Does corporate governance matter in determining CEO compensation in the publicly listed companies in New Zealand? An empirical investigation

Abstract

Purpose – The purpose of this paper is to investigate the relationship between Chief Executive Officers’ (CEOs) compensation and corporate governance practices of publicly listed companies in New Zealand for the period 2005-2010. Design/methodology/approach – Prior literature argues that corporate governance systems and structures are heterogeneous, that is, corporate governance mechanisms that are important tend to be specific to a country and its institutional structures. The two corporate governance mechanisms most important for monitoring CEO compensation are ownership structure and board structure. The authors use a generalised least squares regression estimation technique to examine the effect ownership structure and board structure has on CEO compensation, and examine whether ownership structure, board structure, CEO and director compensation have an effect on company performance. Findings – After controlling for size, performance, industry and year effects, the authors report that internal features rather than external features of corporate governance practices influence CEO compensation. Companies that have their CEO on the board pay them more than those who do not sit on the board, suggesting CEOs on boards have power to influence board decisions and therefore boards become less effective in monitoring CEO compensation in the New Zealand context. Companies that pay their directors more tend to reward their CEOs more as well, thus supporting the managerial entrenchment hypothesis. Research limitations/implications – The results confirm the findings reported in prior studies that institutional investors are ineffective in monitoring managerial decisions and their focus is on decisions that benefit them on a short-term basis. Practical implications – The findings indicate that although the proportion of independent directors on boards does not significantly influence CEO compensation, it does indicate that outside directors are passive and are no more effective than insiders when it comes to the oversight and supervision of CEO compensation. Originality/value – Being a small and open financial market with many small- and medium-sized listed companies, New Zealand differs from large economies such as the UK and the USA in the sense that CEOs in New Zealand tend to be closely connected to each other. As such, the relationship between pay-performance for New Zealand is found to be different from those reported for the UK and the USA. In New Zealand, the proportion of institutional and/or block shareholders is positively associated with CEO compensation and negatively associated with company performance, suggesting that it is not an effective mechanism for monitoring CEO compensation.

Executive pay and performance: the moderating effect of CEO power and governance structure

“…The moderating effect of CEO Power and CG structure on the PPS As previously explained, although a limited number of studies have examined the direct effect of CG on the PPS (Core et al, 1999;Cornett et al, 2009;Sanchez et al, 2010;Conyon & He, 2011, 2012Reddy et al, 2015;van Essen et al, 2015), studies examining the moderating (joint) effect of CG and especially CEO power on the PPS even within a developed corporate setting are rare (Li & Srinivasan, 2011;Wowak et al, 2011). Thus, in this section, we seek to contribute to extant literature by briefly ascertaining whether CEO power and CG structure have a moderating effect on the PPS within a developing corporate context.…”

“…The results of a considerable number of studies that have examined the link between director pay and performance suggest a positive, but relatively small PPS (Frydman & Saks, 2010;Goergen & Renneboog, 2011;Pepper et al, 2013), with some suggesting that performance (firm size) can explain as low (high) as less than 5% (over 40%) of the differences in executive pay (Tosi et al, 2000;Reddy et al, 2015).…”

Is Board Gender Diversity a Driver of CEO Compensation? : Examining the Leadership Style of Institutional Women Directors

“…Past research (O'Reilly & Main, 2010;Reddy, Abidin, & You, 2015) provides evidence that corporate governance mechanisms influence CEO compensation. Some scholars suggest that CEO compensation may help to reduce the agency conflicts between executives and shareholders (Spraggon & Bodolica, 2011;Tosi, Werner, Katz, & Gomez-Mejia, 2000) and may resolve problems associated with monitoring executives (Sanders & Carpenter, 1998).…”

The corporate governance, supplier network and firm supply performance

“…In emerging economies, the sound corporate governance in the form of an effective code of corporate governance is the pre-condition of increasing investment from the institutional investors (Basheer, 2014). The level of compliance a firm shows with the code of corporate governance shows its governance quality (Munisi et al, 2014;Reddy et al, 2015). According to Jensen and Meckling (1976), there is a separation of the risk-bearing and risk-taking function, because of this separation there exists a conflict of interest between owners and managers.…”

“…The board of director competencies, independence and the board size have been discussed as key determinants of agency conflict (Javed & Basheer, 2017). Thus, it is evident from the literature that there exists a conflict of interest between owners and managers and board of directors offers effective control mechanism to bridge the gap (Munisi et al, 2014;Reddy et al, 2015;Basheer, 2014).…”