Director remuneration pdf

Therefore, the principal needs to protect their interest and investment by implementing appropriate actions to control agent behavior, incurring monitoring costs to limit inappropriate behavior of their agent. Signaling theory was posited by Spence to focus on the different behavior in the labor market, with the ultimate objective of examining communication between two different parties.

It is based on the general assumption of information asymmetry in which managers tend to disclose more inancial information to provide a signal to investors and market Ross, This theory argued that information disclosed by the irms may reduce information asymmetry and is assumed as a good signal by market analyst. These irms will disclose more information through Internet inancial reporting.

Younger irms will be reluctant to disclose more information publicly, especially on their new product developments, research and development expenditures, and capital expenditure, to gain an edge over long-established competitors Al- Shammari, ; Owusu-Ansah, Owusu-Ansah also found that younger companies tend not to disclose information due to cost constraint and dificulties in collecting and disseminating information.

Furthermore, the author also suggested that newly-established irms lack experience and expertise on public disclosure, resulting in less disclosure. Ho and Wong found a negative association between the level of disclosure and age of the company. They concluded that younger irms tended to disclose more information than older irms, due to information asymmetry. This inding was consistent with Hughes , who reported that the newly established irms tended to disclose more information, as predicted by the signaling theory, in order to differentiate themselves from other new irms.

However, older irms tend to have gained expertise to develop and expand their business, and as such will be inclined to disclose more information on their strengths and achievements Camfferman and Cooke, According to Alsaeed , more established companies are more likely to disclose voluntary information than the younger companies because the older irms used the disclosure practice as their strategy to portray their credibility, transparency and future forward-looking policies and business strategies as a mode of business expansion, such as to access to global markets and capital.

Based on research conducted by Camfferman and Coke , company age is positively affected by Internet disclosure as a result of the companies experience and competency in the market forces.

They tend to update their annual information and add more information over time to ensure that relevant and reliable information is easily accessible.

In the context of Malaysia, it is not unequivocally possible to conclude that the longer established irms will necessarily to disclose more information than the newly established irm, including information on compensation of directors.

This is related to the agency theory, as according to Chow and Wong-Boren , irm size is positively related to agency cost. Therefore, large irms have more agency cost and thus disclose more voluntary information to alleviate cost. Large Malaysian publicly listed companies are expected to disclose more information on the mandated annual inancial statement as compared the smaller size of company.

Since big companies have invested a substantial amount of investment on the advanced information system to provide the signiicant information to management and all stakeholders, the marginal cost to produce non-mandatory disclosure on the annual report is lower.

They also have ability to provide higher-quality reporting Al- Janadi, Rahman and Omar, This expectation is consistent with the previous literature for example Chow and Wong-Boren, ; Lang and Lundholm, ; Wallace and Naser, ; Owusu-Ansah, ; Barros, Boubaker and Hamraouni, which found that the size of a company is positively related to levels of voluntary disclosure. Ho and Taylor , Ghazali and Weetman and Muhammad and Sulong empirically demonstrated that in Malaysia, larger companies are more likely to disclose more information voluntarily than their counterparts, small companies.

Core for example found that irm with less growth opportunities tended to disclose less voluntarily disclosure due to less dependence on external source of inancing and lower incentive to produce voluntarily disclosure since the mandated disclosure provide high quality information to reduce information asymmetry.

Firms with high growth opportunity on the contrary tended to carry out more voluntary disclosure to reduce information asymmetry with outsiders and attract potential shareholders to give inancial support to the irm Gaver and Gaver, ; Core, Similarly, Gaver and Gaver found that director compensation and stock option plans are higher in growth companies than non-growth irms.

They claimed that directors and managers in high-growth companies demanded high total compensation due to the higher risk such as loss reputation and tarnished professionalism if companies fail to manage the business effectively and face bankruptcy. They claimed that irms which reported higher proit and operated in a high-impact economy and exposed to high global standards and regulatory intervention were encouraged to disclose more information in their annual reports to clarify and justify the inancial performance and position.

Accordingly, Owusu-Ansah posited that proitability is a mechanism to evaluate the irm performance and management. Similar findings were also suggested by Barros, Boubaker and Hamraouni for listed companies in France and Ghazali and Weetman for Malaysian listed irms. Normally, a company has high incentives and motivations to disclose more information in the annual report due to the high proit reported in the inancial statement to communicate the good news to the shareholders Adelopo, Again, signaling theory suggesting that a proitable company will disclose more information than a less proitable irm to signal to investors and shareholders about the stronger inancial performance and position as compared to the competitors in the industry.

Accounting information users such as shareholders, investors and other stakeholders might be interested to assess the irm performance through the information disclosed in the annual report Wallace et al. The inding suggests that irms are concerned with their going concern status because it signals investors, lenders, and regulatory bodies that the irms are able to meet their short term obligation without having to liquidate their resources.

Similarly, Naser found that the level of comprehensiveness of disclosure for listed companies was positively related to high liquidity ratio.

This is because irms with a high liquidity ratio tend to have strong inancial position and are more likely to disclose more comprehensive information to both existing and potential investors. In contrast, according to agency theory, the higher the proportion of debt in the capital structure, the higher the agency cost, leading to higher liquidity ratios. This encourages the irm to disclose less information. This contradicts the signaling theory, which predicts more disclosure Watson et al.

Normally, the liquidity ratio is used to determine the ability level of the irms to meet short-term obligations without selling assets in place to pay their short term debts.

Walace and Naser have argued that liquidity ratio is an important determinant for investors, lenders, stakeholders and even regulatory institutions because it is closely related to the going concern of the irms. If the irms fail to manage the liquidity ratio properly, the irms may face insolvency especially during the economic meltdown. Many researchers have conducted studies to examine the relationship between irm liquidity and the extent of different subject of disclosure. Wallace et al. They argued that low-liquidity irms will enhance levels of disclosure in the annual report to portray strong performance and strategy to investors.

Similar indings were exposed by Fontana and Macagnan and Agyei-Mensah , while Watson et al. In contrast, Belkaoui and Kahl found a positive relationship between the liquidity and the level of disclosure, but the results were insigniicant. Excessive levels of leverage may cause a company inancial dificulties and lead to bankruptcy. Meek, Roberts, and Gray and Esa and Mohd Ghazali used leverage as a predictor for quality of corporate disclosure.

Eng and Mak examined the relationship between leverage and the extent of corporate disclosure. They found that irms will disclose less information when they have a higher level of leverage. This is because irms would want to solve their cash low problem and control the agency cost of debt through the restriction imposed by debt covenants in debt agreements.

Disclosure of such information may put the irms in a bad light. In addition, high leverage may act as a substitute for voluntary disclosure in governing the company and alleviate free cash low problem. Watson et al. Previous studies found the positive and signiicant relationship between cost of capital and levels of disclosure Leuz and Verrecchia, ; Karamanou and Vafeas, A highly-leveraged capital structure increased the probability of the irms to enter insolvency, especially during the inancial crisis and economic distress.

The creditors may control the low of cash borrowed from to be transferred to the shareholders. Therefore, irms with high level of leverage are under the scrutiny of the creditors to avoid the irms from breaching the debt covenants. Similarly, Barako et al. Bursa Malaysia is the only integrated exchange that offer various exchange-related services in Malaysia, such as companies seeking public capital via listing on the stock exchange.

This year was selected because the code of corporate governance was revised in It is expected that a company has matured in practicing corporate governance after the code was irst revealed in However, companies such as banks and inancial institutional were removed due to the differences in the laws and regulations that bind the operations and hence governance of the company.

A similar approach was also adopted by Haniffa and Hudaib In addition, companies that were not listed for one full year such as delisted, newly-listed and in-transition companies due to mergers and acquisitions in were also eliminated.

The inal sample of the largest listed companies by market capitalization were selected and ranked by market capitalization. One of the weaknesses of this guideline is the code perhaps too general and locally-based. Thus, this study extends disclosure examination by including the international requirements in the second model, Global Practices.

In addition, it will provide a global perspective and signal to the worldwide business community the readiness level of Malaysian companies to adopt and practice global standards. The irst model is speciic for local needs, while the second model is for international standards. Under the irst model, there are 16 statements that divided into four 4 sections — Policy and Level on Makeup of Remuneration, Procedures of Remuneration, Disclosure on Remuneration, and Remuneration Committee.

In the second model, there are 16 statements divided into three sections — the Level and Make up of Remuneration, Procedures on Directors Remuneration, and Disclosure on Remuneration. The third model is the combination or total inal score of the irst and second model.

It is one 1 if it is disclosed or zero 0 if it is not disclose; where year t is To avoid subjectivity and bias, this study adopted an unweighted approach in which all items are considered of equal importance Barros, Boubaker and Hamraouni, This implies that most of the companies in the sample were well-established irms since they were incorporated a long time ago. As for company size, total assets were used as proxy. In order to reduce broad variations, the total assets were converted to logarithm ten score from 0 to Meanwhile, the mean scores for the growth, proitability, liquidity and leverage were 1.

Table 2 provides an indication that all correlation value is less than 0. Therefore, there is no problem with multicollinearity, as Gujarati suggests a harmful level of multicollinearity when the bivariate correlation magnitude reaches 0.

However, the results reject H2 due to an inverse relationship, whereas, the other variables were found to be insigniicant. Based on the assumption testing, multiple regression of model 1 is tested for the problems of multicollinearity. The result of variation inlation factor VIF values is below 4 and the tolerance statistics are above 0.

Therefore, we conclude that the data did not violate the assumption of multicollinearity. Statistics Beta Std. However, once more the results reject H4b due to an inverse relationship. Finally, there was no collinearity problem on the data of model 2. The resultant tolerance statistics are above 0. However, the result rejects H2 due to an inverse relationship. Similarly, the results reject H4b due to an inverse relationship.

The multiple regression of model 3 is also tested for the problems of multicollinearity. Table 5 also demonstrates the result of VIF values, which are below 4 and the tolerance statistics all well above 0. Thus the data presented in model 3 does not violate the assumption of the multicollinearity.

This predictor, however, was insigniicant in model 2. However, the statistical results reject H2 due to a negative relationship. This is consistent with the indings by Fontana and Macagnan which suggested a negative relationship between size and voluntary disclosure for companies listed in the Brazilian capital market.

The proxy, ROA, is signiicant in model 2 and 3. However; the multiple regression result rejects the hypothesis, H4b due to negative relationship. The empirical result in this study contradicted with the signaling theory explained by Owusu-Ansah claimed that the proitable companies are more likely to disclose more information voluntarily to signal the investors that the companies are performing well.

Furthermore, Wang et al. Adelopo argued that companies which reported high proits in their inancial statement are more likely to disclose more information in the annual report to portray their strong achievements and performance in order to raise capital through the subscription of shares from both existing and potential investors.

However the hypotheses was rejected, as the relationship is negative contradict with the early prediction of positive relationship. The other predictors — age, growth, liquidity and leverage of the company — were found to be insigniicant across all models.

This result provides an interesting avenue for researches and practitioners to debate and further explore, as the results contradicted previous studies. For model 1 MCCG , only small-size companies disclose more information. However, the disclosure requirements contained there are extremely limited. All the directors have to disclose are the emoluments of the highest paid director and chair, the aggregate emoluments of all directors, and loss of office payments.

As the remuneration debate became more pronounced, it became widely acknowledged that these disclosure requirements were wholly inadequate. There was no breakdown between salary, fees, bonuses, benefits or pensions required. Further, there was no set method of disclosure which meant that the information differed from company to company.

This made it very difficult to build up a coherent picture of remuneration comparisons between companies. This occurred especially in relation to share options. Sometimes, they were listed under both. In , responding to the growing calls for reform based on the inadequacies of the law described above, the Confederation of British Industry CBI , an organisation that 5 See e. The most significant recommendation was that the remuneration committee should make a remuneration report each year to the shareholders, and this report should be annexed to the Annual Report and Accounts.

Their findings were not particularly encouraging. The Greenbury Report recommended that the remuneration committee should consider each year whether the circumstances are such that the AGM should be invited to approve the policy set out in the report. Their findings are set out below: Linkage of Payment to Performance Number of companies Number of companies Number of disclosing in broad terms. Report Indicates Short No. Long No. In particular, the evidence indicates that companies are only complying with the Greenbury requirements in the broadest terms.

Detailed reporting was only occurring in a minority of instances. This lack of detail was even more pronounced in relation to other details, as the following table indicates: Number of Number of companies Number of Number of companies disclosing disclosing in absolute companies companies not in broad terms. Despite the recommendations of Greenbury, the Government still had concerns. The new s. The report should also contain a graph indicating changes in shareholder return.

Finally, the report should also contain full details on any service contracts. It can be seen that the new disclosure requirements go far beyond the current requirements contained in s.

The directors should also ensure that the details contained in the report are accurate as the directors need to approve the report, and then have it signed by a member of the board or secretary on behalf of the entire board.

If it is not signed in this way, then the company and every officer involved is guilty of an offence and liable to a fine. Under the new s. Should this not be complied with, every officer of the company who is in default is guilty of an offence and liable to a fine. Requiring shareholder consent for remuneration issues is not a new suggestion.

Opinions are mixed but the weight of argument appears to be cautious of granting the shareholders the power to interfere in remuneration issues. These criticisms will now be examined. Problems with the Requirement of Shareholder Approval Perhaps the most concerning part of the Regulations relates to the increased role given to the shareholders.

This is the most recent, and radical, step in a series of measures designed to give the shareholders more say in the remuneration process. Previous examples include s. However, proposals aimed at giving shareholders a greater supervisory role in matters of executive pay have been severely criticised.

It is to these criticisms that we now turn. First, however, it should be noted that it may be the case that the shareholder approval requirement probably had to be included given that simply giving the shareholders access to more information would not improve matters to any great degree. The reason for this is that existing governance mechanisms have shown themselves to be ineffective when dealing with remuneration concerns.

The shareholding thresholds ensure that most shareholders will not be able to table a resolution on the matter at the AGM even if they do have access to reliable information.

Derivative actions will not be permitted on remuneration matters due to the rule in Foss v Harbottle. Many commentators correctly regard such a solution as too severe. However, some have urged shareholders to use the threat of dismissal more often, see Reward for Failure Independent on th Sunday, 10 March.

Initially, this seems like an unusual statement. After all, exorbitant pay represents and divergence of interest between the shareholders and the management, i. Therefore one would assume that the shareholders would carefully monitor levels of executive pay so as to minimise agency costs and maximise profits.

However, for several reasons, this has not proven to be the case. The question is why have shareholders not felt the need to interfere more often. An obvious reason, and one that the Regulations seeks to remedy, is that the shareholders have traditionally been unable to access the information they need to launch an effective challenge.

The Government hopes that this informational asymmetry will be addressed by the Regulations. However, there are strong reasons to believe that even if shareholders do have access to the relevant information, there are still disincentives to activism. When Cedric Brown announced his pay increase, many private shareholders wished to attend the AGM in order to voice their dissatisfaction. In any case their voting power is such that they would be unlikely to be able to defeat management in any resolution relating to executive pay.

It can therefore be argued that the requirement contained in s. For many years, academics have hoped that the increased concentration of equity ownership in the hands of institutions will lead to a new era of shareholder accountability.

This includes institutional involvement in the remuneration process. However, for numerous reasons, institutions have failed to increase accountability in any real way. The Regulations do little to alleviate these problems as we shall see.

The traditional problems of institutional accountability still remain. Institutional voting levels, whilst improving, are still not high enough. Institutions who vote against a proposed remuneration package will risk cutting themselves off from this flow of soft information that management provides. However, there are more specific reasons to doubt that institutions will vote against management in relation to s.

What management would do is to characterize a vote on executive pay as a vote of no confidence, to be followed by the resignation of the board. Accordingly, as long as the institutional investors are relatively content with the way the company is being run, they will probably conclude that it is not worth undermining management by vetoing what has been proposed. Again the British Gas Example is useful.

Following the pay increases discussed earlier, a shareholders resolution was put forward at the AGM which called for the company to revise its remuneration policy. This no doubt dissuaded the institutions from rocking the boat and the resolution was easily defeated. Many academics writing before the Regulations predicted that if the general meeting were to be given more powers in relation to remuneration matters, then many of the shareholders would simply abstain and those that did vote would defer in almost every case to the judgment of the directors and the remuneration committee.

This shareholder apathy towards remuneration issues is likely to be exacerbated by the technical nature of modern remuneration packages. The complexity of these packages could weaken the central function of the disclosure rules i.

The problem is that the Regulations set out extensive disclosure requirements but say little on how that information is to be disclosed. The danger is that the company will provide extensive and technical information which could serve to confuse the shareholders rather than inform them.

Ultimately, the simple fact may be that the shareholders are not qualified to evaluate matters of executive remuneration. Determining executive remuneration is a complicated issue. The fact that committees exist solely to determine 32 B. That these remuneration committees themselves often feel the need to employ professional compensation consultants further indicates that the job of determining and evaluating executive remuneration is not a matter for the shareholders.

The remuneration committee working with the compensation consultants will have the time, resources and expertise to take into account the many factors that determine appropriate remuneration levels. Shareholders in comparison are poorly positioned. Even institutional shareholders will be unable to take the requisite factors into account. Whilst they may have more expertise than individual shareholders, they will often be monitoring dozens of companies.

The fund managers will probably feel that taking time to determine the validity of remuneration packages for individual directors is not a profitable use of their time and resources. However, they still do not go as far as US disclosure requirements, although it is clear to see that they were influenced by them.

The remuneration debate that the UK is currently experiencing took place at an earlier time in the US.