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

• Published date: 06 June 2016
• DOI: https://doi.org/10.1108/CG-10-2015-0133
• Pages: 539-563
• Date: 06 June 2016
• Author: Zahid Riaz
• Subject Matter: Strategy,Corporate governance

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.

Abstract

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

consultant.

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

regulation.

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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