Corporate Governance Essay Example for Free

integrated Governance Essay rescindThis paper examines whether the net income of the chief executive director military officer position in Hong Kong public unshakables is affected by maturate composition, given the influence of family figure on the boards of umpteen Hong Kong companies. It is hypothesized that I) in family-controlled boards, top dog executive Officers pass catcher high ge arr pay and II) pass Executive Officers in family-controlled boards help oneself as Chief Executive Officer positions longer. In family-controlled boards, corporeal organization is of very high importance as the independent non-executive directors drive out pattern less influence over the board, compargond to non-family-controlled boards ( sprinkle 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 cheek. In line with global trends towards hi gher standards of corporate governance, the duties and liabilities of the directors of the listed companies father therefore become more stringent.It follows that many corporate governance mechanisms designed to varan board members whitethorn be less effective for family-owned and family-controlled business dissolutes. However, to attr action outside investors, family-owned and family-controlled firms tend to encourage greater independency and monitoring from the board.For the purposes of the study, family-owned and family-controlled ar ingestiond interchangeably. The reason is that existent family monomania is difficult to ascertain due to versatile sh atomic number 18holdings and special purpose vehicles that atomic number 18 used, and can non be deduced from annual reports.Thus, in this study we classify family-control and family- willpower when the board is make of a mass of related family members as a family-controlled board. When it is not, we classify it as a disp ersed board. In practice, there atomic number 18 instances where the family owns the majority of a company but comprise of a minority of the board, and it is attainable that the family is able to exert influence via other avenues, however, this study will not be examining such(prenominal).Family-owned firms atomic number 18 common throughout Asia. Studies signal 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 hand over connections with family-owned groups (Bebchuk Fried, 2006). Family-owned businesses represent the predominant form of listed companies in Hong Kong (Standard myopics, 2002). such family ownership structure implies the strong influence of dominant shareholders and go aways limited voice for minority shareholders. Compared to the Anglo-American environment, where ownership blocks are less concentrated but institutional investors are more prevalent, in Hong Kong, ther e is less of a finishing for non-executive directors or minority shareholder activists to challenge.Variations in ownership structure may lead to disputes in the nature of authority fightings, the integrity-valued functions of directors may vary in accordance to the ownership structure. For family-owned firms, Shleifer and Vishny (1997) argue that the primary agency fight is betwixt 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 in the midst of executives and shareholders. As a consequence, tying wage to performance of executives may prove the most effective way to rationalize this agency conflict.To date, a vast of literatures published in new-made years show the growing recognition of influences of family-owned firms and executive net profit on corporate governance. Many studies adjudge tended to focus on the use of recompense contracts to alig n interests of executives with owners in family-owned firms.The rise in executive hire in recent years has been the put forward of public criticism, which moreover intensified corporate governance scandals.Therefore, the question whether a correlation coefficient exists between remuneration and family-control in board composition at Hong Kong-listed companies.2.OBJECTIVESIn 1994, Hong Kong Exchanges and Clearing Limited introduced rules that pack 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 revelation of Financial Information rule under Hong Kong Exchanges and Clearing Limiteds lean Rules was amended on 31 March 2004 to require full divine revelation, on an individual and named basis, of directors fees and any other reimbursement or benefit payable to a director. In growth, Hong Kong Financial Reporting Standard 2 requires listed firms to disclose dir ectors share- ignorantd remuneration.The reckon on Corporate Governance Practices forms part of the Listing Rules and came into effect on 1 January 2005. According to the command on Corporate Governance Practices, Hong Kongs listed firms should be over sympathisen by an effective board, which should assume responsibility for the leadership and control of the listed firm, and the members of which should be collectively 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 transparent procedure for setting policy on executive directors remuneration. The Chief Executive Officer, a director in the board of company, wil l hence have his/her full remuneration disclosed.It is recommended that remuneration should be set at a level sufficient to attract and retain directors of the caliber required to suffer 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 outside 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 closeness 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 relationship between family-board-control of firms and remuneration of Chief Executive Officers. To summarize, this study revolves around the following major objectives. To test whether there are of import differences in Chief 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 riotous 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 applause 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 DEVELOPME NT3.1 Agency theoryIt is commonly acknowledged that ownership structure, the basis of corporate governance, is important to the overall performance of firms. While there are a vast number of literatures discussing ownership structure, agency theory is frequently cited as a foundation.In modern corporations, the insularity of ownership and control leads to agency conflicts that can be alleviated through various corporate governance mechanisms (Fama and Jensen, 1983). As one such mechanism, compensation schemes are designed to provide bonuss 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 tutelage from the general public and academics.One of the issues in the field of management is the impact 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 Blac k et al., 2003).There are various studies in assorted areas like accounting, economics, finance, law 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 interest and useful observations.According to Alchian and Demsetz (1972), the principal agent fuss comes from hidden action due to asymmetric information. The centre 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 line 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, end control rights fall into the hands of management instead of the residual cash flow claimants. As a result, the sum of monitoring expenditures be incurred by the principal, bonding expenditures inc urred by the agent, and the value of the lost 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 unfitness of the comparatively small shareholders to monitor the behavior of management. The monitoring of managers by shareholders is also weakened by free-rider problem. To decline the problem of agency, Ang (2000) and Denis and Sarin (1999) suggested the shareholding of management to be cast upd 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 support by many scholars. Shleifer and Vishny (1986), McConnell and Servaes (1990), and Zingales (1995) found a strong posit ive relationship between ownership concentration and corporate performance.In transitional economies, 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 work Group of the Hong Kong Society of Accountants in 1995 indicated that a high concentration on family-controlled listed firms is highly entrepreneurial and expedient 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 stand up Committee for Corporate Law Reform, as intumesce as a report from Standard Poors, indicated that family ownership structur es present particular challenges. Theoretically, there is a major puzzle regarding the constituent of family in sizable firms (Bertrand Schoar, 2006 Villalonga Amit, 2006).In family-controlled firms, threatening factors may negatively influence the firms value (Demstez, 1983 Demstez and Lehn, 1985). Table 1 as at a lower place 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 taken 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 evaluate to influence the size and structure of their remuneration packages to their own benefit. 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 lower remunerations at such family-controlled firms. Some believe 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 deputation.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 empirical (Allen Pamian, 1982 Gomez-Mejia et al., 2001 Schulze et al., 2001) endorse suggest that incumbents with family ties to owners enjoy 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 rewarded with a relatively assured job (Allen Pamian, 1982 Kets de Vries, 1993 Gomez-Mejia et al., 2001).Moreover, some 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 evaluate 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, heavy(p) 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 above scenario suggests that in family-controlled firms, risk adverse agents would consider 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, thus 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 Execut ive Officers build common interests and identities (Habbershon Williams, 1999) and play a dual role 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 obtain 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 outside directo rs, have a higher percentage of executive remuneration in equity-based form. Moreover, the percentage 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 Pitch er et al., 2000). However, according to Finkelstein and Hambrick (1996), the relationship between remuneration and turnover has not been subjected to rigorous empirical examination, even given the emphasis on retention as a exculpation for high remuneration of Chief Executive Officer.The following hypotheses are framedHypothesis 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 actually independent non-executive directors in the corporate governance regime is seen as one way of mitigating agency problem associated 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 hands 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 breakup 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 even the control rights they actually have. Moreover, th e free-rider problem spunkd by individual investors makes them uninterested in expending 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 macrocosm (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 commutative 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 remunera tion 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 conflicting 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 ideal 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 basic 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, causi ng risk-averse executives to prefer an increase in base salary rather than an increase in bonuses. most(prenominal) 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, which are based on annual performance. pennant 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.