SRI engagement and monitoring was a major theme during my first day at the 28th Annual SRI Conference this year (#AllinForImpact), although my 1st impressions were interrupted by the issuance of SEC SLB 14I, as previously noted. SRI has grown more than 13% a year since 1995 (when I started this blog) and now total over $8.7 trillion in assets. No longer just focused on screening or even ESG, SRI has become a mainstream investment strategy AND it holds the power to address our most pressing societal challenges in a way the public sector simply cannot. Continue Reading →
Tag Archives | monitoring
The Deal Professor, Steven Davidoff Solomon, recently discussed voting rules aimed at fostering “long-termism” in his post, France Answers Hostile Bids With the Two-Vote Share. While less damaging than dual-class shares issued at the IPO stage that continue ad infinitum, importing such a scheme to the United States would reinforce the behavior of idiots. Continue Reading →
Buying and holding stocks and bonds for the long term and maintaining a diversified portfolio are still the smartest strategies for the average investor, says Vanguard founder Jack Bogle in answer to Mark Cuban and other critics of these traditional approaches. In the Big Interview with Journal columnist Jason Zweig, Bogle takes aim at the culture of market speculation. Betting on long odds, he says, “doesn’t pay off very often.” Continue Reading →
The July 2014 edition of Corporate Governance: An International Review contains four research papers, all dealing with firms outside the US and UK, which usually get most of the attention. Still, insights from these studies could help efforts around the globe, including the US and UK.
Monitoring in Japan
Feng Li and Suraj Srinivasan examine CEO compensation, CEO retention policies, and M&A decisions in firms where founders serve as a director with a non-founder CEO (founder-director firms). They find that founder-director firms offer a different mix of incentives to their CEOs than other firms. Pay for performance sensitivity for non-founder CEOs in founder-director firms is higher and the level of pay is lower than that of other CEOs. CEO turnover sensitivity to firm performance is also significantly higher in founder-director firms compared to non-founder firms. Bottom-Line: Boards with founder-directors provide more high powered incentives in the form of pay and retention policies than the average U.S. board. Stock returns around M&A announcements and board attendance are also higher in founder-director firms compared to non-founder firms. (SSRN-Corporate Governance When Founders are Directors by Feng Li, Suraj Srinivasan, 1/8/2011)
CEOs in founder-director companies have higher pay-for-performance sensitivity (PPS) than CEOs in non-founder firms. For non-founder firms, the average CEO’s annual total compensation including the change in value of stock and option holdings increases by about $5.20 for a $1,000 increase in the market value of the firm. For firms with a founder-director the additional PPS is $2.24. In addition, after controlling for other economic determinants of pay level, CEOs of founder-director firms receive lower pay than CEOs in non-founder firms. We interpret this as lower excess pay due to better governance in these firms (Core et al., 1999). In terms of economic magnitude, CEOs of founder-director firms, on average, receive $329,000 less than CEOs of non-founder firms in annual compensation after controlling for other economic determinants of pay.
Second, CEOs in founder-director firms are more likely than those in non-founder firms to be replaced for poor performance. A decline in performance from the top to bottom decile in performance increases the likelihood of a forced CEO turnover by almost 8.3% more in founder-director firms compared to non-founder firms. Lastly, we find that the three-day M&A announcement return is 1.29 % higher for founder-director firms than other firms…
Results suggest that the founder’s role extends to more effective board level monitoring and not just to superior executive performance as documented in prior research. The higher PPS, lower excess compensation, and higher turnover-performance sensitivity are uniquely associated with founder-directors.
Cristina Cella investigates whether institutional investors influence firms’ investment policies. By virtue of their significant ownership stakes and investment horizons, long-term institutional investors should closely monitor management and thus reduce agency costs.
Using a panel dataset of 2,511 U.S. manufacturing firms that went public in 1980-2003 and using several econometric specifications, she find that firms with long-term institutional investors tend to have lower capital expenditure relative to widely-held firms. Further, investment is reduced precisely in those firms that suffer mostly from over-investment. In fact, the presence of a large blockholder is associated with a reduction of capital expenditure in firms that (a) invest too much with respect to their growth opportunities, financing constraints and industry affiliation, (b) have few investment opportunities but large availability of cash-flows.
Most importantly, she finds that reduction in capital expenditure in these firms leads to improvements in firms’ profitability in subsequent years, confirming that institutional investors’ actions aimed at removing over-investment are value-enhancing. Cella concludes that an important area of further research would be to explore the circumstances of when investors prefer to use their voice, and comparing the effectiveness of voice versus exit. (Institutional Investors and Corporate Investment, 2/15/ 2010, available at SSRN)