysekera, 2010). Shleifer and Vishny (1997) argue that effective corporate governance
mechanisms can mitigate agency problems and provide assurances that managers will
concentrate on maximizing company value, while Patel and Dallas (2002) state that effective
corporate governance practices include: a vigilant board of directors, meaningful disclosure
and a transparent ownership structure. They go on to provide empirical evidence that
corporate disclosure is integral to corporate governance. Elshandidy and Neri (2015) argue
that corporate governance structures can be linked to voluntary disclosure through the
company’s inputs and/or outputs. Specifically, effective corporate governance is not only
achieved by monitoring the figures provided by accountants, but also extends to the quality
of those accounts. The authors also argue that effective corporate governance structures
tend to encourage managers to adopt the best disclosure policy. Finally, Healy and Palepu
(2001) note that effective monitoring by the board plays an important role in extending and
increasing the credibility of voluntary disclosure.
Although the voluntary disclosure literature has provided empirical evidence regarding
the beneficial effect of numerous internal and external governance mechanisms on the
quantity and quality of corporate disclosure (for example, Haniffa and Cooke, 2002; Barako
et al., 2006), Haji and Ghazali (2013) argue that their influence on IC disclosure, in particular,
has received little attention. Based on the theoretical and empirical literature on corporate
governance and voluntary disclosure in general, and IC disclosure in particular, this paper
examines the influence of several corporate governance mechanisms on IC disclosure.
IJOES Specifically, it develops five hypotheses, three of which are related to the characteristics of
34,1 the board of directors, while the remaining two relate to ownership structures. These
hypotheses are described in detail in the following sections.
2.2.1 Board size. Board size measures the number of directors on the board. Fama and
Jensen (1983) argue that this number may affect how directors carry out their
responsibilities. According to resource dependence theory, board size is important in
106 managing a company’s capital needs and the regulatory environment (Pfeffer and Salancik,
1978). Abeysekera (2010) argues that it can be a “resource” that companies can use to inform
investors about resources that are not disclosed in traditional financial statements. The best
board size for optimal functioning is the subject of continuing debate in the literature
(Bathula, 2008). From an agency theory perspective, it can be argued that a larger board is
more likely to detect agency problems – simply because it offers greater expertise,
management oversight and access to a wider range of resources. In addition, a greater
number of directors reduce uncertainty and information asymmetries because there are
more people to carry out the work (Fauzi and Locke, 2012). Similarly, resource dependence
theory argues that larger boards introduce a diversity of vital resources and links with the
company’s external environment, reducing dependencies and increase access to resources,
thus improving decision-making (Pfeffer and Salancik, 1978; Abeysekera, 2010). He et al.
(2009) argue that adding more members to the board provides potentially useful information
and resources. Thus, a bigger board directly enhances the company’s competitiveness and
enhances the corporate environment. In contrast, fewer studies advocate for smaller boards.
One example is Jensen (1993), who argues that bigger boards are less effective as more
complex coordination overwhelms any advantages gained from having more directors to
draw upon. Furthermore, he claims that smaller boards can perform better, as when there
are more than seven or eight members they are less likely to coordinate and communicate
effectively, and are harder for the CEO to control.
The empirical results are mixed regarding the association between IC disclosure and
board size. For example, Abeysekera (2010) examines the effect of board size on IC
disclosure in listed companies in Kenya and reveals a positive association with board size.
Similarly, Rodrigues et al. (2016), in Portugal, and Haji and Ghazali (2013), in Malaysia,
observe a positive and significant association. In contrast, Cerbioni and Parbonetti (2007),
using a sample of European companies, show that board size is negatively associated with
the overall level of voluntary IC disclosure, but positively associated with two specific
elements of IC, namely, external and human capital. Interestingly, Hidalgo et al. (2011)
observe that an increase of up to 15 directors in a sample of Mexican boards has a beneficial
effect on IC disclosure. However, they note that as this number exceeds 15, the effect is
reversed as the capacity for supervision and control in the decision-making process
decreases. Finally, Rodrigues et al. (2016) highlight the need for caution in believing that
adding extra directors to an existing board necessarily improves IC disclosure.
In Kuwait, the Commercial Companies Law No. 15 of 1960 and its amendments requires
that a KSE-listed company be managed by a board of directors, whose structure is stated in
the company’s Articles of Association (Article, 138). The board must comprise at least three
directors, appointed by secret ballot. In 2013, there was wide variation in the number of
directors on the boards of KSE-listed companies, ranging from three to ten. Drawing on
agency theory and resource dependence theory, larger boards are expected to be associated
with higher IC disclosure, given that more directors enhances their effectiveness.
Consequently, this study hypothesizes that:
H1. Ceteris paribus, there is a positive association between board size and IC disclosure.
2.2.2 External directors. The composition of the board of directors refers to the mix of Role of
internal (executive) and external (nonexecutive) directors. Fama and Jensen (1983) suggest corporate
that the board’s composition is an important mechanism in diffusing internal agency
conflicts. Greater external representation is often advocated, as these people are likely to be
governance
more objective in monitoring management actions (Sundaramurthy et al., 1997). Li (1994)
argues that decision control is the board’s primary function, and external directors have the
particular responsibility of advocating shareholder interests and monitoring management
behavior. Fama and Jensen (1983) hypothesize that external directors have an incentive to 107
develop a reputation as an expert in decision control. According to this hypothesis, vigilant
external directors who establish a good reputation are rewarded with additional seats on
boards, while their less-effective peers lose them (Fich and Shivdasani, 2007). In an
examination of stock market reaction to the election of external directors in the USA,
Rosenstein and Wyatt (1990) observed significant, positive shareprice reactions following
the announcement of a new external board member, suggesting that shareholders react
favorably to such appointments. Sundaramurthy et al. (1997) note that the appointment of
external directors may serve as a signal to the market that the board’s monitoring capacity
is being strengthened. External directors who have an established reputation have an
incentive to increase the quantity and quality of corporate disclosure (Huafang and Jianguo,
2007). Cerbioni and Parbonetti (2007) argue that a sound corporate governance model
characterized by, among other things, a board that is composed of a majority of external
directors who play an active role in monitoring, is important in improving the overall
quality of voluntary corporate disclosure. Finally, Li et al. (2008, p. 139) argue that:
The wider expertise and experience of non-executive directors on the board will encourage
management to take a disclosure position beyond a ritualistic, uncritical adherence to prescribed
norms, to a more proactive position reflecting the value relevance of intellectual capital to
stakeholders.
Empirical studies report mixed results. Based on a sample of European companies, Cerbioni
and Parbonetti (2007) observe that IC disclosure increases with the proportion of external
directors. Li et al. (2008) observe similar, positive and significant results in listed companies
in the UK. In Malaysia, Haji and Ghazali (2013) show that there is a significant, positive
association between external directors and both the extent and quality of IC disclosure.
Abeysekera (2010) observes similar results among listed companies in Kenya. In contrast,
Rodrigues et al. (2016), in Portugal, and Abdul Rashid et al. (2012) in Malaysia, document a
significant, negative association between external directors and IC disclosure. Finally,
Hidalgo et al. (2011) document an insignificant association between external directors and IC
disclosure in Mexico.
In Kuwait, the law has nothing to say about board composition; it does not distinguish
between executive and nonexecutive directors, nor does it specify their percentages.
Consequently, it is determined by a company’s Articles of Association (Alfraih et al., 2015).
Given that boards with a higher proportion of external directors have greater control over
managers and benefit from reputational incentives to enhance the quantity and quality of
corporate disclosure, it is expected that a higher proportion of external directors is
associated with greater IC disclosure. Consequently, this study hypothesizes that:
H2. Ceteris paribus, there is a positive association between the proportion of external
directors and IC disclosure.
2.2.3 CEO duality. From an agency theory perspective, an independent board improves
monitoring and is crucial in limiting managerial entrenchment. Finkelstein and D’Aveni (1994)
IJOES argue that boards are charged with ensuring that CEOs carry out their duties in a way that
34,1 serves the best interests of shareholders. Similarly, Cullinan et al. (2012) highlight that boards
are often considered shareholders’ first line of defense against incompetent management, as
they are responsible for ensuring that CEO performance serves their (the shareholders) best
interests. However, the board is only an effective device for decision control if it limits the
decision discretion of individual top managers (Fama and Jensen, 1983). Bathula (2008)
108 highlights the critical role played by the board’s chairperson in decision making and the
effective monitoring of management, notably the CEO.
However, in many instances, one person holds these two positions (Bathula, 2008).
Finkelstein and D’Aveni (1994) suggest that CEO duality is a double-edged sword. On the
one hand, CEO duality can entrench a CEO at the top of a company, challenging a board’s
ability to effectively monitor and discipline management. On the other hand, the
consolidation of these two most powerful positions establishes a unity of command at the
top of the company. Unambiguous leadership can clarify decision-making authority and
send reassuring signals to stakeholders (Finkelstein and D’Aveni, 1994). On the other hand,
Cerbioni and Parbonetti (2007) argue that allowing the CEO to also serve as chairperson
compromises the desired system of checks and balances, and it represents a conflict of
interest. Similarly, Cullinan et al. (2012) consider that CEO duality impairs good corporate
governance. In the disclosure context, Haniffa and Cooke (2002) hypothesize that the
separation of the roles of chairperson and CEO may help enhance the quality of board
monitoring and limit any benefits resulting from withholding corporate information, which
may in turn improve the quantity and quality of corporate disclosure.
A number of empirical studies have explored the influence of role duality on IC
disclosure. In Portugal, Rodrigues et al. (2016) explore the influence of the board of directors
on the voluntary disclosure of IC information, and they found that it was reduced by role
duality. Similar results were obtained by Cerbioni and Parbonetti (2007), who show that
CEO duality is strongly and negatively linked to the quantity and quality of IC disclosure in
companies in Europe. Finally, Li et al. (2008) investigated the influence of corporate
governance attributes on IC disclosure among listed companies in the UK, and documented
an insignificant association between CEO duality and the extent of IC disclosure.
In contrast to best practice in other jurisdictions, directors of KSE-listed companies can
hold the role of both chair of the board of directors and CEO, as there is no legal requirement
to separate the two roles (Alfraih et al., 2015). Although CEO duality is considered an
impediment to good corporate governance, it remains common practice in Kuwait. For
example, in 2013, CEO duality was observed in 35 per cent of KSE-listed companies. Given
the potential benefits associated with separating the roles of chairperson and CEO, including
greater attention to the board’s functioning and improved quality and quality of corporate
disclosure, it is expected that the CEO duality is likely to adversely affect the extent of IC
disclosure. Consequently, this study hypothesizes that:
H3. Ceteris paribus, there is a negative association between CEO duality and IC
disclosure.
2.2.4 Blockholder ownership. The theoretical framework developed by Jensen and Meckling
(1976), based on agency theory and ownership structure, plays a central role in the corporate
governance literature. Bonazzi and Islam (2007) argue that effective control mechanisms
that reduce agency costs and force managers act in the best interests of shareholders have
been a major concern for corporate governance. Similarly, Jensen (1993) argues that
ownership structure is a crucial element in corporate control and governance. Finance
theory has long recognized the important role of the size of shareholders in corporate Role of
governance (Dhillon and Rossetto, 2009). corporate
Their resources and expertise mean that owners of large blocks of shares have a greater
incentive to monitor and discipline managers to overcome free-rider problems resulting from
governance
dispersed ownership (Shleifer and Vishny, 1986). Edmans (2014) claims that large
shareholders – also known as blockholders[2] – play a critical role in governance, because
the size of their stake in the company provides an incentive to bear the cost of monitoring
managers. Dhillon and Rossetto (2009) argue that blockholders provide a public good to 109
other investors. Similarly, Dou et al. (2016) claim that when no shareholder has a majority
interest (i.e. widely dispersed ownership), it is less economically viable for any individual
shareholder to incur significant monitoring costs, as they will receive only a small portion of
the benefits. Thus, blockholders may help to improve the quality of reporting and
transparency. White et al. (2007) argue that low ownership concentration can be equated to
managerial control, while the opposite can be equated to owner control. Alternatively, Li
et al. (2008) argue that blockholders provide effective monitoring and reduce information
asymmetry, as they can typically access the corporate information they need.
The results of empirical studies of the influence of blockholder ownership on IC
disclosure are inconclusive. For example, Gan et al. (2013) observe a positive relationship in
listed companies in Malaysia. In contrast, Oliveira et al. (2006) show that blockholders have
a significant negative influence on the voluntary reporting of IC in listed companies in
Portugal. In examining the drivers of voluntary IC disclosure in listed companies in
Australia, White et al. (2007) observe no significant correlation between disclosure practice
and the level of blockholder ownership.
In Kuwait, Article 17 of the KSE Regulations requires listed companies and its
stockholders to immediately disclose any single ownership interest once that interest
directly or indirectly equals or exceeds 5per cent of a company’s capital. Given the
effectiveness of blockholders as a corporate governance tool and their ability to exert
pressure on managers to increase accountability, transparency and disclosure practices, it is
expected that a higher proportion of blockholder ownership is associated with greater IC
disclosure. Consequently, this study hypothesizes that:
H4. Ceteris paribus, there is a positive association between blockholder ownership and
the extent of IC disclosure.
2.2.5 Government ownership. Eng and Mak (2003) define government ownership as the
proportion of shares owned by the government and government-related institutions. From a
stakeholder theory perspective, state ownership is a crucial influence on the quantity and
quality of voluntary disclosure, particularly in emerging and frontier markets, where
concentrated ownership structures are widespread (Albassam, 2014). Firer and Williams
(2005) argue that government ownership may significantly influence disclosure practices,
including those related to IC. They claim that directors of companies with government
ownership focus more on policies (such as the development of human resources and IC) that
are beneficial for the well-being of the country as a whole. These directors use voluntary
disclosure to signal to the authorities and society at large that they have implemented
government policy in these areas. On the one hand, Eng and Mak (2003) argue
that government ownership increases moral hazard and agency problems. However,
governments tend to see good corporate governance practices and disclosure as measures
that protect shareholders and mitigate information asymmetry. On the other hand, Mak and
Li (2001) argue that governments are able to obtain information from various sources and
tend to be less active in monitoring their investments in listed companies. These companies
IJOES are less likely to adopt strong governance mechanisms, as they are less accountable,
34,1 monitoring of their financial performance is weaker, and they have easier access to
financing. Finally, Huafang and Jianguo (2007) argue that poor accountability and
monitoring tend to weaken the pressure for voluntary disclosure in companies with a higher
proportion of state ownership.
Empirically, the relationship between government ownership and of IC disclosure has
110 not been examined in any detail. Generally, findings suggest a positive relationship.
Specifically, Firer and Williams (2005) in Singapore, and Gan et al. (2013) and Haji and
Ghazali, (2013) in Malaysia, observe a positive and significant association between the
proportion of government ownership and IC disclosure.
Over the past decade, and in the context of a general economic reform, the Kuwait
Government has pursued several initiatives and reforms related to listed companies. For
example, in 2010, it established the Capital Market Authority to regulate securities’ activities
based on principles of transparency and fairness, and to enhance disclosure (Alfraih, 2016).
In addition, it signed agreements with the US Securities and Exchange Commission,
Strahota Capital Markets, LLC and the National Association of Securities Dealers, to review
the KSE regulatory framework and provide feedback.
Given the Kuwaiti Government’s clear intention to promote accountability and
transparency of listed companies, and that it acts as a role model through its direct
investments in them, it is expected that higher levels of government ownership motivate
companies to increase voluntary IC disclosure. Consequently, this study hypothesizes that:
H5. Ceteris paribus, there is a positive association between government ownership and
the extent of IC disclosure.

3. Data and research design

3.1 Data
Two data sets were used to investigate the influence of corporate governance mechanisms
on IC disclosure in companies listed on the KSE:
(1) corporate annual reports; and
(2) corporate governance variables.

The main sources were the official website of the KSE (www.kse.com.kw); the company’s
website; and the company’s corporate headquarters. As of 31 December 2013, a total of 195
companies were listed on the KSE. They are classified into five main sectors: financial
institutions, investment, real estate, manufacturing and services. As this number was
relatively small, all companies were considered. The main sampling criteria were:

the availability of an English-language version of the 2013 annual report; and

the availability of corporate governance variables (namely, board characteristics
and ownership structure for the year 2013).

These criteria were applied to the entire population and the final sample consisted of 182
companies.

3.2 Measurement of IC disclosure

Whiting and Miller (2008) review studies of IC disclosure and its determinants and report
that content analysis is almost invariably used to measure its level. This approach involves
“codifying qualitative and quantitative information into pre-defined categories to derive
patterns in the presentation and reporting of information” (Guthrie et al., 2004, p. 287). The Role of
technique typically requires humans to code elements of IC disclosure found in corporate corporate
annual reports (Lee and Guthrie, 2010), consistent with Abeysekera’s (2010) argument that
governance
this is the principal source of information about a company’s IC activities. Following earlier
empirical work (Bozzolan et al., 2006; Huafang and Jianguo, 2007; Brüggen et al., 2009;
Abeysekera, 2010; Vafaei et al., 2011; Gamerschlag, 2013; Alcaniz et al., 2015), this study
takes the same approach. 111
The technique can be applied in several ways. These include counting keywords,
sentences or sections or reading the whole text (Gamerschlag, 2013). However, Li et al. (2008)
argue that as keywords are the smallest unit of measurement, they provide maximum
robustness. Similarly, Gamerschlag (2013) argue that identifying specific IC keywords is the
most reliable form of content analysis, as it always produces the same scores and can be
easily replicated by other researchers. Following earlier work (Vafaei et al., 2011;
Gamerschlag, 2013), the measure used in this study is the occurrence of keywords found in
the annual reports of KSE-listed companies. Keywords were defined using the framework
proposed by Sveiby (1997) and modified by Guthrie et al. (2004), which has been used with
success in several IC studies (Whiting and Miller, 2008; Branco et al., 2010). It has 3
categories and 24 components. The three IC categories are: internal, external, and human
capital.
Academic experts and qualified professionals were consulted to ensure the validity
of the framework in the Kuwaiti corporate environment. The full framework is shown
in Table I.
To quantify the level of IC disclosure, earlier empirical studies (Guthrie and Petty,
2000; Li et al., 2008; Abeysekera, 2010; Haji and Ghazali, 2013) have used the
dichotomous (unweighted) approach. In this approach, a value of “0” is assigned to non-
disclosure and a value of “1” is assigned if the item appears. Cooke (1989) argues that
the dichotomous approach is more objective than the weighted approach as it gives all
items equal importance. Similarly, Abeysekera (2010) argues that assigning weights to
different types of IC disclosure may introduce errors due to scaling bias. Consistent
with earlier work, each IC disclosure item is assigned an equal weight in this study.
Each company’s corporate annual report was examined by the researcher to identify
occurrences of 24 keywords, and the score was recorded on a coding sheet. The total
disclosure score was calculated for each company, and an index was constructed to
measure its relative disclosure level. This index is the ratio of a company’s actual
disclosure score to the maximum possible (i.e. 24).

Internal capital External capital Human capital

Intellectual property Brands Education

Corporate culture Customers Know-how
Patents/Copyrights/Trademarks Company names Work-related knowledge/competencies
Information systems Customer satisfaction Academic qualifications
Networking systems Customer loyalty Professional qualifications
Management process Distribution channels Human capital/resources
Management philosophy Business collaboration Training
Financial relations Licensing agreements Entrepreneurial spirit, innovativeness, Table I.
proactive and reactive abilities, Intellectual capital
changeability framework
IJOES 3.3 Regression model
34,1 Once the level of IC disclosure has been determined, the next step was to investigate the
relationship between IC disclosure and governance mechanisms. IC disclosure was used as
the dependent variable in a multiple regression model. To test H1-H5, the influence of each
governance mechanism (board size, external directors, CEO duality, blockholder ownership
and government ownership) was used as independent variables. Company size, company
112 leverage and company performance were used as control variables. The regression is
estimated and the detail for each variable is presented in Table II:

IC5 b 0 þ b 1 BSIZE þ b 2 OUT þ b 3 ROLE þ b 4 BLOCK þ b 5 GOV þ b 6 SIZE

þ b 7 LEV þ b 8 ROA þ « i (1)

4. Results and discussion

4.1 Descriptive analysis
Descriptive statistics for both dependent and independent variables are reported in
Table III. The results show that the mean IC disclosure level for all KSE-listed companies in
2013 was 28 per cent, ranging from 0 to 96 per cent. This wide variation encourages a more
detailed examination of the role of corporate governance.
Descriptive statistics for corporate governance variables (Table III) show that board size
ranges from 3 to 10 directors, with a mean of 6. These results also reveal that on average,
boards consist of 87 per cent external directors, ranging from 47 to 100 per cent.
Furthermore, in 35 per cent of companies, the CEO is also the board chairman. With respect
to ownership concentration, Table III shows that the mean percentage of blockholders is 52
per cent. In contrast, the mean percentage of shares held by the government is only 4
per cent.

Abbreviated
Full variable name variable name Measurement

Dependent variable
IC disclosure IC Number of IC indicators in the annual report, divided by the
maximum possible (24)
Corporate governance variables
Board size BSIZE The total number of members of the board of directors
External directors OUT Percentage of external directors compared to the total number
of directors
CEO duality ROLE Dummy variable that equals 1 if the CEO of a company is
also the chairman of the board; 0 otherwise
Blockholder ownership BLOCK Proportion of ordinary shares held by blockholders (who own
at least 5% of shares) compared to total outstanding shares
Government ownership GOV Proportion of ordinary shares held by government (at least
5%) compared to total outstanding shares
Table II. Control variables
Model specification Company size SIZE The natural logarithm of total assets
and variable Company leverage LEV The ratio of total debt to total assets
measurement Company performance ROA The ratio of net income divided by total assets
As for control variables, Table III shows that company size varied significantly, ranging Role of
from Kuwaiti Dinar (KD)[3] 1.68m to KD 18,600.14 million, with a mean of KD 533.25m corporate
(SD = 207.45). This result suggests that the distribution is positively skewed and non-
normally distributed. Non-normality was largely corrected with the natural logarithm
governance
transformation of the variable SIZE. Company leverage ranged from 0.02 to 0.89 with a
mean of 0.37, while company performance, measured by ROA, ranged from 0.25 to 0.23
with a mean of 0.03.
113
4.2 Bivariate correlations
Table IV presents the strength and direction of Pearson’s correlation for all variables. The
results show that correlations tend to be relatively consistent in both magnitude and
significance. The highest correlation was observed between external directors and CEO
duality (r = 0.60, p < 0.05), followed by board size and company size (r = 0.35, p < 0.01).
However, no pairwise coefficient exceeds 0.8, suggesting that multicollinearity is unlikely to
be a serious problem. Tolerance and variance inflation factors (VIF) were also examined and
found to be well within acceptable limits[4].

4.3 Regression results

Table V shows the results of the regression analysis based on regressing IC disclosure on
both corporate governance and control variables. This shows that board characteristics,
ownership structure and control variables in combination are highly significant in

Variable Mean SD Minimum Maximum

IC disclosure score 0.28 0.22 0.00 0.96

Board size 6.10 1.57 3.00 10.00
Independent directors 0.78 0.98 0.47 1.00
CEO duality 0.35 0.48 0.00 1.00
Institutional ownership 0.52 0.23 0.00 0.99
Government ownership 0.04 0.11 0.00 0.76 Table III.
Company size 533.25 207.45 1.68 18,600.14
Company leverage 0.37 0.24 0.02 0.89
Descriptive statistics
Company performance 0.03 0.06 0.25 0.23 for dependent and
independent
Note: See Table II for the definitions of variables variables

Variable IC BSIZE OUT ROLE BLOCK GOV SIZE LEV

Board size 0.44*** 1.00

Outside directors 0.25*** 0.24** 1.00
CEO duality –0.20** –0.05 –0.60** 1.00
Blockholder ownership 0.23*** –0.09 –0.011 –0.18** 1.00
Government ownership 0.12 0.33*** 0.11 –0.17** –0.23*** 1.00
Company size 0.30*** 0.35*** 0.20** –0.12 –0.13 0.21*** 1.00 Table IV.
Company leverage 0.11** –0.04 –0.07 –0.01 0.09 –0.01 0.11*** 1.00
Bivariate correlations
Company performance 0.12*** –0.15* –0.03 –0.01 0.27*** 0.15** 0.01*** –0.08
between dependent
Notes: See Table II for the definition of variables; *, ** and ***significant at the 0.10, 0.05 and 0.01 levels, and independent
respectively (two-tailed) variables
IJOES Unstandardized Standardized Collinearity
34,1 coefficient coefficient statistics
Variable B SE Beta t-statistic Significant Tolerance VIF

Dependent variable: intellectual capital disclosure

Variable Intercept 1.560 0.218 7.156 0.000***
Corporate Board size 0.033 0.012 0.183 2.708 0.007*** 0.724 1.381
114 Governance External 0.191 0.084 0.134 2.272 0.024** 0.949 1.054
directors
CEO duality 0.046 0.036 0.078 1.287 0.200 0.908 1.101
Blockholder 0.170 0.076 0.144 2.227 0.027** 0.795 1.257
ownership
Government 0.160 0.166 0.062 0.962 0.338 0.784 1.276
ownership
Control Company 0.077 0.012 0.416 6.261 0.000*** 0.750 1.333
size
Company 0.055 0.029 0.114 1.898 0.059* 0.924 1.082
leverage
Company 0.006 0.003 0.128 2.064 0.041** 0.863 1.158
performance
2
N R Adj.R2 F-statistic p-value (F-statistics)
182 0.441 0.415 16.675 0.000
Table V. Notes: See Table II for definitions of variables; *, ** and ***significant at the 0.10, 0.05 and 0.01 levels,
Regression analysis respectively (two-tailed)

explaining variation in IC disclosure (F = 16.675, p < 0.01). This finding is consistent with
the hypothesis that the level of IC disclosure is a function of, among other factors, effective
corporate governance mechanisms. The adjusted R2 indicates that the corporate governance
variables, along with control variables, explain about 42 per cent of the variance.
As for corporate governance variables, the standardized coefficients presented in
Table V show that board size has the strongest influence on IC disclosure ( b = 0.18),
followed by blockholder ownership ( b = 0.14), and external directors ( b = 0.13), while
CEO duality ( b = 0.08) and government ownership ( b = 0.08) have the least
influence.
H1 predicts that IC disclosure is positively associated with board size. Consistent with
this prediction, Table V shows a significant, positive association (p < 0.01). This finding
supports agency theory and resource dependence theory, which suggest that a larger board
is more likely to detect agency problems because they can provide more expertise, greater
management oversight and access to a wider range of resources. This enhances the
company’s competitiveness in the corporate environment. Empirically, this finding is
consistent with Abeysekera (2010), Haji and Ghazali (2013), and Rodrigues et al. (2016), who
observe that an increase in the number of directors (up to 15) has a beneficial effect on IC
disclosure.
Li et al. (2008) argue that the presence of external directors on the board increases IC
disclosure. The results presented in Table V support this argument as they show that the
external directors coefficient is positively and significantly (p < 0.05) associated with IC
disclosure. They also support H2, which argues that external directors have a strong
incentive to improve corporate disclosure in order to maintain their reputation. The finding
is consistent with Cerbioni and Parbonetti (2007), and Li et al. (2008) who observe that IC
disclosure increase with the proportion of external directors.
 With respect to the influence of CEO duality on IC disclosure, the results presented in Role of
Table V shows that while the CEO duality coefficient is negative, it is non-significant; hence, corporate
the results do not support H3. This finding is consistent with the non-significant association
observed by Li et al. (2008).
governance
H4 predicts a positive association between blockholder ownership and IC disclosure.
Consistent with this prediction, Table V shows a significant, positive association (p < 0.05).
This result supports the argument that blockholders provide a public good to other
investors by monitoring and disciplining managers, and increasing corporate disclosure. 115
The finding is consistent with Gan et al. (2013), but inconsistent with Oliveira et al. (2006)
who document a significant negative association.
H5 predicts that greater state ownership will increase IC disclosure. The results
presented in Table V show that while the coefficient is positive, it is non-significant; hence,
the results do not support H5. This positive, but non-significant association is inconsistent
with the findings of Firer and Williams (2005), Gan et al. (2013) and Haji and Ghazali, who all
document a positive, but significant association.
With respect to the control variables, the results show that the estimated coefficients for
company size (p < 0.01), company leverage (p < 0.10) and company performance (p < 0.05)
are positive and significant, suggesting that that larger, highly leveraged and more
profitable KSE-listed companies are associated with higher levels of IC disclosure.

5. Conclusion
This study explored the role of corporate governance mechanisms (board size, external
directors, CEO duality and ownership structure) on IC disclosure among companies listed on
the KSE. Following a review of the literature on voluntary disclosure and corporate
governance, a framework based on agency theory and resource dependency theory was
developed. IC disclosure was predicted to be influenced by the quality of corporate
governance mechanisms. Within this framework, five hypotheses were developed and
tested. Specifically, IC disclosure was predicted to be positively associated with board size,
the proportion of external directors, blockholder ownership and government ownership.
Furthermore, it was predicted that IC disclosure would be negatively associated with CEO
duality.
Based on the framework proposed by Sveiby (1997) and modified by Guthrie et al. (2004),
a content analysis was used to analyze the annual reports of all KSE-listed companies for the
year 2013. After determining the level of IC disclosure, the association between it and
corporate governance variables was examined using a multiple regression analysis. The
result show that the mean IC disclosure level for all KSE-listed companies in 2013 was 28
per cent, ranging from 0 to 96 per cent. This wide variation encouraged a deeper
examination of the role of corporate governance. The findings support three of the five
hypotheses, with the exceptions being CEO role duality and government ownership.
Significant, positive associations were found between IC disclosure and board size, external
directors and blockholder ownership. Standardized coefficients reveal that board size has
the strongest influence on IC disclosure, followed by institutional ownership and external
directors. Overall, the findings suggest that KSE-listed companies with larger boards, a
higher proportion of external directors and higher blockholder ownership are associated
with higher levels of IC disclosure.
This study makes a theoretical contribution and has practical implications. First, it
contributes to our theoretical understanding of corporate reporting of IC and the relationship
between IC disclosure and corporate governance mechanisms. In particular, it provides
empirical support for the effectiveness of corporate governance mechanisms in promoting IC
IJOES disclosure in a frontier capital market. Second, and again in the frontier market context, the
34,1 findings provide a certain degree of empirical support for the prediction by Healy and
Palepu (2001) that effective corporate governance plays an important role in increasing the
extent of voluntary disclosure. Furthermore, they are consistent with results from other
developed and emerging markets, for example, Cerbioni and Parbonetti (2007), Li et al.
(2008), Abeysekera (2010), Gan et al. (2013), Haji and Ghazali (2013), and Rodrigues et al.
116 (2016). Third, and from a practical perspective, the results can be used as a useful guideline
for regulators, company management and shareholders. Finally, given the recent initiatives
by the Kuwaiti Government to promote transparency and the informational efficiency of the
stock market, this research provides timely empirical evidence in support of these efforts.
As with any research, the study has several limitations, and there are several areas that
merit further investigation. First, an unweighted measure of IC disclosure was used.
Therefore, the quality of disclosure was not addressed. A fruitful avenue for future research
would to examine the quality of IC disclosure, and its relationship with corporate
governance mechanisms. Second, the lack of data meant that a limited number of corporate
governance attributes were considered. Future research could include other board
characteristics such as gender, interlocks, qualifications or tenure. Another interesting
aspect is ownership structures, where future research could examine director ownership,
family ownership, management ownership or royal family ownership. Finally, subjectivity
is an inherent problem in assessing IC disclosure in this study and in previous IC studies.
Consistent with previous studies, several strategies were adopted to minimize this potential
bias, and an initial, careful review of the full annual report was included. Despite these
limitations, the results provide interesting insights into the relationship between IC
disclosure and corporate governance mechanisms, based on empirical evidence from a
frontier market.

Notes
1. The terms “intangibles” and “intellectual capital” are often used synonymously. However,
“intangibles” is an accounting term, while “intellectual capital” is found in the human resources
literature (Oliveira et al., 2006).
2. Although there is no unambiguous definition of a blockholder, the empirical literature typically
defines it as a shareholding of 5% or more (Eng and Mak, 2003).
3. The average exchange rate with the US dollar is approximately KD 1 = US$3.00.
4. (Pallant, 2013) notes that multicollinearity is unlikely to be a problem when tolerance is above 0.1
and VIF is below 10. The statistics presented in Table V show that tolerance and VIF for all
independent variables are within these limits.

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About the author

Mishari M. Alfraih, PhD, CPA, CIA, is an Associate Professor of Accounting at the College of
Business Studies, The Public Authority for Applied Education and Training, Kuwait. He holds a PhD
in Accounting from Queensland University of Technology, Australia. He is a Certified Public
Accountant (CPA), Certified Internal Auditor (CIA) and a Certified Fraud Examiner (CFE). Dr
Alfraih’s research interest focuses on the role of information in capital markets and IFRS reporting
practices. His research areas in IFRS include financial information flows, information quality,
decision usefulness of financial reporting and audit quality in emerging capital markets. Mishari M.
Alfraih can be contacted at: m@dralfraih.com

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