Governance News from Manifest - ISSN 1745 - 1132

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Corporate Governance Reform and CEO Compensation: Intended and Unintended Consequences

 

Voluntary vs. Mandatory Corporate Governance: Towards an Optimal Regulatory Framework

 

Executive Compensation, Corporate Governance, and the Partner-Manager

 

Shareholders’ Remedies: The Choices of Objectives and the Social Meaning of Derivative Actions

 

Corporate Governance & Investor Concerns

 

Comply or Explain: Market Discipline and Non-Compliance with the Combined Code

 

Academic Roundup

Manifest-I presents a summary of recently released academic papers on international corporate governance and corporate social responsibility issues.

 

Corporate Governance Reform and CEO Compensation: Intended and Unintended Consequences, by Ella Mae Matsumura and Jae Yong Shin, University of Wisconsin – Madison – Department of Accounting and Information Systems. Journal of Business Ethics.

This paper outlines the structure of executive compensation and details some criticisms of it, along with raising other relevant ethical issues. The authors then discuss what previous research suggests are likely intended and unintended consequences of some widely proposed executive compensation reforms. This includes recommendations requiring: the greater independence of compensation committees; executives to hold equity in the corporation; the greater disclosure of executive compensation; increased institutional investor involvement in corporate governance; and for firms to expense stock options on their income statements.  The paper outlines ethical issues related to the reform of executive compensation and proposes possible areas for future research.

 

Voluntary vs. Mandatory Corporate Governance: Towards an Optimal Regulatory Framework, by Anita I Anand, Queen’s University (Canada) – Faculty of Law. Delaware Journal of Corporate Law, Vol. 31, No. 1.

This paper compares mandatory to voluntary corporate governance regimes. The paper takes the view that firms have incentives to voluntarily adopt enhanced corporate governance and disclosure practices, although at the same time recognises that there are advantages to a mandatory governance regime.

The author concludes that the preferred regime is a hybrid one, in which the adoption of best practice governance is voluntary but disclosure of corporate governance practices is mandatory. Such a regime, argues the paper, would balance the costs to all stakeholders, particularly issuers and investors. A cost analysis of different regimes should weigh the level of expected compliance with the total costs of the regime adopted by regulators, the paper argues. A partially mandatory structure, it is suggested, is likely to produce a high level of compliance with a defined set of practices at lower cost than an entirely compulsory regime. Although it is possible a wholly mandatory structure could produce slightly better compliance, the paper argues, its costs are likely to be much higher.

 

Executive Compensation, Corporate Governance, and the Partner-Manager, by Richard A Booth, University of Maryland School of Law. University of Illinois Law Review.

This paper takes issue with the assumption that the chief executive of a publicly traded company is ultimately an employee of the shareholders. The paper suggests that if one views the company as a partnership between management and stockholders, the fact that a substantial proportion of gains is paid to management does not seem problematic.

The article gives a brief overview of corporate theory and practice over the last 40 years and then attempts to explain why executive compensation has come to rely so heavily on stock options. Chief executives have come to bear increasing levels of risk because much of their wealth must be tied to the fortunes of a single company, while stockholders’ investments have become increasingly diversified and so increasingly immune to company-specific risk, the paper argues. Chief executives therefore demand the prospect of greater returns, argues the paper, and have come to insist on returns more consistent with those of a partner than an employee.

In addition to this, the paper suggests that in aggregate chief executive compensation has been remarkably stable over the last 20 years, and that unlike other forms of compensation stock options are self-regulating and so inherently less likely to cause concern than other fixed levels of compensation.

 

Shareholders’ Remedies: The Choices of Objectives and the Social Meaning of Derivative Actions, by Arad Reisberg, University of Oxford, Pembroke College; University College London – Faculty of Laws. European Business Organization Review, Vol. 6, 2005.

Shareholder litigation is neither the initial nor primary protection against managerial misconduct, and this paper considers what role should be assigned to shareholder litigation that may, in turn, enhance the capabilities of other corporate governance mechanisms of accountability.

The paper begins by analysing the merits and disadvantages of shareholder litigation, and considers whether its primary purpose is to deter misconduct or simply compensate shareholders for wrongdoing. The public image of shareholder litigation is then examined from the stance of determining whether the perception enhances or detracts from such actions being understood as a positive social force. The paper also considers what actions can be taken to address the negative effects of shareholder litigation, so that the action is more likely to be viewed as an instrument that affirms good corporate governance practice.

 

Corporate Governance & Investor Concerns, by Dr Najah Attig, assistant professor of economics at the Sobey School of Business, Saint Mary’s University.

This paper is the recipient of the fifth annual Barclays Global Investors (BGI) Canada research award. Rajiv Silgardo, president and chief executive of BGI Canada, said the corporate scandals of the past few years have meant that it is vital for investors to understand the governance structures of equity issuers. The paper fosters a better understanding of the impact of different control structures in the Canadian equity market, said Silgardo.

The research paper argues that public firms in Canada are vulnerable to inter-shareholders agency problems. The author documents the use of control pyramids, multiple class shares, family management, excess control over commensurate investment, and the number of tiers and firms in the ownership chain that might be used to benefit ultimate owners and expropriate small investors. The paper argues that the use of these features has a negative impact on corporate value, stock liquidity and the communication of earnings.

 

Comply or Explain: Market Discipline and Non-Compliance with the Combined Code, by Iain MacNeil and Xiao Li, Univeristy of Glasgow School of Law.

In this paper the authors examine the nature of the explanations given by companies with an established record of non-compliance under the “comply or explain” principle of the UK’s Combined Code on Corporate Governance. Also considered is the role of the market in permitting deviations from the Code. Particular attention is given to share price performance as a factor in non-compliance, and the extent to which investors appear to rely on this indicator rather than engage in the more difficult task of judging the relative merits of the Code against alternatives.

The authors approach is based on the premise that financial performance may be a determinant of corporate governance structure, rather than vice versa. The paper argues that there is a strong link between share price performance and investors’ tolerance of non-compliance with the Code. 

 

June 2005

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