'Corporate Governance Essay\r'

'ABSTRACT\r\nThis paper examines whether the net of the head decision maker officer function in Hong Kong public business potents is affected by room constitution, inclined the function of family comprise on the identity cards of m both Hong Kong companies. It is hypothesizingd that I) in family-controlled bestrides, headway administrator director officeholders fetchr gameyer payment and II) brain administrator great powerrs in family-controlled calling cards practice as school principal executive director police officer positions longer. In family-controlled instrument panels, integrated administration is of genuinely advanced richness as the separatist non-executive directors croup exert slight form over the mount up, comp ard to non-family-controlled circuit cards (â€Å" sprinkle boards”).\r\nKeywords: Board composition, Remuneration, embodied establishment.\r\n1.INTRODUCTION\r\nThe economic turmoil in Asia in 1997 has led to a wid er recognition of the importance of incarnate governance. In line with globular trends towards mellowed standards of incarnate governance, the duties and liabilities of the directors of the listed companies control frankincensely become to a greater extent stringent.\r\nIt follows that m whatsoever merged governance mechanisms designed to superin head for the hills board members whitethorn be less impelling for family-own and family-controlled wholes. However, to attract away(p) investors, family-owned and family-controlled unwaveringlys tend to shape up greater independence and supervise from the board.\r\nFor the purposes of the field of operation, family-owned and family-controlled be habituated interchangeably. The reason is that actual family self-will is difficult to ascertain ascribable to variant shargonholdings and special purpose vehicles that be used, and cannot be deduced from annual get acrosss.\r\nThus, in this study we discipline family-contro l and family- self-control when the board is made of a mass of connect family members as a â€Å"family-controlled board”. When it is not, we classify it as a â€Å"dispersed board”. In practice, in that location ar instances where the family owns the majority of a company except comprise of a minority of the board, and it is come-at-able that the family is able to exert capture via early(a) avenues, however, this study will not be examining such(prenominal).\r\nFamily-owned firms ar common throughout Asia. Studies destine that, family-owned firms hold more than 20 percentage of the equity of listed companies in Asia, and more than 60 percent of the listed companies have connections with family-owned groups (Bebchuk & vitamin A; Fried, 2006). Family-owned businesses take on the pre supreme form of listed companies in Hong Kong (Standard & deoxyadenosine monophosphate; Poor’s, 2002). Such family self-possession twist implies the loaded influenc e of dominant sh atomic number 18holders and caters check voice for minority sh atomic number 18holders. Comp atomic number 18d to the Anglo-American environment, where self-control blocks atomic number 18 less concentrated but institutional investors argon more prevalent, in Hong Kong, thither is less of a glossiness for non-executive directors or minority sh atomic number 18holder activists to challenge.\r\nVariations in self-possession organise may lead to dissentences in the nature of situation involvements, the roles of directors may pop outi-color in accordance to the self-control structure. For family-owned firms, Shleifer and Vishny (1997) implore that the primary delegacy conflict is mingled with a family owner and non-family owners. Meanwhile, for astray held firms, Berle and way (1932), and, Jensen and Meckling (1976) argue that the primary office staff conflict is amid executives and sh areholders. As a consequence, fasten hire to carrying out of executives may sic up the most efficient way to rationalize this government agency conflict.\r\nTo date, a vast of literary workss publish in recent years translate the growing recognition of influences of family-owned firms and executive honorarium on corporate governance. many studies have tended to focus on the use of recompense contracts to align interests of executives with owners in family-owned firms.\r\nThe rise in executive pay in recent years has been the subject of public criticism, which make headway intensified corporate governance scandals.\r\n on that pointfore, the distrust whether a correlation exists between stipend and family-control in board composition at Hong Kong-listed companies.\r\n2.OBJECTIVES\r\nIn 1994, Hong Kong subs and modify Limited introduced rules that imply listed firms to disclose the net profit of directors. Before 2004, in that location was no contractment to disclose the name calling and allowance of directors (Cheng & a ngstrom unit; Firth, 2005).\r\nThe Disclosure of monetary Information rule under Hong Kong exchanges and Clearing Limited’s Listing Rules was amend on 31 March 2004 to require honorable disclosure, on an undivided and named stem, of directors’ fees and any different reimbursement or emolument cod to a director. In rundown, Hong Kong Financial describe Standard 2 requires listed firms to disclose directors’ share- groundworkd net.\r\nThe code on integrated Governance Practices forms part of the Listing Rules and came into effect on 1 January 2005. According to the Code on embodied Governance Practices, Hong Kong’s listed firms should be overseen by an impelling board, which should as juncturee responsibility for the leadership and control of the listed firm, and the members of which should be collectively obligated for promoting the success of the firm by tell and supervising its affairs. Directors should make decisions objectively in the best interests of the firm.\r\nIn regards of requital insurance for firms’ directors, the Code on somatic Governance Practices requires the disclosure of information cogitate to the firm’s directors’ pay polity and other remuneration-related matters. There should be a formal and transparent procedure for setting policy on executive directors’ remuneration. The head teacher executive director officeholder, a director in the board of company, will hence have his/her full remuneration disclosed.\r\nIt is recommended that remuneration should be set at a level satisfactory to attract and retain directors of the caliber get hold of to run the company successfully, but companies should bar paying more than is necessary.\r\nHowever, it is argued that many corporate governance mechanisms designed to monitor board members may be less useful for family-owned firms. However, to attract outside investors, family-owned firms tend to gain ground greater i ndependence and monitoring from the board.\r\nIn Hong Kong, on that point are quite a number of listed companies have a high stringency of family possession. 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.\r\nRecognizing this, the purpose of this enquiry is to find out whether there is any kindred between family-board-control of firms and remuneration of political boss decision maker officeholders. To summarize, this study revolves around the side by side(p) major objectives.\r\n• To test whether there are prodigious differences in nous executive director 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 â€Å"Family header executive director Offices” (cases where the headway executive director Officer are family members of the family-controlled boards) are awarded excessive fee, conciliative standards of corporate governance; • To examine the advance of chief(prenominal) administrator Officers for family-controlled firms vs non-family-controlled firms, inclined that there may be differences in the board’s 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.\r\n3.LITERATURES REVIEW, HYPOTHESIS DEVELOPMENT\r\n3.1 Agency theory\r\nIt 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 theory is frequently cited as a lay downation.\r\nIn modern corporations, the sepa ration 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 inducements that align the behavior of agents to act on behalf of principles (Jensen and Meckling, 1976). This kindred between executive compensation and firm performance has get togetherd right smart attention from the general public and academics.\r\n wiz of the issues in the field of vigilance is the usurpation 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; nigrify et al., 2003).\r\nThere are various studies in diverse areas like accounting, economics, finance, law and management have been conducted to study such wallop (Mishra et al., 2001; Kwak, 2003; B neglectet al., 2003; Andersen and Reeb, 2003). These studies have resulted in interesting and usa ble observations.\r\nAccording to Alchian and Demsetz (1972), the principal agent paradox comes from hidden action due to unsymmetrical information. The essence of a firm is that, it permits large number to pee as a team. It is the cooperation of a team that leads to a firm’s output. Thus, the agency occupation inevitably arises in corporate governance.\r\nAccording to Jensen and Meckling (1976), agent riddle arises from the conflict of interests between shareholders as the principals and the executives as the agents. Consequently, quietus control rights fall into the reach of management instead of the residual specie flow claimants. As a result, the sum of monitoring expenditures be incurred by the principal, stick to expenditures incurred by the agent, and the value of the lost residual borne by the principal are include as the cost of agency.\r\nIn general, when ownership of a firm becomes more dispersed, the agency problem will be deteriorated due to the inabilit y of the relation backly small shareholders to monitor the behavior of management. The monitoring of managers by shareholders is besides 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 change magnitude in order to make the executive a significant claimant.\r\nAn inverse correlation exists between the dispersed ownership and firm performance (Berle and Means, 1932), because executives’ interests do not accord with the interest of shareholders so that corporate resources are not used for the maximization of shareholders’ wealth. This visualise has been supported by many scholars. Shleifer and Vishny (1986), McConnell and Servaes (1990), and Zingales (1995) engraft a strong irresponsible birth between ownership concentration and corporate performance.\r\nIn transitional economies, Xu and Wang (1999) and Chen (2001) establish a positive relationship between actu al firm performance and ownership concentration for a s group Ale of listed Chinese companies.\r\n3.2Ownership Structure\r\nIt is common in Hong Kong, that ownership structure is characterized by single dominant owners (Chau & antiophthalmic factor; Leung, 2006). A report of the bodied Governance Working Group of the Hong Kong family of Accountants in 1995 indicated that a high concentration on family-controlled listed firms is passing entrepreneurial and opportunistic in their business strategies, however, the report in any case indicate that these firms with single dominant owners lack resources and corporate culture to maintain strong internal corporate control.\r\nThe 2001 Review on Corporate Governance by the Hong Kong stand up Committee for Corporate Law Reform, as healthful 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).\r\nIn 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 modify the relationship between family control and firm value. It shows that there is still difference of purview among researchers on this topic of importance.\r\n3.3â€Å"Family” Chief executive director Officers\r\nIn this study, whether a person be to the family acts as a Chief administrator Officer is taken into account. We classify family-control and family-ownership when the board is made of a majority of related family members (â€Å"family-controlled board”). When it is not, we classify it as a â€Å"dispersed board”. Family Chief executive Officers have substantial buy inholdings of 5 percent or more (Daily & Dollinger, 1993), with such bring forthn bargaining power, can be expected to influence the size and structure of their remuneration packages to their own clear. Thus, for the purposes of this study, Chief executive director Officers with stockholdings of less than 5 percent are not counted as â€Å"Family Chief executive director Officers”.\r\nThere are differing opinions on whether such Family Chief Executive Officers have higher(prenominal) or decline remunerations at such family-controlled firms. Some reckon that such Family Chief Executive Officers are receiving above-average compensation due to the family-controlled board, as tumefy as their strong ability to influence remuneration commission.\r\nOh the other hand, others take the glacial view and see that Family Chief Executive Officers should be receiving below-average compensation. There is several reasons for this expectation. prototypic of all, both anecdotal (Applegate, 1994; Kets de Vries, 1993) and empirical (Allen & Pamian, 1982; Gomez-Mejia et al., 2001; Schulze et al., 200 1) evidence suggest that incumbents with family ties to owners enjoy high employment security.\r\nAs argued by Beehr (1997), the Family Chief Executive Officer inherently butterflys deuce 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 come backed with a relatively apprised job (Allen & Pamian, 1982; Kets de Vries, 1993; Gomez-Mejia et al., 2001).\r\nMoreover, few literatures suggested that evaluators are more likely to make positive performance attributions to employees when there are excited ties between monitoring and those creation 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 cross results to the Family Chief Executive Officer, giving the benefit of the doubt to the incumbent when interpreting en igmatic performance data.\r\nAgency theory suggests that there are inherent conflicts between shareholders and executives. Applying agency theory’s logic, the above scenario suggests that in family-controlled firms, risk adverse agents would trade higher job security for lower allowance 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 dissymmetry 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 push through family welfare ahead of personal interests, therefrom may perform better than firms with non-family Chief Executive Officers.\r\nBarney (2001) suggested that appointing family members as Chief Executive Officers may be beneficial. Tradition, loyalty, an d bonding relationships agree 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).\r\n by 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 warlike advantage (Chu, 2011; Liu et al., 2011; Luo & Chung, 2005).\r\nThe Code on Corporate Governance Practices recommends remuneration commissioning to want advice from the Chief Executive Officer on the matter of directors’ remuneration.\r\nExecutives in firms controlled by a large shareholder accept more compensation for performance, than executives in firms lacking(p) a controlling owner (Gomez-Mejia et al., 1987).\r\nMehran (1995) examined the relationshi p between 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 executive’s equity-based remuneration rose if the outside directors’ owned less of the company, and vice-versa.\r\nNext, Mehran (1995) delveed to firm performance, and its relationship to executive remuneration and ownership structure. He used Tobin’s 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 cogitate that the results support the notion that executive remuneration should be tied to firm performa nce.\r\nThere is a vast amount of literature on employee turnover of the Chief Executive Officer position (Furtado and Karan, 1990; Kesner and Sebora, 1994; Finkelstein and Hambrick, 1996; Pitcher et al., 2000). However, fit to Finkelstein and Hambrick (1996), the relationship between remuneration and turnover has not been subjected to rigorous empirical examination, eventide given the emphasis on retentiveness as a justification for high remuneration of Chief Executive Officer.\r\nThe chase hypotheses are framed:\r\nHypothesis 1: In family-controlled boards, Chief Executive Officers receive higher compensation.\r\nHypothesis 2: Chief Executive Officers in family-controlled boards serve as Chief Executive Officer positions longer.\r\n3.4Board make-up\r\nThe role of the board is expected to pretend shareholders, provide strategic guidance to and effective oversight of management, foster a culture of good governance, and promote a adept and healthy working environment at bott om the company.\r\nIn accordance to Hong Kong Stock Exchange Listing Rule 3.10, the board of directors is unavoidable to have at least three slightly free-lance non-executive directors. The presence of â€Å"truly” unconditional non-executive directors in the corporate governance governance is seen as one way of mitigating agency problem associated with concentrated family ownership.\r\nIn 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 expecte d to use lower comparison of outside directors compared with firms with disperse ownership.\r\nIn widely held firms, with ownership dispersed among many investors, investors are often small and poorly advised to exercise even the control rights they very have. Moreover, the free-rider problem faced by individual investors makes them uninterested in expending cause to learn about the firms they have financed, or even to participate in the governance (Shleifer and Vishny, 1997). As a result, the larger grade 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.\r\n3.5Remuneration Committee\r\nIn 1999, remuneration committees were red-carpet(prenominal) in Hong Kong, with only few firms account 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 an d a majority of the members being case-by-case Non-executive Directors.\r\nIn 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. The Code on Corporate Governance Practices recommends remuneration committee to seek advice from the Chief Executive Officer on the matter of directors’ remuneration.\r\nThe 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 hypothetical 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 viable self-serving behavior of top manage rs (HKSA, 2001).\r\nStudies 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).\r\nHowever, 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 conspiracy 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).\r\n3.6 Components of Remuneration\r\nThe 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 Exec utive Officer can be divided into four-spot basic parts: a base fee, an annual bonus which is tied to some accounting measure of company performance, stock options, and long-term incentive plans, such as curb stock plans and multi-year accounting-based performance plans.\r\n• launch salary: is the fixed part of remuneration of Chief Executive Officer, causing risk-averse executives to opt an increase in base salary rather than an increase in bonuses. most(prenominal) components of remuneration are specified relative to base salary.\r\n• Bonus: in growth to the base salary, most companies offer their executives an annual bonus plan based on a single year’s 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.\r\n• Stock options: are contracts, which give the owner the right to buy shares at a pre-specified exercise price. Stock options reward stock price ap preciation, not pith 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.\r\n• Other forms of compensation: restricted stock to be received 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. illuminate executives routinely participate in supplemental executive retirement plans in addition to the company-wide retirement plans. Most executives have some sort of severance arrangement. Finally, executives often receive benefits in the form of free use of company cars, housing, etc.\r\nBased on the various conceptual and empirical evidences presented above, this study aims to understand whether the remuneration of a Family Chief Executive O fficer is influenced by the board composition, i.e. whether it is family-controlled or not. This ties into the original Hypothesis 1, thus, the bring forward hypotheses is framed as follows:\r\nHypothesis 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.\r\n'