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Shamsu D. Chowdhury Dalhousie University Eric Zengxiang Wang Athabasca University

Variations in the Composition of Outside Director Compensation across Two Stock Exchanges: Canadian Evidence. Shamsu D. Chowdhury Dalhousie University Eric Zengxiang Wang Athabasca University. Why study outside director compensation?.

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Shamsu D. Chowdhury Dalhousie University Eric Zengxiang Wang Athabasca University

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  1. Variations in the Composition of Outside Director Compensation across Two Stock Exchanges: Canadian Evidence Shamsu D. Chowdhury Dalhousie University Eric Zengxiang Wang Athabasca University

  2. Why study outside director compensation? • Sarbanes-Oxley Act 2002 mandates independent directors hold a majority position. • Canadian Coalition for Good Governance (CCGG) recommends that at least 2/3 of directors should be independent of management. • CEO compensation soaring requires more vigilant outside directors.

  3. What roles do directors play? • Legal perspective :Duty of loyalty to shareholders and duty of care – a director must exercise due diligence in making decisions (Monks & Minow, 2011). • Management theory: Directors are agents and resources providers (Boyd, 1990/94/96, Hillman & Dalziel 2003, Hillman, Cannella &Paetzold 200)

  4. How are the two roles played out in real world? • An appropriate context is needed to answer this question. Canadian corporate world provides the ideal settings: two stock exchanges---TSX-composite versus TSX venture

  5. The two exchanges compared TSX-C TSX-V Emerging small and medium-size firms Value >0.05% of the total index, but no requirement of minimum stock price No liquidity requirement • Large, established firms • Eligibility criteria are more rigid (value>0.05% of the total index, trading price>CAD$1) • High liquidity

  6. Two kinds of Roles for Outside Directors Monitoring for TSX-C Providing Resources for TSX-V Seek to be established May not be part of the director network Insider/business/knowledge board Providing Resources Hillman & Dalziel (2003), Pfeffer & Salancik (1978) • Established business people • As one node of director network • More like a stakeholder board • Control, supervising, and overseeing • Berle &Means (1932), Jensen&Meckling (1976)

  7. Hypotheses H1: Compensation/revenue ratio higher for TSX-V firms than TSX-C H2: Contingent pay proportion in TSX-V>TSX-C H3: Stock options proportion in TSX-V > TSX-C H4: TSX-V contingent pay proportion more related to firm performance than TSX-C

  8. Outside director pay structure • Non-contingent pay ( annual retainers, board meeting fees, committee fees): non-contingent pay may be paid in the form of stocks, e.g., deferred stock units • Contingent pay (stock awards and stock options) • Total pay: sum of the above two parts

  9. Variables • Firm performance: Tobin’s q ratio, or any others? • How to measure human and social capital resources? Needs for control versus needs for resources---firm specific: • Monitoring: assets, sales, number of employees, intangible assets to total assets, leverage, debt ratio, volatility • Resource provision needs: Classification of board into insider/business/knowledge/stakeholder board • Richness of board resource: mean of interlocks per board member • Management’s newness ( an indicator for resource): top management team industry experience, team size, average age

  10. Challenges • Data • Time and resources • Work in progress • Any ideas would be appreciated • Thank you all!

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