Corporate Governance When Founders are Directors

Abstract

We 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). We 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. Overall, the evidence suggests that boards with founderdirectors 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.

Executive pay and performance: the moderating effect of CEO power and governance structure

“…The moderating effect of CEO Power and CG structure on the PPS As previously explained, although a limited number of studies have examined the direct effect of CG on the PPS (Core et al, 1999;Cornett et al, 2009;Sanchez et al, 2010;Conyon & He, 2011, 2012Reddy et al, 2015;van Essen et al, 2015), studies examining the moderating (joint) effect of CG and especially CEO power on the PPS even within a developed corporate setting are rare (Li & Srinivasan, 2011;Wowak et al, 2011). Thus, in this section, we seek to contribute to extant literature by briefly ascertaining whether CEO power and CG structure have a moderating effect on the PPS within a developing corporate context.…”

“…Institutional shareholders also enjoy knowledge and information advantages over individual or less-informed investors, which can facilitate greater activism and managerial monitoring that can impact positively on the PPS (Hartzell and Starks, 2003;Ding et al, 2015). Also, the alignment of interest that is often associated with director ownership can have a positive effect on the PPS (Morck et al, 1988;Li & Srinivasan, 2011;Ntim, 2012a).…”

“…A major implication of this is that institutional shareholders in SA can exert their influence on executive pay not only through voting, but also with a direct voice (i.e., have "say-on-pay") on the RCOM/board. Further, Li and Srinivasan (2011) and Sanchez-Marin and Baixauli-Soler (2013) report that director ownership impacts positively on the PPS. Thus, and given the inherent pervasiveness of block, institutional and director shareholdings in SA (Ntim et al, 2012a, b), our third hypothesis is that:…”

“…Further and whilst a limited number of prior studies have taken into account the role of CG when estimating the PPS (Chahine & Goergen, 2011;Conyon & He, 2011, 2012, they have mostly done so by examining direct effect of CG on the PPS without considering any potential interactions that may exist between monitoring and incentive alignment mechanisms (Lin, 2005;Chen et al, 2011). By contrast, studies assessing the extent to which CEO power and CG features may affect the PPS are rare (Cornett et al, 2009;Finkelstein et al, 2009;Li & Srinivasan, 2011;Wowak et al, 2011). A major methodological implication is that failing to a sufficiently complex model of the PPS, that simultaneously examines the effects of both incentive alignment and monitoring mechanisms, can result in endogenous associations (Larcker & Rusticus, 2010;Gil-Alana et al, 2011).…”

“…This indicates that the PPS may differ according to country-level institutional features, as well as company-specific characteristics. In particular, contextual differences in the effectiveness of board and ownership structures, legal, regulatory and enforcement environment, and markets (e.g., capital, control, labour, product and services) can explain the differences in the level of PPS that is observed across different countries (Li & Srinivasan, 2011;Wowak et al, 2011;Sanchez et al, 2010;Sanchez-Marin & Baixauli-Soler, 2014). In the UK and US, for example, ownership is often widely held within a fairly strong internal governance structures, and cultural, legal, regulatory and enforcement environment.…”