Government regulation on disclosure differs considerably across countries. This gives rise to some interesting research questions. One line of research is investigating if certain types of disclosure regimes are more prone to disclosure evasion.
In our study we ask if limiting the coverage of mandatory disclosure to board members whose names appear in corporate registries (hereafter, registered board members) or to executives paid above a certain threshold can lead to disclosure evasions. We have two kinds of evasive behavior in mind. The first is deregistration, that is, a registered board member stepping down from the board but retaining a non-registered executive position. The second is pay-cut, that is, the deliberate lowering of a registered board member’s pay below the minimum level that mandates pay disclosure.
We investigate this possibility using publicly traded companies in Korea that introduced a new disclosure regime in 2013. Under the new rule, companies are mandated to disclose the compensation of each executive by name, but with limited coverage. The disclosure is only mandatory for registered board members whose yearly pay exceeds 500 million Korean won (approximately worth 500 thousand US dollars) in the prior fiscal year.
We find several interesting results. First, we find that evasion is pervasive. Among the executives registered as board members and disclosed compensation in 2013, we find that 21.7 percent evaded disclosure through either deregistration (11.4 percent) or pay-cuts (10.3 percent) in 2014.
Second, we find that family executives are more likely to evade mandatory disclosure than are non-family executives. Specifically, using a cross-sectional sample of evasions and retirements in 2014, we find that the probability of a family executive evading disclosure via deregistration or pay-cuts is higher than that of a non-family executive by 28.3 percentage points, on average. In other words, we find that the likelihood of evasion decreases with the cost of evasion, where the cost is captured by the absence of family ties to the firm’s controlling shareholder. Furthermore, we find that the likelihood of a family executive’s deregistration jumps exactly in the year it is expected. Specifically, we find that family executives are no more likely to deregister than non-family executives during 2009-2012; however, they become more likely to do so staring in 2013 and remain so in 2014.
Third, we find that the tendency of evasion by family executives strengthens as the pay gap between executives and average workers (Executive-to-Worker Pay Ratio) widens. In other words, we find that the likelihood of evasion increases with the cost of disclosure (or, the benefit of evasion), where this cost is captured by the pay gap between executives and average workers.
Fourth, we find that family executives tend to evade through pay-cuts rather than through deregistration, if the original level of pay is close to the threshold of 500 million won. In other words, we find that family executives, when evading mandatory disclosure, deliberately chose the least costly method.
We believe our findings can be generalized to many other countries. First, a disclosure regime that limits mandatory disclosure only to registered board members is more common than a regime that does not (see OECD Corporate Governance Factbook 2017). In addition, family-controlled firms, where evasion is more likely to occur, are prevalent around the world. Second, Korea is not alone in exempting executives from mandatory disclosure if they are paid below a certain threshold. Japan introduced its own mandatory disclosure rules in 2010; however, it exempts executives who are paid less than 100 million yen (approximately 100 thousand dollars). Therefore, evasion through pay-cuts is also possible in Japan.
Jinheok Ra is a researcher at the Department of Finance, Korea University Business School.
Woochan Kim is Professor of Finance at the Department of Finance, Korea University Business School.