Country‐, Firm‐ and Director‐level Risk and Responsibilities and Independent Director Compensation

Research Question
This study investigates how and to what extent country‐level institutional characteristics, firm‐ and independent director‐level risk and responsibilities are related to independent director compensation, in terms of amount and design.

Research findings/Insights
Using an international sample of 5,220 independent directors on 727 non‐financial listed firms in 16 countries, this study revealed that both country‐level institutional characteristics and firm‐ and director‐level agency account for the variation of independent director compensation amount. Firm‐level ESG‐related reputational risk and director‐level observable responsibilities on the board are strongly related to independent director compensation amount. These agency relationships vary in the different institutional settings. Country‐level director liability substitutes for firm‐level and director‐level monitoring. Firms conform to institutional pressures for independent director compensation design. Institutional embeddedness comes from the firm’s primary institutional environment and its exposure to foreign financial markets.

Theoretical/Academic implications
This study develops a multilevel theory of the antecedents of independent director compensation. Firm‐ and director‐level agency issues are nested in, and interact with, the institutional context in which the agency relationship between shareholders and independent directors is embedded.

Practitioner/Policy Implications
This study helps practitioners to understand how director liability regulations, a firm’s ESG‐related reputational risk and the specific responsibilities on the board are related to independent director compensation. It helps firms explain to shareholders (and stakeholders) how independent director compensation is determined. Firms should consider that the consequences of their ESG practices extend beyond direct costs. Policymakers can find our results useful when regulating on director liability and developing best practices.