Executive compensation, supervisory board, and China’s governance reform: a legal approach perspective

Executive compensation, supervisory board, and China’s governance reform: a legal approach... China’s corporate governance system implements both American and German style mechanisms, but the supervisory board, a typical feature of German style governance is generally considered dysfunctional. After 2006, the newly amended Chinese Corporate Law significantly enhances the role played by supervisory boards. Our study examines if the new Corporate Law improves supervisory board’s monitoring over executive compensation, which becomes one of the main agency concerns in China’s emerging market, thus providing a quasi-experimental testing of the legal approach of governance (La Porta et al. in J Financ Econ 58:3–27, 2000). We examine the effects of both size and meeting frequency of supervisory boards on executive compensations in Chinese listed companies, by using data before and after the new Corporate Law became effective in 2006. We find that before the new Corporate Law became effective, supervisory boards did not affect executive compensation, although their role after that became significant; both supervisory board size and meeting frequency affect total executive compensation, and supervisory board size also influences pay-performance sensitivity. Furthermore, we find that there exists a non-linear effect of supervisory board meeting frequency on executive pay, and an optimal range exists. Policy implications are discussed. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Executive compensation, supervisory board, and China’s governance reform: a legal approach perspective

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Publisher
Springer Journals
Copyright
Copyright © 2010 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-010-0168-1
Publisher site
See Article on Publisher Site

Abstract

China’s corporate governance system implements both American and German style mechanisms, but the supervisory board, a typical feature of German style governance is generally considered dysfunctional. After 2006, the newly amended Chinese Corporate Law significantly enhances the role played by supervisory boards. Our study examines if the new Corporate Law improves supervisory board’s monitoring over executive compensation, which becomes one of the main agency concerns in China’s emerging market, thus providing a quasi-experimental testing of the legal approach of governance (La Porta et al. in J Financ Econ 58:3–27, 2000). We examine the effects of both size and meeting frequency of supervisory boards on executive compensations in Chinese listed companies, by using data before and after the new Corporate Law became effective in 2006. We find that before the new Corporate Law became effective, supervisory boards did not affect executive compensation, although their role after that became significant; both supervisory board size and meeting frequency affect total executive compensation, and supervisory board size also influences pay-performance sensitivity. Furthermore, we find that there exists a non-linear effect of supervisory board meeting frequency on executive pay, and an optimal range exists. Policy implications are discussed.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Feb 17, 2010

References

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