Directors' remuneration, expropriation and firm performance in Malaysia: evidence from non-executive directors' service duration within the remuneration committee

Abstract

In emerging markets, the issue of directors' remuneration being used as an expropriation channel by controlling shareholders is a significant problem to be investigated. In this study, using the fixed effect method, we examine the relationship between directors' remuneration and firm performance, and tests whether independent directors' tenure within the remuneration committee moderates this relationship in a sample of Malaysian publicly-listed firms. We find that the directors' remuneration is not significantly associated with firm performance and hence, not used as a channel of expropriation by controlling shareholders. Our results also show that longer tenure of the independent directors within the remuneration committee is negatively related with firm value. However, when directors' remuneration increase simultaneously with the tenure of the independent directors within the remuneration committee, firm value increased. This increment is stronger in family firms compared to non-family firms. These findings may provide policy implications with respect to how the Securities Commission (SC) could design and implement proper rules and regulations to govern the tenure of the independent directors within the remuneration committee in East Asian emerging market firms where agency problem type II is prevalent and ownership is highly concentrated.