Bottom-Up Corporate Governance

Abstract

In many instances, "independently-minded" top-ranking executives can impose strong discipline on their CEO, even though they are formally under his authority. This paper argues that the use of such a disciplining mechanism is a key feature of good corporate governance.We provide robust empirical evidence consistent with the fact that firms with high internal governance are more efficiently run. We empirically label as "independent from the CEO" a top executive who joined the firm before the current CEO was appointed. In a very robust way, firms with a smaller fraction of independent executives exhibit (1) a lower level of profitability and (2) lower shareholder returns after large acquisitions. These results are unaffected when we control for traditional governance measures such as board independence or other well-studied shareholder-friendly provisions.

Do Chief Executives’ Traits Affect the Financial Performance of Risk‐trading Firms? Evidence from the UK Insurance Industry

“…We select CEOINT (a dummy IV capturing whether a CEO was an internal (1) or external (0) appointment) as an instrument for our CEO power proxies. Compared with internal candidates for the top job, CEOs appointed from other firms are likely to be at an information disadvantage and less likely to have established close social ties with incumbent board members (Landier et al, 2012). Following Serfling (2014), we select the natural logarithm of the consumer price (CPI) of the CEO's birth year (LOG CPI(BIRTHYEAR) it ) as an IV for CEO age.…”

“…Nowhere are financial performance indicators so central to corporate governance and the realization of strategic activities than in firms engaged in the trading, bearing and management of extreme risks such as those operating in the insurance industry (Landier et al, 2012). Insurance is a highly specialized and technically complex commercial activity (e.g.…”

CEO power, product market competition and the acquisition motive for going public

“…For instance, Bebchuk et al (2011) find that powerful CEOs are associated with lower profitability and firm value. Similarly, Landier et al (2013) find that acquiring firms with powerful CEOs are associated with lower profitability and weaker shareholder returns. On the other hand, research suggests that CEO power is associated with greater variance in firm performance, with powerful CEOs being associated with the best and worst performing firms (Adams et al, 2005).…”

“…Research suggests that whether CEO power is beneficial or harmful to the firm, is contextual and depends among other factors, on the extent of competitive threats faced by the firm (Li et al, 2014;Han et al, 2016). For instance, CEO power may be beneficial in situations where firm performance depends on the speed with which management can respond to competitive threats and implement changes necessary to secure a competitive advantage (Landier et al, 2013;Li et al, 2014). Further, while the agency costs associated with CEO power are likely to be mitigated in competitive markets due to its disciplinary impact, in less-competitive markets, these costs are likely to outweigh any potential benefits of faster decision-making, thereby adversely affecting firm performance (Li et al, 2014).…”

“…For instance, research suggests that whether CEO power is beneficial or harmful is contextual and depends among other factors, on the extent of product market competition (Li et al, 2014;Han et al, 2016). For instance, studies suggest that CEO power positively influences firm value in competitive industries (Landier et al, 2013;Li et al, 2014). On the other hand, Han et al (2016) find that during industry downturns, powerful CEOs perform worse than other CEOs particularly for firms in highly competitive environments.…”