Corporate Governance

Topics: Corporate governance, Board of directors, Non-executive director Pages: 25 (7050 words) Published: January 24, 2013
Chief Executive Officer





This paper examines whether the remuneration of the Chief Executive Officer position in Hong Kong public firms is affected by board composition, given the influence of family control on the boards of many Hong Kong companies. It is hypothesized that I) in family-controlled boards, Chief Executive Officers receiver higher compensation and II) Chief Executive Officers in family-controlled boards serve as Chief Executive Officer positions longer. In family-controlled boards, corporate governance is of very high importance as the independent non-executive directors can exert less influence over the board, compared to non-family-controlled boards (“dispersed boards”).

Keywords: Board composition, Remuneration, Corporate Governance.


The economic turmoil in Asia in 1997 has led to a wider recognition of the importance of corporate governance. In line with global trends towards higher standards of corporate governance, the duties and liabilities of the directors of the listed companies have therefore become more stringent.

It follows that many corporate governance mechanisms designed to monitor board members may be less effective for family-owned and family-controlled firms. However, to attract outside investors, family-owned and family-controlled firms tend to encourage greater independence and monitoring from the board.

For the purposes of the study, family-owned and family-controlled are used interchangeably. The reason is that actual family ownership is difficult to ascertain due to various shareholdings and special purpose vehicles that are used, and cannot be deduced from annual reports.

Thus, in this study we classify family-control and family-ownership when the board is made of a majority of related family members as a “family-controlled board”. When it is not, we classify it as a “dispersed board”. In practice, there are instances where the family owns the majority of a company but comprise of a minority of the board, and it is possible that the family is able to exert influence via other avenues, however, this study will not be examining such.

Family-owned firms are common throughout Asia. Studies show that, family-owned firms hold more than 20 percent of the equity of listed companies in Asia, and more than 60 percent of the listed companies have connections with family-owned groups (Bebchuk & Fried, 2006). Family-owned businesses represent the predominant form of listed companies in Hong Kong (Standard & Poor’s, 2002). Such family ownership structure implies the strong influence of dominant shareholders and provides limited voice for minority shareholders. Compared to the Anglo-American environment, where ownership blocks are less concentrated but institutional investors are more prevalent, in Hong Kong, there is less of a culture for non-executive directors or minority shareholder activists to challenge.

Variations in ownership structure may lead to differences in the nature of agency conflicts, the roles of directors may vary in accordance to the ownership structure. For family-owned firms, Shleifer and Vishny (1997) argue that the primary agency conflict is between a family owner and non-family owners. Meanwhile, for widely held firms, Berle and Means (1932), and, Jensen and Meckling (1976) argue that the primary agency conflict is between executives and shareholders. As a consequence, tying remuneration to performance of executives may prove the most efficient way to mitigate this agency conflict.

To date, a vast of literatures published in recent years show the growing recognition of influences of family-owned firms and executive remuneration on corporate governance. Many studies have tended to focus on the use of remuneration contracts to align interests of...
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