Executive director ’ s remuneration after fraud and lawsuit revelation

The twofold objectives of this study are; firstly, to determine whether fraud and lawsuit firms reduce their executives’ remuneration after fraud revelation; and secondly to empirically examine the effects of fraud and lawsuit revelation on the internal monitoring mechanisms which are board of directors (BOD) and remuneration committee. This study has a sample of 136 firms comprising 68 fraud and lawsuit firms that experienced fraud and lawsuit revelation from 2001 to 2006. The results revealed that the median executives’ remuneration between fraud and lawsuit firms is significantly different compared to non-fraud and non-lawsuit firms in the second year after the fraud and lawsuit revelation. It is found that fraud and lawsuit firms reduced the executives’ remuneration by 6% while non-fraud and nonlawsuit firms still increased the executives’ remuneration by 8.08%. Furthermore, the interesting finding is, fraud and lawsuit revelation further enhanced the monitoring role of the independent directors in fraud and lawsuit firms.


INTRODUCTION
A Firm is a corporate person created by law, which does not have a direct "mind and will" to do any wrongdoing.Any decision and action made by the firm lays on the people who manage the firm, namely executive directors especially the CEOs.Section 132 (1) Companies Act 1965 states that a director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office.So, it can be said that the executive director is accountable for any wrongdoing of the firm.This has raised an important question of whether executive directors are being reprimanded when a firm is involved in fraud and lawsuit action (Persons, 2006).
There is a broad agreement that fraud and lawsuit commonly leads to significant valuation losses for investors, as is apparent in numerous recent governance failures such as those committed in World Com, Enron, Transmile Group Bhd and Megan Media Holdings Bhd (Fich and Shivdasani, 2007).In the wake of these scandals, many of these firms saw their equity values plummet dramatically and experienced a decline in the credit ratings of their debt issue.Therefore, when a firm is faced with fraud and lawsuit revelation, it seems inappropriate for the board of directors (BOD) and the remuneration committee to reward the executive directors favourably remuneration when the fact is, the executive directors have failed to manage the firm properly and the firm"s performance is therefore, threatened.
To date there have been limited empirical studies done to find out if there is any reduction of the executive remuneration in the managerial labour market after a fraud and lawsuit revelation in Malaysian firms.This study is therefore, carried out to discover whether the executives" remunerations have been reduced, after fraud and lawsuit revelation.Furthermore, this study also observes the moderating effect of fraud and lawsuit revelation on the relationship between the reduction *Corresponding author.E-mail: suriamajdi@salam.uitm.edu.my.Tel: +6019 2893782.Fax: +603 55444921.
of the executives" remuneration and the internal monitoring mechanisms (board of directors and remuneration committee).In simple say, this study want to ascertain whether fraud and lawsuit revelation increase the tendency of board of directors and remuneration committee to decrease the executives remuneration.

Fraud and lawsuit revelation
A firm"s performance becomes questionable after a fraud and lawsuit revelation, since this signals a decrease in the firm"s value (Agrawal and Chadha, 2005) and a decrease in shareholders" wealth (Bhagat et al., 1998;Alexander, 1999).Alexander (1999) notes that when fraud harms only the private parties and not the government, the punishment is normally been addressed through a civil or market based sanction and not a criminal one.Alexander (1999) studied 78 US fraud public firm"s market reaction and found a strong correlation between observed business loss and equityprice changes when related party crimes became known to the public.This indicates improbable future for the firm"s performance (in terms of share price), thus, giving the BOD and remuneration committee incentives to restructure the executives" remuneration in an attempt to improve the firm"s performance, recover lost reputation, or limit the firm"s exposure to liabilities arising from fraud and lawsuit revelation.This shows that a fraud and lawsuit revelation does create a gap in the executive remuneration offered to fraud and lawsuit firms in relation to non-fraud and non-lawsuit firms.Thus, the first hypothesis is: H 1 : There is a significant difference between the salary changes of fraud and lawsuit firms and non-fraud and non-lawsuit firms.
Similarly, when the firm"s performance is affected by fraud revelation, an incentive is created for the BOD to restructure the firm"s operation such as by dismissing their employees or changing the composition of the BOD.According to Denis and Denis, (1995), forced resignations are rare and are due more often to external factors (for example, block holder pressure, takeover attempts, etc.) than to normal board monitoring.In addition, a study by Agrawal et al. (1999) on corporate governance changes after fraud revelation did not find any results to suggest that fraud revelation will result on executives" dismissal.This may therefore suggest that the BOD could penalize their executives through other means such as reducing the salaries of executives involved in fraud revelation.
In corporate governance, Jensen and Meckling (1976) identified 3 types of cost that might occur in an agent-principle relationship which are monitoring cost, bonding cost and residual cost.Bonding cost is different from monitoring and residual cost in the sense that bonding costs is incurred by the agent and not the principal.Bonding cost is a cost incurred by managers to guarantee that certain actions that could be harmful to the shareholders or to ensure that if such actions were undertaken, the shareholders would be compensated.In short, bonding cost refers to the shareholders right to adjust or restructure the agent"s remuneration based on the shareholders" expectations of how much the agent"s behaviours are likely to be apposing the shareholders" interest.
Therefore, in the event of a fraud and lawsuit revelation, the shareholders may adjust the managers" remuneration accordingly because they perceive the risk in their interests such that fraud and lawsuit may result in lower share prices.Thus, fraud and lawsuit revelation will result in higher probabilities for the reduction of executives" salary due to the fact that the shareholders have more information to evaluate the performance of the managers (Andjelkovic et al., 2002).Therefore, the following hypothesis will be tested in this study: H 2 : Fraud and lawsuit revelation has a positive and significant relationship with the reduction of the executives" remuneration.

Internal monitoring mechanism after fraud and lawsuit revelation
In this study, the internal monitoring mechanisms consist of effectiveness of the BOD and remuneration committee.Effectiveness of the BOD as an important internal monitoring mechanism leads to optimal contracting of remuneration package and will result in supporting the managers" and shareholders" interests towards the same direction.CEO duality, composition of independent directors, board size and board meetings are used as proxies to measure the effectiveness of the BOD.In practice, however, the determination of the managers" compensation is typically delegated to a subgroup of the main board, the remuneration committee (Conyon and He, 2004;Bebchuck andFried, 2003, Brick et al. 2006).Therefore, it is also interesting to look at the role of the remuneration committee.
CEO duality is important in determining the reduction of executives" remuneration.CEO duality refers to a person who occupies not only the position of the CEO, but is also the chairman of the BOD, a situation which can be described as an inappropriate due to the concentration of power on one person.As the CEO, he not only has access to inside information but also has power to use the firms" resources, and as the Chairman he is in the powerful position of managing the BOD and is responsible for running the BOD meetings, setting agendas and overseeing the processes of hiring, firing and compensating top management, including himself (Fama and Jensen, 1983).Clearly, this will result in a conflict of interests which can compromise the independence and effectiveness of the BOD (Daynton, 1984 as cited by Abdullah, 2004;Berghe and Baelden 2005).Thus, he/she can use the power against other board members for his/her own advantage.
Additionally, if duality exists in fraud and lawsuit firms, it will lessen the association between duality and the reduction of salary.In other words, having duality will lead to lesser possibilities for the BOD to reduce the CEO"s remuneration.This is because of two reasons; first the CEO will become more protective in discussing the reduction of his/her salary and secondly; the BOD will have difficulties in discussing or even agreeing to the reduction of salary because the Chairman will avoid giving consent to concerning perks which are of personal interest to the Chairman.In this instance, the monitoring power of the BOD in fraud and lawsuit firms will be more ineffective when there is duality.This study therefore, expects the lesser likelihood for BOD to further reduce the executives" remuneration in fraud and lawsuit firms if there is duality.So, the moderating hypothesis will be: H 3 : Fraud and lawsuit revelation has a significant moderating effect on the relationship between duality and the reduction of the executives" remuneration.
Agency theory becomes the basis for the group of researchers who is in favour of a greater number of independent directors on the BOD.In agency theory, the presence of independent directors would result in a more effective monitoring of the BOD thus, limiting the managers from becoming opportunistic (Fama and Jensen, 1983).In other words, the presence of outsiders on the BOD can ensure a check and balance in the decision making process as outside directors are deemed more objective than inside directors.Fich and Shivdasani (2007) alleged that outside directors face a greater loss in reputation when their firms are found to be involved in fraud or lawsuit revelation, thus enhancing the monitoring power of the independent director.There is also a possibility that the independent directors become overly active to show their credentials after a bad firm performance and this can affect the level of monitoring as well (Martinez et al., 2006).Therefore, this study expects the independent director to be more rigorous in implementing a restructuring plan for the firm, including that of the executives" remuneration after the fraud and lawsuit revelation, hence, increasing the possibility of a reduction of executives" remuneration.Therefore, the following hypothesis will be tested: H 4 : Fraud and lawsuit revelation has a significant moderating effect on the relationship between the proportion of independent directors and the reduction of the executives" remuneration An important variable in the study of board monitoring mechanism is the number of meetings held by the BOD.The number of board meetings indicates the effectiveness of the BOD, Where an active board will meet more often than a passive board.The number of board meetings is a proxy for the directors" effort in reviewing the firms" policies and in taking proper action on the executives" remuneration.In general, the higher the frequency of meetings, the more attentive and active the BOD will be.
This can be seen in Persons (2006) finding where higher probabilities in the reduction of the top executives" salary could be due to a higher frequency in the member of BOD meetings in fraud and lawsuit firms.In addition, Abbott et al. (2000) examined whether the audit committee"s characteristics would reduce the likelihood of fraudulent or aggressive financial statement actions and found that firms with audit committees that meet at least twice per year are less likely to be sanctioned for fraudulent or misleading reporting.This indicates that meetings not only play an important role in monitoring the activities of the firm, and but also suggest that a greater number of meetings is associated with a greater level of monitoring by the BOD.
Normally, the number of meetings will increase when the firm foresees any additional matters to be discussed.Furthermore, it is claimed that the operating performance improves the following years of abnormal board meetings (Vafeas, 1999).Vafeas (1999) found that the annual number of board meetings is inversely related to firm value, a result which is driven by an increase in board activity following a decline in share prices.This indicates that there are usually abnormal board meetings following a crisis in the firm.Since the number of meetings indicates effectiveness of the BOD, greater the number of meetings when there is a fraud and lawsuit revelation the greater the effectiveness of the BOD.Therefore, this study expects that a higher number of meetings following a fraud and lawsuit revelation will not only enhance board monitoring activities, but also result in further increasing the likelihood of a salary reduction.Therefore, the following hypothesis will be tested: H 5 : Fraud and lawsuit revelation has a significant moderating effect on the relationship between the number of board meetings and the reduction of the executives" remuneration The literature discusses two main effects of board size.First, as board size increases, problems in communication and coordination also increase.Second, an increase in board size decreases the ability of the BOD to control management, thus, leading to agency problems as managers tend to pursue self interests rather than maximize shareholders" profit.Jensen (1993) suggests that larger boards lead to less candid discussion of managerial performance and a greater control by the CEO.Yermack (1996) suggests that the CEO"s performance based remuneration and the threat of dismissal operate less strongly as the BOD size increases (Beasley, 1996).This shows that a larger board leads to a poorer performance because problems of communication and decision-making would overwhelm the effectiveness of such groups.Furthermore, Doucouliagos et al. (2007) also found an inverse relationship between board size and directors" remuneration.This result implicates that small boards are associated with a lower level of directors" pay, (Benito A, Conyon 1999).Fraud and lawsuit revelation may influence the composition of the BOD and remuneration committee.Lausten (2002) has found a significant negative relationship between turnover and firm performance.This shows that a decrease in the firm"s performance will increase the likelihood of dismissal.He also quoted that Jensen and Murphy (1990) further asserted that ""the results suggest that managers are more likely to leave their firms after bad years than after good years..." This indicates that low firm performance leads to a greater of turnover because directors tend to stay during the good times and leave the firm during the bad times.Agrawal et al. (1999) also said that there is a higher probability for governance changes in the firm after fraud revelation, which includes changes in the BOD composition.Baum et al. (2008) found that the turnover rates of inside board directors increase following the suit filing.These imply that there is a change in the BOD size following fraud and lawsuit revelation.
Since, these studies argue that directors tend to quit in response to fraud and lawsuit revelation, thus, the current study expects the BOD and remuneration committee to become smaller after fraud and lawsuit revelations.As a smaller board is claimed to be effective compared to a larger board, this study therefore, expects that the relationship between board size, remuneration committee size and reduction of salary may be moderated by fraud and lawsuit revelation.This results in the following hypotheses: H 6 : Fraud and lawsuit revelation has a significant moderating effect on the relationship between board size and the reduction of the executives" remuneration H 7 : Fraud and lawsuit revelation has a significant moderating effect on the relationship between the size of remuneration committee and the reduction of the executives" remuneration

METHODOLOGY
The sample of this study consisting of Malaysian firms with revelation of fraud and lawsuits was obtained from two available sources, which are the websites and the annual report of the Bursa Malaysia and Securities Commission.Due to the small sample size of fraud firms, this study also includes lawsuit firms in the current study because Persons (2006) argued that firm performance of these firms were also questionable after a lawsuit revelation.The first step in selecting the fraud and lawsuit firms is the identification of all firms that had breached any statutory regulation applicable in Malaysia.The following topics were used to identify fraud and lawsuit firms in the website: "Companies Announcements", "Public Reprimand Companies and Director" and "Enforcement".The reason for using these sources is that firms with fraud and lawsuit revelation reported in these websites are likely to face greater pressure from the shareholders to take disciplinary action against their executives.Also included as a prerequisite in the sampling is that the firm must be a public listed firm.
The next step is the detailed according to the nature of fraud and lawsuit, timing of fraud and lawsuit case, the people involved in the respective cases and the fraud and lawsuit firm year.The basic elements of fraud as discussed by the Asian Organisation of Supreme Audit Institution (ASOSAI) (n.d) have been used to determine the fraud offences.Essentially, the description will also be digested to see whether the public knew about these frauds even before being reported in these sources.By default, the fraud and lawsuit firm year is determined by the year the fraud and lawsuit scandal is disclosed in these sources.In some cases, the same fraud and lawsuit is reported more than once, thus, the earliest year reported is used as the fraud and lawsuit firm year.In most cases, the firms identified in the Securities Commissions are also reported in Bursa Malaysia.However, fraud and lawsuit firms reported in the Securities Commission but not in Bursa Malaysia have also been added to the sample as fraud and lawsuit firms.A firm is allowed to have more than one fraud or lawsuit revelation as long as the fraud and lawsuit revelations are at least two years apart (Persons, 2006).
There is a number of variations in the type of fraud and lawsuit comprising submitting false information to the authorities, utilising firm"s fund for unapproved purposes, criminal breach of trust, falsification of annual report and being sued by Bursa Malaysia for breach of Bursa Malaysia Listing Requirements.This search procedure yielded an initial sample of 78 fraud and lawsuit firm years.However, 10 fraud and lawsuit firm years were rejected where four were IPO firms connected with submitting false statements to the authorities for public listing, and six firms had no annual reports or the firms had been taken out of the Bursa Malaysia.Thus, the final sample consisted of 68 fraud and lawsuit firm years.
For each of the fraud and lawsuit firm year in the sample, this study identified a potential control firm with the closest total assets to the fraud and lawsuit firm and which is listed in the same industry.The potential control firm is included in the final sample if there is no report of fraud or lawsuit event for the firm that is reported in the Securities Commissions and Bursa Malaysia website for years -2 through 0 relative to the year of announcement of the fraud and lawsuit firm.This procedure assures that the control firms do not have any reported fraud and lawsuit in the two years or the year of their matched fraud and lawsuit firms (Persons, 2006;Agrawal et al., 1999).This search procedure yielded a sample of 68 non-fraud and non-lawsuit firms.Therefore, the final sample for this study is 136 firms (68 fraud and lawsuit firms and 68 non-fraud and non-lawsuit firms).
As the executive remuneration and data of the BOD and remuneration committee are reported in the annual reports in Bursa Malaysia, the sample must have this available information for the year before (Y-1) to two years after fraud and lawsuit revelation year (Y+2).Therefore, the earliest year in the sample period can only be 2001 because that was the year public listed firms started to complying with the (MCCG, 2001).The latest fraud and lawsuit firm year will therefore be 2006.The non-financial data were collected from annual reports of the respective firms while the financial data that were used to calculate the measurements for control variables were obtained from the DataStream.A logistic regression analysis is carried out to test the hypotheses since the dependent variable (reduction of salary) employed in this  Ibrahim et al. (2004), this study defines executive remuneration as the total cash remuneration of the executive directors in the year of fraud and lawsuit revelation.This study uses the total cash remuneration and excludes any long term stock compensation because, unlike long term stock compensation, cash remuneration is determined annually by the remuneration committee and the BOD (Persons, 2006).Therefore, the committee and the BOD can easily reduce the salary of the executive directors after a fraud and lawsuit revelation.The total remuneration is then converted into categorical variable (1, 0), valued as one if there is a reduction in the executives" remuneration and zero if otherwise.The observation on the reduction of the executives" remuneration is made for two consecutive years after fraud and lawsuit revelation.The reduction of the executives" remuneration in the first year after a fraud and lawsuit revelation year (SALCHG_1) is measured as the total salary in the first year after fraud and lawsuit revelation year (Y+1) less the total salary in fraud and lawsuit revelation year (Y_0).The reduction of executives" remuneration in the second year after fraud and lawsuit revelation (SALCHG_2) is measured as the total salary in the second year after fraud and lawsuit revelation year (Y+2) less the total salary in previous year (Y+1).
As for internal monitoring mechanisms, five (5) indicators are included in the model; CEO duality, the composition of independent directors, the number of meetings, the size of the BOD and the remuneration committee.These measures were used by Persons (2006), Abdul Rahman and Haniffa (2005), Abdul Rahman and Mahamod (2008), Vafeas (1999) and Petra and Dorata (2008).The control variables comprise Tobins Q, earning per share (EPS), size of the firms and annual revenue growth (ARG).The measurement was used before by *Ibrahim et al., 2004 andPersons, 2006).

RESULTS AND DISCUSSION
The investigation indicates that 28 (41.18%)fraud and lawsuit firms reduced their executives" remuneration one year after a fraud and lawsuit revelation and the remaining 40 (58.82%)fraud and lawsuit firms still increased the executives" remuneration.On the other hand, 20 (52.63%) fraud and lawsuit firms reduced the executives" remuneration in the second year after a fraud and lawsuit revelation and 18 (47.37%)fraud and lawsuit firms did not reduce the executives" remuneration.Overall, there is a higher percentage of fraud and lawsuit firms with a reduction in the executives" remuneration in the second year after fraud revelation compared to the first year after fraud revelation.In total sample (136 firms), there were 52 firms (38.24%) out of a total sample of 136 firms had a reduction in the executives" remuneration in the first year after the fraud and lawsuit revelation, and 34 firms (38.64%) out of 88 firms had a reduction in the executives" remuneration in the second year after the fraud and lawsuit revelation.Further analysis found that 13 (6 are fraud/lawsuit firms) out of 136 firms (9.56%) had reduced the executives" remuneration in both consecutive years (SALCHG_1 and SALCHG_2).
Descriptive statistics are performed in this study to gain an understanding of the characteristics of the sampled companies of 136 firms over the period of 2001 to 2006.The descriptive statistics and the results of the t-tests for fraud and lawsuit firms and non-fraud and non-lawsuit firms are presented in Table 1.The results in Table 1 show that the characteristics of fraud and lawsuit firms were significantly different from non-fraud and nonlawsuit firms in terms of CEO duality, the size of the BOD, the number of BOD meetings and the sales growth.It was found that fraud and lawsuit firms have a higher percentage of CEO duality, a higher number of BOD meetings, a small BOD size and low sales growth (Beasley, 1996).
The Spearman"s Correlation matrix in Table 2 shows the correlation coefficients of the variables based on the whole sample of fraud and lawsuit firms and non-fraud and non-lawsuit firms.The correlation coefficients between the independent variables are mostly below 0.50.These generally modest correlations suggest that multicollinearity is not likely to be a problem in the logistic regression analysis because according to (Ibrahim et al., 2004;Studenmund, 2006), multicollinearity problem exists when correlation coefficient between the variables exceed 0.8.
As illustrated in Table 2, the reduction of the executives" salary in the first year after fraud and lawsuit revelation (SALCHG_1) has a significant relationship with  the composition of independent directors on the BOD (INED), the number of board meetings (BODMEET) and the size of remuneration committee (COMMSIZE) at the 5% level of significance.The positive sign coefficient among the composition of independent director, number of board meetings and the reduction of executives" salary in the first year after fraud and lawsuit revelation indicates that when one unit increases in the composition of the independent directors and the number of board meetings,the likelihood of executive" salary reduction also increases.Furthermore, the negative sign coefficient between the size of the remuneration committee and the reduction of the executives" salary in the first year after the fraud and lawsuit revelation signifies that for one unit increase in the size of remuneration committee, the likelihood that the executives" salary reduction would occur decreases Also, Table 2 shows the relationship between firms involved with fraud and lawsuit revelation (FRAUD) and the reduction of the executives" salary in the second year after the fraud and lawsuit revelation (SALCHG_2).
FRAUD is significant at the 1% level and the positive correlation coefficient between FRAUD and SALCHG_2 implies that when there is a fraud and lawsuit revelation, the probability of a reduction in the executives" salary is increased and when there is no fraud and lawsuit revelation, the probability of a reduction in the executives" salary is decreased.
For differentiation purposes, the Mann Whitney U test provides the Z score of non-parametric statistics which tests the significant difference in the salary change in RM between fraud and lawsuit firms and non-fraud and non-lawsuit firms.The Mann Whitney U test is used instead of a ttest because of the not normal data.The results presented in Table 3 are based on the changes (increase or decrease) in the executives" remuneration relative to the previous year salary, before it is converted to dummy variable (1, 0).
The median score for fraud and lawsuit firms in Table 3 shows that in the second year after the fraud and lawsuit revelation, fraud and lawsuit firms reduced the executives" salary by RM 27,099.50(-6.00%).The negative sign of the score indicates that there is a reduction in the executives" salary relative to the previous year salary and the salary change in the second year after the fraud and lawsuit revelation is significantly different between fraud and lawsuit firms and non-fraud and non-lawsuit firms at 10% level of confidence.It shows that non-fraud and non-lawsuit firms increase the executives" salary by RM 79,249.50but fraud and lawsuit firms reduce the executives" salary by RM 27,099.50 or equivqlent to a 6% reduction.Therefore, H 1 that This table compares the current salary of executives" remuneration relative to the previous year salary (salary change) between fraud and lawsuit firms and non-fraud and nonlawsuit firms in RM and percentage.Sample sizes for SALCHG_0, SALCHG_1 AND SALCHG _2 are 132,136 and 88 fraud and lawsuit years, respectively.SALCHG_0= Total salary in fraud and lawsuit revelation year (Y-1) less total salary before fraud and lawsuit revelation year (Y-1), SALCHG_1 = Total salary in the first year after fraud and lawsuit revelation year (Y+1) less total salary in fraud and lawsuit revelation year (Y_0).SALCHG_2 = Total salary in the second year after fraud and lawsuit revelation year (Y+2) less total salary in previous year (Y+1).*** Significant at the 1% level, ** Significant at the 5% level, * Significant at the 10% level remuneration compared to the healthy firms.The significant differences in salary change between fraud and lawsuit firms and non-fraud and non-lawsuit firms take effect only after two years of fraud and lawsuit revelation.This seems to suggest that the BOD and remuneration committee need more time before making any decision on this issue.Moreover, Denis and Kruse (2000) also found that a substantial fraction of the sample in their study experienced disciplinary events (corporate takeovers, board dismissals, and shareholder activism) in the year of and the three years following the year performance decline.This indicates that corporate restructuring may occur gradually for a period of three years after the fraud and lawsuit revelation.
Table 4 further tests the salary change (increase or decrease) of fraud and lawsuit firms which have changed executive directors or otherwise.The rationale for this is to see if there is any difference in the executives" salary of the two group resulting from the with the executive"s turnover after the revelation of fraud and lawsuit.
The analysis of the median score for firms with turnover (FT) in the second year after fraud and lawsuit revelation (SALCHG_2) found that the salary change in the FT group is greater compared to the firms without turnover (FNT).The median score for FT is RM -159220.00 in the second year after the fraud and lawsuit revelation, while the median score for (FNT) is RM -1430.00.This seems to suggest that when the fraud and lawsuit firm fires the existing executive, the new appointed executive may be paid a lower salary compared to the other executive who remains in the firm after the fraud and lawsuit revelation year.
The new executive could start with a low salary to compensate their lack of experience in the specific post and firm (Conyon and Nicolitsas, 1998).
This shows that fraud and lawsuit firms are keen to reduce staff cost by paying a low salary to new executives rather than reducing the salary of existing executives.Therefore, it can be concluded that the reduction in the executives" salary in the Note: This table shows the interaction between fraud and lawsuit revelation and internal monitoring mechanisms with the reduction of the executives" salary controlling the economic factors that is size of the firms (FIRMSIZE) measured by total assets in RM, annual sales growth of the firms (SGROWTH) measured by percentage change on sales, profitability measured by earnings per share (EPS) and market performance (TOBIN_Q).D2-D6 is the year dummies that control the variation of the fraud and lawsuit revelation.There are 136 firms in the first year after the fraud and lawsuit revelation; 52 firms with a reduction in salary and 84 firms without a reduction of salary.While, there are 88 firms in the second year after the fraud and lawsuit revelation; 34 firms with a reduction in salary and 54 firms without a reduction in salary.The dependent variables are SALCHG_1= the salary reduction in the first year after the fraud and lawsuit revelation; and SALCHG_2 is the salary reduction in the second year after the fraud and lawsuit revelation.
Other variables are defined as follows; DUALITY=dummy variable that takes on a value of one when the firm"s CEO is also the Chairman, and zero otherwise; INED= percentage of independent-non executive directors to total number of directors on the BOD; BODSIZE=number of board members; BODMEET=number of board meetings during the year; COMMSIZE=number of remuneration committee members; FDUALITY=interaction variable between FRAUD and DUALITY; FINED=interaction variable between FRAUD and INED; FBSIZE=interaction variable between FRAUD and BODSIZE; FMEET=interaction variable between FRAUD and BODMEET; FCSIZE=interaction variable between FRAUD and COMMSIZE; *** Significant at the 1% level, ** Significant at the 5% level, * Significant at the 10% level.
second year after the fraud and lawsuit revelation is not due to the firm"s action of reducing the salary of the existing executive, but more to the termination of the poor executive and the low salary given to the new executive.This proposes that fraud and lawsuit revelation is reflected in the removal of the executive rather than in the reduction of the executives" salary, a result consistent with that found by Conyon and Nicolitsas (1998) where managers in public firms face an increased probability of dismissal following the poor past firm"s performance rather than changes in salary.
The earlier t-test analysis found that the internal monitoring mechanism (BOD and remuneration committee) in fraud and lawsuit firms did reduce the executives" salary in the second year after the fraud and lawsuit revelation by replacing executive directors and offering the new appointed directors with a lower salary.A subsequent test as presented in Table 5 further investigates the moderating effect of fraud and lawsuit revelation on the relationship between the internal monitoring mechanism and the reduction of the executives" remuneration.The pseudo R 2 in Table 5 are 0.372 (SALCHG_1) and 0.387 ( SALCHG_2) and the Chi-square test is significant in the models (p<0.05),thus rejecting the null hypothesis that the coefficients are simultaneously equal to zero.The result shows that BODMEET and COMMSIZE have a significant relationship with the reduction of executives" salary in the first year after fraud and lawsuit revelation at the 1% level.These indicate that, the firms (fraud/lawsuit and non-fraud/non-lawsuit) are likely to reduce their executives" remuneration if the BOD meets often during the year and if the size of remuneration committee is small.However, when these variables are interacted with the fraud and lawsuit dummy, FINED, FMEET and FCSIZE are found to be significant at the 10, 1 and 5% level of confidence respectively, which indicates that fraud and lawsuit revelation has an influence on the relationship between the internal monitoring mechanism (comprising independent director, number of BOD meetings and the size of remuneration committee) and the reduction of the executives" salary.Thus, H 4 , H 5 and H 7 are supported.Whereas, FDUALITY and FBSIZE are not significant (p-value> 0.1), thus, H 3 and H 6 are not supported.
In the second year after the fraud and lawsuit revelation, all internal monitoring mechanisms (FDUALITY, FINED, FBSIZE, FMEET, and FCSIZE) no longer interact signifycantly with the fraud and lawsuit revelation to influence the reduction of the executives" salary.It could be assumed that the monitoring roles of the BOD and the remuneration committee had gone back to normal (optimal monitoring) and were no longer seen to reduce the executives" salary.They were however seem to encourage the newly appointed director by increasing his/her remuneration.To support these arguments, other variables such as firm size and sales growth were taken as significant in the second year after the fraud and lawsuit revelation.This indicates that as with the BOD"s greater monitoring roles by the BOD in the first year after the fraud and lawsuit revelation, the fraud and lawsuit firms were more likely to reduce the executives" salary in the second year after the fraud and lawsuit revelation.Furthermore, the significant association among the firm size, sales growth and reduction of salary in the second year indicates that the BOD only emphasized their optimal monitoring role after two years of the fraud and lawsuit revelation and left the firm performance (firm size and sales growth) to become the basis for rewarding their executives.
The sample which was divided into fraud and lawsuit firms and non-fraud and non-lawsuit firms was further examined for the effects of internal monitoring mechanisms on the reduction of the executives" salary.The results shown in Table 6 show a significant relationship between independent directors and reduction of salary in fraud and lawsuit firms, indicating that when fraud and lawsuit revelation occurs, the independent directors execute a greater monitoring role in the firms, enhancing further the possibility of a reduction in the executives" salary.Thus, the role of the independent.Director is vital particularly for firms which have a crisis because their presence will enhance the monitoring power of the BOD in controlling the executives" remuneration.One possible reason is that, when fraud and lawsuit revelation occurs, too much attention is given by the shareholders to the role of the independent directors.To avoid greater loss of reputation, independent directors will enhance their monitoring roles in the BOD to show their credential after the fraud and lawsuit revelation occurs These results are supported by other Malaysian studies such that of (Abdullah, 2006;Abdul Rahman and Mahamod, 2008).Abdullah (2006) in his study on executives" remuneration, firms" performance and corporate governance among distressed firms found that independent directors are associated with lower executives" remuneration.In a similar spirit, Abdul Rahman and Mahamod (2008) in their study also found that the relationship between firm performance and corporate governance disclosure level is enhanced with the interaction of a large proportion of independent directors monitoring the decision making process.Thus, this shows that the best practice of corporate governance in the (MCCG, 2001) recommends that firms with one third independent non executive directors in the BOD is an accurate approach for corporate health.
Table 6 further shows that board meetings and the size of remuneration committee in fraud and lawsuit firms have no impact on the reduction of salary.This implies that the frequent number of meetings and the small size of the remuneration committee do not help to reduce the executives" salaries in fraud and lawsuit firms, but it helps to reduce the executives" salaries in non-fraud and nonlawsuit firms.This could be due to the low quality meetings conducted among the fraud and lawsuit firms where no consensus was found to reduce the executives" salaries and the remuneration committee no longer involved determines the salary of the executive directors when fraud and lawsuit revelation happens.Also this task will be passed to the BOD members on to decide.This results is consistent with Newman and Mozes"s (1999) proclamation that although, most of the public firms have a remuneration committee in charge of setting up the remuneration policy in general.
The BOD has the absolute power to possibly adopt with the modest modification the remuneration committees" recommends.
Therefore, this study concludes that fraud and lawsuit revelation has further enhanced the relationship between the independent directors and the reduction of the executives" salary in fraud and lawsuit firms.At the same time, it has reduced the effectiveness of board meetings and the remuneration committee in reducing the executives" salary.In short, the higher number of board meetings and the smaller remuneration committee size has not helped to reduce the executives" remuneration after the fraud and lawsuit revelation.This may be due to This table shows the relationship between salary reduction and the internal monitoring mechanisms while controlling the economic factors for sub samples.DUALITY=dummy variable that takes on a value of one when the firm"s CEO is also the Chairman, and zero otherwise; INED= percentage of independent non executive directors to total number of directors on the BOD; BODSIZE=number of board members; BODMEET=number of board meetings during the year; COMM SIZE=number of remuneration committee members; Refer to Table 4.7 and Table 4.8 for the definition of the other control variables.***Significant at the 1% level, **Significant at the 5% level, *Significant at the 10% level the more effective roles of the independent directors in the fraud and lawsuit firm in reducing the executives" salary after the fraud and lawsuit revelation relative to other internal monitoring mechanisms.
Furthermore, the majority of Malaysian public listed firms complied with (MCCG, 2001) which recommends that the BOD should comprise independent directors at least one third (33.33%) of the total number of directors serving on the BOD.Also, the Code suggests that the level of executives" remuneration should be decided by the remuneration committee consisting wholly and mainly of independent non-executive directors.

CONCLUSION
This study contributes to the lack of studies on the reduction of executives" remuneration in Malaysia in relation to fraud and lawsuit firms.It found that the salary change in fraud and lawsuit firms was significantly different from that of non-fraud and non-lawsuit firms in the second year after the fraud and lawsuit revelation.The results show that fraud and lawsuit firms reduced their executives" salaries, while nonfraud and non-lawsuit firms still increased their executives" salaries.Hence, this study concludes that the BOD did reprimand their executive directors after a fraud and lawsuit revelation and as a result, shareholders and stakeholders feel relieved that after 8 years of the (MCCG, 2001) in Malaysia, this study ascertains that the Malaysian capital market is becoming more transparent.
When this study further analysed the role of the BOD and remuneration committee in the reduction of the executives" remuneration after fraud and lawsuit revelation, it found that the independent directors further enhanced the monitoring role of the BOD in fraud and lawsuit firms.In short, independent directors performed better in fraud and lawsuit firms rather than their non-fraud and nonlawsuit counterpart because after the fraud and lawsuit revelation, the independent directors of fraud and lawsuit firms are likely to reprimand the executive directors by reducing their remuneration.Therefore, this study confirms that the appointment of one third independent directors on the BOD by (MCCG, 2001) is the better practice for firms in Malaysia.
This study also provides evidence that corporate governance in Malaysia is not only working effectively but also provides an insight into the importance of the independent directors" role during the firm"s hardship period.Hopefully, this will create awareness especially among the members of the BOD and the shareholders, of the importance of appointing independent directors after a fraud and lawsuit revelation.Also, it may be helpful to the body of authorities to emphasize on the need to appoint more independent directors in fraud and lawsuit firms or when there is suspicion of fraud and lawsuit in the public firms.
As this study was conducted under limited time and resources, several limitations are discussed.
The first limitation is the limited sample.Future research may extend the sample size of fraud and lawsuit firms by studying the reduction of salary in the non-listed firms as well.Second, this study used total cash remuneration of the executive directors and not the salary for the particular executive director (offender) connected with the fraud and lawsuit scandal because of limited disclosure of the executives" remuneration in the annual reports.Moreover, this study is only limited to providing information for the Malaysian capital market.A more extensive study comparing more countries (for example, the Asian and European region) is recommended when investigating the relationship between the internal monitoring mechanisms and the reduction of the executives" salary.

Table 1 .
Descriptive statistics of independent and control variables based on the pooled sample of 136 firms.
DUALITY=dummy variable that takes on a value of one when the firm"s CEO is also the Chairman, and zero otherwise; INED= percentage of the independent-non executive directors to total number of directors on the BOD; BODSIZE=number of board members; BODMEET=number of board meetings during the year; COMMSIZE=number of remuneration committee members ; FIRMSIZE measured by total assets in RM that control the differences in firm size; SGROWTH is sales growth measured by percentage change on sales; EPS is the firms" earnings per share ; TOBINS_ Q is market performance of the firms measured by market capitalization plus total debt and divided by total assets.

Table 2 .
Spearman"s correlation matrix between dependent and independent variables.
This table shows the Spearman"s correlation coefficient among the variables for the pooled sample consisting of fraud and lawsuit firm years from 2001 to 2006.SALCHG_1 is the reduction in salary for the first year after fraud and lawsuit revelation and SALCHG_2 is the reduction in salary for the sec ond year after fraud and lawsuit revelation; DUALITY=dummy variable that takes on a value of one when the firm"s CEO is also the Chairman, and zero otherwise, INED= percentage of independent non executive directors to total number of directors on board; BODSIZE=number of board members, BODMEET=number of board meetings during the year, COMMSI ZE=number of remuneration committee members, FRAUD=dummy variable that takes on a values of one when the firm is a fraud and lawsuit firm and zero otherwise, FIRMSIZE= t otal assets of the firm in RM, SGROWTH=sales growth measured by percentage change on sales, EPS= firms" profit measured by earnings per share, Tobins Q measures firm performance by market performance based.N=136 (SALCHG_1); 88 (SALCHG_2).**Correlation is significant at the 0.01 level (1-tailed) * Correlation is significant at the 0.05 level(1-tailed)

Table 3 .
The difference in salary change between fraud and lawsuit firms and non-fraud and non-lawsuit firms after fraud and lawsuit revelation.

Table 4 .
The difference in salary change between fraud and lawsuit firms with executives" turnover (FT) and fraud and lawsuit firms without executives" turnover (FNT).

Table 5 .
Logistic regression results on the interaction between fraud and lawsuit revelation and internal monitoring mechanisms with reduction of executives" salary.

Table 6 .
Logistic regression result on the relationship between internal monitoring mechanisms and reduction of executives" salary bet ween fraud and lawsuit firms and nonfraud and non-lawsuit firms.