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Board of directors' independence and executive compensation disclosure transparency Canadian evidence

Board of directors' independence and executive compensation disclosure transparency Canadian... Purpose – This paper aims to investigate the relationship between board of directors' independence and executive compensation disclosures transparency. Design/methodology/approach – The paper examines compensation disclosure practices of a sample of 181 firms listed on the Toronto Stock Exchange. Board independence from management is assessed through an aggregate score which takes into account the proportion of independent directors, board leadership structure (i.e. CEO is the board chairperson), and the existence and independence of board committees. A cross‐sectional regression analysis is used to examine the relationship between board independence and the extent of compensation disclosure. Findings – The paper finds that board independence from management is positively related to the transparency of executive compensation‐related information. In addition, this study documents a positive (negative) relation between firm size, US cross‐listing, growth opportunities (leverage) and the extent of executive compensation disclosure. Research limitations/implications – The study's results provide support to the managerial opportunism hypothesis in executive compensation. These findings highlight the importance of the board of directors as an effective governance mechanism which limits managerial rent‐seeking in the design as well as the disclosure of executive compensation practices. Originality/value – This paper extends prior disclosure studies by examining the impact of board characteristics on the transparency of executive compensation disclosures in a principles‐based governance regime. Furthermore, executive compensation disclosure provides an interesting setting in which to examine the ability of the directors to act independently from managers in a conflict of interests situation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Applied Accounting Research Emerald Publishing

Board of directors' independence and executive compensation disclosure transparency Canadian evidence

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Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
0967-5426
DOI
10.1108/09675421111130603
Publisher site
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Abstract

Purpose – This paper aims to investigate the relationship between board of directors' independence and executive compensation disclosures transparency. Design/methodology/approach – The paper examines compensation disclosure practices of a sample of 181 firms listed on the Toronto Stock Exchange. Board independence from management is assessed through an aggregate score which takes into account the proportion of independent directors, board leadership structure (i.e. CEO is the board chairperson), and the existence and independence of board committees. A cross‐sectional regression analysis is used to examine the relationship between board independence and the extent of compensation disclosure. Findings – The paper finds that board independence from management is positively related to the transparency of executive compensation‐related information. In addition, this study documents a positive (negative) relation between firm size, US cross‐listing, growth opportunities (leverage) and the extent of executive compensation disclosure. Research limitations/implications – The study's results provide support to the managerial opportunism hypothesis in executive compensation. These findings highlight the importance of the board of directors as an effective governance mechanism which limits managerial rent‐seeking in the design as well as the disclosure of executive compensation practices. Originality/value – This paper extends prior disclosure studies by examining the impact of board characteristics on the transparency of executive compensation disclosures in a principles‐based governance regime. Furthermore, executive compensation disclosure provides an interesting setting in which to examine the ability of the directors to act independently from managers in a conflict of interests situation.

Journal

Journal of Applied Accounting Research – Emerald Publishing

Published: May 31, 2011

Keywords: Boards of Directors; Disclosure; Corporate governance; Compensation; Canada; United States of America

References

  • The effect of board's quality on performance: a Canadian study
    Adjaoud, F.; Zeghal, D.; Andaleeb, S.
  • Association between corporate characteristics and disclosure levels in annual reports: a meta‐analysis
    Ahmed, K.; Courtis, J.
  • Voluntary adoption of corporate governance mechanisms
    Anand, A.; Milne, F.; Purda, L.
  • Managerial power and rent extraction in the design of executive compensation
    Bebchuk, L.; Jesse, M.F.; Walker, D.
  • The effect of audit committee expertise, independence, and activity on aggressive earnings management
    Bedard, J.; Marrakchi Chtourou, S.; Courteau, L.
  • Ownership concentration and corporate governance practices: substitution or expropriation effects?
    Bozec, Y.; Bozec, R.