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.     

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.     

Does the independence of independent directors matter?

This paper analyzes the characteristics of firms that declare board directors as independents, although the directors are not strictly independent, and examines the consequences in terms of performance and corporate governance outcomes. Based on publicly available information, eight criteria of “independence” used to examine a panel of Spanish listed firms classify 14.2% of the directors as strictly independent, whereas the firms classify 32.5% of the board as independent directors. Firms with dispersed ownership structures misclassify directors more frequently than do firms with large controlling owners. In terms of consequences, we find weak evidence of a negative relation between misclassification and a firm's future operating performance. However, no relation is found between independents' misclassification and several relevant outcomes of the primary delegated committees with monitoring roles: the audit committee and the nomination and remuneration committee. There is no significance with regard to the non-strictly independent measures explaining executive directors' compensation, CEO turnover, audit qualifications or earning management behavior.     

Independent directors and the propensity to pay dividends

Using data from 944 public companies in 2006, I examine how a firm's propensity to pay dividends is related to (i) board independence and (ii) independent directors' tenure, number of board seats (busy) and equity incentive compensation. After controlling for the effects of traditional economic, CEO entrenchment and ownership determinants of the propensity to pay dividends, I find evidence of a positive association between the propensity to pay and (i) board independence and (ii) director tenure, and a negative association between the propensity to pay and (i) busy directors and (ii) greater equity incentive compensation in the director pay structure. I find consistent results when the decision is to pay cash dividends or repurchase shares. In further tests, I find that equity incentive compensation in the independent director pay structure is the most pervasive determinant across other dividend measures such as dividend payout, total payout and repurchases. Overall, the findings suggest that the characteristics of independent directors are important determinants of the payout policy. The results also suggest that future corporate governance research could benefit from incorporating characteristics of independent directors rather than limiting governance measures to board independence especially when recent empirical evidence (Linck et al., 2008, 2009) shows convergence, and therefore, narrowing variation in the proportion of outsiders and insiders on a board.     

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 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.     

CEO Involvement in the Selection of New Board Members: An Empirical Analysis

We study whether CEO involvement in the selection of new directors influences the nature of appointments to the board. When the CEO serves on the nominating committee or no nominating committee exists, firms appoint fewer independent outside directors and more gray outsiders with conflicts of interest. Stock price reactions to independent director appointments are significantly lower when the CEO is involved in director selection. Our evidence may illuminate a mechanism used by CEOs to reduce pressure from active monitoring, and we find a recent trend of companies removing CEOs from involvement in director selection.     

Earnings management and corporate governance: the role of the board and the audit committee

We examine the role of the board of directors, the audit committee, and the executive committee in preventing earnings management. Supporting an SEC Panel Report's conclusion that audit committee members need financial sophistication, we show that the composition of a board in general and of an audit committee more specifically, is related to the likelihood that a firm will engage in earnings management. Board and audit committee members with corporate or financial backgrounds are associated with firms that have smaller discretionary current accruals. Board and audit committee meeting frequency is also associated with reduced levels of discretionary current accruals. We conclude that board and audit committee activity and their members' financial sophistication may be important factors in constraining the propensity of managers to engage in earnings management.     

Shareholder election of CSR committee members and its effects on CSR performance

We examine the election of directors to corporate social responsibility (CSR) committees and whether shareholder votes influence CSR committee effectiveness. Our study is motivated by the importance that shareholders place on CSR and the responsibilities of the board in overseeing a firm's CSR practices. We find that CSR committee members receive greater shareholder support than other directors. We further find that among CSR committee members, those who are more experienced and skilled receive greater shareholder support. Furthermore, when a firm's CSR performance is poorer (better), CSR committee members receive lower (greater) shareholder support compared with other directors. Finally, we find that through voting, shareholders can increase the efficacy of the CSR committee, leading to improvements in CSR committee structure and performance. Overall, our results suggest that shareholders value the services and expertise of CSR committee members and hold them accountable for CSR performance. Shareholder votes are also effective in enhancing CSR performance.     

Board and Monitoring Committee Independence

This study focuses on the composition of boards of directors and their monitoring committees (audit and compensation) for large Australian companies. For firms whose boards use a committee structure, much of the monitoring responsibility of the board is expected to rest with the independent committee members. We document a positive association between the proportion of independent directors on the full board and its monitoring committees, and a greater proportion of independent directors on both audit and compensation committees than the full board. Our hypotheses tests involve an examination of the impact of other mechanisms used to control agency conflicts on full board and committee independence, and the association between this independence and firm value. We find that full board independence is associated with low management ownership and an absence of substantial shareholders. Audit committee independence is associated with reduced monitoring by debtholders when leverage is low. While we predict a positive relationship between board and monitoring committee independence and firm value, our results do not support this conjecture.     

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.     

Length of Board Tenure and Outside Director Independence

I posit and test two competing views on the significance of outside director tenure lengths; the expertise hypothesis suggesting that extended board service time is a sign of director commitment, experience, and competence and the management‐friendliness hypothesis suggesting that extended board service time marks directors who befriend management at the expense of shareholders. I find evidence that Senior directors, defined as directors with twenty or more years of board service, are almost twice as likely to occupy a 'management‐affiliated' profession compared to the rest, and that they are also more likely to staff the firm's nominating and compensation committees. Senior director participation in the compensation committee is associated with higher pay for the CEO, especially when the CEO is more powerful in the firm. These results are consistent with the management‐friendliness hypothesis, and highlight a need for setting term limits for directors.     

Compensation and Board Structure: Evidence From the Insurance Industry

Monitoring by outside board members and incentive compensation provisions in executive pay packages are alternative mechanisms for controlling incentive problems between owners and managers. The control hypothesis suggests that if incentive conflicts vary materially, those firms with more outside directors also should implement a higher degree of pay‐for‐performance sensitivity. Our evidence is consistent with this control hypothesis. We document a relation between board structure and the extent to which executive compensation is tied to performance in mutuals: compensation changes are significantly more sensitive to changes in return on assets when the fraction of outsiders on the board is high.     

Co-opted directors,covenant intensity,and covenant violations

This study investigates how the level of board co-option might affect a borrowing firm's ex ante covenant intensity and ex post covenant violations. As the fraction of co-opted directors (those who joined the board after the CEO assumed office) increases, creditors include more covenant restrictions in their loan contracts, indicating that more co-opted boards are considered as weaker monitors. The results remain robust to various approaches accounting for endogeneity, and are not driven by alternative explanations such as CEO tenure, director inexperience, or CEO's involvement in the nominating committee. Ex post tests reveal that firms with more co-opted boards are more likely to violate loan covenants after controlling for covenant intensity. Non-co-opted independent directors appear to be the most effective monitors in mitigating covenant violations among revolving loans and loans to unrated borrowers.     

Overlapping Membership on Audit and Compensation Committees and Financial Reporting Quality

This paper examines whether the audit committee members of a board improve financial reporting quality if they are also on their organisation's compensation committee. Audit committees are responsible for overseeing the financial reporting process of organisations and have been urged to broaden their understanding of business risk and of the incentives provided by their firms’ executive compensation structures. Acknowledging the interrelationships among executive compensation, risk‐taking and financial reporting quality, members of audit and compensation committees have been advocating more information sharing between the two committees. Using archival data from a sample of Australian Stock Exchange listed companies, and discretionary accruals as a proxy for financial reporting quality, this study finds that firms with overlapping committees have better quality financial reporting than those without such an overlap. Our evidence for this is stronger in cases where managers tend to manage earnings upwards in order to meet or beat earnings benchmarks. We also find that the beneficial effect of the existence of overlapping committees is adversely affected by the equity holdings of directors with overlapping memberships.     

The Effects of Compensation and Board Quality on Non-GAAP Disclosures in Europe

This study reports international evidence on the impact of compensation and board quality on the voluntary disclosure of non-GAAP earnings numbers. We find that compensation contracts of board directors that are linked to firm's market performance are associated with a higher probability of disclosure of non-GAAP figures in the earnings announcements' press release. Furthermore, when this type of compensation is used, firms tend to report non-GAAP figures in the title of the press release, make more adjustments for recurring items, and avoid reporting reconciliations. These reporting practices have been associated with opportunistic disclosure. We also show that an efficient governance structure of the board of directors can help restrain most of these discretionary disclosure decisions regarding non-GAAP reporting.     

The Nature of Board Nominating Committees and Their Role in Corporate Governance

This study examines the association between the employment and composition of nominating committees with board and ownership characteristics. First, the results suggest that the likelihood of using a nominating committee is inversely related to the level of inside ownership and positively weakly, related to the independence, but not the number, of outside board members. Second, the percentage of insiders participating in the committee is positively related to inside ownership, and negatively related to proxies for outside director quality. Finally, outside directors are more likely to serve on the nominating committee the more outside directorships they hold, and the longer their tenure in the firm. The likelihood of insider committee membership rises with a director's equity investment, with board tenure, and with other committee memberships. Taken together, the results are consistent with nominating committees substituting inside ownership in controlling management, mostly improving board quality, and being staffed with independent, experienced, and knowledgable members.     

Ineffective corporate governance: Director busyness and board committee memberships

Our paper examines whether holding multiple outside board seats compromises a director’s ability to effectively perform monitoring duties. Analyzing over 1400 firms, we report that individuals who hold more outside directorships serve on fewer board committees. The relation, however, appears non-linear, U-shaped, and in support for both the busyness and the reputation hypotheses. In addition, we find that holding more outside board seats decreases the likelihood of membership on compensation and audit committees. The findings substantiate evidence [Akhigbe, A., Martin, A.D., 2006. Valuation impact of Sarbanes–Oxley: Evidence from disclosure and governance within the financial services industry. Journal of Banking and Finance 30 (3), 989–1006] of value relevance of board committee structures. Additional analysis of committee memberships suggests that women and ethnic minorities are placed on more board committees. Also, directors on smaller and independent boards serve on more committees. Finally, it appears that the Sarbanes–Oxley act had a material impact on the association between the number of multiple board seats and committee memberships.     

董事会规模、多元化战略与企业风险承担

不确定的外部竞争环境和公司战略定位对企业的风险承担水平具有重要影响.以2005-2015年沪深A股上市公司为研究对象,以董事会规模作为门槛变量,分析当董事会人数在不同区间下多元化战略的实施对企业风险承担产生的影响.研究表明:随着董事会人数的增加,多元化战略与企业风险承担呈现先增后减的变化趋势,且二者存在基于董事会规模的双重门槛效应.     

Board Characteristics,Firm Profitability and Earnings Management: Evidence from India

The present paper explores the association between earnings management and specific board characteristics and the firm's profitability in the Indian context. In India, the corporate ownership model is the promoter dominated shareholders model. This is the first study based on a panel data framework that employs a fixed effect model to control for time‐invariant endogeneity. It also contributes to the literature by exploring the role of the firm's profitability in transmitting the impact of audit committee independence on earnings management. The study finds that profitability is an important variable, as it moderates the association between audit committee independence and earnings management. Managers of a profit‐making company would have little need to modify their earnings. This signifies that independent audit committees are more effective monitors of earnings management in profitable firms than in non‐profitable firms. Independent directors with multiple directorships are also found to be ineffective monitors. The findings are of material significance to policymakers in analysing board effectiveness and earnings management and improving policymaking for corporate governance by using profitability and related variables.