Director Compensation, Corporate Governance and Firm Performance: An Empirical Analysis of New Zealand Listed Companies

Abstract

In this study, I examine the interaction between the level of board compensation and governance characteristics facing New Zealand’s publicly listed firms. I also examine the relationship between excess board compensation and firm governance characteristics. Finally, I determine whether a relationship exists between either of these measures of director compensation and firm performance. I employ a two-way fixed effects regression to address possible unobserved heterogeneity and year effects. Endogeneity and reverse causality are controlled for by using a simultaneous system of equations approach. Director compensation provides an incentive to increase the monitoring function and reduce agency conflicts in firms with weak corporate governance. I find that firm governance characteristics influence the level of compensation the board receives. Board independence and ownership concentration are both found to reduce the level of board compensation. The level of compensation received by the directors has a positive influence on firm performance. The presence of at least one female director on the board is found to be associated with a significant increase in total board compensation. However, the relationship between female board representation and firm performance is insignificant, but certainly not positive. This result challenges the motives underlying how firms are recruiting women to their boards and whether or not female directors are simply tokens.