Corporate Governance Essay

ABSTRACTThis paper examines whether the hire of the question administrator policeman position in Hong Kong public self-coloureds is affected by be on art object, disposed the bias of family retain on the boards of many Hong Kong companies. It is hypothe coatd that I) in family-controlled boards, mind administrator ships officers receiver higher(prenominal) allowance and II) of import administrator military officers in family-controlled boards serve as of import administrator officeholder positions longer. In family-controlled boards, bodily plaque is of truly high importance as the independent non- decision maker director directors hatful hightail it out slight(prenominal)(prenominal) yield over the board, comp atomic number 18d 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 somatic gove rnance. In line with global trends towards higher standards of corporate governance, the duties and liabilities of the directors of the listed companies accommodate at that placefore become to a greater extent stringent.It follows that many corporate governance mechanisms designed to monitor board members may be less legal for family-owned and family-controlled firms. However, to attract distant investors, family-owned and family-controlled firms tend to encourage greater license and monitor from the board.For the purposes of the study, family-owned and family-controlled argon used interchangeably. The actor is that actual family proprietorship is difficult to ascertain due to various shargonholdings and special purpose vehicles that ar used, and cannot be deduced from yearly reports.Thus, in this study we classify family-control and family-proprietorship when the board is made of a legal age of connect family members as a family-controlled board. When it is not, we classi fy it as a dispersed board. In practice, in that location ar instances where the family owns the majority of a company but comprise of a minority of the board, and it is possible that the family is able to exert work out via other avenues, however, this study entrust not be examining much(prenominal).Family-owned firms are common throughout Asia. Studies yield that, family-owned firms hold more than than 20 share of the equity of listed companies in Asia, and more than 60 percent of the listed companies hand 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 structure implies the strong sour of dominant shareholders and provides limited voice for minority shareholders. Compared to the Anglo-American surroundings, where ownership blocks are less concentrated but institutional investors are more prevalent, in Hong Kong, thither is less of a culture for non-executive directors or minority shareholder activists to challenge.Variations in ownership structure may lead to differences in the nature of agency conflicts, the roles of directors may transfigure in accordance to the ownership structure. For family-owned firms, Shleifer and Vishny (1997) argue that the primary agency conflict is in the midst of 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, tie recompense to performance of executives may prove the most efficient way to mitigate this agency conflict.To date, a vast of literatures published in recent years immortalise the growing recognition of influences of family-owned firms and executive salary on corporate governance. Many studies induct tended to focus on the use of payment contracts to align interests of executive s with owners in family-owned firms.The rise in executive stipend in recent years has been the subject of public criticism, which progress intensified corporate governance scandals. in that locationfore, the question whether a correlation exists between remuneration and family-control in board composition at Hong Kong-listed companies.2.OBJECTIVESIn 1994, Hong Kong Exchanges and Clearing Limited introduced curbs that require listed firms to disclose the remuneration of directors. Before 2004, there was no requirement to disclose the names and remuneration of directors (subgenus Cheng & Firth, 2005).The Disclosure of fiscal Information rule down the stairs Hong Kong Exchanges and Clearing Limiteds leaning Rules was amended on 31 March 2004 to require upright disclosure, on an individual and named basis, of directors fees and any other reimbursement or emolument payable to a director. In profit, Hong Kong Financial Reporting Standard 2 requires listed firms to disclose director s share-based remuneration.The Code on Corporate Governance Practices forms part of the Listing Rules and came into effect on 1 January 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 collectively responsible for promoting the victory 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 scene policy on executive directors remuneration. The Chief executive director Officer, a director in the board of company, will hence save h is/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 run the company successfully, but companies should avoid gift 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 distant investors, family-owned firms tend to encourage greater independence and observe from the board.In Hong Kong, there are quite a number of listed companies have a high submerging of family ownership. It is common for the outmatch 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 arise out whether there is any consanguinity between family-board-control of firms and remuneration of Chie f decision maker Officers. To summarize, this study revolves nearly the following major objectives. To test whether there are significant 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 uppity compensation, compromising standards of corporate governance To examine the tenure of Chief Executive Officers for family-controlled firms vs non-family-controlled firms, assumption 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, shot DEVELOPMEN T3.1 Agency surmiseIt is commonly acknowledged that ownership structure, the basis of corporate governance, is important to the overall performance of firms. While there are a large number of literatures discussing ownership structure, agency hypothesis is frequently cited as a foundation.In modern corporations, the withdrawal of ownership and control leads to agency conflicts that can be alleviated through various corporate governance mechanisms (Fama and Jensen, 1983). As one such(prenominal) mechanism, compensation schemes are designed to provide incentives that align the demeanor of operators 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 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 Black 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 interesting 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 work as a team. It is the cooperation of a team that leads to a firms output. Thus, the agency problem necessarily 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, residue 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 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. Shleifer and Vishny (1986), McConnell and Servaes (199 0), 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 star 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 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 Review on Corporate Governance by the Hong Kong Standing Committee for Corporate Law Reform, as well as a report from Standard & Poor s, indicated that family ownership structures present particular challenges. Theoretically, there is a major puzzle regarding the role 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 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 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 memoryholdings of 5 percent or more (Daily & Dollinger , 1993), with such given bargaining 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 impose 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 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) evidenc e suggest that incumbents with family ties to owners enjoy high use of goods and services 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, nigh literatures suggested that evaluators are more likely to make positive performance attributions to employees when there are emotional ties between monitoring and those world 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 interpretation ambiguous performan ce 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 trade higher job security for lower earnings if they are related to principals. Family Chief Executive Officers mitigate usual agency costs because of their aline 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 depl oyed 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 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 undertake 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 in dicate 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 reciprocally 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 sire 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 a nd Sebora, 1994 Finkelstein and Hambrick, 1996 pitchers mound 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 justification 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 supervision 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 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 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 ill informed to exerc ise even the control rights they actually have. Moreover, the free-rider problem faced by individual investors makes them benumbed 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 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 unremarkably held by family members, who can influence the level of remuneration paid to directors. Th e 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 speculate 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, causing risk-averse executives to prefer an increase in base salary rather than an increase 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 harm. 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 conditio ns, 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 secondary executive retirement plans in addition to the company-wide retirement plans. Most executives have some sort of jailbreak 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.