A hybrid of state regulation and self-regulation for remuneration governance in Australia

Author:Zahid Riaz
Publication Date:06 Jun 2016
A hybrid of state regulation and
self-regulation for remuneration
governance in Australia
Zahid Riaz
Zahid Riaz is Assistant
Professor at Lahore
School of Economics,
Lahore, Pakistan.
Purpose This paper aims to explore an alternative approach to regulation for addressing governance
problems relating to director and executive remuneration in publicly listed firms. The author investigates
the development of hybrid regulatory framework, composed of state regulation and self-regulation, for
remuneration governance in Australia.
Design/methodology/approach The synthesis of constructs borrowed from agency and institutional
theories and its contextual analysis examines the effectiveness of formal (state regulation) and informal
(self-regulation) institutions for the development of a hybrid of regulation. Thereafter, the author
examines the impact of hybrid regulation on remuneration disclosure behavior in Australia.
Findings The author finds that improvement in disclosure is primarily driven by the establishment of
remuneration committees and separate role of chief executive officer (CEO) and chairperson but
weakened by the presence of CEO at remuneration committee and presence of remuneration
Originality/value Global crises have called for greater transparency and protection of investors
through state regulation alone. However, corporate governance, being a social practice that is shaped
by diverse interests, calls for a holistic approach. A useful contribution of this study is that through an
in-depth examination into the stages and actors of the government interventions involving the balancing
of tension between conflicting forces, it provides insights for developing an effective regulatory hybrid
which has greater acceptance for corporate governance. In conclusion, it implies the significance of
priming the social arena through active engagement of diverse market forces prior to introducing state
Keywords Australia, Corporate governance, Agency theory, Institutional theory, Regulation,
Director and executive remuneration
Paper type Research paper
In the past decade, director and executive remuneration or (hereafter as remuneration)
has become a contentious issue, one that is often associated with, and believed to
share some causal factors common in a series of corporate and financial crises in the
world (Banks et al., 2010;Hill, 2006;Hill et al., 2010;Hill and Yablon, 2002;Miller, 2004).
Failures of corporate governance are often linked to inadequate corporate reporting and
disclosure (Whittington, 1993). This raises a fundamental question: are market-based
regulatory mechanisms adequate to facilitate good corporate governance (Clarke, 2004;
Cullen, 2014;Hill, 2005;Massey, 2010;Mayes, 2010;Stanton, 2010).
Governments around the world including Australia have increasingly been pressured to
intervene to ensure accountability and transparency, particularly in matters relating to
remuneration (Chapple and Christensen, 2005;Kirkbride and Letza, 2004;Sheehan, 2009).
To many regulatory theorists, self-regulation is best, as it is likely to contribute to greater
shareholder value (Desmond, 2000). Also, neo-liberalists assert that any interference with
current market-based regulatory mechanisms will have a distorting effect (Hart, 1995;
Kirkbride and Letza, 2004;McSweeney, 2009;Sheehan, 2009).
Received 8 October 2015
Revised 12 March 2016
Accepted 23 March 2016
DOI 10.1108/CG-10-2015-0133 VOL. 16 NO. 3 2016, pp. 539-563, © Emerald Group Publishing Limited, ISSN 1472-0701 CORPORATE GOVERNANCE PAGE 539
However, to what extent can society rely on self-regulation? Should corporate entities be
better governed through statute? Governance is a unique social process of interaction
between “institutions and actors” (Stoker, 1998, p. 18) and cannot work in isolation from
other social and non-economic institutions representing “power, legislation, social
relationships and institutional contexts” (Black and Baldwin, 2010;Letza et al., 2004). The
purpose of my study is to shed light on the debate regarding the development of a
regulatory framework for corporate governance that aligns state regulation designed to
protect shareholder interests with self-regulation. Recent academic thinking, backed by
empirical research, appears to suggest that appropriate regulation is not a choice between
state regulation and self-regulation but a hybrid of both (Bartle and Vass, 2007;Black and
Baldwin, 2010;Brown, 2006;Brunoa and Claessensb, 2010;Ford, 2010;Kirkbride and
Letza, 2003;Lazzarini and Mello, 2001;Smith, 2004;Verbruggen, 2009). I demonstrate that
the hybrid of state regulation and self-regulation reflects the diverse and often competing
interests that influence the social practice of corporate governance in the modern society
(Ford, 2010;Mashaw, 2006). Currently, there is dearth of research that has theoretically
framed and empirically tested the harmonized role of hybrid regulation regarding director
and executive remuneration disclosure. This paper aims to fill this gap.
I first explain the development of a hybrid regulatory framework in Australia by focusing on
the issue of improving remuneration disclosure. It is pertinent to highlight hybrid regulation
is the outcome of Corporate Law Economic Reform Program (CLERP) 9 Act 2004 and the
Principles of Good Corporate Governance Practice and Best Practice Recommendations
2003 developed by the Corporate Governance Council of the Australian Securities
Exchange (ASX). CLERP 9 Act 2004 has solicited firms to disclose information regarding
director and executive remuneration, and ASX besought the listed entities to implement
international best governance arrangements regarding director and executive
remuneration. I then examine the effect of the hybrid regulation on disclosure behavior in
Australian companies and identify the key determinants of disclosure levels before and
after the establishment of hybrid regulation in 2004. Thereafter, using econometric
analyses, I compare disclosure levels, and the contribution of self-regulatory elements of
best practice to disclosure of information, respectively, before and after the introduction of
hybrid regulation. I find that disclosure levels are significantly higher after the introduction
of hybrid regulation. After controlling for firm-specific characteristics, results indicate that
the improvement in disclosure is primarily driven by the implementation of recommended
self-regulatory practices, namely, the establishment of remuneration committees and
separate role of chief executive officer (CEO) and chairperson. I also find that the presence
of CEO at remuneration committee and presence of remuneration consultant can
undermine the disclosure level of remuneration. This study thus demonstrates how a hybrid
of state regulation and self-regulation can be mutually reinforcing mechanisms rather than
competing ones, and through such demonstration, I contribute to the emerging body of
literature on the role of hybrid regulation as a contemporary and effective approach for
corporate governance.
Theoretical and empirical underpinnings
Agency conflict arises when an agent engages in a self-serving behavior by exploiting firm
resources, including time for personal use (Jensen and Meckling, 1976). Lack of perfect
contracting and observation of each and every action of agent by principal permits agents
to engage in regulatory non-compliance (Eisenhardt, 1989, pp. 59-60; Husted, 2007,
p. 181). In the presence of incomplete information, the principal cannot determine whether
the agent is acting in the best interests of the organization (Eisenhardt, 1989;Gomez-Mejia
and Balkin, 1992, p. 923). Information asymmetries, eventually, give rise to a situation of
moral hazard. According to agency theorists, investments in information systems such as
budgeting systems, reporting procedures, boards of directors and additional layers of
management can curb agent opportunism by keeping the principal informed about what
the agent is actually doing. Similarly, a complete and detailed disclosure of remuneration

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