laksmana - 2008 - corporate board governance and voluntary disclosure of executive compensation practices

Corporate Board Governance and Voluntary Disclosure of Executive Compensation Practices* INDRARINI LAKSMANA, Kent State University Introduction The rise of recent corporate scandals has focused considerable public attention on the role of boards of directors in corporate governance McKinsey & Company’s global investor opinion surveys (2000, 2002), for example, report that institutional investors perceive board practices to be at least as important as financial performance when evaluating companies for investment The surveys also highlight that investors demand that boards take greater responsibility for communicating material matters to shareholders and be responsive to investor requests for information on governance issues In the present study, I examine whether certain board and compensation committee characteristics, as proxies for board governance quality, are associated with the extent of board disclosure of compensation practices Executive compensation disclosure provides a natural setting to examine disclosure of board practices To address the criticisms about board failure to use the “pay for performance” standard, the U.S Securities and Exchange Commission (SEC) made boards more accountable for their decisions by requiring a report justifying their compensation policies (SEC 1992) The SEC, however, does not specify the items to be disclosed or the reporting format to be followed Thus, boards have considerable latitude in what details to report, making the reported items, for all practical purposes, voluntary disclosures The absence of clear regulatory guidance has led to cross-sectional differences in the amount of information reported by the boards, providing a research avenue to examine whether quality of board governance is associated with variations in board disclosure of compensation practices The present study differs from prior disclosure studies (e.g., Chen and Jaggi 2000; Eng and Mak 2003; Ajinkya, Bhojraj, and Sengupta 2005; Karamanou and Vafeas 2005) by examining disclosures as the outcomes of board decisions rather than the (assumed) effect of boards on management decisions The present study focuses on compensation-related disclosures because boards of directors (especially the compensation committees) have a responsibility to report the basis of their actions for determining executive compensation in the companies’ proxy statements * Accepted by Laureen Maines This study is based on my dissertation at Georgia State University I would like to thank my dissertation committee members, Lawrence D Brown, Jennifer R Joe, Omesh Kini, and especially Ram S Sriram (chair), for their guidance and support I am grateful to Laureen Maines (associate editor) and two anonymous referees for their constructive comments and suggestions An earlier version of this paper benefited from comments made by participants at the 2005 Annual Meeting of the American Accounting Association and the 2005 Ohio Region Meeting of the American Accounting Association Contemporary Accounting Research Vol 25 No (Winter 2008) pp 1147–82 © CAAA doi:10.1506/car.25.4.8 1148 Contemporary Accounting Research To make effective disclosure decisions, boards and compensation committees need to devote a significant amount of time and resources (i.e., personnel and their knowledge base) to set compensation disclosure policies, examine potential disclosure items, consider the consequences of several disclosure options, and make the final decisions I posit that the time and resource commitment of directors to perform these tasks is positively associated with the extent of compensation practice disclosure I use three proxies to measure the time and resource commitment of boards: the proportion of busy outside directors (measured by number of directorships), meeting frequency, and board (compensation committee) size The first two are measures for time commitment of directors and board diligence Board (committee) size is a proxy for knowledge base and ability to distribute workload and assignments Boards of directors also need the power to act independently from management to serve the best interests of shareholders The present study examines board disclosure decisions where shareholders and managers may have conflicts of interests Although shareholders demanding greater disclosure on executive compensation practices show enthusiasm for the compensation committee report, corporate executives expressed concerns that the report was “an undue intrusion into the internal affairs of the company” (SEC 1992, 2992) Management resistance to greater disclosure of compensation practices suggests potential disagreements with boards on the extent of disclosure I posit that more independent boards and compensation committees are more likely to make objective decisions by supporting greater disclosure Because chief executive officers (CEOs) have some influence on the director nomination process, I also investigate whether the presence of dominant CEOs is associated with less compensation transparency I develop a disclosure index consisting of 23 compensation-related items I note that firms reported, on average, 32 percent of the total items in the first year (i.e., 1993) that boards were required to issue a compensation report I also note that boards reported more compensation-related disclosures in 2002 than they did in 1993 The development of this disclosure index is a unique feature of this study However, like other disclosure indexes, its construction is subjective I, therefore, validate the index by showing that the disclosure scores are inversely related to two measures of information asymmetry: bid – ask spread and stock return volatility This provides evidence that greater compensation disclosure reduces information asymmetry On the basis of the 1993 sample, I find that boards and compensation committees with the authority to exercise independent oversight of management provide more disclosure of executive compensation practices The results show that CEO influence in the director selection process and, more weakly, board (compensation committee) independence status play some role in explaining board disclosure practices From both sample periods, I find that board disclosure increases with the amount of time and resources dedicated to board duties More specifically, board (compensation committee) meeting frequency and board (compensation committee) size are positively associated with compensation practice transparency The results of this study contribute to a greater understanding of why some boards are more likely to voluntarily disclose their executive compensation practices CAR Vol 25 No (Winter 2008) Corporate Governance and Executive Compensation Disclosure 1149 than others First, the study provides further support that boards need the power to act independently from top management for them to make effective decisions The results suggest that less CEO influence in the director nomination process leads to greater transparency because directors have greater ability to exercise independent judgement when there are potential disagreements with management These results are consistent with prior studies documenting that independent-dominated boards are more likely to influence management disclosure decisions than managementdominated boards (Chen and Jaggi 2000; Ajinkya et al 2005; Karamanou and Vafeas 2005) Second, the results highlight the importance of the board governance process for effective decision making The study documents that having less time to meet as a group and having fewer directors serving on the board lead to less transparency Frequent board meetings would facilitate greater information sharing among directors and having more directors serving on boards would allow better workload distribution and committee assignments The remainder of this paper is organized into five sections Section provides some background information and discusses the hypotheses Section addresses the sample selection process, data sources, development of the disclosure index, and its validity assessment Section discusses the main analyses, including the board governance measures, the ordinary least squares (OLS) regression model, and the control variables, and presents the OLS regression results Section presents the additional analysis using the two-stage regression model Section concludes and discusses the implications of the study and future research Background and hypothesis development Board report on executive compensation practices On October 15, 1992, the SEC enacted new disclosure rules governing executive compensation (SEC 1992).1 One of the rules is that boards must issue a report to explain the basis of their decisions in setting executive compensation The report addresses a frequent criticism about the lack of association between senior managers’ performance and their pay The SEC believes that the report will “enhance shareholders’ ability to assess how well directors are representing their interests” and “to inform shareholders of the (Compensation) Committee’s good-faith rationale for its compensation actions” (2992).2 The board’s report on executive compensation practices should provide shareholders with information on how management performance is measured and whether pay is aligned to performance The report requires directors to disclose the basis for their actions in setting the compensation of executive officers, including how corporate performance and executive compensation are aligned In the case of the CEO, the report must also address the extent to which CEO compensation is performance-related and the quantitative and qualitative performance measures used to determine the compensation The board, however, does not have to report specific performance targets or other compensation disclosures that would jeopardize the firm’s competitive advantages Other than requiring boards to report the rationale for their decisions, the SEC does not provide specific guidance on the specific items that must be reported and the reporting format that must be followed CAR Vol 25 No (Winter 2008) 1150 Contemporary Accounting Research Board governance and compensation practice disclosures To make effective decisions, boards need the power to act independently from management Unlike insider and affiliated directors whose career or personal interests are tied to the firm management, outside directors should be free from personal conflicts of interest and be able to exercise independent judgement when there are disagreements with management Boards also need to devote sufficient time and resources to perform their monitoring duties Effective board decisions necessitate that directors dedicate adequate time and resources to learn the issues at hand before board meetings, engage in substantive discussion and decision making during meetings, and perform follow-up reviews after meetings (Conger, Finegold, and Lawler 1998; Beasley, Carcello, Hermanson, and Neal 2007) Prior research has shown that the appointment of independent outside directors is in the best interests of shareholders.3 Fama and Jensen (1983) argue that independent outside directors value their reputation as directors because good reputation signals the value of their services to the director labor market Reputation will be more important to them than to inside directors whose careers are tied to the CEOs or affiliated outside directors who have family or business ties to the firm’s management.4 There has been some evidence that the independence of the board and its committees is associated with the quality of the financial reporting process Board independence and / or audit committee independence are inversely related to the likelihood of earnings manipulation (Dechow, Sloan, and Sweeney 1996) and financial statement fraud (Beasley 1996; Wright 1997), the absolute values of abnormal accruals (Klein 2002a), and the likelihood that firms avoid an earnings decline (Vafeas 2005) Audit committee independence is associated with a decrease in the likelihood of auditor dismissal following going-concern opinions (Carcello and Neal 2003) and an increase in the likelihood of auditors’ issuing going-concern opinions (Carcello and Neal 2000) Finally, board independence is positively associated with the issuance, frequency, and accuracy of management earnings forecasts (Ajinkya et al 2005; Karamanou and Vafeas 2005) and analyst forecast accuracy (Byard, Li, and Weintrop 2006).5 A number of studies find that corporate executives are sensitive to stakeholder criticism on compensation-related issues and distort proxy disclosures to manage stakeholder impressions (e.g., Lewellen, Park, and Ro 1996; Murphy 1996; Yermack 1998; Baker 1999) Greater compensation practice disclosure increases the ability of investors to monitor and punish managers for underperformance In addition, greater disclosure could diminish management’s ability to negotiate favorable changes in future contracts with the board Unjustified deviations from publicly disclosed policies, such as awarding a “special” bonus when top management fails to achieve previously reported performance targets and lowering performance targets to make them easier to reach (Byrne, Lavelle, Byrnes, and Vickers 2002), could attract adverse publicity and shareholder criticisms Although shareholders demand greater disclosure of executive compensation practices and show enthusiasm for the compensation committee report, corporate executives have expressed concerns that the report is “an undue intrusion into the internal affairs of the company” (SEC 1992, 2992) CAR Vol 25 No (Winter 2008) Corporate Governance and Executive Compensation Disclosure 1151 Requiring boards and compensation committees to report details of executive compensation imposes greater responsibility for them to justify their compensation policies and become more effective at performing their monitoring duties Independent, outside directors whose reputations are at stake are more likely to report more details of compensation practices than are inside or affiliated directors when there are disagreements with management on the extent of disclosure Because improved compensation transparency is in the best interests of shareholders, independent directors who value their reputation are more likely to provide greater compensation disclosure than inside or affiliated-outside directors Therefore: HYPOTHESIS The extent of executive compensation disclosure in the compensation committee report is positively associated with board and compensation committee independence Although directors have reporting responsibility to disclose compensation practices, top management, especially the CEO, could affect board decisions on the extent of information to be reported CEOs have incentives to protect their job and increase their other benefits by using their influence in the director nomination process They often dominate this process in an attempt to acquire “weak” boards whose directors are less likely to challenge the CEOs and are more inclined to support their decisions (Mace 1986; Lorsch and MacIver 1989; Monks and Minow 1996) In the context of the present study, CEOs with significant influence over the director nomination process could use their power to limit compensation disclosure Thus: HYPOTHESIS The extent of executive compensation disclosure in the compensation committee report is negatively associated with CEO power over the director nomination process Prior studies show that directors who have reputations as effective (ineffective) monitors are rewarded (punished) with increases (decreases) in the number of directorships held (Gilson 1990; Shivdasani 1993; Harford 2003; Farrell and Whidbee 2000) Furthermore, Ferris, Jagannathan, and Pritchard (2003) find a significantly positive market reaction to the initial appointment of outside directors with multiple directorships to a board without an incumbent “busy” director, suggesting that the experience and reputation capital of such directors are valuable to the board While the number of multiple directorships seems to be associated with director expertise, directors serving on too many boards could spread themselves too thinly As the number of directorships increases, directors could devote less time to performing their duties at a single board Busy boards are associated with an increased likelihood of financial fraud (Beasley 1996), excessive CEO compensation (Core, Holthausen, and Larcker 1999), substandard financial performance, and negative abnormal returns (Fich and Shivdasani 2006), implying that the presence of overcommitted directors reduces the oversight of management CAR Vol 25 No (Winter 2008) 1152 Contemporary Accounting Research Executive compensation is a vital mechanism to discipline management Boards and their compensation committees have the primary responsibilities to set appropriate incentive contracts, to ensure that the contracts are optimally structured, and to adjust the contracts to better align performance measures to pay Directors holding multiple directorship positions are likely to have more experience to perform these tasks and have greater incentive to maintain good oversight and decision-making performance To perform these duties effectively, however, boards and their compensation committees must spend adequate time and effort Mace (1986) and Lipton and Lorsch (1992), on the basis of their experience serving on corporate boards, conclude that typical directors not devote enough time to carry out their duties This problem is more severe for outside directors holding too many directorships These competing explanations, therefore, lead to the following nondirectional hypothesis: HYPOTHESIS The extent of executive compensation disclosure in the compensation committee report is associated with “busy” boards and compensation committees A sufficient number of well-organized meetings could lead to board effectiveness (Conger et al 1998) A few studies suggest that the frequency of board and committee meetings is a relatively good proxy for board diligence Vafeas (1999) finds that boards meet more frequently after stock price declines and that firm performance increases following years of higher number of board meetings Frequency of meetings is also associated with the quality of financial reporting Board and audit committee meeting frequency is positively associated with external audit fees (i.e., more audit work for greater assurance) (Carcello, Hermanson, Neal, and Riley 2002) and is negatively associated with discretionary accruals (Xie, Davidson, and DaDalt 2003) I posit that board and compensation committee meeting frequency is positively associated with the extent of compensation practice disclosure when directors have more time together as a group to discuss various aspects of compensation disclosure Thus: HYPOTHESIS The extent of executive compensation disclosure in the compensation committee report is positively associated with board and compensation committee meeting frequency Two views exist regarding the relationship between board (committee) size and its monitoring effectiveness Some believe that smaller boards facilitate more frequent and intense information sharing and processing than larger boards (Lipton and Lorsch 1992; Jensen 1993) This view is consistent with organizational behavior research, such as Hackman 1990, highlighting that productivity losses could arise when working groups grow larger Yermack (1996), for example, provides empirical evidence on the effectiveness of small boards He finds that smaller boards are more likely to provide CEOs with stronger compensation incentives and dismiss them for poor performance than are larger boards CAR Vol 25 No (Winter 2008) Corporate Governance and Executive Compensation Disclosure 1153 In contrast, more recent studies suggest that larger boards have a greater knowledge base to fulfill their advisory role (Coles, Daniel, and Naveen 2005) and greater ability to distribute workload and committee assignments to perform their monitoring duties (Klein 2002b; Anderson, Mansi, and Reeb 2004) than smaller boards Recent studies show that board (committee) size is inversely related to the cost of debt (Anderson et al 2004) and positively associated with the issuance of management earnings forecast updates (Karamanou and Vafeas 2005) In the context of the present study, larger boards (compensation committees) would have more resources (i.e., directors with various backgrounds and skills) to perform their tasks than smaller boards However, larger boards could become less effective than smaller boards because of coordination and free rider issues These competing explanations lead to the following nondirectional hypothesis: HYPOTHESIS The extent of executive compensation disclosure in the compensation committee report is associated with board and compensation committee size Sample and disclosure scores Sample and data sources The initial sample for this study consists of firms in nonregulated industries listed on the Standard & Poor’s (S&P) 500 as of December 31, 1992 Two examination periods, 1993 and 2002, are used The 1993 proxy season is selected because the board’s report on compensation practices was required for firms filing any proxy statements after January 1, 1993 By selecting the 1993 proxy year, I could examine boards’ first response to the new disclosure requirement The 2002 proxy season is selected because, at the time of data collection, it was the most recent period for which proxy statements were available The data on board disclosures, board and compensation committee characteristics, director information, stock ownership by blockholders and institutions, and shareholder votes were hand-collected from proxy statements Searches of the Dow Jones Interactive / Factiva database were performed to identify firms’ compensation-related news Executive compensation and other accounting/market data were obtained from COMPUSTAT, ExecuComp, and the Center for Research in Security Prices (CRSP) In selecting the sample, I excluded firms if they are in regulated industries (110 firms).6 In addition, I excluded firms if proxy statements, compensation committee reports, director data, and compensation, as well as accounting and/or other data are not available for the examination periods The final sample for the 1993 and 2002 proxy seasons consists of 218 and 232 firms, respectively The sample represents six major industries Manufacturing is the largest group (65 percent) The remaining firms are from wholesale and retail (14 percent), service (9 percent), transportation (5 percent), mining (6 percent), and construction (1 percent) CAR Vol 25 No (Winter 2008) 1154 Contemporary Accounting Research Compensation disclosure scores To measure the extent of board disclosure, I constructed a database of disclosure index based on information reported in compensation committee reports Prior research used disclosure indexes to measure voluntary disclosure, but they focused mainly on financial reporting practices (e.g., Botosan 1997; the Association for Investment Management and Research (AIMR) disclosure rankings) To my knowledge, no published study to date has used an index to specifically measure disclosures related to management performance and reward The selection of items included in my compensation disclosure checklist was guided by the SEC rules for the Board Compensation Committee Report (SEC 1992); discussion of the elements of incentive compensation plans by Butler and Maher 1986 and Hilton, Maher, and Selto 2003; the Conference Board’s Best Practices for Establishing Executive Compensation (Brancato, Peck, and Hervig 2001); and leading company proxy statements Table presents the disclosure checklist and percentage of firms reporting each item during the 1993 and 2002 proxy years Firms receive one point for the presence of each item in their compensation committee report The extent of board disclosure on compensation practices is measured as the sum of scores obtained Each item is equally weighted because user preferences are not known In both 1993 and 2002, the basis for determining salary (item 4), type of general and specific measures for determining annual rewards (items and 9), and discussion of whether annual rewards are granted on achievement of performance targets (item 15) are the items reported most often; more than 84 percent of corporate boards disclose them In contrast, weights assigned to performance measures (items 11, 18, and 19), specific performance targets (items 13 and 21), and award formulas (items 14 and 22) are among the least reported items A number of firms disclosed that they kept these items confidential to avoid compromising their competitive positions Chi-square tests were performed to compare the percentage of firms disclosing each item in 1993 with that in 2002 Compared with 1993, there have been significant increases in the percentage of firms disclosing the employment of compensation consultants (item 2), the basis for determining salary (item 4), types of performance evaluation (items and 6), weights on performance measures (items 10, 11, 18, and 19), and range or absolute value of rewards (items 12 and 20) in 2002 (all p-values Ͻ 0.05 or better) Validity assessment of board disclosure scores Because the development of the disclosure index requires subjective assessments, I examine its validity by correlating the disclosure scores with bid–ask spread and stock return volatility, two common proxies for information asymmetry (Glosten and Milgrom 1985; French and Roll 1986) High bid–ask spread and return volatility are associated with high information asymmetry Because greater disclosure will reduce investors’ uncertainty about how incentive systems are set to promote management accountability, the disclosure scores should be inversely related to both bid–ask spread and return volatility CAR Vol 25 No (Winter 2008) Corporate Governance and Executive Compensation Disclosure 1155 TABLE Compensation practice disclosure items % firms disclosing Disclosure item Item no 1993 proxy (n ϭ 218) 2002 proxy (n ϭ 232) Compensation process Full board review and approval Employment of a compensation consultant Top management’s involvement in compensation process 32.11 45.87 25.00 60.34* 20.18 15.95 Base salary Basis for determining salary 85.32 91.38† 19.27 34.05* 39.45 10.55 62.93* 11.21 97.71 95.26 86.70 85.78 10 11 12 13 14 14.68 4.13 34.86 6.42 6.88 31.90* 20.26* 52.16* 7.33 10.78 15 84.86 88.79 16 54.13 47.41 17 37.61 36.21 Pay-for-performance practices Type of performance evaluation: absolute or relative Type of performance evaluation: formula-based or subjective Portion of compensation at risk Annual incentive Performance measures Types of measures disclosed (e.g., financial, nonfinancial, corporate, business-unit, individual) Specific measures disclosed (e.g., ROA, operating income, customer satisfaction) Weight assigned on performance measures Weight assigned on each type of measures Weight assigned on each measure Range or absolute value of rewards Specific performance targets Detail formula or steps disclosed Discussion whether awards are granted on achievement of performance targets Long-term incentive Performance measures Types of measures disclosed (e.g., financial, nonfinancial, corporate, business-unit, individual) Specific measures disclosed (e.g., ROA, operating income, customer satisfaction) (The table is continued on the next page.) CAR Vol 25 No (Winter 2008) 1156 Contemporary Accounting Research TABLE (Continued) % firms disclosing Disclosure item Weight assigned on performance measures Weight assigned on each type of measure Weight assigned on each measure Range or absolute value of awards Specific performance targets Detail formula or steps disclosed Discussion whether awards are granted on achievement of performance targets Item no 1993 proxy (n ϭ 218) 2002 proxy (n ϭ 232) 18 19 20 21 22 1.83 1.83 11.47 4.59 2.75 10.78* 9.05* 22.41* 8.62 3.02 23 42.20 44.40 Notes: Chi-square tests are performed to test for differences in percentage of firms reporting disclosure items in 1993 and 2002 * Significant at the 0.01 level † Significant at the 0.05 level Following Guo, Lev, and Zhou 2004, I regress bid–ask spreads (SPREAD) on disclosure scores (SCORE ) and three control variables: firm size (MKVAL), trade volume (VOLUME ), and return volatility (VOLATILE ) These control variables have been documented in prior research to be correlated with bid – ask spreads (e.g., Leuz and Verrecchia 2000) All data are from the 1993 and 2002 fiscal years SPREAD is the annual average of the daily absolute difference between the closing bid and ask prices scaled by the mean of the bid and ask prices SCORE is the total score received from all disclosure items shown in Table MKVAL is the total market value of the firm’s equity at the end of the fiscal year VOLUME is the mean percentage of daily traded shares (i.e., daily traded shares divided by total shares outstanding) over the fiscal year VOLATILE is the standard deviation of daily stock returns over the fiscal year The simple correlations between SPREAD and SCORE for the 1993 and 2002 data are Ϫ0.18 and Ϫ0.21, respectively Both are statistically significant ( p-value Ͻ 0.05) The correlations between the logarithmic transformations of SPREAD and SCORE for the 1993 and 2002 data are Ϫ0.23 and Ϫ0.20, respectively ( p-value Ͻ 0.01) Panel A of Table reports the results of the regressions of SPREAD on SCORE and the control variables using both untransformed and transformed variables (i.e., log linear model) The coefficients of SCORE are negative and significant in all regressions in both examination periods ( p-value Ͻ 0.05, onetailed), providing evidence that a greater number of disclosure items is associated with lower information asymmetry CAR Vol 25 No (Winter 2008) INDEPENDENCE CEOPOWER BUSYDIR DILIGENCE/SIZE OP_COM SUBJECT OVERPAID NEWS VOTE %BLOCKOWN %INST_OWN PERFORM LnF_SIZE PROP EXCHANGE TAX Variable B C D E F G H I J K L M N O P Q Panel B: 2002 sample TABLE (Continued) 0.04 Ϫ0.04 0.13 0.19 0.11 0.20 ؊0.14 0.08 Ϫ0.03 ؊0.19 0.08 0.19 0.10 Ϫ0.09 0.16 0.07 A Ϫ0.06 Ϫ0.02 0.07 0.04 0.05 Ϫ0.06 0.01 0.05 ؊0.26 0.07 ؊0.22 0.00 Ϫ0.06 Ϫ0.03 Ϫ0.09 B 0.04 Ϫ0.14 Ϫ0.02 0.09 Ϫ0.03 Ϫ0.10 Ϫ0.01 0.08 ؊0.15 0.16 0.03 Ϫ0.02 ؊0.22 0.06 C 0.13 0.27 0.02 0.07 Ϫ0.03 0.07 Ϫ0.04 Ϫ0.01 0.12 0.35 Ϫ0.07 0.09 Ϫ0.01 D 0.12 0.02 0.05 0.13 0.00 Ϫ0.07 Ϫ0.09 Ϫ0.03 0.54 Ϫ0.02 0.18 ؊0.16 E G H I J K L M N O CAR Vol 25 No (Winter 2008) 0.00 P (The table is continued on the next page.) Ϫ0.05 0.35 Ϫ0.11 Ϫ0.05 0.01 Ϫ0.01 Ϫ0.08 0.07 0.01 Ϫ0.04 ؊0.17 Ϫ0.11 ؊0.13 Ϫ0.06 0.01 0.00 0.06 0.07 Ϫ0.05 0.00 Ϫ0.02 0.07 0.07 0.01 Ϫ0.10 0.11 ؊0.15 ؊0.20 0.27 0.11 0.05 0.18 0.01 ؊0.18 ؊0.21 0.01 ؊0.25 0.14 Ϫ0.02 0.04 Ϫ0.07 0.17 0.19 ؊0.14 Ϫ0.06 0.19 0.01 0.03 0.08 Ϫ0.03 Ϫ0.12 0.07 0.08 0.18 Ϫ0.09 0.07 0.00 0.08 ؊0.19 0.09 0.01 Ϫ0.03 0.06 Ϫ0.10 0.03 F SCORE 1168 Contemporary Accounting Research Corporate Governance and Executive Compensation Disclosure 1169 TABLE (Continued) Notes: Correlations with p-values equal to or lower than 0.05 are in boldface All variables except SCORE and VOTE are from the 1992 (2001) fiscal year INDEPENDENCE is the score for the board independence factor on which variables B_INDDIR, C_INDDIR, and IND_NOM have high loadings CEOPOWER is the score for the CEO power factor on which variables B_%APPOINT, C_%APPOINT, and CEOTENURE have high loadings BUSYDIR is the score for the busy director factor on which variables LnB_OTHDIR, B_BUSY, LnC_OTHDIR, and C_BUSY have high loadings DILIGENCE is the score for the board diligence factor on which variables LnB_MEETINGS and LnC_MEETINGS have high loadings (1993 sample only) BOARDSIZE is the score for the board size factor on which variables LnB_SIZE and LnC_SIZE have high loadings (1993 sample only) DILIGENCE/SIZE is the score for the diligence/size factor on which variables LnB_MEETINGS, LnC_MEETINGS, LnB_SIZE, and LnC_SIZE have high loadings (2002 sample only) LnF_SIZE is the natural log of total assets (millions of dollars) TAX is equal to one if the compensation committee report includes a discussion about IRC section 162(m), and zero otherwise (2002 sample only) Other variables are as defined in Table OLS regression results Table presents the 1993 and 2002 OLS regression results I perform several diagnostic tests The White and Breusch-Pagan-Godfrey (BPG) tests suggest that heteroscedasticity is not a problem Multicollinearity diagnostics using variance inflation factor (VIF) and condition index (CI) indicate no severe multicollinearity Columns (1) and (2) of panel A report the 1993 regressions of SCORE on the governance variables before and after controlling for other explanatory variables, respectively The results are robust to the inclusion of the control variables The results of the full model are discussed hereafter Column (2) of panel A shows that board independence (INDEPENDENCE) is positively related to SCORE, suggesting that independent-dominated boards report more details on compensation practices than management-dominated boards (p-value Ͻ 0.05, one-tailed) Greater CEO power in the director nomination process (CEOPOWER) is associated with a smaller number of disclosed items (p-value Ͻ 0.01, one-tailed), implying that dominant CEOs are more likely to limit compensation disclosures Both results suggest that directors not appointed by the incumbent CEO and whose interests are not tied to the CEO have more bargaining power over the CEO’s pressure to limit disclosures CAR Vol 25 No (Winter 2008) 1170 Contemporary Accounting Research TABLE Regression of board disclosure scores on board characteristics and control variables Panel A: 1993 sample (n ϭ 218) Variable Exp sign Intercept ? INDEPENDENCE ϩ CEOPOWER Ϫ BUSYDIR DILIGENCE (LnB_MEETINGS) BOARDSIZE (LnB_SIZE) DILIGENCE/SIZE ϩ/Ϫ ϩ ϩ/Ϫ Dependent variable: SCORE Dependent variable: SCORE (1) (2) (1) 7.65 (43.14)* 0.37 (2.04)† Ϫ0.33 (Ϫ1.71)† Ϫ0.49 (Ϫ2.58)* 0.11 (0.57) 0.57 (3.11)* 10.24 (5.62)* 0.38 (2.09)† Ϫ0.50 (Ϫ2.54)* Ϫ0.38 (Ϫ1.91)‡ 0.14 (0.70) 0.55 (2.91)* 8.84 (37.77)* 0.14 (0.60) Ϫ0.08 (Ϫ0.33) 0.28 (1.16) ϩ/Ϫ OP_COM Ϫ SUBJECT ϩ/Ϫ OVERPAID ϩ NEWS ϩ VOTE ϩ/Ϫ %BLOCKOWN ϩ/Ϫ %INST_OWN ϩ/Ϫ PERFORM ϩ/Ϫ LnF_SIZE ϩ PROP Panel B: 2002 sample (n ϭ 232) ϩ/Ϫ 0.52 (2.15)† Ϫ2.82 (Ϫ3.02)* 0.60 (1.37) 0.51 (2.23)† 0.75 (1.00) 0.39 (0.94) 0.01 (0.42) Ϫ0.03 (Ϫ1.69)‡ Ϫ0.01 (0.00) Ϫ0.12 (Ϫ0.65) Ϫ1.80 (Ϫ1.51) (2) (3) 7.46 Ϫ0.86 * (Ϫ0.26) (2.84) 0.01 0.00 (0.06) (0.02) Ϫ0.11 Ϫ0.15 (Ϫ0.46) (Ϫ0.61) 0.28 0.32 (1.14) (1.28) 1.61 (1.89)† 1.91 (1.41) 0.76 (2.70)* 0.83 0.89 (0.87) (0.92) 1.21 1.18 (2.55)† (2.46)† Ϫ0.20 Ϫ0.18 (Ϫ1.32) (Ϫ1.17) 1.25 1.21 (1.23) (1.18) Ϫ0.79 Ϫ0.73 (Ϫ1.68)‡ (Ϫ1.55) Ϫ0.03 Ϫ0.03 (Ϫ1.27) (Ϫ1.37) 0.01 0.02 (0.83) (0.84) 6.10 5.64 (1.83)‡ (1.68)‡ Ϫ0.18 Ϫ0.14 (Ϫ0.71) (Ϫ0.53) Ϫ2.97 Ϫ2.68 † (Ϫ1.77)‡ (Ϫ1.98) (The table is continued on the next page.) CAR Vol 25 No (Winter 2008) Corporate Governance and Executive Compensation Disclosure 1171 TABLE (Continued) Panel A: 1993 sample (n ϭ 218) Variable Exp sign EXCHANGE Dependent variable: SCORE Dependent variable: SCORE (1) (2) (1) (2) 2.14% 1.04 (1.12) 2.18 (2.76)* 12.36% Ϫ0.02 (Ϫ0.03) ? TAX Panel B: 2002 sample (n ϭ 232) ϩ Adjusted R 7.50% 12.72% (3) 1.13 (1.20) 2.16 (2.73)* 11.63% Notes: The t-values are in parentheses * Significant at the 0.01 level One-tailed test is used whenever the directional prediction is made † Significant at the 0.05 level One-tailed test is used whenever the directional prediction is made ‡ Significant at the 0.10 level One-tailed test is used whenever the directional prediction is made Variables are as defined in Table BUSYDIR is inversely related to SCORE (significant at the 0.10 level, twotailed) When outside directors hold multiple directorships and the majority of outside directors are busy, the board and compensation committee report fewer disclosure items The coefficient of DILIGENCE is not significantly different from zero Meeting frequency is not associated with SCORE The coefficient of BOARDSIZE is significantly positive (p-value Ͻ 0.01, two-tailed), providing evidence that larger boards disclose more compensation items than smaller boards Overall, the results suggest that boards and compensation committees release fewer compensation details when they not have adequate time and directors to work on board/committee assignments With respect to the control variables, the coefficient estimates of three variables are statistically significant in the full model The proportion of CEO compensation allocated to stock options (OP_COM) is inversely related to disclosure scores (p-value Ͻ 0.01) because firms relying heavily on stock options for CEO compensation have fewer compensation details to disclose The coefficient of OVERPAID is positive and significant (p-value Ͻ 0.05), suggesting that boards provide greater transparency to justify their compensation policies and decisions when CEO compensation is greater than the benchmark pay Finally, the coefficient of %INST_OWN is inversely related to SCORE ( p-value Ͻ 0.10), implying that greater institutional ownership substitutes the need for greater disclosure CAR Vol 25 No (Winter 2008) 1172 Contemporary Accounting Research Panel B of Table reports the 2002 regression results Overall, the 2002 results are weaker than the 1993 results DILIGENCE/SIZE is the only governance variable significantly associated with SCORE (p-value Ͻ 0.05, two-tailed) in both columns (1) and (2) of panel B Because both measures of board /compensation committee diligence and board/compensation committee size load highly on this factor, I run a sensitivity analysis by replacing DILIGENCE/SIZE with two single indicators, LnB_MEETINGS and LnB_SIZE, to examine whether both measures drive the result Column (3) of panel B presents the regression result The frequency of board meetings (Ln B_MEETINGS ) is positively associated with SCORE (p-value Ͻ 0.05, two-tailed) The coefficient of board size (LnB_SIZE) is not statistically significant The insignificant relationship between compensation disclosure scores and both INDEPENDENCE and CEOPOWER could be driven by two factors First, firms have responded to pressure on governance reform by increasing the number of independent directors serving on boards and compensation committees B_INDDIR significantly increased from 67 percent in 1992 to 79 percent in 2001 and C_INDDIR increased from 87 percent in 1993 to 97 percent in 2002 (see Table 3) At the same time, their variability (standard deviation) decreased Second, with the pressure from shareholders for better board governance in recent years, independent outside directors whose careers are more closely tied to their reputations as good monitors of management are more sensitive to this shareholder pressure The 2002 regressions in columns (2) and (3) of panel B include an indicator variable (TAX) to control for the effect of section 162(m) of the Internal Revenue Code (IRC) 1986, limiting the deductibility of compensation paid to the five highest paid executives to one million dollars.9 TAX equals one when the compensation committee report includes a discussion about IRC section 162(m) and its impact on the executive compensation policy, and zero otherwise Disclosure scores are likely to increase following the enactment of IRC section 162(m) because compensation committees are now required to establish and disclose performance goals as well as to certify that the goals have been satisfied before the firms can qualify for compensation deductions above the $1 million limit As expected, the coefficient of TAX is positive and significant (at the 0.01 level, one-tailed) In addition, the coefficients of three other control variables (i.e., SUBJECT, PERFORM, and PROP) are significantly associated with SCORE (at the 0.10 level or better, twotailed) Additional analysis Hermalin and Weisbach (2003) discuss that board characteristics as measures for board governance quality are endogenously determined OLS estimators are neither consistent nor efficient when determinants of board characteristics are not included in the right-hand side of the regression model being estimated To address the issue of endogeneity, I follow the approach used by Larcker et al 2007 They assume that firm size and industry membership are the two main determinants of board characteristics Firm size is defined as the natural log of the market value of equity Industry membership is measured using two-digit SIC codes I run a regression of CAR Vol 25 No (Winter 2008) Corporate Governance and Executive Compensation Disclosure 1173 each board governance variable (i.e., INDEPENDENCE, CEOPOWER, BUSYDIR, etc.) on firm size and industry membership I estimate five regressions for the 1993 sample and four regressions for the 2002 sample The residuals from these regressions indicate whether a firm’s board governance quality is above or below an “optimal” governance quality (i.e., a benchmark) For example, a firm whose residual from the regression of INDEPENDENCE is positive has a more independent board than the benchmark firm In contrast, the CEO of a firm whose residual from the regression of CEOPOWER is positive has, relative to the benchmark, more power in the director nomination process For each governance variable, two new variables are created on the basis of the sign of the residuals (i.e., positive or negative) If a residual from the regression of INDEPENDENCE on firm size and industry membership is positive, variable R_INDEPϩ is equal to the value of the residual, and zero otherwise If the residual is negative, then R_INDEPϪ takes on the value of the residual, and zero otherwise Ten (eight) new variables from five (four) governance variables are created for the 1993 (2002) sample By separating the residuals from each regression into two variables, I allow the new variables to have different slopes and I can examine the potentially different impact of firms with higher or lower board governance quality on disclosure For example, greater board independence than the benchmark may be associated with greater number of disclosed items In contrast, lower board independence than the benchmark may not be associated with disclosure The expected signs of the residual variable coefficients are the same as that of the underlying governance variable For example, the expected sign of INDEPENDENCE (see Table 5) is positive and so is that of R_INDEPϩ and R_INDEPϪ The positive relationship between R_INDEPϩ (R_INDEPϪ) and SCORE indicates that greater (lower) board independence than the benchmark leads to more (less) disclosure In contrast, the expected sign of R_CEOPOWERϩ (CEOPOWERϪ) is negative following that of CEOPOWER (see Table 5) The negative relationship between R_CEOPOWERϩ (R_CEOPOWERϪ) and SCORE suggests that firms whose CEOs have more (less) power in the director nomination process than the benchmark would issue less (more) disclosure Table presents the results of the regressions of SCORE on the residual variables Panel A (panel B) reports the results for the 1993 (2002) sample Columns (1) and (2) of each panel report the regression results before and after controlling for other explanatory variables, respectively The full regression results are discussed hereafter For the 1993 sample, column (2) of panel A shows that firms with lower CEO power (R_CEOPOWERϪ) issue more details on executive compensation practices than the benchmark firms (p-value Ͻ 0.05 level, one-tailed) In contrast, greater CEO power (R_CEOPOWERϩ) than the benchmark is not associated with disclosure Boards and compensation committees with lower meeting frequency (R_DILIGENCEϪ) are associated with fewer disclosed items (p-value Ͻ 0.10, one-tailed) Higher meeting frequency (R_DILIGENCEϩ), in contrast, is not related to disclosure Finally, the coefficient of R_BOARDSIZEϪ is positive and significant (p-value Ͻ 0.10, two-tailed), suggesting that boards and compensation committees with fewer members relative to the benchmark are associated with less CAR Vol 25 No (Winter 2008) 1174 Contemporary Accounting Research TABLE Regression of board disclosure scores on board characteristics and control variables, twostage method Panel A: 1993 sample (n ϭ 218) Variable Exp sign Intercept ? R_INDEPϩ ϩ R_INDEPϪ ϩ R_CEOPOWERϩ Ϫ R_CEOPOWERϪ Ϫ R_BUSYDIRϩ ϩ/Ϫ R_BUSYDIRϪ ϩ/Ϫ R_DILIGENCEϩ ϩ R_DILIGENCEϪ ϩ R_BOARDSIZEϩ ϩ/Ϫ R_BOARDSIZEϪ ϩ/Ϫ R_DILIGENCE/SIZEϩ Dependent variable: SCORE Dependent variable: SCORE (1) (2) (1) (2) 7.44 (16.87)* 0.60 (1.42)‡ 0.33 (0.85) 0.09 (0.20) Ϫ0.82 (Ϫ1.95)† Ϫ0.50 (Ϫ1.17) Ϫ0.73 (Ϫ1.60) Ϫ0.27 (Ϫ0.66) 0.59 (1.35)‡ 0.73 (1.67)‡ 0.70 (1.51) 9.37 (5.13)* 0.44 (1.05) 0.41 (1.04) Ϫ0.27 (Ϫ0.58) Ϫ0.72 (Ϫ1.68)† Ϫ0.29 (Ϫ0.67) Ϫ0.72 (Ϫ1.59) Ϫ0.35 (Ϫ0.87) 0.69 (1.57)‡ 0.49 (1.09) 0.81 (1.71)‡ 8.53 (15.30)* 0.38 (0.60) 0.00 (0.01) Ϫ0.17 (Ϫ0.33) 0.06 (0.10) 1.06 (2.01)† Ϫ0.49 (Ϫ0.85) 5.38 (2.21)† 0.44 (0.71) Ϫ0.49 (Ϫ1.05) Ϫ0.42 (Ϫ0.86) 0.42 (0.68) 0.65 (1.26) 0.06 (0.10) 0.02 (0.03) 0.94 (1.52) 0.40 (0.72) 1.32 (2.14)† 0.77 (0.79) 1.26 (2.62)* Ϫ0.17 (Ϫ1.12) 1.34 (1.29) ϩ/Ϫ R_DILIGENCE/SIZEϪ Panel B: 2002 sample (n ϭ 232) ϩ/Ϫ OP_COM Ϫ SUBJECT ϩ/Ϫ OVERPAID ϩ NEWS ϩ Ϫ2.76 (Ϫ2.85)* 0.56 (1.26) 0.50 (2.06)† 0.81 (1.06) (The table is continued on the next page.) CAR Vol 25 No (Winter 2008) Corporate Governance and Executive Compensation Disclosure 1175 disclosure The coefficients of four control variables, OP_COMP, OVERPAID, %INST_OWN, and PROP, are statistically significant (at the 0.10 level or better) The 1993 two-stage regression results are different from the 1993 OLS results (see column 2, panel A of Table 5) in three aspects First, the two-stage regression results show the different impact of higher or lower board governance quality on disclosure Second, none of the coefficients of board / compensation committee independence variables (R_INDEPϩ and R_INDEPϪ) and board / compensation committee “busyness” variables (R_BUSYDIRϩ and R_BUSYDIRϪ) in the twostage regression is statistically significant In contrast, INDEPENDENCE and BUSYDIR are positively and negatively associated with SCORE, respectively, in the OLS regression Third, R_DILIGENCEϪ is positively related to SCORE (p-value Ͻ 0.10, one-tailed) while the coefficient of DILIGENCE in the OLS regression is not statistically significant CEOPOWER and BOARDSIZE are the only board governance variables with consistent results using both regression methods For the 2002 sample, column (2) of panel B of Table shows that the coefficient of R_DILIGENCE / SIZEϪ is positive and significant, implying that lower meeting frequency and smaller boards are associated with fewer compensation TABLE (Continued) Panel A: 1993 sample (n ϭ 218) Variable Exp sign VOTE ϩ/Ϫ PERFORM ϩ/Ϫ LnF_SIZE Dependent variable: SCORE ϩ/Ϫ %INST_OWN Dependent variable: SCORE ϩ/Ϫ %BLOCKOWN Panel B: 2002 sample (n ϭ 232) ϩ PROP (1) ? TAX (1) 0.43 (0.96) 0.01 (0.32) Ϫ0.03 (Ϫ1.69)‡ 0.30 (0.12) 0.04 (0.24) Ϫ2.44 (Ϫ1.97)† Ϫ0.10 (Ϫ0.11) ϩ/Ϫ EXCHANGE (2) ϩ Adjusted R 6.63% 10.82% 1.00% (2) Ϫ0.71 (Ϫ1.49) Ϫ0.03 (Ϫ1.52) 0.01 (0.64) 7.50 (2.19)† 0.09 (0.42) Ϫ3.42 (Ϫ2.23)† 1.11 (1.20) 2.00 (2.50)* 11.63% (The table is continued on the next page.) CAR Vol 25 No (Winter 2008) 1176 Contemporary Accounting Research TABLE (Continued) Notes: The t-values are in parentheses * Significant at the 0.01 level One-tailed test is used whenever the directional prediction is made † Significant at the 0.05 level One-tailed test is used whenever the directional prediction is made ‡ Significant at the 0.10 level One-tailed test is used whenever the directional prediction is made R_INDEPϩ is the residual produced from a regression of INDEPENDENCE on market value and industry, if it is positive, and zero otherwise R_INDEPϪ is the residual produced from a regression of INDEPENDENCE on market value and industry, if it is negative, and zero otherwise R_CEOPOWERϩ is the residual produced from a regression of CEOPOWER on market value and industry, if it is positive, and zero otherwise R_CEOPOWERϪ is the residual produced from a regression of CEOPOWER on market value and industry, if it is negative, and zero otherwise R_BUSYDIRϩ is the residual produced from a regression of BUSYDIR on market value and industry, if it is positive, and zero otherwise R_BUSYDIRϪ is the residual produced from a regression of BUSYDIR on market value and industry, if it is negative, and zero otherwise R_DILIGENCEϩ is the residual produced from a regression of DILIGENCE on market value and industry, if it is positive, and zero otherwise R_DILIGENCEϪ is the residual produced from a regression of DILIGENCE on market value and industry, if it is negative, and zero otherwise R_BOARDSIZEϩ is the residual produced from a regression of BOARDSIZE on market value and industry, if it is positive, and zero otherwise R_BOARDSIZEϪ is the residual produced from a regression of BOARDSIZE on market value and industry, if it is negative, and zero otherwise R_DILIGENCE/SIZEϩ is the residual produced from a regression of DILIGENCE/SIZE on market value and industry, if it is positive, and zero otherwise R_DILIGENCE/SIZEϪ is the residual produced from a regression of DILIGENCE/SIZE on market value and industry, if it is negative, and zero otherwise Other variables are as defined in Table disclosures (significant at the 0.05 level or better, two-tailed) In contrast, R_DILIGENCE / SIZEϩ is not associated with disclosure Thus, the significant coefficient of DILIGENCE / SIZE (see panel B of Table 5) seems to be driven by firms with lower board meeting frequency and those with smaller boards The coefficients of four control variables (SUBJECT, PERFORM, PROP, and TAX) are statistically significant These four variables are the same variables that were CAR Vol 25 No (Winter 2008) Corporate Governance and Executive Compensation Disclosure 1177 reported as having significant relationships with SCORE in panel B of Table Overall, the 2002 two-stage regression results for the full model are consistent with the 2002 OLS results (see column (2) of panel B of Table 5) Conclusion In an effort to enhance the quality of board governance, shareholder activists and regulatory bodies have issued numerous reports on improving board practices One issue addressed by these reports is the responsibilities of boards of directors in communicating management and board practices to shareholders (Blue Ribbon Committee 1999; Steinberg and Bromilow 2000; Eccles, Herz, Keegan, and Phillips 2001; McKinsey & Co 2000, 2002) The current study examines whether certain board and compensation committee characteristics are associated with the extent of board disclosure This study contributes to the literature on voluntary disclosure and corporate governance It uses a comprehensive list of compensation-related items that, if publicly disclosed, could improve shareholders’ understanding of how boards determine executive compensation and whether they use pay-for-performance principles in setting compensation Unlike other disclosure studies, the present study examines disclosures as the outcomes of board decisions rather than the assumed effect of boards on management decisions The study shows some evidence that effective board and committee characteristics are associated with greater communication about board practices to shareholders Particularly, the study complements prior research by providing evidence that board (compensation committee) meeting frequency and board (committee) size are positively associated with the transparency of board disclosure practices In addition, on the basis of the 1993 sample, this study shows that boards with the power to act independently of top management (measured by CEO influence on the director nomination process and board/compensation committee independence status) provide more disclosure This study has several implications First, boards with the ability to exercise independent judgement will make decisions that are in the best interests of shareholders when having disagreements with management Monks and Minow (1996) note that most CEOs dominate the director nomination process by selecting the slate of director candidates These candidates, in turn, are most likely to run without opposition from shareholders The present study suggests that CEOs’ influence in the director selection process affects the effectiveness of board decisions Firms need to consider limiting CEO domination in the director nomination process and reducing CEO influence in shaping board / committee meeting agendas to obtain “stronger” boards that would perform their monitoring duties more effectively Second, the board governance process is essential for effective decision making The study suggests that frequent board meetings would facilitate information sharing among directors, and adequate board size would allow better distribution of workload and committee assignments, leading to more effective board decisions Future research could provide additional insights on the board governance process More specifically, future research could investigate board meeting quality, such as the information flow and acquisition before meetings, the use of meeting CAR Vol 25 No (Winter 2008) 1178 Contemporary Accounting Research time, and the exchange of ideas during meetings Future research could also examine boardroom expertise Firms need directors with various backgrounds and skills to perform their monitoring duties in today’s complex business environment Studies examining the association between the optimal mix of director expertise and board effectiveness are warranted Endnotes The rules mandated three main disclosure elements in a registrant’s proxy statement: (a) annual compensation (salary, annual incentive, and long-term incentive) tables of the five highest paid executives; (b) a board/compensation committee report on executive compensation practices; and (c) a performance graph comparing the company’s cumulative stock returns with the cumulative total returns of certain indexes, including an industry or other peer group index To address the concerns regarding the potential director liability for the compensation committee report, the SEC (1992) stated that the committee reports could not be used as a basis for litigation against a registrant although it is not exempt from SEC actions Despite the inclusion of the report in a proxy statement, it will not be considered “soliciting material” or a “filed document” under section 18 of the Securities Exchange Act of 1934 Zahra (1996), however, presents a different view regarding the appointment of outside directors, finding that outsiders’ dominance on a board is negatively associated with corporate entrepreneurship (i.e., innovation, venturing, and strategic renewal) and that this relationship is stronger for high-technology firms than low-technology firms Vicknair, Hickman, and Carnes (1993) are among the first to define “independent” outside directors as excluding not only inside directors, but also “affiliated/gray” directors, those with family or other interests tied to the management or the enterprise other than being on the board of directors (e.g., former employees, relatives of management, consultants of the firms, interlocking directors) The results of prior studies on voluntary financial and nonfinancial disclosure and board independence, however, are inconclusive Chen and Jaggi (2000) find a positive association between the proportion of independent directors and the extent of management disclosure, while Eng and Mak (2003) document a negative association I excluded firms in regulated industries (i.e., banking, insurance, and public utilities) because their corporate governance structures are systematically different from those of firms in unregulated industries (i.e., board size, percentage of outside directors, executive compensation structure) (Adams and Mehran 2003) In addition, John and Qian (2003) find that firms in the banking industry have compensation structures with lower pay-performance relation than firms in unregulated industries (e.g., manufacturing), suggesting that financial institutions likely receive lower compensation disclosure scores Prior studies adopt the latter interpretation of subjective performance evaluation (e.g., Hayes and Schaefer 2000; 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HYPOTHESIS The extent of executive compensation disclosure in the compensation committee report is associated with board and compensation committee size Sample and disclosure scores Sample and data sources