Does CEO duality give more influence over executive pay to the majority or minority shareholder? (A survey of Brazil)

• Published date: 01 February 2016
• DOI: https://doi.org/10.1108/CG-05-2015-0073
• Date: 01 February 2016
• Pages: 96-115
• Author: Enoima Abraham,Gurcharan Singh
• Subject Matter: Strategy,Corporate governance

Does CEO duality give more influence

over executive pay to the majority or

minority shareholder? (A survey of Brazil)

Enoima Abraham and Gurcharan Singh

Enoima Abraham and

Gurcharan Singh are both

based at the Department

of Accounting and

Finance, University of

Buckingham,

Buckingham, UK.

Abstract

Purpose –The purpose of this paper is to focus on comparing the influence of majority and minority

shareholders on executive compensation under conditions of CEO duality, examining majority and

minority shareholder influences by measuring their investment and return activity. The paper seeks to

uncover how CEO duality changes the impact the two categories of shareholders have on executive

compensation, especially in an emerging nation.

Design/methodology/approach –In total, 30 corporations out of the 70 corporations listed on the

BM&F Bovespa (a Brazilian stock market) were used for the paper. Quarterly data were collected on the

companies from the Datastream database. The paper conducted a moderated regression analysis on

the data to determine the conditional effects of majority and minority holders’ investment and returns on

executive compensation.

Findings –There are incentives for executives meeting majority shareholder objectives, but minority

shareholders’ influences act as a disincentive for executives. Only the influence of blockholders by their

returns is affected by the separation of the roles of CEO and Chairman. The effect is such that firms with

a separation of the roles have their executives rewarded in line with increments to the returns made to

blockholders, but firms that have the roles merged pay a high wage that is inconsistent with managerial

performance. Finally, the majority of variation in executive pay levels can be attributed to individual

company traits.

Research limitations/implications –The paper’s sample is biased to firm which had publicly

available data on the total compensation payable to their top executives.

Practical implications –Advocates of minority shareholder rights may need to exercise patience with

the implementation of more formalised governance structure, as they are not providing protection for

minority shareholders within the period studied.

Originality/value –The paper provides empirical evidence within the Brazilian context of minority

shareholder effects on executive compensation and the effect of CEO duality on the relationship.

Keywords Corporate governance, Chairman, Chief executives, Shareholders, Emerging markets,

Merit pay

Paper type Research paper

1. Introduction

Globalisation has contributed to propagating similar compensation structure across

various nations of the world. Various nations across the world, as well as international

bodies, have deployed many different models to address compensation structures that

have a weak relationship with performance (Bebchuk and Weisbach, 2010;Fahlenbrach

and Stulz, 2011). The Swiss, the USA, the Chinese and European Union commission have

undertaken or are undergoing deliberations for legislation focused at influencing executive

compensation processes (New york times, 2007;The Economist, 2013a,2013b;The

Guardian, 2013). These nations have varying market economies, unite on similar models for

influencing the executive pay process, but do not have conclusive efficient models to

improve the relationship between pay and performance. Brazil, which struggles as well on

how efficiently to improve this relationship, has an economy characterised by the presence

of public and private blockholders due to its adoption of a form of capitalism regarded as

Received 30 May 2015

Revised 2 November 2015

Accepted 3 November 2015

PAGE 96 CORPORATE GOVERNANCE VOL. 16 NO. 1 2016, pp. 96-115, © Emerald Group Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-05-2015-0073

state-permeated market economies (Nölke, 2011). This situation is argued to have led to

executive remunerations being highly controlled (Borodina and Shvyrkov, 2010). It is

exemplified in the executives of government-owned organisations being likely to be

remunerated on the basis of public salary scales rather than performance (Aslund, 1999).

As well, firms with a controlling family or individual are likely to conduct strong surveillance

of management to make sure that their remuneration promotes loyalty to the blockholder

(Borodina and Shvyrkov, 2010).

In recent years, Brazil has made strong strides to enhance and exploit the economic

potential of the nation (Borodina and Shvyrkov, 2010). The steady growth of Brazil has led

to its inclusion in the group of nations referred to as the BRICs[1]. This group of emerging

nations has been estimated in the next 50 years to be a powerful driving force in the world’s

economy (Armijo, 2007). The strong development of the Brazilian stock market since 2006,

the presence of abundant natural resources and an estimated population size of 190 million

make Brazil one of the 10 largest markets in the world (Borodina and Shvyrkov, 2010). This

large potential has attracted substantial investment into the economy, and has also

increased the demand for improved corporate governance, mainly in regard to the rights

of minority shareholders and corporate enterprise risk (Borodina and Shvyrkov, 2010).

Apart from investment, Brazil potentially has prompted increased research into its

corporate structure and governance (Crisóstomo et al., 2011;Latini et al., 2014;Lattemann,

2014;Silveira et al., 2010).

As stated previously, the economy of Brazil operates on a model or style of capitalism

regarded as state-permeated market economies (SMEs) (Nölke, 2011). This form of

capitalism promotes corporate frameworks, where ownership is usually in the hands of

national elites or public authorities. These national elites and public authorities form large

blockholders in Brazilian public and private corporate institutions. There is a close

cooperation between the public authorities and private business actors, and this may be

attributed to personal relations supported by common values and shared social

background (Nölke, 2011). What uniquely defines SME of Brazil is this cooperation that

portrays a seemingly equal partnership by two bodies in the coordination of the economic

mechanism of the nation. This implies an omnipresence of public sector participation in

corporate entities but without an engagement of a strong, centralised economic planning

paradigm. The private elites take advantage of public authority participation in their entities

to enhance industrial relations by ensuring regulatory formulation and implementation that

provide favourable competitive advantage to their companies.

In terms of the corporate governance prevalent within this variation of Brazil capitalism, it

is not uncommon for family-controlled companies[2] to combine the position of Chairman

of the board and Corporate Executive Officer (CEO) in a single person. Boards with public

representatives and board members connected to the controlling shareholder are also

fashionable (Borodina and Shvyrkov, 2010). This corporate governance structure

significantly affects organisational operations and wealth-creation dynamics in terms of

meeting the general stakeholder objectives or those of the majority holder (Sora and Natale,

2004). Depending on whether majority ownership is in the hands of the state or private

elites, corporate objectives will tend to differ (Jones and Mygind, 2011).

According to Bebchuk and Weisbach (2010, p. 945), executive decisions are influenced by

director oversight, by shareholder monitoring and by incentives provided to them by

executive compensation arrangements and bonuses. All these influences are necessary to

curb the asymmetry in information between the shareholders and managers of the

company due to the nature of their relationship. The shareholders and management have

a principal – agent relationship arrangement (with the former being the principal and the

latter being the agent), and as such, shareholders can have either no information or partial

information in terms of management’s efforts at meeting their objectives (Shavell, 1979). For

the principal to enjoy the results of the activity of the agent, and to compensate the agent

adequately, these influences curb the information gap between the two parties.

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