A Study of CEO Management Philosophy and Corporate Governance - Variation of Executive Compensation

According to past empirical studies, the board of director has the function of increasing firm value. However, in Taiwan, where family control is the rule, the board does not play an effective monitoring role. We suggest that in this type of environment, CEO's honesty is the foundation of effective corporate governance. In this study, we develop a proxy variable to represent the CEO's management philosophy (MP) by calculating the ratio of executive compensation divided by the net income of the firm. Then, we use the variation in this ratio to evaluate the CEO's MP. If the ratio is less than zero, it means that the CEO is not only benefiting the stakeholder, but also him/herself. In contrast, if the ratio is more than zero, it means that CEO is primarily benefiting him/herself from taking advantage of the stakeholder. The aim of this paper is to investigate the relationship between MP and firm performance. We find that a decrease in MP will increase firm value. In addition, to evaluate conflict of interest, we also measure the impact of having bankers on the board of directors on firm value. The results show that the presence of bankers on boards does not improve the board's firm monitoring. Our results confirm that bankers on boards does however, offer protection to creditor faced with the dilemma of being both stockholder and creditor.