The impact of board secretaries’ excess compensation on corporate disclosure quality

Abstract

Purpose Extensively public concern on “Huge Executive Compensation” makes it urgent to investigate the reasonability of high executive compensation. The purpose of this paper is to explore the effectiveness of compensation contracting based on the specific responsibility of executives. More specifically, this paper is to examine whether high compensation is helpful to mitigate agency problems. Design/methodology/approach Considering that board secretaries of listed companies are responsible for information disclosure in China, this paper examines the effect of board secretaries’ excess compensation on firms’ disclosure quality using listed company data from 2007 to 2015. The first measure of disclosure quality is based on the disclosure violation behavior of firms, and the second is KV value that represents the extent to which the investors relay on the stock trading volume. To provide additional confidence that the findings are robust, this paper further conducts two indirect tests based on rumors and cost of equity capital. Findings The results show that board secretaries’ excess compensation is negatively associated with the probability of information disclosure violation and also negatively associated with firms’ KV value, suggesting firms that pay high compensation to their information providers are more likely to provide high-quality disclosures. Besides, this paper further finds that board secretaries’ excess compensation is negatively related to the incidence of rumors, the number of rumors incurred or the cost of equity capital. Research limitations/implications Overall, the findings provide support to the efficient contracting of executive compensation, which implies that highly paid board secretaries would be better information providers than those poorly paid. Practical implications This paper provides empirical evidence that firms’ disclosure quality can be improved by modifying the compensation contract of information providers. This may indicate a new way to improve the quality of disclosures, so as to mitigate the agency problem. Social implications In spite of the public criticism on executive excess compensation, the high compensation is not always a signal of manipulation, collusion and self-interest. It also can be a signal of individual talents and great efforts. Board secretaries are worth to be highly paid if they can improve firms’ disclosures, thereby reducing the incidence of rumors and reducing the cost of equity capital. Originality/value This paper is the first research to examine the effectiveness of compensation contracting based on information providers’ disclosure responsibility in the Chinese context. It documents a positive relation between board secretaries’ excess compensation and corporate disclosure quality.

Do board secretaries influence annual report readability?

“…Bu and Sun (2018) show that board secretaries with role duality can improve the quality of disclosures. Further, Peng et al (2019) suggest a positive relationship between high-quality disclosures and board secretaries’ compensation. Sun (2019) finds that board secretaries with high reputation are more likely to simplify textual disclosures to mitigate the negative impact of complexity on their performance and reputation.…”

“…As a unique corporate governance mechanism in China, board secretaries are required by Company Law to be present in top management teams (TMTs). These individuals play the role of information providers (Mao et al , 2013; Jiang et al , 2016; Peng et al , 2019), with their primary responsibilities being the preparation and disclosure of information (Gao and Wu, 2008; Li et al , 2021). Specifically, board secretaries are the chief officers of information disclosure departments (IDDs) and take the lead in drafting information.…”

Corporate Secretary Professional Expertise and Annual Report Readability

“…Momtaz (2021) stated the results of his research that information asymmetry between management and investors causes agency costs that reduce CEO loyalty. Omran & El-Galfy (2014) and Omran et al (2021) stated that information asymmetry can practice of corporate governance, disclosure, and financial reporting of companies (Nowland et al, 2021;Peng et al, 2019). Financial Services Authority Regulation Number 35/POJK.04/2014 dated 8 December 2014 concerning Corporate Secretary of Issuers or Public Companies stipulates that every public company in Indonesia is required to appoint a company secretary carried out by the Board of Directors and reported to OJK and the Indonesia Stock Exchange.…”

“…This expertise is a form of resource that helps companies to increase disclosure which will later add value to the company. Corporate secretary is a bridge between the company and the public which also affects the quality of disclosure (Nowland et al, 2021;Peng et al, 2019). In carrying out this role, the corporate secretary also needs the same resources.…”

“…Sigauke et al (2015) later confirmed that the corporate secretary plays a significant role in improving corporate governance practices and providing input to the board of directors and commissioners. Peng et al (2019) found that companies that provide high compensation to the corporate secretary will have good disclosure quality. Then the research results of Nowland et al (2021) strengthen the corporate secretary's significant role in corporate governance and information disclosure.…”