Directors` remuneration : an analysis on firm performance and earnings management

Abstract

High profile scandals such as Enron, Worldcom and Lehman Brothers, create chaos among the public, especially shareholders and investors, and the board of directors has been widely criticized for not doing enough to protect their interests. This issue worsened during the Financial Crisis in 2008 when the focus of the media in Anglo-American countries was directed to corporate governance and directors’ remuneration. In Malaysia, directors are being paid excessively even though the companies are not performing well. The Malaysian Code on Corporate Governance (MCCG), hence, requires public listed company to link directors’ remuneration to firm performance in order to avoid such issue. However, there is a possibility that rewarding the directors based on reported earnings may increase the likelihood of them managing earnings to improve firm performance. Therefore, the current research objective is to examine the earnings management influence on directors’ remuneration. The study utilised the audited annual reports of Malaysian public listed companies published in Bursa Malaysia’s website. The findings in the study highlight that earnings management is used by the directors to alter their own remuneration. Especially when there is the presence of a large number of executive directors that may suggest influence of power over boards’ decision-making. Subsequently, they are able to positively influence boards’ decisions over their remuneration. The research contributes to the growing literature by providing evidences on pay-performance is influenced by earnings management.