Executive Remuneration Disclosure Research Articles

Boardroom backscratching and stock price crash risk

AbstractWe empirically capture boardroom backscratching, or cronyism, as when a firm's Chief Executive Officer (CEO) and directors concurrently receive excessive remuneration. We argue that boardroom backscratching can inhibit a board's constructive criticism and monitoring, resulting in a greater likelihood of bad news hoarding. Using 14,104 US firm‐year observations spanning 1999–2020, we document a significant positive relationship between boardroom backscratching and stock price crash risk. In additional analyses, we show that boardroom backscratching firms produce less readable annual reports and engage in greater upward real earnings management as channels for concealing bad news. We also find that external monitoring mechanisms weaken the positive association between boardroom backscratching and stock price crash risk. Our main findings withstand several endogeneity tests including propensity score matching, entropy balancing, difference‐in‐differences analysis using firms’ commencement of boardroom backscratching and CEO turnover event analysis. Our study offers insights to securities regulators and policymakers to revisit the notion of board independence, develop relevant market oversight and revise director and executive remuneration disclosure requirements so as to mitigate adverse stock market performance associated with boardroom backscratching.

Executive remuneration and the limits of disclosure as an instrument of corporate governance

Why does disclosure continue to be seen as a panacea for failings in corporate governance, despite mounting evidence that it is a weak instrument of control? Through a micro-historical study of the constitution and deliberations of the Greenbury committee, which placed executive remuneration disclosure at the heart of UK corporate governance, we demonstrate how disclosure was discursively constructed by elite business leaders as a primary requirement of accountability of agents to owners. Our research, conducted twenty years after the publication of the Greenbury recommendations in 1995, is based on oral history interviews with surviving members of the committee and its professional advisers, who came to lament that their efforts perversely had helped escalate rather than moderate top executive pay. We argue that disclosure is a poor surrogate for real engagement by owners in corporate governance, and propose four general conditions that, if satisfied, might lead to increased accountability.

Say on Pay: Do Shareholders Care?

This paper examines the impact of enhanced executive remuneration disclosure rules under UK regulations introduced in 2013 on the voting pattern of shareholders. Based on a hand-collected dataset on the pay information disclosed by FTSE 100 companies, we establish that shareholders guide their vote by top line salary, and appear to disregard the remaining substantial body of information provided to them. Analyzing the unique British feature of two votes, one forward looking and one backward looking, we establish that shareholders differentiate between the two dimensions in about 23% of the cases. In contrast to the rationale of the legislation that introduced the two votes, however, differentiating voting behavior is not driven by characteristics of the executive’s remuneration policy, but mainly by exceptionally positive future performance expectations.

Disclosure practices of foreign and domestic firms in Australia

Even while straddling the global economy, multinational corporations (MNCs) need to adapt to different institutional regimes in host country markets in which they operate. This research examines the extent to which MNC-subsidiaries are embedded in their local institutional context in terms of how they pursue local legitimacy and respond to local laws and standards of disclosure of executive remuneration in the host country. Drawing attention to key socio-economic influences on foreign MNC-subsidiaries, we examine whether global MNCs respond to disclosure requirements in a host country and address a higher level of information asymmetry associated with multinational operations. The analysis of disclosure levels of MNC-subsidiaries vis-à-vis domestic firms suggests that, other things being equal, MNCs are more responsive to increased disclosure requirements than their local counterparts if they have substantial economic interactions with domestic product-markets. These results demonstrate that MNCs are willing to incur the marginal cost of increasing disclosure if commensurate benefits justify it. Another interesting finding relates to the negative association between legal system type (common law) of MNC's parent country and disclosure level of director and executive remuneration. It highlights that MNC-subsidiaries with higher regulatory (institutional) distance disclose better level of remuneration to gain external legitimacy and reduce their liability of foreignness.

Remuneration Committee Existence and Effectiveness: A Study on Their Impact on Voluntary Narrative Executive Remuneration Disclosure

Voluntary disclosure in narrative format is generally seen as an important governance mechanism through which an organisation communicates with its stakeholders to provide information, gain legitimacy and demonstrate accountability. This paper investigates the relationship between the existence of a remuneration committee (RCX) and it’s effectiveness (RCE) on the voluntary disclosure of information relating to executive remuneration action in narrative format. Our study utilises data from Top 200 Australian Securities listed (ASX) firms and focuses on such disclosure during a critical period i.e. the global financial crisis years (2007 to 2011) when executive remuneration came into significant scrutiny. We find both the existence and effectiveness of a remuneration committee plays a significant role in the voluntary disclosure of executive remuneration in narrative format (VDER).

Collibration as an alternative regulatory mechanism to govern the disclosure of director and executive remuneration in Australia

This paper explores an alternative approach to regulation for addressing corporate governance problems related to director and executive remuneration disclosure. We draw on the concept of collibration, conceived by Dunsire as an approach to managing tensions between opposing forces in social arena. We explore the application of collibration in the development of a regulatory framework, composed of a mix of state regulation and self-regulation, for corporate governance in Australia. Thereafter, we examine the impact of the mixed regulation developed through collibration on remuneration disclosure behaviour in Australian companies. We find that improvement in corporate disclosure is primarily driven by the establishment of remuneration committees and appointment of reputable auditors. Our research demonstrates the effectiveness of collibration in developing a regulatory framework that aligns state regulation designed to protect shareholder interests with self-regulation, about which little was known in the literature.

The role of codetermination in shareholder oriented corporate governance reform: the case of executive remuneration disclosure

This paper examines the influence of employee representatives in German publicly listed firms' supervisory boards on the likelihood that firms adopt a corporate governance code provision that recommends the disclosure of individualised remuneration arrangements of top management team members. My theoretical perspective suggests that depending on the influence of labour representatives in the boardroom, labour influence and individualised top management team remuneration disclosure may be viewed as either complements or substitutes in firms' internal corporate governance structure. The results provide support for my theory and show that there exists an inverted U-shaped effect of the level of labour influence on the supervisory board on the likelihood that firms thoroughly reform their top management remuneration disclosure practices.

Remuneration committee independence and CEO remuneration for firm financial performance

Purpose– As a result of the Australian Government Productivity Commission's recommendation to mandate remuneration committee independence for ASX300 companies, this study aims to investigate whether voluntary remuneration committee independence aligns chief executive officer (CEO) total pay and bonuses with firm financial performance.Design/methodology/approach– A series of hypotheses test the research question using multiple regressions for a sample of 143 ASX300 companies during 2001. This time was prior to strengthen corporate governance regulation, but after mandated executive remuneration disclosure, thus capturing varying levels of voluntary remuneration committee independence.Findings– This study shows firm size is an influential factor in the relationship under investigation. ASX300 large firm remuneration committees link CEO total remuneration and bonuses to firm financial performance. Smaller ASX firm remuneration committees do not link either type of CEO remuneration to performance despite remuneration committee independence. Findings are mixed for medium-sized ASX300 firms.Research limitations/implications– Limitations include the necessary time restriction to 2001 for sampling the ASX300 firms. The implication of this study's findings is that the proposed public policy for mandatory remuneration committee independence is not universally effective in linking CEO remuneration to firm financial performance for ASX300 firms.Originality/value– This study contributes to the limited research on voluntary remuneration committee independence in relation to CEO remuneration and firm financial performance in the Australian context.

Collibration as an Alternative Regulatory Mechanism for Corporate Governance in a Capitalist Economy

This paper explores an alternative approach to regulation for addressing corporate governance problems relating to director and executive remuneration disclosure. We draw on the concept of collibra...

Executive Compensation in Europe

Will a trend toward greater disclosure of executive remuneration push European regulators to take action?

Disclosure of executive remuneration in listed public utility companies

This paper aims to examine disclosure about listed companies’ executive remuneration, investigating particularly the rules and recommendations adopted in industrialized countries (European countries: France; German; Italy; Spain; United Kingdom; and non-European countries: Canada; Japan; Russia; United States) and to verify if effective communication behaviours adopted in Italy and in foreign countries by listed public utility companies match cognitive and evaluation stakeholders’ expectations and rules and existing specific recommendations. Disclosure of the remuneration is necessary to offer each stakeholder to understand if the amount of compensation paid and its composition is adequate to avoid potential excesses that could compromise the process of value generation by the enterprise. This is an important topic, considering also potential conflicts between form, structure and level of executive directors’ remuneration (fixed and variable elements, stock options, total estimated value of non-cash benefits, remuneration paid to directors in connection with the termination of his activities during that financial year, etc.) and corporate performance optimization in the long term.

Legitimacy and corporate governance determinants of executives' remuneration disclosures

Purpose – The purpose of this paper is to provide Australian evidence on both the extent and key determinants of discretionary disclosure in company annual reports of information about top executives' share rights, options and termination entitlement. Such information has value‐relevance to shareholders and the public, but prior evidence is lacking about the factors that influence top managements' decisions to voluntarily disclose or withhold personally sensitive details about their own remuneration.Design/methodology/approach – The extent and nature of executive remuneration disclosure are obtained from the content analysis of annual reports of 191 Australian listed companies for the years 2003 and 2004, prior to a more detailed prescriptive regulatory environment occurring in this area when international financial reporting standards became effective in 2005. To explain the factors that could influence managements' decisions about the extent of discretionary disclosure details concerning their own remun...

The Practice of Director and Executive Remuneration Disclosure By Australian Firms

Mandatory disclosure of director and executive remuneration is a relatively new phenomenon and has only been a requirement in Australia since 2004. This paper will examine the current practice of disclosure of director and executive remuneration across a sample of Australian listed firms, examine the extent of coverage that this disclosure receives within the total annual report, and the uniformity of disclosure practice across firms of differing market capitalisations.

Executive Remuneration in the EU: Comparative Law and Practice

Executive pay practices are currently a cause celebre of corporate governance in the media, among regulators, in the marketplace, and in academia, in the US, the UK, and Europe. The purpose of this paper is to examine the approaches taken across Europe to the regulation of executive pay practices in listed companies. The outstanding feature of the regulation of executive pay across Europe is the extent to which it reflects the interconnection between pay and corporate governance. This link is expanded on in Part B with respect to the different rules found across European legal systems and how they address/prioritize the concerns which executive pay potentially raises. The role of public regulation is relatively important for disclosure of executive pay, while best practices and private codes generally have some impact on the way in which executive compensation is set for listed companies. On the whole, there is some convergence in continental Europe towards the Anglo-American model. The merits of full disclosure of executive remuneration are increasingly acknowledged in corporate governance codes and reports, while the use of remuneration committees is on the rise in the Continent. The research data on reported pay practices for 2001 among FTSE Eurotop300 companies reveal a reliance on performance-based pay generally and a somewhat variable adoption of share options programmes and other equity-based incentive contracts, which are generating difficulties in dispersed ownership systems. The executive pay problem may therefore be a particular cost of dispersed ownership, and the particular legal and policy responses, which are widely debated a specific feature of Anglo-American corporate governance. Nonetheless, the faultline between both systems, which is evident from the different approaches European states have taken, calls for particular care in the adoption of pan-European reforms but also in the transplanting of reforms based on the Anglo-American experience.