The remuneration of independent directors in the UK and Italy: An empirical analysis based on agency theory

Abstract

This study investigates independent non-executive directors' remuneration from an agency theory perspective, taking into account both optimal contracting and managerial power perspectives. Using a sample of 1733 independent non-executive directors' year observations in Italian and UK non-financial firms listed in the period 2007-2009, we find that in both countries independent non-executive directors' remuneration is mainly based on the observable effort they exert and their responsibilities. Our findings also show that independent non-executive directors who do not fulfil formal independence criteria, as stated in the respective national corporate governance codes, seem to be paid more than those who do fulfil such criteria, particularly in the UK.Our findings contribute to the existing literature by providing evidence on the determinants of independent non-executive directors' remuneration in two major European economies and offer insights to policy-makers by questioning the effectiveness of adopting non-binding criteria when assessing non-executive directors' independence.

Ownership concentration and corporate performance from a dynamic perspective: Does national governance quality matter?

“…Given that the Singaporean and Vietnamese markets are highly representative for two different groups of national governance systems (well-developed vs. under-developed) in the Asian region, the generalisation of our findings is, to a certain extent, achievable. This is supported by Mallin, Melis, and Gaia (2015) who argue that comparing such diverse institutional settings should improve the generalizability of empirical findings.…”

“…In contrast, the corporate governance practices of companies in Vietnam are in the early stages of development (World Bank, 2006) and the average corporate governance score of Vietnamese firms is lower than that of almost other markets within the Asian region (IFC, 2012). From a comparative perspective, this heterogeneity of firm-level governance is important to strengthen empirical estimations (Mallin et al, 2015) that allow us to obtain credible inferences. We therefore believe that such sample structure guarantees an acceptable compromise between the generalizability and credibility of our findings and the limitations on research sources.…”

Corporate Governance Disclosure Index–Executive Pay Nexus: The Moderating Effect of Governance Mechanisms

“…Apart from pursing the recent corporate governance reforms, which have aimed at promoting high corporate governance standards among UK listed firms, ownership is relatively highly dispersed, where institutional shareholders play a crucial role in overseeing and preventing management from expropriating shareholder wealth (Mallin et al ., ). The combination of dispersed ownership structure with strong shareholder activism and good record of adopting and imposing corporate regulations (Filatotchev and Dotsenko, ; Melis et al ., ) has helped in strengthening the markets for capital, product, services, managerial and corporate control in the UK.…”

“…The agency theoretic literature has suggested several monitoring (e.g., good corporate governance practices) and incentive alignment (e.g., executive pay packages) mechanisms that can be employed to mitigate agency conflicts in modern corporations (Jensen and Meckling, ; Fama, ; Fama and Jensen, ; Beatty and Zajac, ). Noticeably, studies examining the extent to which executive pay packages can be used to mitigate agency problems in public corporations are underpinned by two main theoretical perspectives with deep roots in rational agency theory: (i) managerial power hypothesis ; and (ii) optimal contracting theory (Jensen and Murphy, ; Bebchuk et al ., ; Mallin et al ., ; van Essen et al ., ). Briefly, the managerial power hypothesis assumes that in firms with weak corporate governance structures, opportunistic and powerful corporate executives directly determine their own pay packages by controlling the executive pay setting process (Bebchuk et al ., ), and thus the managerial power hypothesis does not expect executive pay to be necessarily related to corporate performance.…”

Outsider vs insider: Does firm governance matter?

“…Agency theory is the most adopted theoretical framework in most of the previous academic literature in the field of corporate governance, because it tends to dominate the recommendations on board best practices in the various codes of corporate governance (Mallin, Melis, & Gaia, 2014). The modeling of the relationship between the owners and the managers to such that exists between the principal and the agent is a key feature of Jensen & Meckling (1976).…”