Commitment or entrenchment?: Controlling shareholders and board composition

This paper examines the determinants of board composition and firm valuation as a function of board composition in Taiwan – a country that features relatively weak protection for investors, firms with controlling shareholders, and pyramidal groups. The results suggest that there is poor governance when the board is dominated by members who are affiliated with the controlling family but good governance when the board is dominated by members who are not affiliated with the controlling family. In particular board affiliation is higher when negative entrenchment effects – measured by (1) divergence in control and cash flow rights, (2) family control, and (3) same CEO and Chairman – are strong and lower when positive incentive effects, measured by cash flow rights, are strong. Moreover, relative firm value is negatively related to board affiliation in family-controlled firms. Thus, the proportion of directors represented by a controlling family appears to be a reasonable proxy for the quality of corporate governance at the firm level when investor protection is relatively weak and it is difficult to determine the degree of separation between ownership and control.     

董事会断裂带与企业薪酬差距

高管与普通员工之间的薪酬差距不仅影响着企业的激励效率与企业价值,还关系到社会的公平与稳定。断裂带是Lau and Murnighan(1998)提出的假想的分割线概念,即可以将团队划分为多个小团体。以2005—2019年中国A股上市公司为样本,本文从董事会断裂带这一视角探索董事会中小团体的差异性对于薪酬差距的影响和后果。本文研究发现:(1)董事会断裂带的存在加剧了企业高管与普通员工之间的薪酬差距;(2)分解董事会断裂带的类型后,由深层特征形成的断裂带对于薪酬差距的影响高于由表层特征形成的断裂带;(3)区分行业竞争的程度后,公司所在行业的激烈竞争有助于缓解董事会断裂带造成的薪酬差距扩大;(4)从经济后果来看,董事会断裂带造成的薪酬差距对企业绩效具有显著的负向影响。本文的研究有助于深入理解企业薪酬差距形成的机制及其后果,同时对于完善我国董事会的监督机制也有一定的现实启发。     

An analysis of the effect of mandatory adoption of IAS/IFRS on earnings management

This paper examines whether mandatory adoption of international accounting standards, IAS/IFRS, by French companies is associated with lower earnings management. In addition, the impact of six factors that may be related to earnings management level are also considered: the independence and the efficiency of the board of directors, the separation of roles of CEO and Chairman of the board, the existence of an independent audit committee, the existence of block shareholders, the quality of the external audit and the listing on foreign financial markets.Based on a sample of 353 French listed groups relating to the period 2003–2006, our results show that the mandatory adoption of IAS/IFRS is associated with a reduction in the earnings management level. In addition, the independence and the efficiency of the board of directors, the existence of an independent audit committee, the existence of block shareholders, the quality of the external audit and the listing on foreign financial markets are important factors for enforcement of IAS/IFRS in France. Mandatory adoption of IAS/IFRS has decreased earnings management level for companies with good corporate governance and those that depend on foreign financial markets.     

Further empirical evidence on block transactions below the MBR: the Spanish market

There is a relatively unknown market for partial control or corporate influence in Spanish listed firms, where the control transaction size is below the legal threshold that triggers a mandatory tender offer, as this kind of deal looks for exercising some degree of control, but not a full control. The goal of this paper is to go further in its empirical analysis by exploring its distinguishing features, using as the criterion to define its transactions obtaining a seat in the board of directors. We find that these deals are mainly located in the segment of the market of large trades where the rules for private negotiations are easier to implement; the size of the block is relatively large and it is negotiated as a whole block. Besides, the most common buyer has no previous stake in the firm. We find no evidence that the buyers pay, in median, for a seat on the board of directors, but the variability of the premiums for those blocks is higher and shows that buyers that had no control position in the target firm pay more for being among largest shareholders (partial control) and less for not being among them (influence).     

Investor abilities and financial contracting: Evidence from venture capital

Using a large, new database of contractual provisions governing the allocation of cash flow rights in venture capital (VC) financings, we investigate how contract design is related to VC abilities to monitor and provide value-added services to the entrepreneur. We find that more experienced VCs, who have superior abilities and more frequently join the boards of their portfolio companies, obtain weaker downside-protecting contractual cash flow rights than less experienced VCs. Several pieces of evidence suggest that this relation is unlikely to be driven by selection effects. The results suggest that VCs with better governance abilities focus less on obtaining downside protections, which entail risk-sharing costs, and more on other aspects of the contract (such as obtaining board representation) during negotiations with entrepreneurs. The results also imply that previous estimates of the amount entrepreneurs pay for affiliation with high-quality VCs are overstated.     

Independent directors’ board networks and controlling shareholders’ tunneling behavior

As one of the channels by which board directors build important relationships, board networks can affect the governance role of independent directors. Defining director board networks as their connections based on direct ties they establish when serving on at least one common board, this paper explores the role of the network centrality of independent directors in restraining tunneling behavior by controlling shareholders in the Chinese capital market. Our empirical evidence shows that tunneling behavior by controlling shareholders is negatively related to the network centrality of independent directors and that this relationship is stronger when non-operating fund occupation is used as the measure of tunneling. The results of our study show that board networks can help independent directors to restrain tunneling behavior by large shareholders, which plays a positive role in corporate governance.     

Director capital and corporate disclosure quality

Conventional wisdom regarding board effectiveness emphasizes the role of board composition and incentives in alleviating conflicts of interest. We argue that board capital, however, may be a more important aspect of board efficacy since directors are the highest level agents of shareholders, meet infrequently, and shareholders have limited recourse for poor decision-making. In contrast, shareholders and the SEC can sue/prosecute directors for conflicts of interest or bias. One role of the board involves determining the depth and degree of the firm’s financial disclosures. To test the idea that high capital boards seek to provide greater disclosure quality to investors, we manually collect data on director attributes and apply factor analysis to measure the networking, educational, and experience capital of the board. The results indicate that board capital is positively related to disclosure quality, with differing key attributes for inside and outside directors. These results are robust to 2SLS and difference-in-difference approaches.     

CEO Compensation, Change, and Corporate Strategy

CEO compensation can influence the kinds of strategies that firms adopt. We argue that performance‐related compensation creates an incentive to look for overly ambitious, hard to implement strategies. At a cost, shareholders can curb this tendency by precommitting to a regime of CEO overcompensation in highly changeable environments. Alternatively shareholders can commit to low CEO pay, although this requires a commitment mechanism (either by the board of the individual company, or by the society as a whole) to counter the incentive to renegotiate upwards. We study the conditions under which the different policies for CEO compensation are preferred by shareholders.     

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.     

Confucian culture and the external pay gap

We examine the impact of Confucian philosophy on external pay gaps, and find that a Confucianist atmosphere is negatively associated with firms’ external pay gaps for both executives and employees. Mechanistically, the Confucian concept of “righteousness” reduces the self-interested motivation of management, in turn reducing executives’ external pay gap; “humaneness” causes management to focus on protecting employees’ rights and interests, benefiting employees’ compensation; and “honesty” improves information disclosure, reducing the external compensation gap for both executives and general employees. The inhibitory effect of Confucian culture on the external pay gap is greater in regions with weak formal institutions and non-state-owned firms, while foreign cultural shocks attenuate the Confucian influence. Finally, the Confucian culture-driven reduction of the external pay gap improves enterprises’ economic efficiency.     

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.     

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.     

Equity‐based incentives and shareholder say‐on‐pay

We study the relationship between CEO pay‐performance sensitivity, pay‐risk sensitivity, and shareholder voting outcomes as part of the “say‐on‐pay” provision of the 2010 US Dodd‐Frank Act. Consistent with our hypothesis, we provide evidence that shareholders tend to approve of compensation packages that are more sensitive to changes in stock price (pay‐performance sensitivity). Our findings are consistent with theoretical predictions that outside owners approve of equity incentives as a means of aligning managers' interests with those of shareholders. We also document that future changes to equity‐based incentives are related to voting outcomes and that shareholders incorporate CFO incentives into their votes. Collectively, these results provide evidence of the importance of equity‐based incentives from the perspective of those most concerned with firm value and of the effectiveness of say‐on‐pay as a governance mechanism.     

Entrenched controlling shareholders and the performance consequences of corporate diversification in Taiwan

The main purpose of this paper is to examine the value/performance effects of corporate diversification in an emerging market. Prior evidence on this issue is still mixed. The present study adds the role of entrenched controlling shareholders into this issue. We argue that when controlling shareholders have larger excess board seats control rights, they have higher ability and incentive to expropriate minority shareholders through corporate diversification. Using a sample of firms listed on the Taiwan Stock Exchange in 2003, we find that controlling shareholders’ excess board seats control is negatively associated with the market valuation of corporate diversification. Consistently, we also document that highly diversified firms run by more entrenched controlling shareholders have lower future financial performance than otherwise similar firms. Overall, our findings imply that corporate diversification is not necessarily harmful or beneficial for firms. We conclude that the agency problem arising from the excess board seats control rights owned by controlling shareholders is an influential factor leading to negative performance consequences with regard to firm diversification.     

Firm Characteristics,Shareholder Sophistication and the Incidence of a ‘First Strike’ Under the ‘Two Strikes’ Rule in Australia

To restrain ‘excessive’ executive pay, Australia introduced new legislation in 2011, commonly known as the ‘two strikes’ rule. This rule has predictable consequences for publicly listed firms and their directors. In this study, we investigate which firm characteristics are associated with the incidence of a ‘first strike’ under the two strikes rule. We find that the incidence of a first strike is positively associated with higher levels of CEO pay, lower ownership concentration, smaller firm size, higher level of institutional ownership and CEO duality. Additional analysis suggests that shareholders fail to differentiate between CEO pay, which is related to the economic characteristics of a firm, and the pay that is not related to firm characteristics. This finding suggests that, unlike US shareholders, Australian shareholders do not appear to have a sophisticated understanding of CEO pay structure.     

The Board's missing link

If a dam springs several leaks, there are various ways to respond. One could assiduously plug the holes, for instance. Or one could correct the underlying weaknesses, a more sensible approach. When it comes to corporate governance, for too long we have relied on the first approach. But the causes of many governance problems lie well below the surface--specifically, in critical relationships that are not structured to support the players involved. In other words, the very foundation of the system is flawed. And unless we correct the structural problems, surface changes are unlikely to have a lasting impact. When shareholders, management, and the board of directors work together as a system, they provide a powerful set of checks and balances. But the relationship between shareholders and directors is fraught with weaknesses, undermining the entire system's equilibrium. As the authors explain, the exchange of information between these two players is poor. Directors, though elected by shareholders to serve as their agents, aren't individually accountable to the investors. And shareholders--for a variety of reasons--have failed to exert much influence over boards. In the end, directors are left with the Herculean task of faithfully representing shareholders whose preferences are unclear, and shareholders have little say about who represents them and few mechanisms through which to create change. The authors suggest several ways to improve the relationship between shareholders and directors: Increase board accountability by recording individual directors' votes on key corporate resolutions; separate the positions of chairman and CEO; reinvigorate shareholders; and give boards funding to pay for outside experts who can provide perspective on crucial issues.     

The role of employer learning and regulatory interventions in mitigating executive gender pay gap

This paper examines the role of information and regulatory interventions in mitigating the executive gender pay gap. We find female executives receive about 34% less compared to equivalent males from the same cohort, which falls by half over tenure within the company, but remains systematically significant throughout. The gender pay gap is the highest for young female executives and in the financial sector. Both demand-side (board gender quotas) and supply-side (family policies) regulatory interventions are associated with a lower gender gap in executive pay. Board gender quotas are associated with lower gender pay gap for experienced female executives in the highest age bracket. In contrast, supply-side interventions are associated with lower gender pay gap for the youngest female executives. Our results have important implications for the relative effectiveness of public policies that aim to reduce gender imbalance in corporate leadership and pay.     

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.     

关系股东与融资约束——基于系族集团的经验证据

已有研究指出,控股股东的关系股东加剧了控股股东与中小股东间的利益冲突.关系股东是否具有积极的一面,研究中尚缺乏关注.本文以2003-2017年间附属于系族集团的A股上市公司作为研究样本,实证检验了系族成员关系股东是否以及如何影响融资约束.研究发现,相对于没有关系股东的系族成员,有关系股东的成员企业面临的融资约束更低,在考虑内生性问题后结论依然稳健.进一步研究表明,关系股东通过降低实际控制人与成员企业的信息不对称、促进内部资本市场资源优化配置,以及降低管理层代理成本从而缓解所在成员企业的融资约束.本文揭示了关系股东对融资约束的影响及作用机理,丰富了关系股东与内部资本市场经济后果方面的研究.     

Perceived importance of corporate boards in October 1987

This study provides empirical evidence from the U.S. firms that shareholders perceived corporate boards to be more important during than surrounding the October 1987 stock market crisis. The results indicate that during the crisis market-adjusted stock returns are negatively associated with CEO–chair duality, board size, and the presence of inside blockholders on board. The valuation effects of CEO–chair duality, percent of inside directors, and the presence of inside blockholders on board are stronger during than surrounding the crisis. The results are consistent with the view that corporate boards have valuation effects.