"Just as bonuses (Latin for “good”) are paid out for good performance, maluses (“bad”) will be meted out if the bank subsequently makes losses or if the employee misses performance targets, UBS said. The maluses could wipe out all previously agreed share bonuses and two thirds of all cash bonuses under stringent new rules designed to align the interests of executives and traders with those of shareholders."
In the academic world, particularly among political scientists and economists, "capture" occurs when decision-makers such as corporate directors favor certain vested interests such as incumbent management, despite the fact that they purport to be acting in the best interests of some other group, i.e. the shareholders. The problem of capture and the theories associated with the idea of capture are most closely associated with George Stigler, and the free-market Chicago School of Economic thought. Among the more interesting and important theories of Stigler and other proponents of capture theory is the idea that capture is not only possible, in many contexts it is inevitable.Read the whale thing here
An academic study found corporate boards are more likely to be influenced by the recommendations of equity analysts following the 2002 rule change that separated the analysts from investment bankers. The study conducted by professors at the Paul Merage School of Business at the University of California in Irvine and at the Jesse H. Jones Graduate School of Management at Rice University in Houston, found that this increase in trust in analysts meant that boards are more likely than in the past to fire an under-performing chief executive based in part on analyst recommendations.The paper is titled CEO Dismissal: The Role of Investment Analysts as an External Control Mechanism, and it's authored by Margarethe Wiersema (of UC-Irvine) and Yan Zhang (of Rice University). It's a pretty good example of the way that regulatory changes affect the impact of various monitoring agents. My take on it is that post SOX, boards are much more likely to "yank the cord" on CEOs following a whole host of "bad news" events (earnings disappointments, product recalls, etc...). I bet that'd make for an interesting research topic for someone (offered free of charge - I'm not going to pursue it).
...It is more work and less play for today’s corporate directors, and, perhaps surprisingly, they seem to like it that way. A high level of job satisfaction is one of the trends identified in the 34th Annual Korn/Ferry International Board of Directors Study, which also found that directors serve on fewer boards but work longer hours.Read the whole thing (for free) here.
In addition, boards are actually smaller today. According to analysis of information reported in the proxies of 891 FORTUNE 1000 companies, we found that boards average 10 directors in size, with only two being full-time company employees. Women and minorities have been very successful in achieving directorships,
when viewed historically over three decades. But, the proxy data reflects that their numbers per board remain small and growth appears stalled.
Our survey shows that the placement of restrictions on the number of boards on which a director may serve remains fairly high in North America and Europe, and, perhaps not surprisingly given this fact, we found a loosening of mandatory retirement rules.
The image of a director’s job also may be improving. Recruitment remains challenging, especially for companies in North America, but boards appear to be having greater success recruiting directors with specialized skills.
Boston lobbyist Robert Crowe was key among the Suffolk University trustees who made David J. Sargent the highest paid university president in the nation in 2006, with a $2.8 million compensation package. Less than a year later, Sargent renewed a $10,000-a-month contract with Crowe's lobbying firm to represent Suffolk's interests in Washington.
This month, as controversy flares over Sargent's pay, the job of publicly defending it falls on George Regan, himself a new appointee to the Suffolk Board of Trustees as well as the beneficiary of a $366,000 annual contract with the university.
Read the whole thing here.
Is this necessarily a bad thing? Not really - it could be perfectly innocent, and it's not surprising that trustees of a university might have significant business ties to the university. After all, they tend to be prominent alumni with a long history with the school. But, when you have those ties, a pay package like that is going to get far greater scrutiny than it would otherwise. Or as Ricky Ricardo would have said, "they got some 'splainin to do".Click here for the whole article.Investors are often thrilled when well-known outsiders come in as white knights to run a company. But a growing body of evidence suggests that a company will perform better over the long run when it is led by a relatively anonymous insider.
This provides some support for Steve Bainbridge's theory of "director primacy", which argues that decisionmaking power should be vested in the board of directors.Shareholder delegation of the power to fire the CEO to the board of directors is central to corporate governance. While the board ideally acts as desired by shareholders, board entrenchment may insulate a poorly performing manager from shareholders agitating for her removal. The conventional 'costly firing' model of managerial entrenchment views this protection from shareholders as purely negative. Yet recent anecdotal evidence on managerial turnover suggests an alternative view of entrenchment: If shareholders misattribute poor performance to the CEO rather than to circumstance, then insulating management from the whims of shareholders may lead to better firing decisions. We propose that entrenchment has an inherent trade-off. We present a model that directly incorporates both sides of this trade-off, and generates a set of empirical predictions that we explore using recently collected data on governance statutes and on the dismissals of CEOs of large U.S. corporations. Our results demonstrate that governance is a very important mediating factor in the relationship between performance and firing. Furthermore, we find support for the 'misguided shareholder' view of entrenchment. Fundamentally this paper explores whether, in caving in to shareholder demands, boards act in the best interests of shareholders or simply respond to their whims: Do they do just do something, or do they do the right thing?
Despite the importance of outside directors and the considerable amount of time now required of them, directors' fees are not very high by the standards of people who generally take these positions—about $140,000 for the largest companies and a lot less for smaller ones. Perceived liability risk would not have to increase much to induce attractive boardroom recruits, such as chief executives of major public companies, to decline directorships.
Outside directors already overestimate the likelihood of out-of-pocket liability, and frequently cite the fear of liability as a reason not to serve. According to surveys we have conducted, even prior to the WorldCom and Enron settlements outside directors believed on average that out-of-pocket liability occurs in about 5 percent of shareholder suits. The actual number is far lower—only a few instances out of several thousand cases—but it is the perception of liability risk that affects directors' willingness to serve.
The WorldCom and Enron settlements will increase liability fears among outside directors. This would be a natural consequence of any high-visibility out-of-pocket payment. The perception of liability risk in the wake of WorldCom and Enron, however, is compounded by the political overtones associated with the lead plaintiffs' being public entities. Even if politics played no role in these cases, one can reasonably be concerned that political considerations unrelated to corporate governance will cause lead plaintiffs in the future to insist on personal payments by outside directors. Especially in light of the praise for the Enron and WorldCom settlements, others making litigation decisions on behalf of public entities may think "If Alan Hevesi made the outside directors pay in WorldCom, I'll look pretty bad if I don't do so as well."
click here for the whole article.
This a great example of the law of unintended consequences. I was recently reading (for the third time) a copy of Thomas Sowell's book Applied Economics: Thinking Past Stage One. In it, he recounts a story of his grad school days when one of his professors asked him what would happen in a given scenario. After his answer, the professor then asked, "then what would happen?" After more thought, Sowell gave his answer. Then, the professor asked, "And THEN what would happen?" It reminded me that actors in a system will always adjust their actions.
I was recently talking to a friend who serves on several boards. He mentioned that he's dropping off most of the boars he serves on because of this very issue.
In brief, the director primacy model views the corporation as a vehicle by which the board of directors hires various factors of production. The board of directors thus is not a mere agent of the shareholders, but rather is a sui generis body - a sort of Platonic guardian - serving as the nexus of the various contracts making up the corporation. Director primacy thus claims that fiat - centralized decisionmaking - is the essential attribute of efficient corporate governance.
For the whole article, click here (subscription required).The New York Stock Exchange and the Nasdaq Stock Market imposed the rules in the past 18 months to boost the number of directors who have no interest in overseeing the companies they serve beyond looking out for shareholders. But a review of 150 corporate filings by The Wall Street Journal highlights how exceptions and qualifiers in the rules have, in the view of some critics, limited their effectiveness.
Coca-Cola Co. counts billionaire Warren Buffett as an independent board member, even though he heads a company that does tens of millions of dollars of business with the soft-drink giant. Citigroup Inc. deems two directors independent, even though they have children employed by the financial giant. At BB&T Corp., in Winston-Salem, N.C., an attorney whose law firm works for the financial-services holding company heads the board committee that sets executive pay -- one of about 20 instances of "independent" directors employed by the public companies' outside law firms.
The rules, which cover companies listed on the NYSE and Nasdaq, were in part a response to fraud scandals at Enron Corp. and other companies that highlighted the risks of directors with financial relationships to their companies. Critics see such ties as potential conflicts, because directors might be tempted to allow their own financial interests to override shareholders'.
"... CEOs at firms where there is a relatively short back door distance between inside and outside directors or between the CEO and the members of the compensation committee earn substantially higher levels of total compensation (after controlling for standard economic determinants and other personal characteristics of the CEO and the structure for board of directors)..."Click here for the abstract.
