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How Do You Optimally Compensate Corporate Board Members?

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How Do You Optimally Compensate Corporate Board Members?. Why might the CEO (and other senior managers) act in the best interest of shareholders? External Control Mechanisms Capital markets. Mergers, tender offers, proxy fights. Large shareholders will monitor.

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Presentation Transcript
slide1
How Do You Optimally Compensate

Corporate Board Members?

slide2
Why might the CEO (and other senior managers) act in the best interest of shareholders?

External Control Mechanisms

  • Capital markets.
        • Mergers, tender offers, proxy fights.
        • Large shareholders will monitor.
          • Institutional investors (shareholder proposals).
  • Managerial labor market.
  • Product markets: Bankruptcy (not very efficient).
  • Shareholder lawsuits.
slide3
Why might the CEO (and other senior managers) act in the best interest of shareholders?

Internal Control Mechanisms

  • Self-interest: Managers also own shares.
  • Management compensation contracts.
  • Board of directors
    • Board members are elected by shareholders.
      • Is the Board nominating committee unduly influenced by the CEO?
    • Independent board members will monitor.

Bhagat-Black (Journal of Corporation Law, 2002).

    • Self-interest of board members: Board members own shares.
slide4
Sample: 1724 publicly-listed U.S. companies during 1992-1996.

Large firms: S&P 500

Annual sales (roughly) over $3 billion.

Small firms: S&P Small-Cap 600

Annual sales (roughly) under $0.4 billion.

slide6

Average Number of Shares Granted to A Corporate Director in U.S.

During 1992-1996

All Firms

Small

Large

300

.

250

200

Number of Shares Granted

150

100

50

0

1

2

3

4

5

Year: 1=1992, 5=1996

slide8

Dollar Value (*$1000) (Including Options) of Shares Owned by the Median Director in Small,

Mid-Size, and Large US Companies in 1993

3500

.

3000

2500

2000

Median

$1000

Mean

1500

1000

500

0

Small

Mid-Size

Large

slide14
Table 4, Panel A

Larger companies are more likely to compensate their directors with stock.

Table 4, Panel B

Smaller companies are more likely to compensate their directors with stock option.

Companies with greater growth prospects are more likely to compensate their directors with stock option.

slide15
What is the impact of directors’ ownership of stock and stock-option in disciplining CEOs of poorly-performing U.S. companies?
slide17
Table 8

Poorer performing companies are more likely to experience discipline-related CEO turnover.

slide19
Table 9 Regression Result

Poorer performing companies are more likely to experience discipline-related CEO turnover,

especially as the median director’s ownership of (dollar value) stock and stock-option increases.

slide20
Takeaways
  • Larger companies are more likely to compensate their directors with stock.
  • Smaller companies are more likely to compensate their directors with stock option.
  • Companies with greater growth prospects are more likely to compensate their directors with stock option.
  • When board members own more stock and stock-option, they are more likely to discipline the CEO of a poorly-performing company.
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