Corporate Governance Essay Example for Free

Corporate Governance EssayABSTRACTThis paper examines whether the stipend of the straits decision maker Officer position in Hong Kong public steadys is affected by visiting card composition, given the influence of family control on the progresss of mevery Hong Kong companies. It is hypothesized that I) in family-controlled boards, head word Executive Officers receiver high stipend and II) antique Executive Officers in family-controlled boards serve as oldtimer Executive Officer positions longer. In family-controlled boards, corporate nerve is of very high importance as the independent non- decision maker directors can exert less influence over the board, comp ared to non-family-controlled boards (dispersed boards). Keywords Board composition, Remuneration, Corporate Governance.1.INTRODUCTIONThe economic turmoil in Asia in 1997 has led to a wider recognition of the importance of corporate system. In line with global trends towards higher standards of corporate govern ing body, the duties and liabilities of the directors of the listed companies have therefore become more stringent.It follows that umteen corporate governance mechanisms designed to monitor board members may be less effective for family-owned and family-controlled sloppeds. However, to attract away(p) investors, family-owned and family-controlled steadfastlys tend to encourage greater independence and monitoring from the board.For the purposes of the employment, family-owned and family-controlled are used interchangeably. The reason is that actual family self-control is difficult to ascertain due to various shareholdings and special purpose vehicles that are used, and cannot be deduced from annual reports.Thus, in this contract we classify family-control and family-ownership when the board is made of a majority of related family members as a family-controlled board. When it is not, we classify it as a dispersed board. In practice, there are instances where the family owns th e majority of a company exactly comprise of a minority of the board, and it is possible that the family is able to exert influence via other avenues, however, this study allow for not be examining such.Family-owned firms are common without Asia. Studies show that, family-owned firms hold more than 20 percent of the equity of listed companies in Asia, and more than 60 percent of the listed companies have connections with family-owned groups (Bebchuk Fried, 2006). Family-owned businesses represent the predominant form of listed companies in Hong Kong (Standard Poors, 2002). Such family ownership coordinate implies the severe influence of dominant shareholders and provides limited share for minority shareholders. Compared to the Anglo-American environment, where ownership blocks are less concentrated but institutional investors are more prevalent, in Hong Kong, there is less of a cultivation for non-executive directors or minority shareholder activists to challenge.Variations in ownership structure may lead to differences in the nature of deputation conflicts, the roles of directors may vary in accordance to the ownership structure. For family-owned firms, Shleifer and Vishny (1997) argue that the primary elbow room conflict is between a family owner and non-family owners. Meanwhile, for widely held firms, Berle and Means (1932), and, Jensen and Meckling (1976) argue that the primary agency conflict is between executives and shareholders. As a consequence, tying profits to executeance of executives may prove the virtually efficient way to mitigate this agency conflict.To date, a vast of bookss published in recent years show the growing recognition of influences of family-owned firms and executive salary on corporate governance. Many studies have tended to focus on the use of remuneration contracts to align interests of executives with owners in family-owned firms.The rise in executive remuneration in recent years has been the subject of public cri ticism, which further intensified corporate governance scandals.Therefore, the question whether a correlation exists between remuneration and family-control in board composition at Hong Kong-listed companies.2.OBJECTIVESIn 1994, Hong Kong switchs and Clearing Limited introduced rules that require listed firms to disclose the remuneration of directors. Before 2004, there was no requirement to disclose the names and remuneration of directors (Cheng Firth, 2005).The Disclosure of Financial Information rule down the stairs Hong Kong Exchanges and Clearing Limiteds Listing Rules was amended on 31 March 2004 to require abundant disclosure, on an individual and named basis, of directors fees and any other reimbursement or emolument payable to a director. In addition, Hong Kong Financial Reporting Standard 2 requires listed firms to disclose directors share- sales boothd remuneration.The Code on Corporate Governance Practices forms part of the Listing Rules and came into effect on 1 Jan uary 2005. According to the Code on Corporate Governance Practices, Hong Kongs listed firms should be overseen by an effective board, which should assume responsibility for the leadership and control of the listed firm, and the members of which should be together with responsible for promoting the success of the firm by directing and supervising its affairs. Directors should make decisions objectively in the best interests of the firm.In regards of remuneration policy for firms directors, the Code on Corporate Governance Practices requires the disclosure of information related to the firms directors remuneration policy and other remuneration-related matters. There should be a formal and crystal clear procedure for setting policy on executive directors remuneration. The forefront Executive Officer, a director in the board of company, will hence have his/her full remuneration disclosed.It is recommended that remuneration should be set at a level sufficient to attract and retain dir ectors of the caliber required to run the company successfully, but companies should avoid paying more than is necessary.However, it is argued that many corporate governance mechanisms designed to monitor board members may be less effective for family-owned firms. However, to attract away investors, family-owned firms tend to encourage greater independence and monitoring from the board.In Hong Kong, there are quite a number of listed companies have a high soaking up of family ownership. It is common for the top executives of family-owned firms in Hong Kong to be family members. The rise of remuneration of family executives in family-owned firms has been the subject of public criticism.Recognizing this, the purpose of this research is to find out whether there is any human relationship between family-board-control of firms and remuneration of mind Executive Officers. To summarize, this study revolves around the following major objectives. To test whether there are significant dif ferences in chieftain Executive Officers remuneration for family-controlled and non-family-controlled firms (specifically firms with family-controlled boards and firms without family-controlled boards) To find out whether Family Chief Executive Offices (cases where the Chief Executive Officer are family members of the family-controlled boards) are awarded excessive compensation, compromising standards of corporate governance To examine the tenure of Chief Executive Officers for family-controlled firms vs non-family-controlled firms, given that there may be differences in the boards ongoing approval and demand of the results delivered by the Chief Executive Office and To test whether there are significant differences in corporate governance structure of family-controlled and non-family-controlled firms.3.LITERATURES REVIEW, HYPOTHESIS DEVELOPMENT3.1 Agency hypothesisIt is commonly acknowledged that ownership structure, the basis of corporate governance, is important to the overa ll feat of firms. While there are a large number of literatures discussing ownership structure, agency theory is frequently cited as a foundation.In modern corporations, the separation of ownership and control leads to agency conflicts that can be alleviated through various corporate governance mechanisms (Fama and Jensen, 1983). As unrivaled such mechanism, compensation schemes are designed to provide incentives that align the behavior of agents to act on behalf of principles (Jensen and Meckling, 1976). This relationship between executive compensation and firm performance has received considerable attention from the general public and academics.One of the issues in the field of management is the pretend of family influence (Mishra et. al., 2001 McConaughy et. al., 1998) and corporate governance on the value of a firm (Khatri et al., 2001 Kwak, 2003 Black et al., 2003).There are various studies in diverse areas like accounting, economics, finance, truth and management have been conducted to study such impact (Mishra et al., 2001 Kwak, 2003 Blacket al., 2003 Andersen and Reeb, 2003). These studies have resulted in interesting and useful observations.According to Alchian and Demsetz (1972), the principal agent problem comes from hidden fill due to asymmetric information. The essence of a firm is that, it permits people to work as a team. It is the cooperation of a team that leads to a firms output. Thus, the agency problem inevitably arises in corporate governance.According to Jensen and Meckling (1976), agent problem arises from the conflict of interests between shareholders as the principals and the executives as the agents. Consequently, residual control rights fall into the manpower of management instead of the residual cash flow claimants. As a result, the sum of monitoring expenditures be incurred by the principal, bonding expenditures incurred by the agent, and the value of the deep in thought(p) residual borne by the principal are included as the cost of agency.In general, when ownership of a firm becomes more dispersed, the agency problem will be deteriorated due to the inability of the relatively small shareholders to monitor the behavior of management. The monitoring of managers by shareholders is also weakened by free-rider problem. To mitigate the problem of agency, Ang (2000) and Denis and sarin (1999) suggested the shareholding of management to be increased in order to make the executive a significant claimant.An inverse correlation exists between the dispersed ownership and firm performance (Berle and Means, 1932), because executives interests do not coincide with the interest of shareholders so that corporate resources are not used for the maximization of shareholders wealth. This view has been supported by many scholars. Shleifer and Vishny (1986), McConnell and Servaes (1990), and Zingales (1995) found a strong collateral relationship between ownership concentration and corporate performance.In transitional eco nomies, Xu and Wang (1999) and Chen (2001) found a positive relationship between actual firm performance and ownership concentration for a sample of listed Chinese companies.3.2Ownership StructureIt is common in Hong Kong, that ownership structure is characterized by single dominant owners (Chau Leung, 2006). A report of the Corporate Governance Working Group of the Hong Kong Society of Accountants in 1995 indicated that a high concentration on family-controlled listed firms is exceedingly entrepreneurial and opportunistic in their business strategies, however, the report also indicate that these firms with single dominant owners lack resources and corporate culture to maintain strong internal corporate control.The 2001 Review on Corporate Governance by the Hong Kong Standing Committee for Corporate Law Reform, as well as a report from Standard Poors, indicated that family ownership structures present particular challenges. Theoretically, there is a major puzzle regarding the rol e of family in large firms (Bertrand Schoar, 2006 Villalonga Amit, 2006).In family-controlled firms, grim factors may negatively influence the firms value (Demstez, 1983 Demstez and Lehn, 1985). Table 1 as below lists positive and negative factors affecting the relationship between family control and firm value. It shows that there is still difference of opinion among researchers on this topic of importance.3.3Family Chief Executive OfficersIn this study, whether a person belonging to the family acts as a Chief Executive Officer is secluden into account. We classify family-control and family-ownership when the board is made of a majority of related family members (family-controlled board). When it is not, we classify it as a dispersed board. Family Chief Executive Officers have substantial stockholdings of 5 percent or more (Daily Dollinger, 1993), with such given bargaining power, can be expect to influence the size and structure of their remuneration packages to their own bene fit. Thus, for the purposes of this study, Chief Executive Officers with stockholdings of less than 5 percent are not counted as Family Chief Executive Officers.There are differing opinions on whether such Family Chief Executive Officers have higher or depress remunerations at such family-controlled firms. Some rely that such Family Chief Executive Officers are receiving above-average compensation due to the family-controlled board, as well as their strong ability to influence remuneration committee.Oh the other hand, others take the opposite view and see that Family Chief Executive Officers should be receiving below-average compensation. There is several reasons for this expectation. First of all, both anecdotal (Applegate, 1994 Kets de Vries, 1993) and existential (Allen Pamian, 1982 Gomez-Mejia et al., 2001 Schulze et al., 2001) evidence suggest that incumbents with family ties to owners transport high employment security.As argued by Beehr (1997), the Family Chief Executive Officer inherently plays two overlapping and interdependent roles a work role as steward of the company, and a non-work role as fulfillment of family obligations. In reciprocity for this role duality, the Family Chief Executive Officer is riposteed with a relatively assured pedigree (Allen Pamian, 1982 Kets de Vries, 1993 Gomez-Mejia et al., 2001).Moreover, any(prenominal) literatures suggested that evaluators are more likely to make positive performance attributions to employees when there are emotional ties between monitoring and those being judged (Cardy Dobbins, 1993). It is expected that in family-controlled firms, board members in their role as monitors may be less inclined to attribute disappointing results to the Family Chief Executive Officer, giving the benefit of the doubt to the incumbent when interpreting ambiguous performance data.Agency theory suggests that there are inherent conflicts between shareholders and executives. Applying agency theorys logic, the abov e scenario suggests that in family-controlled firms, risk adverse agents would trade higher job security for lower earnings if they are related to principals. Family Chief Executive Officers mitigate usual agency costs because of their aligned interests with the owners (Anderson Reeb, 2003). The information asymmetry problem in agency relationships may also be reduced given the close ties between Family Chief Executive Officers and the owners. Since they hold high ownership stakes, Family Chief Executive Officers have sufficient incentives to place family welfare ahead of personal interests, indeed may perform better than firms with non-family Chief Executive Officers.Barney (2001) suggested that appointing family members as Chief Executive Officers may be beneficial. Tradition, loyalty, and bonding relationships determine how resources are deployed in family firms. Family Chief Executive Officers get common interests and identities (Habbershon Williams, 1999) and play a dual ro le by being both owners and executives (Chang, 2003 Yiu, Bruton, Lu, 2005).Through social relationships with managers and employees, Family Chief Executive Officers may help to come intangible resources such as goal congruence, trust, and social interactions, providing valuable, unique, and hard-to-imitate competitive advantage (Chu, 2011 Liu et al., 2011 Luo Chung, 2005).The Code on Corporate Governance Practices recommends remuneration committee to seek advice from the Chief Executive Officer on the matter of directors remuneration.Executives in firms controlled by a large shareholder receive more compensation for performance, than executives in firms lacking a controlling owner (Gomez-Mejia et al., 1987).Mehran (1995) examined the relationship between executive remuneration, ownership structure and firm performance. The results indicate that firms, which have more remote directors, have a higher percentage of executive remuneration in equity- ground form. Moreover, the percen tage of equity-based remuneration is inversely related to the outside directors equity ownership, i.e., the executives equity-based remuneration rose if the outside directors owned less of the company, and vice-versa.Next, Mehran (1995) turned to firm performance, and its relationship to executive remuneration and ownership structure. He used Tobins Q and return on assets as measures of firm performance. He found firm performance to be positively related to the percentage of executive remuneration that is equity-based. However, Mehran (1995) no relationship between firm performance and ownership structure. He concluded that the results support the notion that executive remuneration should be tied to firm performance.There is a vast amount of literature on turnover of the Chief Executive Officer position (Furtado and Karan, 1990 Kesner and Sebora, 1994 Finkelstein and Hambrick, 1996 Pitcher et al., 2000). However, according to Finkelstein and Hambrick (1996), the relationship between remuneration and turnover has not been subjected to rigorous empirical examination, pull down given the emphasis on retention as a justification for high remuneration of Chief Executive Officer.The following hypotheses are frameHypothesis 1 In family-controlled boards, Chief Executive Officers receive higher compensation.Hypothesis 2 Chief Executive Officers in family-controlled boards serve as Chief Executive Officer positions longer.3.4Board CompositionThe role of the board is expected to represent shareholders, provide strategic guidance to and effective oversight of management, foster a culture of good governance, and promote a safe and healthy working environment within the company.In accordance to Hong Kong Stock Exchange Listing Rule 3.10, the board of directors is required to have at least three independent non-executive directors. The presence of truly independent non-executive directors in the corporate governance regime is seen as one way of mitigating agency problem as sociated with concentrated family ownership.In family-owned firms, given the influence of family control on the remuneration and performance relationships exists, where the majority of shares are in the turn over of family members, under this circumstance, the executive and risk-bearer functions are merged and more of the wealth consequences of the executives decisions are internalized. In other words, there is less separation of ownership and control and thus lowering agency costs, which in turn leads to less cost for monitoring by outside directors. Therefore, firms closely controlled and managed by family members are expected to use lower proportion of outside directors compared with firms with disperse ownership.In widely held firms, with ownership dispersed among many investors, investors are often small and poorly informed to exercise flush the control rights they actually have. Moreover, the free-rider problem faced by individual investors makes them uninterested in expendi ng effort to learn about the firms they have financed, or even to participate in the governance (Shleifer and Vishny, 1997). As a result, the larger degree of separation of ownership and control in widely held firms leads to greater conflicts. The use of outside directors by widely held firms is expected to be more.3.5Remuneration CommitteeIn 1999, remuneration committees were uncommon in Hong Kong, with only few firms reporting their existence (Cheng Firth, 2005). Since 2006, Hong Kong Stock Exchange proposes a rule to require issuers to set up a remuneration committee, with the committee chairman and a majority of the members being Independent Non-executive Directors.In family-owned firms, the positions of the Chief Executive Officer are usually held by family members, who can influence the level of remuneration paid to directors. The Code on Corporate Governance Practices recommends remuneration committee to seek advice from the Chief Executive Officer on the matter of directors remuneration.The Code on Corporate Governance Practices recommends that the majority of remuneration committee members be Independent Non-executive Directors. The presence of Independent Non-executive Directors on the remuneration committee is supposed to be used as monitoring mechanism that prevents excessive remuneration for executive directors (Basu et al., 2007), including that of the Chief Executive Officer. The role of independent non-executive directors and large institutional shareholders becomes crucial to curtailing the possible self-serving behavior of top managers (HKSA, 2001).Studies of firms in other countries show at odds(p) results on the relationship between remuneration and remuneration committee. Some findings show that remuneration committees tend to reduce remuneration, whereas others report the opposite (Conyon Peck, 1998 Ezzamel Watson, 1998).However, in practice it is highly likely that the Chief Executive Officer has some influence over the compensation decision (Murphy, 1999). An important question relating to the composition of remuneration committee concerns the pattern combination of outsiders and insiders. Insiders may face distorted incentives due to their lack of independence from the Family Chief Executive Officer (Bushman et al., 2004).3.6 Components of RemunerationThe primary components of remuneration of Chief Executive Officer are similar, however, the relative level and weights on the components differ (Abowd and Kaplan, 1999, and Bryan et al., 2006). Generally, remuneration of Chief Executive Officer can be divided into four basic parts a base salary, an annual bonus which is tied to some accounting measure of company performance, stock options, and long-term incentive plans, such as restricted stock plans and multi-year accounting-based performance plans. Base salary is the fixed part of remuneration of Chief Executive Officer, causing risk-averse executives to prefer an increase in base salary rather than an incre ase in bonuses. Most components of remuneration are specified relative to base salary. Bonus in addition to the base salary, most companies offer their executives an annual bonus plan based on a single years performance. The purpose of such bonuses, as well as options, is to align the incentives of the Chief Executive Officer with that of the shareholders. Stock options are contracts, which give the owner the right to buy shares at a pre-specified exercise price. Stock options reward stock price appreciation, not total shareholder return, which includes dividends. In this study, stock options are excluded, as full details of such information would not be retrievable from annual reports. Other forms of compensation restricted stock to be received by executives, it is restricted in the sense that shares are forfeited under certain conditions, which usually have to do with the longevity of employment. Many companies also have long-term incentive plans in addition to the bonus plans, wh ich are based on annual performance. Top executives routinely participate in supplemental executive retirement plans in addition to the company-wide retirement plans. Most executives have some sort of severance arrangement. Finally, executives often receive benefits in the form of free use of company cars, housing, etc.Based on the various conceptual and empirical evidences presented above, this study aims to understand whether the remuneration of a Family Chief Executive Officer is influenced by the board composition, i.e. whether it is family-controlled or not. This ties into the original Hypothesis 1, thus, the further hypotheses is framed as followsHypothesis 3 The higher the proportion of independent non-executive members on the board of directors at family-board-controlled firms, the lower the Chief Executive Officer remuneration.