An investigation into outside directors, managerial compensation, and firm performance in the Korean insurance industry

Abstract

PurposeThis study investigates the relationship between outside directors, managerial compensation, and firm performance in the Korean insurance industry.Design/methodology/approachThe authors employ a simultaneous equation framework by using three-stage least squares (3SLS) to address the endogeneity problems that could result from the joint determination of outside directors, firm performance, and executive compensation in Korean insurance companies.FindingsThe authors find that the ratio of outside directors on the board is negatively associated with insurance firm's value and financial profitability. In addition, this study's evidence shows that greater representation on the board by outside directors leads to a higher level of executive pay. In particular, the authors provide evidence that variable compensation scheme and outside directors who have backgrounds in the legal profession and former high-ranking government officials drive this study's main results.Originality/valueThis study adds to the literature by first demonstrating the interaction effects between outside directors, firm performance, and executive compensation in the Korean insurance industry. Unlike previous studies that typically focus on US companies, the authors study the Korean insurance sector that is an emerging power in the global insurance market, ranking seventh in terms of total premium volume, and show that the Korean insurance firm's outside directors system does not work in the manner that it is intended to function.