Compensation committee governance quality,chief executive officer stock option grants,and future firm performance

This paper examines whether the relationship between future firm performance and chief executive officer (CEO) stock option grants is affected by the quality of the compensation committee. Compensation committee quality is measured using six committee characteristics – the proportion of directors appointed during the tenure of the incumbent CEO, the proportion of directors with at least ten years’ board service, the proportion of directors who are CEOs at other companies, the aggregate shareholding of directors on the compensation committee, the proportion of directors with three or more additional board seats, and compensation committee size. We find that future firm performance is more positively associated with stock option grants as compensation committee quality increases.     

Do corporate governance mechanisms influence CEO compensation? An empirical investigation of UK companies

The aim of this paper is to empirically examine the influence of corporate governance mechanisms, that is, ownership and board structure of companies, on the level of CEO compensation for a sample of 414 large UK companies for the fiscal year 2003/2004. The results show that measures of board and ownership structures explain a significant amount of cross-sectional variation in the total CEO compensation, which is the sum of cash and equity-based compensation, after controlling other firm characteristics. We find that firms with larger board size and a higher proportion of non-executive directors on their boards pay their CEOs higher compensation, suggesting that non-executive directors are not more efficient in monitoring than executive directors. We also find that institutional ownership and block-holder ownership have a significant and negative impact on CEO compensation. Our results are consistent with the existence of active monitoring by block-holders and institutional shareholders. Finally, the results show that CEO compensation is lower when the directors’ ownership is higher.     

It Takes Two: The Incidence and Effectiveness of Co‐CEOs

This study examines the phenomenon of co‐CEOs within publicly traded firms. Although shared executive leadership is not widespread, it occurs within some very prominent firms. We find that co‐CEOs generally complement each other in terms of educational background or executive responsibilities. Our results show that firms most likely to appoint co‐CEOs have lower leverage, a more limited firm focus, less independent board structure, fewer advising directors, lower institutional ownership, and greater levels of merger activity. The governance structure of co‐CEO firms suggests that co‐CEOships can serve as an alternative governance mechanism, with co‐CEO mutual monitoring substituting for board or external monitoring and co‐CEO complementary skills substituting for board advising. An event study indicates that the market reacts positively to appointments of co‐CEOs while a propensity score analysis shows that the presence of co‐CEOs increases firm valuation.     

Does CEO duality constrain board independence? Some evidence from audit pricing

This study examines whether CEO duality affects the association between board independence and demand for higher quality audits, proxied by audit fee. The findings show that there is a positive association between board independence and audit fees. This result is consistent with findings of Carcello et al. (2002) that more independent boards demand higher audit quality and effort. However, this positive association is only present in firms without CEO duality, thus suggesting that CEO duality constrains board independence. The results support recommendations against CEO duality by showing that dominant CEOs may compromise the independence of their board of directors. Additionally, evidence is provided that board size (the number of directors on the board) is positively associated with audit fee pricing. This is consistent with prior studies that indicate that larger board sizes are associated with inefficiency and negative firm performance.     

Director overconfidence

We examine overconfident chief executive officer (CEO) directors and find they attend more board meetings, are more likely to serve on the nominating or the compensation committee, have more independent directorships, and foster higher attendance rates on boards. Boards with overconfident directors are more likely to appoint a better prepared and more reputable CEO following a turnover. These newly appointed CEOs are also more likely to be overconfident. This evidence indicates overconfident CEO directors exhibit significant influence on the board and over the firm's CEO selection.     

Corporate governance when founders are directors

We examine chief executive officer (CEO) compensation, CEO retention policies, and mergers and acquisition (M&A) decisions in firms in which founders serve as a director with a nonfounder CEO (founder-director firms). We find that founder-director firms offer a different mix of incentives to their CEOs than other firms. Pay-for-performance sensitivity for nonfounder CEOs in founder-director firms is higher and the level of pay is lower than that of other CEOs. CEO turnover sensitivity to firm performance is also significantly higher in founder-director firms compared with nonfounder firms. Overall, the evidence suggests that boards with founder-directors provide more high-powered incentives in the form of pay and retention policies than the average US board. Stock returns around M&A announcements and board attendance are also higher in founder-director firms compared with nonfounder firms.     

Bidder CEO and Other Executive Compensation in UK M&As

This paper investigates the impact of M&As on bidder (CEO and other) executive compensation employing a unique sample of 100 completed bids in the UK over the 1998–2001 period. Our findings indicate that less independent and larger boards award CEOs significantly higher bonuses and salary following M&A completion both for the full sample and for the UK and US sub‐samples. UK CEOs and executives are rewarded more for the effort exerted in accomplishing intra ‐ industry or large mergers than for diversifying or small mergers and their cash pay is unaffected by other measures of their managerial skill or performance. US bidders are rewarded at higher levels than their UK counterparts and their remuneration is related only to measures of CEO dominance over the board of directors. Overall our findings offer support for the managerial power rather than the agency theory perspective on managerial compensation.     

CEO gender and managerial entrenchment

This paper investigates the effect of gender on managerial authority and control over firms. The study examines S&P 1500 firms for the period of 1999–2014. Our findings suggest that accounting performance, firm value, CEO age, firm age, and board size reduce the likelihood of appointing female managers. On the other hand, the appointment of female CEOs is directly associated with the percentage of female directors, board independence, and beta. The study confirms the notion that female CEO appointments are generally associated with firms facing adverse conditions, and shows that female CEOs are more entrenched as compared to male CEOs. We find that the presence of female CEO decreases the turnover-performance sensitivity, increases the E-index, and inflates CEO compensation. Our research suggests that the level of female CEOs’ entrenchment provides them with greater job security, higher level of control, and inflated pay that compensate the risk of accepting the appointment in a high risk and poor performing firm.     

Risk management,corporate governance,and bank performance in the financial crisis

The recent financial crisis has raised several questions with respect to the corporate governance of financial institutions. This paper investigates whether risk management-related corporate governance mechanisms, such as for example the presence of a chief risk officer (CRO) in a bank’s executive board and whether the CRO reports to the CEO or directly to the board of directors, are associated with a better bank performance during the financial crisis of 2007/2008. We measure bank performance by buy-and-hold returns and ROE and we control for standard corporate governance variables such as CEO ownership, board size, and board independence. Most importantly, our results indicate that banks, in which the CRO directly reports to the board of directors and not to the CEO (or other corporate entities), exhibit significantly higher (i.e., less negative) stock returns and ROE during the crisis. In contrast, standard corporate governance variables are mostly insignificantly or even negatively related to the banks’ performance during the crisis.     

Why do firms appoint CEOs as outside directors?

Companies actively seek to appoint outside CEOs to their boards. Consistent with our matching theory of outside CEO board appointments, we show that such appointments have a certification benefit for the appointing firm. CEOs are more likely to join boards of large established firms that are geographically close, pursue similar financial and investment policies, and have comparable governance to their own firms. The first outside CEO director appointment has a higher stock-price reaction than the appointment of another outside director. Except for a decrease in operating performance following the appointment of an interlocked director, CEO directors do not affect the appointing firm's operating performance, decision-making, and CEO compensation.     

CEO incentives-its not how much you pay, but how

The arrival of spring means yet another round in the national debate over executive compensation. But the critics have it wrong. The relentless attention on how much CEOs are paid diverts public attention from the real problem-how CEOs are paid. The authors present an in-depth statistical analysis of executive compensation. The study incorporates data on thousands of CEOs spanning five decades. Their surprising conclusions are at odds with the prevailing wisdom on CEO pay: Despite the headlines, top executives are not receiving record salaries and bonuses. Cash compensation has increased over the past 15 years, but CEO pay levels are just now catching up to where they were 50 years ago. Annual changes in executive compensation do not reflect changes in corporate performance. For the median CEO in the 250 largest public companies, a $1,000 change in shareholder value corresponds to a change of just 6.7 cents in salary and bonus over a two-year period. With respect to pay for performance, CEO compensation is getting worse rather than better. CEO stock ownership-the best link between shareholder wealth and executive well-being-was ten times greater in the 1930s than in the 1980s. Compensation policy is one of the most important factors in an organization's success. Not only does it shape how top executives behave but it also helps determine what kind of executives an organization attracts. That's why it's so urgent that boards of directors reform their compensation practices and adopt systems that reward outstanding performance and penalize poor performance.     

External Networking and Internal Firm Governance

We use panel data on S&P 1500 companies to identify external network connections between directors and CEOs. We find that firms with more powerful CEOs are more likely to appoint directors with ties to the CEO. Using changes in board composition due to director death and retirement for identification, we find that CEO‐director ties reduce firm value, particularly in the absence of other governance mechanisms to substitute for board oversight. Moreover, firms with more CEO‐director ties engage in more value‐destroying acquisitions. Overall, our results suggest that network ties with the CEO weaken the intensity of board monitoring.     

Firm Performance and CEO Reputation Costs: New Evidence from the Venezuelan Banking Crisis

When searching for outside directors, the performance of the candidate as a manager of other firms is important. Using a sample of Venezuelan banks during a systemic crisis, we find that the outside directorships of chief executive officers (CEOs) are negatively affected by banks' performances, measured by their default risk. Our results suggest that a CEOs' personal monitoring talents are what is being purchased when CEOs are appointed as outside directors. In addition, the negative effect of firms' performances on their CEOs' reputations is significantly stronger in an emerging market, suggesting that CEO reputation helps to control for managerial agency costs when other governance mechanisms are absent. The size of the bank has a positive effect on CEO reputation, which partially offsets the negative reputation effect of the bank risk.     

Can CEO dismissals be proactive?

We find significant variation in the prior stock returns of firms that dismiss their CEOs between 1996 and 2008. 49% of firms that dismiss their CEOs do so in the absence of negative industry-adjusted stock returns prior to dismissal (37% dismiss in the absence of negative raw returns). We find evidence for two reasons why boards may dismiss CEOs early, i.e., in the absence of significant poor prior stock performance. First, we find that early dismissals are more likely to be associated with corporate scandals, suggesting that CEOs that are found to engage in unethical or illegal activities are dismissed although their actions may not have a significant adverse impact on firm value. Second, we find support for the argument that early dismissals are proactive actions by boards to dismiss low ability CEOs. We find that firms with more equity-based compensation for directors and higher independent director ownership are more likely to dismiss their CEOs early. Boards with strong incentives are more likely to be proactive and act on their private information about the CEO than boards with poor incentives. Early dismissal firms experience a short-lived decline in operating performance around the date of CEO dismissal, and their operating performance recovers immediately after the CEO is replaced. On the other hand, the operating performance of late dismissal firms declines significantly prior to dismissal and improves substantially after dismissal. We also find that CEOs that are dismissed early are not more likely to find new CEO positions than CEOs that are dismissed late, supporting the idea that early dismissal CEOs may not have different ability than late dismissal CEOs.     

Birds of a feather: Value implications of political alignment between top management and directors

For 2,695 US corporations from 1996 to 2009, we find that alignment in political orientation between the chief executive officer (CEO) and independent directors is associated with lower firm valuations, lower operating profitability, and increased internal agency conflicts such as a reduced likelihood of dismissing poorly performing CEOs, a lower CEO pay-performance sensitivity, and a greater likelihood of accounting fraud. Importantly, we show that our results are driven neither by the effects associated with various measures of similarity and diversity within the board nor the effects of local director labor market and political conditions on board structure. We provide evidence that our measure of individual political orientation reflects the person?s political beliefs rather than opportunistic attempts to seek political favor. Overall, our results suggest that diversity in political beliefs among corporate board members is valuable.     

Executive compensation and corporate governance in China

We investigate executive compensation and corporate governance in China's publicly traded firms. We also compare executive pay in China to the USA. Consistent with agency theory, we find that executive compensation is positively correlated to firm performance. The study shows that executive pay and CEO incentives are lower in State controlled firms and firms with concentrated ownership structures. Boardroom governance is important. We find that firms with more independent directors on the board have a higher pay-for-performance link. Non-State (private) controlled firms and firms with more independent directors on the board are more likely to replace the CEO for poor performance. Finally, we document that US executive pay (salary and bonus) is about seventeen times higher than in China. Significant differences in US-China pay persist even after controlling for economic and governance factors.     

Board composition as the outcome of an internal bargaining process: empirical evidence

The traditional financial economics view of the determinants of board composition is based on outside shareholders' demand for external monitoring of management. In comparison, Hermalin and Weisbach (American Economic Review, 88 (1998) 96) model board composition as the outcome of a bargaining process between the CEO and the rest of the board. The model predicts, inter alia, that the bargaining power of the CEO relative to the rest of the board of directors will determine the level of independence of the board and the extent of board monitoring. This study tests Hermalin and Weisbach's model using a random sample of companies that are subject to limited regulatory constraints in relation to board composition and a common set of corporations regulations that may indirectly affect board composition. There is strong evidence that representation by outside directors varies inversely with CEO bargaining power, which is proxied by CEO tenure and inside shareholdings. An extension of the argument of Hermalin and Weisbach to board leadership is also tested. The results indicate that the appointment of the chairman of the board is also the outcome of a bargaining process between the CEO and the rest of the board with more powerful CEOs likely to hold the position of Chairman of the board. Together, these results suggest that more “powerful” CEOs are relatively entrenched and face fewer constraints and less monitoring than other CEOs. This evidence has potential relevance to current debates in relation to the need to control the number or proportion of outside directors.     

Board Share‐Ownership and Takeover Performance

Abstract:   We investigate the relation between takeover performance and board share‐ownership in the acquiring company for a sample of 363 UK takeovers completed in the period 1985–96. In investigating this relationship we pay particular attention to the composition of board shareholdings as well as their size. Thus, in addition to the analysis of total board holdings, we analyse the separate impact of CEO shareholdings and of the pattern of non‐executive and executive holdings within the board. In addition to our detailed examination of board holdings we assess the impact of non‐board holdings. Our analysis controls for a number of non‐shareholding constraints on discretionary director behaviour and for a variety of other influences on takeover outcomes including: the means of payment; acquirer size and market to book value; the relative size of the acquirer and the target; the nature of the bid in terms of hostility and industrial direction; and the pre‐takeover performance of the acquiring company. We assess performance in terms of announcement returns, long run share returns and a portfolio of accounting measures. We find evidence that overall board ownership has a strong positive impact on long run share returns and a weak positive impact on operating performance. However, much stronger effects are found when the overall board measure is split into CEO, executive, and non‐executive directors. We find strong evidence of a positive relation between takeover performance and CEO ownership, which holds for both long run returns and operating performance measures. This finding is robust to controlling for other factors that determine takeover performance and holds in a two stage least squares framework that controls for endogeneity effects. Shareholdings of other executive directors, non‐executive directors, and non‐board holdings are found to have no significant effect on takeover performance.     

Powerful CEOs and stock price crash risk

We find that powerful chief executive officers (CEOs) are associated with higher crash risk. The positive association between CEO power and crash risk holds when controlling for earnings management, tax avoidance, chief executive officer's option incentives, and CEO overconfidence. Firms with powerful CEOs have higher probability of financial restatements, lower proportion of negative to positive earnings guidance, and lower ratio of negative to positive words in their financial statements. The association between powerful CEOs and higher crash risk is mostly evident among firms with higher sensitivity of CEO wealth to stock prices and when CEOs have lower general skills. External monitoring mechanisms weaken but do not eliminate the association between powerful founder CEOs and higher crash risk.     

Confessions of a trusted counselor

Advising CEOs sounds like a dream job, but doing so can be perplexing and perilous. At times, the questions you must ask yourself-about your own motivations and loyalty-can be thornier than the organizational problems that clients face. David Nadler knows, because he has been asking himself such questions for a quarter century while advising the chiefs of more than two dozen corporations. If you're an adviser to CEOs, recognizing the pitfalls of your role may help you sidestep them. And understanding a problem's nuances and implications may help you uncover a solution. The challenges facing consultants include the following: The loyalty dilemma: Is my ultimate responsibility to the CEO, who pays for my services, or to the institution, which pays for his? Today's shorter CEO tenures and greater board oversight have diminished the top leader's power and autonomy; it's now routine for a CEO adviser to have conversations with directors about the CEO's performance. To defuse loyalty issues, the adviser should raise them with the executive at the outset of the relationship. The overidentification dilemma: How do I immerse myself in the CEO's worldview without making it my own? CEOs can be enormously persuasive, but if you don't push back, you're not doing your job. The trick is to ask probing questions without shaking the CEO's confidence that you fully comprehend the forces that shape her views. The friendship dilemma: If the CEO and I like each other, can we-should we-become friends? A successful, long-term advisory relationship with a CEO requires a strong personal connection; in some cases, that becomes a friendship. But the best relationships are characterized by the participants' clear-eyed recognition of each other's frailties-tempered, of course, by genuine affection and easy rapport.