Performance evaluation on boards of directors and CEOs of selected Malaysian companies

CEO compensation has always been an important issue in corporate governance research. Although many studies have examined the issue of CEO compensation from many perspectives using postpositivist approach and agency theory, so far there has been no study, which explores the use of non-financial measures in the process of evaluating and compensating CEO performance using the interpretive approach. The general objective of this study is to explore whether stakeholder theory adequately explains board members' behaviors and practices in the use of non-measures in CEO performance evaluation through exploring board members' perceptions on the use of non-financial measures, whether board members conduct formative CEO performance evaluation, and whether board members practices have shifted to stakeholder corporate governance. Additionally, this study examines the influences of independent directors and female directors on the use of non-financial measures. Based on 15 interviews and 43 survey questionnaire responses from board members, the analysis of this study was conducted, using thematic analysis, descriptive statistics, and regression analysis. The findings provided a practical theory regarding board members' perceptions on the use of non-financial measures. Interestingly, and inconsistent with previous studies, the findings showed that some board members evaluate and compensate CEO performance primarily based on non-financial measures. Several factors emerged as determinants of the use of non-financial measures such as sustainability, values and ethics, corporate attributes, and individual attributes. Also, the findings indicated that board members conduct formative CEO evaluation and a pattern was found between formative CEO performance evaluation and the use of non-financial measures. The findings also indicated that board members' practices have shifted to stakeholder corporate governance mainly to achieve corporate sustainability or as a result of board members' ethical values. Additionally, some corporate and individual attributes were found to be associated with the stakeholder corporate governance practices. All these findings were used to propose a revised stakeholder perspective on the use of non-financial measures in CEO performance evaluation as the existing stakeholder theory fails to adequately explain board members behaviors and practices in this respect. Finally, the regression analysis showed that both independent directors and female directors have a positive influence on the use of non-financial measures. The study has several implications. The main theoretical implication of this study is that, current corporate governance theories, principally, agency theory and stakeholder theory, are inadequate to explain board members' behaviors and practices regarding the use of non-financial measures in the evaluation of CEO performance. Therefore, this study proposes a revised stakeholder perspective on the use of non-financial measures in CEO performance evaluation based on the actual behaviors and practices of board members. Also, the practical theories provided by this study can be used by practitioners. Finally, the findings implicates regulators to amend MCCG 2012 to require statements regarding CEO performance evaluation and stakeholder corporate governance.

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