Board remuneration, company performance and ownership concentration: evidence from publicly listed Malaysian companies

I. Introduction This study investigates the relationship between total board remuneration and corporate performance in a sample of firms listed on the Kuala Lumpur Stock Exchange (KLSE). Our objective is to examine the relationship between performance and executive salaries within a principal-agent framework. Agency problems associated with the separation of ownership and control have been the subject of considerable empirical research. One strand of this research, predominantly using data from either the United States or United Kingdom, has focused on the compensation of top executives where agency problems might be manifest because of the separation of ownership and control (see Indjejikian 1999 and Murphy 1999). Recently academic research into how executives are rewarded has been fuelled by wider public interest in the United States and United Kingdom regarding the amounts paid to executives, which in turn has been driven by press reports of massive pay-outs. The issue of how executives are rewarded has also captured the imagination of the Malaysian public, particularly following the Asian financial crisis, with a recent Price Waterhouse Coopers (2001) investigation into what top Malaysian executives earn receiving extensive coverage in the Malaysian media. This paper makes two main contributions to the existing literature on executive compensation and corporate performance. First, there are several studies that investigate the relationship between executive compensation and corporate performance in Europe and the United States (see, for example, Murphy 1985; Main, Bruce, and Buck 1996; Brunello, Graziano, and Parigi 1997; Conyon 1997; Crespi and Gispert 1998). However, there has been little investigation of the relationship between corporate performance, performance criteria, and executive compensation in firms in Asian countries. This is an important gap in the literature, given that there are differences in the level of ownership concentration between Asian and Anglo-American economies. Berle and Means' (1932) classic description suggests that ownership in the United States is dispersed among small shareholders with control concentrated in the hands of the managers. This description has been questioned in more recent research. La Porta, Lopez-De-Silanes, and Shleifer (1999) found that ownership in countries other than the United States is more concentrated than depicted in Berle and Means (1932). There is some evidence to suggest that even in the United States ownership is now more concentrated than when Berle and Means (1932) wrote. Studies such as Morck, Shleifer, and Vishny (1988a) and Shleifer and Vishny (1986) have found at least a moderate degree of ownership concentration in the United States. Nevertheless, the concentration of ownership is greater in most Asian countries than in either the United Kingdom or the United States. In Malaysia's case, the main reasons for high levels of ownership concentration are the prevalence of family control and the significant amount of state control in listed companies (see, for example, Claessens, Djankov, and Lang 1999, OECD 1999). This has potentially important implications for the relationship between executive compensation and corporate performance. It suggests that the agency problems arising from the separation of ownership and control may not be as pronounced in Asian countries compared with the United Kingdom or the United States. If this is the case, it implies that the relationship between board remuneration and firm performance should be weaker than in the United Kingdom or the United States. The rationale behind this is that the level of ownership concentration is a proxy for the intensity of shareholder supervision. When ownership is diverse, the potential exists for sub-optimal monitoring because individual shareholders are unable to fully appropriate the gains from the monitoring function. Because monitoring has the features of a public good, an individual shareholder who carries out the monitoring function personally bears the full specification and enforcement costs, but in return appropriates just a fraction of the assumed total gain. …