A dual agency view of board compensation: the joint effects of outside director and CEO stock options on firm risk

Abstract

This paper contributes to multiple agency theory by examining how the compensation schemes awarded to outside directors and the CEO jointly affect firm‐level risk taking. Using data of the S&P 1500 firms from 1997 to 2006, we find support for earlier arguments that providing the CEO, the outside directors, or both with stock options increases risk taking. More importantly, we find that compensating outside directors with stock options has significantly stronger effects than CEO stock options. Finally, contrary to what one would expect, we find that these effects are mutually substituting; that is, if both the outside directors and the CEO are provided with stock option compensation, outside directors' incentives weaken the effect of the CEO's incentives on firms' risk taking. Copyright © 2010 John Wiley & Sons, Ltd.

Post-acquisition structuring of CEO pay packages: Incentives and punishments

“…The average board size was 8.44, a figure which is smaller than the one reported for American firms (Kroll et al, 2008;Musteen et al, 2010). The average CEO/COB duality was 0.26, which is consistent with prior Canadian studies indicating that only a small proportion of firms in Canada combine the two leadership positions (Bozec, 2005), but is in sharp contrast with the evidence gathered on American samples, where this number can be as high as 0.81 (Deutsch et al, 2011;Musteen et al, 2010). The average of unrelated directors was 73.46 percent, suggesting that Canadian boards are largely dominated by independent outsiders, a situation very close to US boards (Hayward and Hambrick, 1997;Sanders, 2001).…”

Utilizing the broader agency perspective for studying headquarters–subsidiary relations in multinational companies

“…Finally, nested structures entail cascading agency relations where an intermediary unit may simultaneously serve as principal for some and agent for others (Shapiro, 2005). Building on research on "dual agency" from the broader perspective (Deutsch, Keil, & Laamanen, 2011) may help understand better the difficulties in setting up and managing regional or divisional headquarters in MNCs (Nell et al, 2011).…”

Managerial Risk Taking

“…For example, the effect of CEO stock option grants is amplified when the BOD possesses more stock options or the CEO is also the chairperson but to a lesser degree when both conditions are present (O'Connor et al, 2006). Research conducted by Deutsch, Keil, and Laamanen (2011) finds that BOD stock option incentives influence board members' monitoring such that CEOs make more risky decisions than they would with only their own long-term incentives in place. Lim and McCann (2013), however, find a potential "house money effect" of board members' stock option compensation because it is over and above what they might have received as their normal compensation.…”