Reforming CEO pay: Focus on the right dimensions
Alex Edmans 11 September 2014
Executive pay is a controversial political issue with big implications for firm performance. Although public debate focuses on the level of compensation – or at best its sensitivity to firm performance – this column argues that the key issue is its temporal structure. A well designed payment structure can align CEO incentives with long-term shareholder value. The authors recommend lengthening the vesting period of equity and options.
Executive pay is a high-profile topic on which almost everyone has an opinion. Many shareholders, workers, and politicians believe that the system is broken and requires a substantial overhaul. Despite being well-intentioned, their suggested reforms may not target the elements of pay that are most critical for shareholder value and for society.
Financial markets Labour markets
executive pay, corporate governance, Executive compensation, CEOs
Unstash the cash! Corporate governance reform in Japan
Chie Aoyagi, Giovanni Ganelli 19 August 2014
Japanese corporations hold a very high level of cash on their balance sheets compared to those in other advanced countries. Such excessive corporate savings are likely to be holding back growth by preventing a more efficient use of resources. This column presents recent research showing that improving corporate governance would help unlock Japan’s corporate savings, exit deflation, and revive growth. Comprehensive corporate governance reform should be a key component of Japan’s growth strategy.
Cash holdings by Japanese companies are very high compared to other G7 countries. As it can be seen in Figure 1, the average ratio of cash and cash equivalent holdings to market capitalisation of Japanese listed companies during 2004-2012 was above 40%, compared to values in the 15-27% range in other G7 countries. Such high cash holdings coexist with a negative contribution of private investment to growth in the last few years and with falling real wages in the face of positive labour productivity growth for most of the last two decades.
Industrial organisation Microeconomic regulation
Japan, corporate governance, cash holdings
Corporate governance of banks and financial stability
Luc Laeven, Lev Ratnovski 21 July 2014
Bank distress during the recent crisis caused significant damage to the real economy. Appropriately, the policy response focused on stronger bank supervision and regulation. This column asks if there is a role for improvements in bank corporate governance. Based on the literature the authors suggest that better risk management, regulation of pay, and enhanced market discipline can help make banks safer. However, corporate governance cannot substitute for strong supervision: it can at best provide a helping hand.
Corporate governance is the practice of shareholders exercising control over managers so that they act in shareholders’ interests. In non-financial firms, this maximises firm efficiency. Such efficiency effects also exist in banks. For example, banks that face more active takeover markets are more cost-efficient (Brook et al. 1998).
Unlike non-financial firms, bank operations have another relevant dimension besides efficiency: risk. Banks are prone to risk-taking, due to:
corporate governance, bank regulation, systemic risk
Through the looking glass: CEO pay in China's listed companies
Alex Bryson, John Forth, Minghai Zhou 24 June 2014
Publicly traded companies are the engine behind China’s growth, which raises the question of how CEO compensation works under an interventionist state. This column presents an analysis of executive compensation in China and a comparison to the West. Chinese listed firms have incentive structures similar to those of the US; in this case, effective compensation policies seem to transcend political boundaries.
For many in the West China remains a paradox: a single-party Communist state with a vibrant, thriving economy set to challenge the US in the coming decade. Some have questioned the sustainability of the Chinese growth miracle in the absence of fully-fledged democracy and root-and-branch market reforms. But others point to state-sponsored decentralised market reforms over the past three decades as the key to China's success (Xu 2012).
Financial markets Labour markets
China, executive pay, corporate governance, Executive compensation, CEOs
Sustainable growth requires a long-term focus
Pascal Lamy, Ian Goldin 28 March 2014
Excessive short-termism is always a problem for policy, but the Global Crisis has brought it sharply into focus. This column introduces a report that discusses how a shift to longer-term solutions is necessary and possible. A key message is that businesses as well as governments need to take a longer-term view. The report identifies ways to overcome the current impasse in key economic, climate, trade, security, and other negotiations.
Just when we thought high-frequency trading couldn’t get any faster, a US communications company is developing a high-speed laser network between the New Jersey data centres of the New York Stock Exchange and the NASDAQ stock exchange, to shave an additional few nanoseconds off high-frequency trading times.
Environment Financial markets Global crisis International trade
growth, climate change, trade, environment, corporate governance, global crisis, high-frequency trading, short-termism, mark-to-market accounting
Say on pay in the UK: Modest effect, even after the crisis
Ian Gregory-Smith, Steve Thompson, Peter Wright 24 March 2014
In 2003, the UK adopted a ‘say on pay’ policy, whereby quoted companies’ executive compensation offers have to be put to a shareholder vote. This column presents evidence that this policy has had a relatively modest impact on executive pay. A 10% increase in compensation is associated with an increase in shareholder dissent against the proposal of just 0.2%. However, remuneration committees representing the more highly rewarded CEOs are quite sensitive to dissent, provided it exceeds a critical threshold of about 10%. Shareholders do not appear more anxious about pay since the crisis.
The extensive academic literature on the growth of executive compensation has tended to polarise around one of two positions: the rents-capture view and the optimal contracting approach. These analyses lead to very different positions on the value of a ‘say on pay’ policy:
Frontiers of economic research Labour markets Microeconomic regulation Poverty and income inequality
voting, UK, executive pay, corporate governance, Executive compensation
Good corporate governance is bad for bank capitalisation
Deniz Anginer, Asli Demirgüç-Kunt, Harry Huizinga, Kebin Ma 10 November 2013
Bank capitalisation determines the probability of a bank failure. This column discusses how bank’s corporate governance affects its capitalisation. Corporate governance, in which the bank acts in the interest of its shareholders, is defined as a good one. Such governance, however, can lead to lower bank capitalisation. It also has possibly negative implications for financial stability.
A failing bank can be defined as one that has insufficient capital. Bank capitalisation strategies thus are crucial in determining the probability of a bank failure. Confirming this, Berger and Bouwman (2013) find that higher levels of pre-crisis capital increase a bank’s probability of survival during a banking crisis. Beltratti and Stulz (2012) and Demirguc-Kunt, Detragiache and Merrouche (2013) find that banks that were better capitalised before the crisis had a better stock-market performance during the crisis.
corporate governance, bank capitalisation, banks
Stock market turnover and corporate governance
Alex Edmans, Vivian W Fang, Emanuel Zur 16 February 2013
The stock market is a powerful tool for controlling corporations’ behaviour. But which is better, a highly liquid market or a number of large blockholders? This column argues in favour of liquidity. Evidence suggests that policymakers should not reduce stock liquidity through greater regulation. While the idea that liquidity encourages short-term trading – rather than long-term governance – sounds intuitive, deeper analysis shows that liquidity is beneficial because it encourages large shareholders to form in the first place, and allows shareholders to punish underperforming firms through selling their stake.
The stock market is a powerful tool for controlling corporation’s behaviour. But what is best:
financial markets, liquidity, corporate governance, firms, stocks
Brain drain or brain gain? Evidence from corporate boards
Mariassunta Giannetti , Guanmin Liao, Xiaoyun Yu 03 January 2013
Is the brain drain reversing? This column argues that increasing numbers of foreign-educated and economic emigrants are returning home. Evidence suggests that the best of the bunch bring with them strong corporate governance practises and an appetite for internationalisation. Through this ‘brain gain’, the return of skilled professionals boosts emerging markets’ economies.
Development economists have long warned about the costs for developing countries of the emigration of the best and brightest that decamp to universities and businesses in the developed world (Bhagwati 1976). This brain drain has attracted a considerable amount of economic research.
brain drain, corporate governance, brain gain
The impact of corporate governance in financial institutions
Hamid Mehran, Alan Morrison, Joel Shapiro 06 April 2012
A recent op-ed by a former Goldman Sachs employee has led to an outcry over two important themes which came to the fore during the crisis, ie corporate culture and incentives. This column argues that neither regulation nor market forces has put either of these issues to rest. It adds that bank complexity and the too-big-to-fail policy both serve to undermine market discipline.
A recent op-ed by former Goldman Sachs employee Greg Smith has led to an outcry over Goldman Sachs’ perceived mistreatment of their customers. This illustrates two important themes in the financial sector, both of which came to the fore during the crisis, ie corporate culture and incentives. Obviously, neither regulation nor market forces has put either of these issues to rest. In this column, we look at both through the lens of corporate governance and we highlight the contribution of recent research to these topics.
corporate governance, banks, too-big-to-fail