Ownership Contingent Influence of Governance Structure on CEO Compensation: Need for Change in Governance Paradigm

24 Pages Posted: 30 May 2017

See all articles by Bala N. Balasubramanian

Bala N. Balasubramanian

Indian Institute of Management Ahmedabad; Formerly IIM Bangalore - Centre for Corporate Governance and Citizensip; Indian Institute of Management Ahmedabad

Samir Kumar Barua

Indian Institute of Management Ahmedabad

D. Karthik

Indian Institute of Management (IIM), Ahmedabad

Date Written: May 27, 2017

Abstract

The study examines the need for changes in the standard governance structure through investigation of the moderating effect of ownership identity and ownership concentration on the influence of standard governance structure on CEO compensation in companies with dominant owners in control.

Using data from companies listed on the National Stock Exchange (NSE) of India that were a part of the diversified 100 stock index for the period 2007-2012, we find that the influence of standard governance structure on CEO compensation is indeed contingent on identity of the owner and concentration of ownership. Duality is the only governance measure that directly influences CEO compensation in family owned domestic private companies. Gender diversity and proportion of non-executive independent directors directly influence CEO compensation in corporate owned foreign private companies. The direction of influence of non-executive independent directors however supports the possibility of board capture by CEOs. In case of government companies, none of the governance measures directly influences CEO compensation. The key finding of the study are the meagre and in one instance an inappropriate (from governance point of view) influence of standard governance measures. As the decision on CEO compensation in case of companies with dominant owners in de facto control of board and executive management implies ‘principal-principal’ rather than ‘principal-agent’ conflict of interest, the results from the study suggest a re-think on the standard governance framework that is designed to deal with the latter conflict. A 2013 legislative initiative disenfranchising interested shareholders from voting on related party transactions including CEO compensation is a step in the right direction but much else remains to be done.

Corporate governance frameworks across the world are derived from the frameworks proposed in the US and UK context of dispersed ownership. The framework is designed to deal essentially with ‘principal-agent’ conflict of interest. This ‘one size fits all’ approach may not ensure governance effectiveness in several situations that arise in functioning of organizations that require dealing with ‘principal-principal’ conflict. Our study on CEO compensation in the Indian context underlines the need for governance based on minority-shareholder-centered governance framework.

Keywords: Corporate Governance, Principal-Principal Conflict, CEO Compensation, Ownership Identity, Concentrated Ownership, Type of Ownership, Related Party Transactions, India

Suggested Citation

Balasubramanian, Bala N. and Barua, Samir Kumar and Karthik, D., Ownership Contingent Influence of Governance Structure on CEO Compensation: Need for Change in Governance Paradigm (May 27, 2017). Available at SSRN: https://ssrn.com/abstract=2975677 or http://dx.doi.org/10.2139/ssrn.2975677

Bala N. Balasubramanian (Contact Author)

Indian Institute of Management Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat
India
+919167036140 (Phone)

Formerly IIM Bangalore - Centre for Corporate Governance and Citizensip ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Indian Institute of Management Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat
India
+919167036140 (Phone)

Samir Kumar Barua

Indian Institute of Management Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380015
India

D. Karthik

Indian Institute of Management (IIM), Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380 015
India

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