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Friday, May 19, 2006

SOX, Boards, Auditors, and CEO Pay

Here are a couple of governance related pieces batched up in one post:

Jim Mahar at FinanceProfessor.com highlights a New York Times article on the easing of SOX-related audit rules for smaller companies. From the article:
"The Securities and Exchange Commission moved yesterday to make audit rules that have angered many companies easier and less expensive to apply. But despite political pressure, the commission said smaller companies would eventually have to comply with rules governing their internal controls."
Like many, I'd have preferred exemptions to easing of the regulations, but half a loaf is better than none.

He also links back to a very nice scholarly article by Linck, Netter, and Yang (which he highlighted back in September): "Effects and Unintended Consequences of the Sarbanes-Oxley Act on Corporate Boards" (available on the SSRN) that provides one of the better analyses of post-SOX governance changes:
"We provide the first comprehensive study on the impact of the Sarbanes-Oxley Act (SOX) on corporate boards using broad sample evidence from more than 7,000 public companies as well as detailed analysis of smaller subsamples. Post-SOX boards are larger and more independent. Director workload and risk increased: audit committees meet more than twice as often post SOX as they did pre SOX, and Director and Officer (D&O) insurance premiums more than doubled. SOX also had a dramatic affect on the makeup of the corporate director pool: more post-SOX directors are lawyers/consultants, financial experts and retired executives, and fewer are current executives. These changes drove a large increase in the cost of the board, particularly for small firms. For example, small firms paid $3.19 in director fees per $1,000 of net sales in 2004, which is $0.84 more than they paid in 2001 and $1.21 more than in 1998. In contrast, large firms paid $0.32 in director fees per $1,000 of net sales in 2004, seven cents more than they paid in 2001 and ten cents more than in 1998. Overall, our evidence suggests that SOX had a dramatic impact on corporate boards and the cost thereof."
The Linck et. al. piece came out of Yang's dissertation, and she's done other work in the givernance area . She has a second paper out of her dissertation (also with Linck and Netter) titled "The Determinants of Board Structure" which is very much worth reading. I wouldn't be surprised to see both of these pieces in top-tier academic journals in the recent future.

Next, Tyler Cowen over at Marginal Revolution provides a different perspective on whether American CEOs are overpaid. He refers to his recent NYT column (nice writing gig, there Tyler) and cites work by Gabaix and Landier, titled "Why Has C.E.O. Pay Increased So Much?"

The "take-away" (at least for me) of this work is that "the six fold increase of CEO pay between 1980 and 1990 can be fully attributed to the six-fold increase in market capitalization of large US companies.

Nice to see contrary evidence. It gieve me some food for though (and ammunition for arguments when discussing "eeeevillll" CEOs).

Update( 5/21): Marginal Utility's Tom Bozzo provides some counter arguments that CEOs ARE Overpaid.

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