Top Management Compensation and the Structure of the Board of Directors in Commercial Banks

We examine the relationship between top management compensationand the structure of the board of directors for a sample ofcommercial banks. We find that boards with more reputable outsidedirectors compensate managers more heavily with long-term incentives(stock and stock options) than with cash (salary and bonus).We also find a significant positive correlation between thefuture performance of our sample banks and the proportion oftheir managers’ compensation in the form of long-termincentives. Taken together, these results suggest that boardswith highly reputed outside directors are more effective inproviding managers with the appropriate incentives and thusensuring better future firm performance. Another indicationof the effectiveness of these boards is our finding that theycompensate managers more heavily with long-term incentives (insteadof cash) when these managers are more entrenched. We also findvery little evidence of mutually beneficial back-scratchingor collusion between outside directors and senior managers whensetting management compensation. But boards with long-servingoutside directors are less effective in creating appropriatemanagement incentives.     

Taking Stock: Equity-Based Compensation and the Evolution of Managerial Ownership

We investigate the impact of stock-based compensation on managerial ownership. We find that equity compensation succeeds in increasing incentives of lower-ownership managers, but higher-ownership managers negate much of its impact by selling previously owned shares. When executives exercise options to acquire stock, nearly all of the shares are sold. Our results illuminate dynamic aspects of managerial ownership arising from divergent goals of boards of directors, who use equity compensation for incentives, and managers, who respond by selling shares for diversification. The findings cast doubt on the frequent and important theoretical assumption that managers cannot hedge the risks of these awards.     

Corporate governance and recent consolidation in the banking industry

Using the universe of publicly traded banks at year-end 1993, we find that target banks' outside directors, but not inside directors, tend to own more stock than their counterparts in other banks. Having an outside blockholder is also associated with banks becoming targets. In contrast to existing research on industrial firms, board structure does not help determine which sample banks sell. Neither the fraction of outsiders on a bank's board nor having an outside-dominated board differentiate the target banks in our sample. Instead, outside directors/shareholders and blockholders appear to be primarily responsible for encouraging bank managers to accept an attractive merger offer     

The timeliness of performance information in determining executive compensation

We study whether boards of directors concentrate on performance near compensation decision times rather than providing consistent incentives for chief executive officers (CEO) throughout the fiscal year. We show empirically that managers can profit by moving sales revenue among fiscal quarters. Though this may suggest that boards use short-term trends when determining rewards, we find evidence consistent with boards tying pay to recent sales growth so as to use the best information about future performance. We also find that the timing of profits throughout the year does not affect CEO pay, which may suggest that smoothing firm income is important to CEOs.     

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.     

Upheaval in the boardroom: Outside director public resignations,motivations, and consequences

We investigate the motives and circumstances surrounding outside directors' decisions to publicly announce their board resignations. Directors who leave “quietly” are in their mid-sixties and professional directors, i.e., retirees, who are retiring entirely from professional life. Directors who announce their resignation are in their mid-fifties and active professionals. Half the time they say they are leaving because they are “busy.” These directors leave from firms with some weakness in their performance, but with no overt manifestations of cronyism such as excessive compensation of either the CEO or directors. The other half of the time directors leave while publicly criticizing the firm. These directors are finance professionals who were members of the audit and compensation committees. They resign from firms with weak boards and financial performance with evidence that managers have manipulated earnings upwards. Public criticism appears to pressure these boards to make management changes associated with improved stock price performance. We conclude that while such public resignations are motivated by the reputational concerns of directors, they can act as a disciplining device for poor board performance.     

Outside directors' equity incentives and strategic alliance decisions

This study examines whether the proportion of equity-based compensation in outside director compensation is associated with corporate strategic alliances. We hypothesize that equity incentives provided to outside directors mitigate potential agency conflicts between outside directors and shareholders that arise from the strategic alliance decision-making process, thus resulting in more alliance activities. Our empirical evidence indicates that the percentage of equity in outside director compensation is positively associated with the incidence and the number of strategic alliance activities. Additionally, when the proportion of outside directors' equity in total compensation is higher, firms with strategic alliances generate better future stock returns. Overall, our findings suggest that providing equity incentives in outside director compensation mitigates the agency problems inherent in corporate strategic alliance decisions and enhances the quality of alliance activities.     

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.     

Women in the boardroom and their impact on governance and performance

We show that female directors have a significant impact on board inputs and firm outcomes. In a sample of US firms, we find that female directors have better attendance records than male directors, male directors have fewer attendance problems the more gender-diverse the board is, and women are more likely to join monitoring committees. These results suggest that gender-diverse boards allocate more effort to monitoring. Accordingly, we find that chief executive officer turnover is more sensitive to stock performance and directors receive more equity-based compensation in firms with more gender-diverse boards. However, the average effect of gender diversity on firm performance is negative. This negative effect is driven by companies with fewer takeover defenses. Our results suggest that mandating gender quotas for directors can reduce firm value for well-governed firms.     

Additional Evidence on the Association Between Director Stock Ownership and Incentive Compensation

Governance scholars argue that outside directors have little incentive to monitor managers when their equity stake in the firm is not significant. A sample with a substantial level of outside director shareholdings is examined and a negative relationship between incentive compensation and outside director stock ownership is found. While firms pay higher incentive compensation when they have greater investment opportunities, the compensation contains excess pay due to ineffective corporate governance. Overall, the results suggest more effective corporate governance and lower incentive compensation when outside director stock ownership is higher.     

Institutional investor horizon and bank risk-taking

We test the effect of short-term versus long-term institutional shareholding –so-called investor horizon– on bank risk-taking. We find that in contrast to banks dominated by short-term shareholders, banks with greater long-term shareholding are associated with lower risk, better stock performance, and conservative business and compensation policies. Our results imply that bank regulators should be more vigilant over the actions of banks that heavily rely on short-term shareholding.     

Auditors’ Economic Incentives and the Sensitivity of Managerial Pay to Accounting Performance

The use of managerial incentives to manage earnings in order to enhance accounting performance‐based compensation is greater when auditors have economic incentives to compromise their independence. Hence, compensation committees face more difficulties in determining cash compensation when earnings quality declines. This study investigates whether boards of directors can mitigate the agency problems between managers and shareholders by being aware of the opportunistic earnings management encouraged by auditors’ economic incentives and actively adjusting performance‐based compensation for the reduced earnings quality. To this end, it examines how auditors’ economic incentives affect the sensitivity of managerial pay to accounting performance. The findings show a negative association between the client's economic importance to the auditor and the sensitivity of managerial pay to accounting performance, with this association more pronounced for firms that opportunistically inflate earnings, suggesting that boards mitigate agency problems by actively intervening to modify performance‐based compensation schemes for the reduced earnings quality. Additional analyses show that board effectiveness in determining compensation depends on its characteristics. These results suggest the urgent need to oblige companies to establish compensation committees, particularly in countries that lack such a mandatory requirement or where few companies have such committees.     

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.     

Top Management Incentives and Corporate Performance

There is little agreement about either the effect of executive compensation on corporate performance or the best way to measure the strength of executive incentives. With little guidance from academic research, managers and directors continue to rely heavily on the percentage of pay "at risk" as a proxy for incentive strength.
Starting with the premise that managers, like investors, are motivated by prospective changes in their wealth, this article presents a measure of incentive strength called "wealth leverage" that reflects the sensitivity of an executive's company-related wealth—total stock and option holdings plus the present value of expected future compensation, including future salary, bonus and stock compensation—to changes in shareholder wealth. After estimating top management's wealth leverage at 702 companies, the authors conclude that: 1) the median company has significant wealth leverage; 2) almost all corporate wealth leverage comes from their accumulated stock and option holdings, not from current compensation; and 3) companies with higher wealth leverage significantly outperform their industry competitors.     

Making honest men of them: Institutional investors,financial reporting,and the appointment of female directors to all-male boards

In this paper, we theorize that dedicated institutional investors are more likely than transient institutional investors to appoint female directors to investee firms with all-male boards, particularly those with high opacity. We conjecture that dedicated investors appoint female directors as a governance mechanism to improve the financial reporting quality of these investee firms. Specifically, we find that through the appointment of female directors, dedicated institutional investors trigger the release of stockpiled negative accounting information, thereby increasing the likelihood of a stock price crash risk. We also show that dedicated investors, through the appointment of female directors, improve investee firms' corporate disclosure environment by decreasing earnings management. Finally, we find that through continued service on investee firms' boards, female directors reduce the future likelihood of a stock price crash.     

The investment opportunity set and the voluntary use of outside directors: New Zealand evidence

This study examines whether the composition of boards of directors differs between high and low growth firms. Based on prior research, we hypothesise that firms with greater investment opportunities require more monitoring because managers in these firms have more discretion both in selecting investments and allocating resources between investments. Because outside directors can be more effective monitors than inside directors, we predict that outsiders will make up a larger proportion of the board in high growth firms than in low growth firms. Using a cross-sectional sample of 77 New Zealand firms, our results suggest that the percentage of outside directors is related to growth for two of the four measures of investment opportunities which we employ. As expected, the percentage of outside directors is also related to a composite measure of investment opportunities.     

Corporate governance in banking: The role of the board of directors

We use a sample of large international commercial banks to test hypotheses on the dual role of boards of directors. We use a suitable econometric model (two step system estimator) to solve the well-known endogeneity problem in corporate governance literature, and demonstrate the empirical and theoretical superiority of system estimator over OLS and within estimators. We find an inverted U-shaped relation between bank performance and board size, and between the proportion of non-executive directors and performance. Our results show that bank board composition and size are related to directors’ ability to monitor and advise management, and that larger and not excessively independent boards might prove more efficient in monitoring and advising functions, and create more value. All of these relations hold after we control for the measure of performance, the weight of the banking industry in each country, bank ownership, and regulatory and institutional differences.     

Director Compensation and the Reliability of Accounting Information

This paper studies the effect of incentive-based compensation on directors' monitoring of management. Using total accruals to measure the level of earnings management, I find that director stock option compensation is associated with higher levels of total accruals. I interpret this result to suggest that director stock options are more likely to align interests of directors with those of managers and that this convergence of interest manifests in lower transparency and reliability of financial information. The results suggest that director stock option compensation provides incentive for directors to compromise their task in the financial reporting process.     

Beyond gender diversity: How specific attributes of female directors affect earnings management

We apply the system GMM regression estimation approach to a matched sample of French firms listed on Euronext Paris during the period 2001–2010 in order to investigate the relationship between female directors and earnings management by considering their specific (statutory and demographic) attributes. We first find that the presence of female directors deters managers from managing earnings. However, this finding does not hold when the statutory and demographic attributes of female directors are taken into account, thus showing that the detection and the correction of earnings management require particular competencies and skills. Interestingly, we find that business expertise and audit committee membership are key attributes of female directors that promote the effective monitoring of earnings management. An important implication of our findings is that the decision to appoint women on corporate boards should be based more on their statutory and demographic attributes than on blind implementation of gender quotas. Finally, our supplementary analysis reveals that female CEOs and CFOs are strongly inclined to reduce earnings management.     

CEO equity incentives and the remediation of material weaknesses in internal control

This study examines how CEO equity incentives affect the remediation of material weaknesses (MWs) in internal control disclosed pursuant to the Sarbanes‐Oxley Act (SOX). We find that the sensitivity of CEO equity portfolios to stock price (CEO price sensitivity, or delta) has a positive impact on firm promptness in remedying MWs, whereas the sensitivity of CEO equity portfolios to stock return volatility (CEO volatility sensitivity, or vega) has a negative impact on firm promptness in remedying MWs. In addition, we provide evidence that effective boards of directors mitigate the undesirable, negative effect of CEO volatility sensitivity on remediation of MWs. Our results shed light on the effects of equity compensation structures on internal control quality in the more transparent, post‐SOX environment.