Risk Allocation in Retirement Plans: A Better Solution

The corporate world is reconsidering the cost‐effectiveness of defined benefit pension plans while contemplating a change to defined contribution plans. This article begins by examining the three primary risks faced by sponsors of most DB pension plans—investment risk, interest rate risk, and longevity risk—and shows how shifting these risks to employees through a DC plan would affect both the corporation and the individual. Although DC plans clearly help companies manage risks, they provide at best an incomplete solution for individual participants. This article describes an innovation in pension design—the Retirement Shares Plan (RSP)—that combines many of the best features of DB and DC plans. An RSP provides:

• ? predictable and stable cost to the plan sponsor, with little chance of unfunded liabilities;
• ? lifetime income, guaranteeing that retirees will never outlive their benefits;
• ? a benefit accrual pattern comparable to that of traditional pension plans that preserves value for older, long‐service employees; and
• ? potential inflation protection for retirees.

The RSP accomplishes this by allocating risk to sponsors and individuals differently than either a traditional DB plan or a DC plan. Unlike most DB plans, the RSP shifts investment and interest rate risks from plan sponsors to participants. Unlike DC plans, the RSP keeps longevity risk with the sponsor.     

Pay me now (and later): Pension benefit manipulation before plan freezes and executive retirement

Large US firms modify top executives’ compensation before pension-related events. Top executives receive one-time increases in pensionable earnings through higher annual bonuses one year before a plan freeze and one year before retirement. Firms also boost pension payouts by lowering plan discount rates when top executives are eligible to retire with lump-sum benefit distributions. Increases in executive pensions do not appear to be an attempt to improve managerial effort or retention and are more likely to occur at firms with poor corporate governance. These findings suggest that in some circumstances managers are able to extract rents through their pension plans.     

Corporate governance and board effectiveness

This paper surveys the empirical and theoretical literature on the mechanisms of corporate governance. We focus on the internal mechanisms of corporate governance (e.g., corporate board of directors) and their role in ameliorating various classes of agency problems arising from conflicts of interests between managers and equityholders, equityholders and creditors, and capital contributors and other stakeholders to the corporate firm. We also examine the substitution effect between internal mechanisms of corporate governance and external mechanisms, particularly markets for corporate control. Directions for future research are provided.     

Do Managers of U.S. Defined Benefit Pension Plan Sponsors Use Regulatory Freedom Strategically?

We use historical particularities of pension funding law to investigate whether managers of U.S. corporate defined benefit pension plan sponsors strategically use regulatory freedom to lower the reported value of pension liabilities, and hence required cash contributions. For some years, pension plans were required to estimate two liabilities—one with mandated discount rates and mortality assumptions, and another where these could be chosen freely. Using a sample of 11,963 plans, we find that the regulated liability exceeds the unregulated measure by 10% and the difference further increases for underfunded pension plans. Underfunded plans tend to assume substantially higher discount rates and lower life expectancy. The effect persists both in the cross‐section of plans and over time and it serves to reduce cash contributions. We further show that plan sponsor managers use the freed‐up cash for corporate investment and that credit risk is unlikely to explain the finding.     

Corporate governance and audit fees: Evidence from companies listed on the Shanghai Stock Exchange

This study uses data from companies listed on the Shanghai Stock Exchange to investigate the relationship between corporate governance and audit fees. Full sample results reveal a significant negative relationship between corporate governance and audit fees, and subsample results further show that corporate governance’s influence on audit fees is affected by corporate growth. The negative relationship between corporate governance and audit fees is economically and statistically significant in sample companies that grew moderately during the sample period, and mixed or insignificant in companies that experienced overly fast or negative growth.     

Do Family Firms’ Specific Governance Mechanisms Moderate the Cost of Debt?

This study considers whether the specific governance mechanisms of Spanish family firms decrease their debt cost. We explore the idea of reducing debt costs through specific governance mechanisms of family firms, such as the business succession plan, the family council, as well as other traditional mechanisms like the board of directors. Because most corporate governance research has focused on larger firms, more research on smaller privately held family firms is necessary. For this empirical research, we used a sample of 281 small and medium‐sized family firms. The results show that the implementation of a business succession plan not only serves to solve family conflicts and to plan the business succession but also moderates the cost of financing. Our results confirm that credit institutions receive a positive signal when family firms implement business succession plans as governance mechanisms, reducing both family opportunism and asymmetries of information, influencing risk analysts in their decision‐making processes.     

Does “Vote No” Change Corporate Governance and Firm Value? Evidence from the Shareholder Activism of the Korean National Pension Service

In this paper, we analyze the effect of shareholder activism on firm value through internal corporate governance in an emerging market. We investigate the shareholder activism by the National Pension Service (NPS) of Korea, the fourth-largest pension fund in the world in 2010. We investigate stock price reaction to a “vote no” press announcement and find that the market does not react in the short run, which reaction is inconsistent with the results from developed countries. We also find that firms experiencing “vote no” and improved internal corporate governance have higher firm valuation. Shareholder activism by the NPS is effective in increasing target firm value through improving internal corporate governance.     

“De‐risking” Corporate Pension Plans: Options for CFOs

Until the stock market bubble burst in 2000–2002, most CFOs viewed their defined benefit pension plans as profit centers and relatively risk‐free sources of income. Since neither pension assets nor liabilities were reported on corporate balance sheets, and expected returns on pension stocks could be substituted for actual returns when reporting net income, the risks associated with DB plans were masked by GAAP accounting and thus assumed to have no bearing on corporate capital structure. But when stock prices and corporate profits fell together, the risks associated with conventional stock‐heavy pension plans showed up first in reduced pension surpluses (or, in many cases, deficits) and then later in higher required cash contributions and lower reported earnings. As a consequence, today's investors (and rating agencies) are viewing pension and other legacy liabilities as corporate debt, and demands for transparency and increased funding have triggered accounting changes and proposed legislative reforms that will further unmask the economics. This article aims to provide both private‐sector and public‐sector CFOs with suggestions for reducing and controlling the cost of providing for the retirement of their employees. Profitable, tax‐paying companies with DB plans should consider (1) funding any unfunded liabilities (if necessary, by issuing debt) and (2) reducing pension equity and interest rate exposures by shifting some (if not all) pension assets into bonds and defeasing the pension liability (achieving a tax arbitrage in the process). And in cases where the expected costs of maintaining DB plans outweigh the benefits, companies should consider freezing or terminating their plans and switching to a defined contribution (DC) or some form of hybrid plan. The authors also propose similar changes for public pension plans, where underfunding and mismatch problems are greater, less transparent, and in some ways less tractable than those of corporate DB plans.     

Taxation and Corporate Pension Policy

This paper focuses on the impact of taxes on optimal corporate pension policy. The analysis is based upon an integration of corporate and individual shareholder considerations. The major conclusions are that a company should fully fund its pension plan and should invest the pension fund totally in bonds.     

中国内部控制的社会认同度研究

严格严密的内部控制制度是现代公司治理实现其基本目标的前提条件。对经营权的有效控制并使之与股东利益保持动态一致,只有在内部控制制度的全力保障下,才有可能成为现实。一个社会对公司治理、一个公司对自身治理的关注和重视程度,直接体现在其对公司内部控制制度的关注和重视上。本文从法律法规的制定、公司自身、会计师事务所和投资者四个角度考察了中国社会对内部控制的关注程度,借以对中国公司治理认同度问题做出大致判断。基于对内部控制关注程度的研究发现,公司治理在我国仍缺乏应有的认同,从而使得公司治理在我国的实践中可能只是一种徒具驱壳而缺乏实质内容和实在效果的时髦理论。     

CFO narcissism and audit fees: Evidence from listed companies in China

This paper examines the effects of CFO narcissism on audit fees in China. Using the size of CFO signatures in annual audit reports to measure individual narcissism, we find that CFO narcissism is associated with higher audit fees. We find empirical evidence that CFO narcissism significantly increases the audit fees of listed companies, and this effect is stronger in state-owned enterprises. This paper also explores the mediating effects of financial information and the engagement of prestigious Big-4 and Big-10 firms. The results show that companies with narcissistic CFOs have lower quality financial information and prefer more prestigious firms, which leads to higher audit fees. This research highlights the importance of CFO narcissism in corporate performance and provides new evidence that will be useful for listed companies that plan to hire senior executives.     

保险治理与公司违规——董事高管责任保险的治理效应研究

公司治理机制被认为是影响公司违规的重要因素,然而董事高管责任保险作为一种重要的外部治理机制,是否会影响公司违规尚未得到充分研究。本文研究发现董事高管责任保险显著降低公司违规概率,符合监督效应假说。经工具变量法、Heckman两阶段模型和倾向得分匹配法稳健性检验,上述结论依然成立。影响机制分析表明,董事高管责任保险显著降低了公司违规倾向,显著增加了违规后被稽查的概率,并降低了上市公司的第一类代理成本。对董事高管责任保险的监督职能做进一步分析发现:(1)董事高管责任保险对上市公司经营违规和领导人违规的监督效应更为显著,但对信息披露违规的治理作用并不显著;(2)董事高管责任保险发挥的监督职能与股权属性和保险机构股东治理存在替代效应,与外部审计师治理和董事长CEO二职分离存在互补效应;(3)分组检验结果表明,董事高管责任保险对公司违规的监督效应在外部监管环境较差或者公司内部信息透明度较高的情况下更加显著。本文既提供了保险合约通过公司治理渠道影响公司违规的证据,同时也表明保险机构通过董事高管责任保险为中国资本市场提供了一种较为有效的公司外部治理机制。     

Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans

I exploit sharply nonlinear funding rules for defined benefit pension plans in order to identify the dependence of corporate investment on internal financial resources in a large sample. Capital expenditures decline with mandatory contributions to DB pension plans, even when controlling for correlations between the pension funding status itself and the firm's unobserved investment opportunities. The effect is particularly evident among firms that face financing constraints based on observable variables such as credit ratings. Investment also displays strong negative correlations with the part of mandatory contributions resulting solely from unexpected asset market movements.     

高管团队内部治理与企业资本结构调整——基于非CEO高管独立性的视角

本文以2001-2017年A股上市公司为研究样本,实证检验了高管团队内部治理对企业资本结构的影响。研究发现:当企业负债不足时,高管团队内部治理效应能够显著提高企业(尤其是非国有企业)的负债水平,降低企业实际资本结构与目标资本结构的偏离程度。这种高管团队内部治理效应在第一类委托代理问题比较严重以及非CEO高管监督动机较强的企业中更加显著。作用机制分析表明,高管团队内部治理效应能够通过降低第一类代理成本来降低企业资本结构与目标资本结构的偏离程度。本文的研究结论为改善我国上市公司治理提供了新的思路,对于优化企业融资结构、深化金融供给侧结构性改革具有一定的启示意义。     

Corporate pension funding policy

What policy should a corporation adopt concerning the funding of a defined-benefit pension plan and the investment of the assets held in trust for the plan? Until recently, pension plans did not have to be insured, and some risk could be borne by intended beneficiaries. Federal legislation has now mandated such coverage. This paper analyzes corporate policy under three conditions which correspond, roughly, to the earlier situation (‘uninsure’ loans), the current situation (‘partially insured’ loans), and the situation required by law to be implemented in the future (‘completely insured’ plans). We show that if insurance premiums are set correctly, corporate policy in this area may not matter; otherwise the optimal policy may simply be that which maximizes the difference between the value of the insurance and its cost.     

Determinants of Real Estate Asset Allocations in Private and Public Pension Plans

Numerous studies have examined the factors associated with allocation of corporate and government pension-plan assets. Yet to date there has been no attempt to identify the sponsor-related conditions that affect the percentage of U.S. private and public pension-fund assets invested in real estate. The purpose of this article is to examine various asset-and liability-matching hypotheses regarding pension-plan asset allocations. Models are specified for both corporate and government defined-benefit plans that relate the characteristics of each plan to the percentage allocated to real estate investments. Our results confirm the existence of a significant size effect for both corporate and government pension plans, although we find mean levels of real estate allocation to be much lower than those suggested in previous real estate allocation studies. The article, however, contains some anomalous findings. In particular, our findings suggest that pension-plan sponsors do not hedge their real estate risk. We also find that pension-plan sponsors do not invest in real estate, as theory might suggest, to minimize the noise level in their pension liabilities.     

Allocating Shareholder Capital to Pension Plans

This article discusses the corporate challenge of providing retirement income to employees while limiting the costs and risks of pension plans to the companies themselves by addressing five main questions:

• ? What are the major issues and challenges surrounding pensions? Although the pension shortfalls have been the focus of attention, the author argues that the more serious concern is the risk stemming from the mismatch between pension assets and pension liabilities— that is, the funding of debt‐like liabilities with equity‐heavy asset portfolios.
• ? To what extent do the equity market and equity prices reflect the shortfall in value and the mismatch in risk? While the author describes some evidence of the market's ability to capture pension risk, analysts' P/E multiples and management's assessments of cost of capital may still be distorted by failure to take full account of the risks associated with pension assets.
• ? How should management analyze and formulate strategic solutions? Without offering specific solutions, the author presents a framework for analyzing the problem from a strategic perspective that can be used in formulating a company's pension policy. In particular, the article recommends that companies take an integrated perspective that views pension assets and liabilities as parts of the corporate balance sheet, and the pension asset allocation decision as a critical aspect of a corporate‐wide enterprise risk management program.
• ? If a company chooses to make a major change in its pension policy, such as a partial or complete immunization accomplished by substituting bonds for stocks, how would you communicate the new policy to the rating agencies and investors?
• ? What are the major issues to be thinking about when contemplating a change from a DB plan to a defined contribution, or DC, plan? The author argues that DC plans without some corporate oversight or responsibility for results are not a long‐term solution.

     

Systemic risk in non financial companies: Does governance matter?

The paper investigates the impact of four key corporate governance mechanisms - board, audit, compensation and ownership, and anti-takeover provisions - on the exposure and contribution to systemic risk of >400 US non-financial companies (NFCs) listed in S&P500 from 2005 to 2020. Our results show that in NFCs, unlike in banks, good corporate governance practices constrain both systemic risk exposure and contribution. We find a complementary effect between internal corporate governance mechanisms in reducing both the contribution and the exposure to systemic risk, and a substitution effect between internal and external governance practices in constraining the exposure of NFCs to systemic risk. Moreover, strong corporate governance practices are shown to constrain systemic risk both in steady-state conditions and in times of distress.     

Corporate Governance and Mergers and Acquisitions Performance in Banks: Evidence under the Special Regulatory Environment in Taiwan

In this study, we focus on the relation between bank governance and bank merger results under Taiwan’s special regulatory environment in 2000. Adopting governance variables (executive remuneration, managerial ownership, and board diversity), we find that managerial ownership is positively related to bank merger results and that board size is negatively correlated with bank mergers’ performance. This study supports sound governance mechanisms to prevent banks from pursuing a value-loss merger and acquisition (M&A). Our results offer the insight that internal bank governance structures have a bigger impact on the value effects from bank mergers. Thus, regulators may elevate the performance of bank M&As by enhancing corporate governance codes.