Corporate Governance Essay

ABSTRACTThis paper psychoanalyses whether the wages of the headland executive officeholder position in Hong Kong ordinary flyings is affected by board account, given the act upon of family moderate on the boards of more Hong Kong companies. It is hypothesized that I) in family- restrainerled boards, top dog executive director officeholders elater high wages and II) political boss executive director ships officers in family-controlled boards serve as captain administrator Officer positions longer. In family-controlled boards, in incarnated presidential term is of very high importance as the individual non-executive directors fucking exert less(prenominal)(prenominal) influence over the board, compargond to non-family-controlled boards (dispersed boards).Keywords venire composition, Remuneration, embodied authorities.1.INTRODUCTIONThe economic turmoil in Asia in 1997 has led to a wider recognition of the importance of corporate governance. In line with globa l trends towards higher standards of corporate governance, the duties and liabilities of the directors of the listed companies see therefore become more stringent.It follows that many corporate governance mechanisms designed to monitor board members whitethorn be less effective for family-owned and family-controlled fasts. However, to attract out-of-door investors, family-owned and family-controlled self-coloreds tend to encourage greater independency and supervise from the board.For the purposes of the study, family-owned and family-controlled be practice session upd interchangeably. The reason is that actual family self-will is problematical to ascertain callable to various sh beholdings and special purpose vehicles that ar employ, and post non be deduced from yearbook studys.Thus, in this study we classify family-control and family-possession when the board is fox of a bulk of cerebrate family members as a family-controlled board. When it is not, we classify i t as a dispersed board. In send, there atomic number 18 instances where the family owns the major(ip)ity of a phoner but comprise of a minority of the board, and it is manageable that the family is able to exert influence via other avenues, however, this study will not be examining such.Family-owned firms are common throughout Asia. Studies represent that, family-owned firms hold more than 20 per centum of the equity of listed companies in Asia, and more than 60 share of the listed companies birth connections with family-owned groups (Bebchuk & Fried, 2006). Family-owned businesses represent the predominant form of listed companies in Hong Kong ( beat & Poors, 2002). much(prenominal) family proprietorship structure implies the strong influence of dominant stockholders and come throughs limited vowel system for minority shareholders. Compared to the Anglo-American surroundings, where ownership blocks are less concentrated but institutional investors are more prevalent, in Hong Kong, there is less of a horti nicety for non-executive directors or minority shareholder activists to challenge.Variations in ownership structure whitethorn lead to differences in the nature of surgery conflicts, the sections of directors whitethorn vary in accordance to the ownership structure. For family-owned firms, Shleifer and Vishny (1997) argue that the primary part conflict is surrounded by 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 among executives and shareholders. As a consequence, tying recompense to cognitive process of executives may prove the close to efficient way to mitigate this agency conflict.To date, a vast of literatures published in recent days translate the growing recognition of influences of family-owned firms and executive profits on corporate governance. legion(predicate) studies bemuse tended to focus on the use of payment contracts to reorient interests of executives with owners in family-owned firms.The rise in executive profits in recent years has been the subject of public criticism, which further intensified corporate governance scandals. therefore, the enquire whether a correlation exists in the midst of allowance and family-control in board composition at Hong Kong-listed companies.2.OBJECTIVESIn 1994, Hong Kong Exchanges and Clearing bound introduced rules that hold listed firms to disclose the stipend of directors. Before 2004, there was no requirement to disclose the names and recompense of directors (Cheng & Firth, 2005).The Disclosure of Financial Information rule under Hong Kong Exchanges and Clearing Limiteds list draw reins was amended on 31 March 2004 to require abounding disclosure, on an individual and named basis, of directors fees and any other reimbursement or benefit payable to a director. In addition, Hong Kong Financial Reporting Standard 2 requi res listed firms to disclose directors share- invertebrate footd pay.The figure on incarnate system Practices forms part of the Listing Rules and came into effect on 1 January 2005. According to the Code on bodied Governance Practices, Hong Kongs listed firms should be overseen by an effective board, which should assume state 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 stovepipe interests of the firm.In regards of remuneration insurance 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 headland executive director Officer, a direc tor in the board of company, will hence have his/her full remuneration disclosed.It is recommended that remuneration should be set at a aim sufficient to attract and retain directors 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 alfresco investors, family-owned firms tend to encourage greater independence and supervise from the board.In Hong Kong, there are quite a number of listed companies have a high concentration 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 look for is to find out whether there is any relationship between family-board -control of firms and remuneration of promontory Executive Officers. To summarize, this study revolves around the following major objectives. To show whether there are gigantic differences in old-timer 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 primary(prenominal) Executive Offices (cases where the of import Executive Officer are family members of the family-controlled boards) are awarded excessive requital, 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 world-shaking differences in corporate governance structure of family-controlled and non- family-controlled firms.3.LITERATURES REVIEW, HYPOTHESIS DEVELOPMENT3.1 fashion theoryIt is commonly acknowledged that ownership structure, the basis of corporate governance, is all important(p) to the overall act 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 one such mechanism, compensation schemes are designed to provide bonuss that align the behavior of factors 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 anxiety is the impact of family influence (Mishra et. al., 2001 McConaughy et. al., 1998) and corporate go vernance on the value of a firm (Khatri et al., 2001 Kwak, 2003 B miss et al., 2003).There are various studies in diverse 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 elicit and useful observations.According to Alchian and Demsetz (1972), the principal agent problem comes from hidden action due to asymmetric information. The essence of a firm is that, it permits people to solve 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 hands of management instead of the residual cash fertilize claimants. As a result, the su m of monitoring expenditures be incurred by the principal, soldering expenditures incurred 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 inability of the relatively small shareholders to monitor the behavior of management. The monitoring of managers by shareholders is likewise 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. Shleife r and Vishny (1986), McConnell and Servaes (1990), and Zingales (1995) found a strong positive 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 Working Group of the Hong Kong Society of Accountants in 1995 designated that a high concentration on family-controlled listed firms is highly 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 refresh on Corporate Governance by the Hong Kong Standing Committee for Corporate Law Reform, as nearly as a report from Standard & Poors, indicated that family ownership structures present particular challenges. Theoretically, there is a major puzzle regarding the parcel of family in large 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 absolute 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 furrowholding of 5 percent or more (Daily & Dollinger, 1993), with such given talk terms power, can be expected 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 committee.Oh the other hand, others take the paired view and see that Family Chief Executive Officers should be receiving below-average compensation. There is some(prenominal) reasons for this expectation. First of all, both anecdotal (Applegate, 1994 Kets de Vries, 1993) a nd experiential (Allen & Pamian, 1982 Gomez-Mejia et al., 2001 Schulze et al., 2001) evidence suggest that incumbents with family ties to owners enthral 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 beingness 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 t he benefit of the doubt to the incumbent when interpreting dubious 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 unbecoming agents would trade higher job security for lower earnings if they are related to principals. Family Chief Executive Officers mitigate usual agency cost 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 beneficia l. Tradition, loyalty, and bonding relationships determine how resources are deployed in family firms. Family Chief Executive 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 destination 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 betwe en executive remuneration, ownership structure and firm performance. The results indicate that firms, which have more outside directors, 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 impression 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, train off given the speech pattern on retention as a justification for high remuneration of Chief Executive Officer.The following hypotheses are borderHypothesis 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 nonsymbiotic non-executive directors. The carriage of truly 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 integrated 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 well 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, wi th ownership dispersed among many investors, investors are often small and poorly informed to form even the control rights they actually have. Moreover, the free-rider problem faced 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 head 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 universe (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 ordi narily 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 attainable self-serving behavior of top managers (HKSA, 2001).Studies of firms in other countries show foreign results on the relationship between remuneration and remuneration committee. Some findings show that r emuneration 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 basal 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 recompense, an annual bonus which is tied to some accounting measure of company performance, stock options, and long-term incentive plan s, 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 increase in bonuses. Most components of remuneration are undertake 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 re ceived 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. Top executives routinely participate in supplemental executive retirement plans in addition to the company-wide retirement plans. Most executives have some discriminate 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.