On REIT CEO Compensation: Does Board Structure Matter?

In a perfect world where the board of directors is independent of CEO influence, CEO pay-for-performance compensation contracts should be a function of performance only. If the CEO can influence board structure through his ownership of company stock or chairmanship of the board, however, performance contracts are sub-optimal and agency problems arise, which allow the CEO to extract rent and demand compensation in excess of the equilibrium level. As such, models of compensation contracts must include board and ownership structure variables, in addition to the traditional economic determinants. Our analyses with REITs corroborate this notion. Our data demonstrate that the structure of REIT boards are not independent of CEO influence, and significant agency problems exist allowing the CEO to design boards that reward him at the cost of shareholder wealth. CEO compensation in REITs depends significantly on the usual economic measures of performance including firm size and return on assets; more importantly, CEO compensation is higher in REITs where the board is weak in monitoring because of large size, and older directors; the effect of a blockholder is adverse, however. This study provides additional evidence to the growing literature that observed board structures are ineffective in monitoring and governance.     

Managerial Equity Ownership and the Demand for Outside Directors

This paper examines the linkage between the use of outside directors and managerial ownership. We conjecture there are two linkages: the standard incentive‐alignment demand for monitoring when managers own little stock and an entrenchment‐amelioration demand when managerial stock ownership is high. As a consequence, we predict the association between managerial ownership and board composition will be nonlinear (U‐shaped if the entrenchment effect is sufficiently pronounced). Using UK data, we find that both quadratic and logarithmic models outperform the simple linear relationship assumed in prior research and that the substitution between managerial ownership and board composition is stronger than hitherto supposed.     

Corporate governance,top executive compensation and firm performance in Japan

For 174 large Japanese corporations during 1992–1996, we find that top executive pay is higher in firms with weaker corporate governance mechanisms, controlling for standard economic determinants of pay. We use management ownership and family control (“the ownership mechanisms”), and keiretsu affiliation, the presence of outside directors, and board size (“the monitoring mechanisms”) to measure corporate governance mechanisms. We also find that the excess pay related to ownership and monitoring variables is negatively associated with subsequent accounting performance, consistent with the presence of an agency problem. We do not, however, find an association between this excess pay and subsequent stock returns.     

The Effects of Outside Directors and Board Shareholdings on the Relation Between Chief Executive Compensation and Firm Performance

Critics of corporate governance have suggested that improvements in board monitoring will arise from more independent boards consisting of outside directors and from increased stock ownership by directors. Presumably these changes should result in more rational, more defensible compensation decisions in which pay is clearly tied to results. In this paper, we test the premise that boards with a relatively higher proportion of outsiders and boards with significant shareholdings maintain a closer link between corporate performance and executive pay than do boards with fewer outsiders and boards holding little stock. The results of the study, based on a sample of 268 large corporations, are mixed. As expected, boards with significant shareholdings maintain a stronger linkage between compensation and firm-level performance. This finding persists even after controls are included for CEO and outsider shareholdings. Contrary to expectations, however, evidence was not found that firms with a higher proportion of outsiders on the board of directors relate compensation more strongly to firm results.     

Competition For Board Seats Following Stock‐For‐Stock Mergers

We examine the board structure of firms following stock‐for‐stock mergers. We find that former target inside (outside) directors are more likely to join the combined firm board when target insiders (outsiders) have a relatively strong position on the pre‐merger target board. The relative size of the target firm, target firm profitability, and target blockholder ownership also influence whether target directors join the combined board. We conclude that competition for board seats on the combined board is won by target directors with greater bargaining positions.     

Stock Market Reaction to the Appointment of Outside Directors

This paper examines the UK stock market's reaction to the appointment of outside (non‐executive) board members. Tests conducted using a sample of 714 appointments reported by EXTEL between 1 July, 1993 and 31 December, 1996, indicate a strong interaction between appointee characteristics and the magnitude of the agency problem: the share price reaction to outside director appointments is significantly more favourable when board ownership is low and the appointee possesses strong ex ante monitoring incentives. In contrast, the appointment of independent and manager‐affiliated outside directors does not appear to benefit shareholders on average, even in the presence of serious agency problems.     

Corporate Governance and Performance in the Market for Corporate Control: The Case of REITs

We examine 132 mergers and acquisitions by Real Estate Investment Trusts (REITs) during 1997–2006 and explore the relationship between acquirer external and internal corporate governance mechanisms and announcement abnormal returns. We argue that in regulated industries with absent active takeover market, the importance of outside governance mechanisms is diminished and substituted by internal governance controls. We focus on the REIT industry. We find that bidder returns are higher for REITs with smaller boards, with more experienced CEOs, but with shorter tenure. Acquirers’ announcement returns are also significantly and positively related to higher ownership by their CEOs and board directors. We find no significant relationship between presence of staggered board and abnormal bidder returns, which supports our hypothesis that anti-takeover defense measures have reduced importance for REITs.     

Corporate governance and firm value during a financial crisis

The main purpose of this paper is to evaluate the effects of management ownership and other corporate governance variables on Hong Kong firms’ stock performance following the onset of the Asian Financial Crisis (1997–98). Our results show that Hong Kong firms with a more concentrated management (executive board) ownership displayed better capital market performance during the 13-month period of the Crisis. We also find that firms with more equity ownership by non-executive directors, and in which the positions of CEO and board chairperson were occupied by the same individual experienced a smaller stock price decline. Our findings are consistent with the notion that there is a greater alignment of insiders with outside owners, rather than the expropriation by insiders who have the opportunity to divert value, for firms with higher levels of management ownership during an unexpected capital market crisis.     

Determinants of corporate ownership and board structure: evidence from Singapore

This study examines the determinants and interrelationships among corporate ownership and board structure characteristics using a sample of Singapore listed firms. The institutional environment in Singapore differs from that in many developed Western economies in several important respects, including a weak market for corporate control, more concentrated stock ownership, and significant government ownership in many private sector firms.Three characteristics—board composition, board leadership structure and board size—are used to capture the monitoring ability of the board. These board characteristics are assumed to be endogenously determined, together with two ownership characteristics, managerial ownership and blockholder ownership. We use two-stage least squares regression to estimate the determinants of board and ownership characteristics. Our findings indicate that corporate ownership and board structures are related, and that there are significant interrelationships among board structure characteristics. The proportion of outside directors is negatively related to managerial ownership, board size and government ownership. The use of a dual leadership structure is positively related to blockholder ownership, and negatively related to regulation and to CEO tenure.     

The Impact of the Sarbanes-Oxley Act on the Structure of REIT Boards of Directors

The changes in the board structure for REITs for the period 1999?C2005 are presented. Post-SOX REIT boards have changed primarily in the form of greater independence, as fewer REIT boards are led by their CEOs due to SOX. In the relation between Post-SOX board structure and performance, the results show no improvement in performance for REITs whose boards have a majority of preferred features. That is, REITs with small boards, majority of outside directors, and not led by their CEOs do not perform better than their counterparts. These results provide additional fuel for the debate on the benefits and costs of SOX.     

Separation of Ownership and Control: Implications for Board Composition

This article investigates the implications of separation of ownership and control for board composition over a spectrum of ownership structures present in the U.S. property–liability insurance industry. We hypothesize that agency costs associated with manager–owner conflicts increase with the degree of separation of ownership and control. Greater agency costs imply a greater need for monitoring by outside directors on the board. Therefore, use of outside directors is expected to increase as the separation of ownership and control gets larger. Employing a sample of property–liability insurers exhibiting different degrees of separation of ownership and control, we find support for our hypothesis.     

Managerial ownership,board structure,and the division of gains in divestitures

This study shows that shareholders of a firm that divests assets receive gains that are significantly related to stock ownership by the firm's managers and to the proportion of outside directors on the firm's board when the divestiture produces positive total dollar gains. Our results agree with the notions that higher levels of ownership give managers the incentive to sell assets that create negative synergies, the incentive to negotiate the best price for shareholders, and that outside directors fulfill their responsibilities as effective monitors and advisors to management.     

Ownership, Governance, and Bank Performance: Korean Experience

The paper examines the effect of ownership and governance on firm performance. Tracing the post financial crisis experience, 1998–2002, of the Korean commercial bank industry, the paper investigates whether the involvement of foreign investors in the ownership structure had any significant effect on the banks' performance i.e., return and risk measures. Further, it examines the effects of the presence of outside directors, especially directors from foreign countries, in the corporate board structure impacts banks performance. Evidence indicates that the extent of the foreign ownership level, not the mere existence of foreign ownership, has a significant positive association with the bank return and a significant negative association with the bank risk. The number of outside board of directors does not have any significant affect on performance however the presence of a foreign director on that board is significantly associated with bank return and risk. These findings are relatively robust under the different specifications of performance measures.     

The differential effects of classified boards on firm value

Classified boards actually benefit firms that have low monitoring costs and greater needs for advisory services. Previous literature has emphasized the entrenchment effect of classified boards. However, we find that this adverse impact of classified boards can be offset or even superseded by the potential benefits of board classification for firms who hope to benefit from the advisory services of their independent directors. We show that firms with greater advising needs appoint more outside directors with diverse attributes and expertise, qualifications that enhance the ability to provide useful advice to managers. Furthermore, in such firms, board classification is associated with higher performance sensitivity of forced CEO turnover and better acquisition performance. Conversely, in firms with high monitoring costs, board classification hurts managerial equity-based incentives and risk-taking incentives. These findings suggest how and through which channels classified boards engender the differential effects on firm value.     

Bankruptcy outcomes: Does the board matter?

We examine the association between board composition and bankruptcy outcomes. Preliminary analyses provide no evidence that the proportion of outside directors is significantly associated with the likelihood that a Chapter 11 firm liquidates. Further analyses indicate, however, that the relation between the proportion of outside directors and bankruptcy outcomes is a function of the outside directors' ownership. More specifically, we find that the association is positive when outside director ownership is low and negative when it is high. The overall evidence supports the notion that a one-size-fits-all approach to corporate governance is likely to result in suboptimal board structures and hinder firms' strategies for dealing with poor performance.     

Attendance of board meetings and company performance: Evidence from Taiwan

This paper empirically investigates board meeting attendance and its effects on the performance of Taiwanese listed corporations. Directors with higher qualifications attend board meetings more often by themselves. The ownership of the largest shareholder of a company also has a positive effect on director’s own meeting attendance. High meeting attendance by directors themselves can enhance a firm’s performance but high attendance by their representatives has an adverse effect. Independence of directors or a board is also positively associated with firm performance. These results largely hold even when the sample is decomposed to count for different ownership structures and director types.     

Subordinate board structures

The board of directors is a flat governance structure where each director has an equal vote in determining the collective actions taken by the group. Yet, some boards choose to delegate authority for specific tasks to numerous committees, while others choose to create relatively few subcommittees of the board. We investigate the determinants of subordinate board structures, exploring both their benefits and costs. Using a sample of the S&P 1500 we find that subordinate board structures are positively related to board size and the proportion of outside directors, even after controlling firm characteristics such as complexity and ownership structure. Further tests indicate that these board structures can offset the negative associations that board size and the proportion of outsiders can have with firm performance. Yet, in firms with relatively small or insider oriented boards, where co-ordination problems among directors or social loafing may be less pronounced, we find that subordinate board structures are negatively related to firm performance. Categorizing committees as either monitoring or advisory, we find that both types of committees appear related to firm performance. Taken as whole, these results are consistent with the idea that subordinate board structures can be a costly remedy to alleviate problems that arise with larger, more outsider dominated boards.     

Bank power,block ownership,boards and financial distress likelihood: An investigation of Spanish listed firms

We investigate the effects of bank power, block ownership and board independence on the likelihood of financial distress. Using a matched sample design, we find that firms in which banks have power are more likely than their counterparts to enter financial distress. However, the bank power effects are moderated by block ownership and board independence. Specifically, on the one hand, financial distress due to bank power is lower for firms with greater ownership by pressure resistant blockholders and such blockholders appear to be the largest blockholder in the firm. The bank power effects are also lower in firms with greater outside directors and this appears to be primarily driven by proprietary directors than independent directors. On the other, we document evidence suggesting that the bank power effects are magnified for firms in which the board chair is a proprietary director aligned to non-financial blockholders or CEO/Chair, suggesting that banks might partly influence decisions via board chairs. Overall, the findings are consistent with bank power actions being detrimental to the firm, but the extent to which such actions harm the firm depends on the monitoring intentions of blockholders and/or board of directors. These findings have important implications for policymakers.     

Monitoring an owner: The case of Turner broadcasting

Turner Broadcasting illustrates how organizational mechanisms can be adapted to prevent a majority owner from imposing costs on minority shareholders through inept management or opportunistic behavior. These mechanisms involve issuing preferred stock with unusual features, concentrating its ownership among a small group of investors, allowing the new preferred shareholders to elect several directors, and requiring supramajority approval of major management decisions by a reconstituted board of directors. The alienability of the preferred stock is restricted to help insure that its ownership stays concentrated and in the hands of those with the specific knowledge and incentives to be effective monitors.     

What Determines Stock Price Synchronicity in REITs?

This paper studies the behavior of REIT stock price synchronicity for the years 1997 through 2006. Theory suggests that REIT stock prices should be largely independent of market changes; and, at the very least, REITs should have a low covariance with other assets, including other REIT stocks. The evidence presented below does not support this view. Instead, synchronicity appears to be quite high in the equity REIT market, especially among REITs that larger and more liquid. We also find that REIT stock price synchronicity is negatively related to hedge fund ownership, but positively related to pension fund and insurance company ownership. The evidence further suggests that synchronicity is the highest among industrial and regional mall REITs, and lower among apartment, health care, and mixed property REITs.