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Compensation committees: independence and firm performance

Sharon Kay Lee (Business Administration, University of Hawaii West Oahu, Kapolei, Hawaii, USA)
William Bosworth (Accounting and Finance, Western New England University, Springfield, Massachusetts, USA)
Franklin Kudo (Business Administration, University of Hawaii West Oahu, Kapolei, Hawaii, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 31 December 2015

2266

Abstract

Purpose

Recently all major stock exchanges issued a requirement that listed companies have 100 percent independence on audit committees of the board of directors but now the focus has turned to compensation committees. Does 100 percent independence on compensation committees make a difference in firm performance? The paper aims to discuss these issues.

Design/methodology/approach

Only 1 percent of the S & P 1,500 firms are not in compliance with the new 100 percent independence requirement for compensation committees. This presents an opportunity to examine characteristics of these firms and if this noncompliance may harm firm performance. Industry-adjusted ROA and Tobin’s Q measures are collected as well as firm size, debt ratios, and the presence of a classified board.

Findings

Findings are as follows: S & P 500 firms with lower levels of debt, have classified board, but do not perform significantly worse than firms in compliance in the same industry; mid-cap firms with debt levels similar to complying firms, have classified boards, and perform significantly worse, and lastly, small-cap firms with lower levels of debt, have classified boards, and perform significantly worse.

Research limitations/implications

Results imply that non-complying mid-cap and small-cap firms may be protecting under-performing management through maintaining classified boards, low levels of debt to avoid scrutiny of the debt markets, and less objectivity (i.e. overall and committee independence) on boards.

Originality/value

Existing corporate governance literature provides evidence that overall board independence may promote shareholder wealth maximization. The latest focus regarding independence has recently been on compensation committees. Should independence on compensation committees matter to shareholders? It is appears that noncompliance should matter in the case of small- and mid-cap firms.

Keywords

Citation

Lee, S.K., Bosworth, W. and Kudo, F. (2015), "Compensation committees: independence and firm performance", Managerial Finance, Vol. 42 No. 1, pp. 23-33. https://doi.org/10.1108/MF-10-2015-0263

Publisher

:

Emerald Group Publishing Limited

Copyright © 2016, Emerald Group Publishing Limited

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