Controlling Shareholders’ Networks and Related Party Transactions: Moderating Role of Director Remuneration in Malaysia

Abstract

Past research argued that controlling shareholders can use their power of control to influence their networks via proxy (CSProxy) and multiple-directorship (CSMulti) to engage in related party transactions (RPT). Thus, we examine the associations between CSProxy and CSMulti, and RPTs. Additionally, directors are rewarded with remunerations, and therefore, director remuneration may be effective in minimizing agency conflict. Thus, we examine the impact of director remuneration as a moderator of the relationships between CSProxy and CSMulti, and RPT. The hypotheses are tested using a sample that consists of 622 listed companies in Malaysia over the period 2012-2014 with a total of 1,866 observations. CSProxy and CSMulti are found to have positive associations with RPTs. We also find that director remuneration is significant in moderating the CSProxy and CSMulti, and RPT relationships. This evidence suggests that director remuneration is an effective monitoring cost to minimize the abuse of RPTs by opportunistic controlling shareholders via their networking, CSProxy and CSMulti. It raises the concerns of the regulators and policy makers that controlling shareholders may utilize their posts, power, position and networks to opportunistically expropriate firm resources. Firm's remuneration committee has to understand the importance of determining attractive remuneration that fulfils directors' expectation and satisfaction.

Controlling Shareholder Ownership Structure and Conflict-Related Party Transactions

“…However, the more extensive past discussion focused on the second category of RPT. An opportunist related parties, specifically the controlling shareholder, may use RPT in an abusive way by creating a self-dealing transaction to tunnel out companies' wealth and turn into a personal benefit (Johnson, La Porta, Lopez-De-Silanes, & Shleifer 2000;Rahmat et al 2018). As a result, the minority shareholders of companies where resources have been tunnel out will receive a lower profit distribution.…”

“…Overall, the market reacts negatively towards companies engaged with the RPT (Bona-Sánchez, Fernández-Senra, & Pérez-Alemán 2016; Kohlbeck & Mayhew 2010;Nekhili & Cheriff 2013;Rahmat, Ahmed & Lobo 2020;Tsai 2015) because they perceived the controlling shareholders were taking advantage over their position to legitimate the RPT that brings personal benefit (Dahya et al 2008;Rahmat, Mohd Amin, & Mohd Saleh 2018). The market poor valuation may encourage the controlling shareholder to hide or conceal the RPT engagement opportunistically by utilizing ownership shareholding structures (Mindzak & Zeng 2018;Nekhili & Cherif 2013;Riyanto & Toolsema 2008).…”

“…It is consistent with our argument that an indirect and pyramid shareholding structure provides an opportunity for controlling shareholders to hide their ability to control companies and easier to conceal their engagement. Overall, it is suggesting that the controlling shareholder may exercise their ownership, power, and position to opportunistically misuse RPT for personal benefit (Rahmat et al 2018;Barclay et al 2007;Lim, How, & Verhoeven 2014).…”

“…Past studies often determined controlling shareholders based on the percentage of direct shareholding (Munir et al 2013;Rahmat et al 2018). Overall, past studies documented evidence that controlling shareholders actively and opportunistically engage in RPT (Ariff & Hashim 2013;Dahya et al 2008;Munir et al 2013).…”

Board Independence, Nomination and Remuneration Committee, and Compensation in Indonesia

“…Bebchuk and Fried (2003) explain that the dominant approach to executive compensation studies views managers' payment arrangements as part of a deduction for agency problems among financial economists. Agency conflicts can be minimized effectively through director remuneration (Aslam et al, 2019;Rahmat et al, 2018). In line with this, (Mutlu et al, 2018) state that management incentives are an instrument to reduce moral hazard problems that arise from selfish managerial behavior.…”