infonet-economy

This paper provides empirical evidence on the relationship between compensation types (salary, bonus, stock options, and shares) and the propensity of top executives to leave the organization in high and low discretion contexts. Drawing on the behavioural decision theory and behavioural economics it is hypothesized that agents attribute greater importance to fixed pay than to variable pay because fixed pay is directly tied to agents' standard of living while variable pay is perceived as windfall gain for "instant endowment". In the same vein, the paper provides empirical evidence on the "crowding out" of intrinsic motivation, norms of fairness and reciprocity by changes in monetary incentives. Finally, the paper explores whether the "crowding out"- effect is contingent on the discretion context and company performance.

The paper attempts to explore the role of MNCs in the convergence of corporate governance systems. By introducing a theoretical model that accounts for three levels of analysis (systems, institutions, actors) the paper extends previous work on system convergence which concentrated either on firms and actors or on systems of corporate governance. It is argued that foreign subsidiaries with a low degree of autonomy enhance system convergence by introducing corporate governance practices common in the corporate governance system the headquarter of the MNC is located in. Mimetic processes among companies in the country of the subsidiary boost the spread and the institutionalization of corporate governance practices and, therefore, heighten the chance of system convergence.

CEO turnover in the event of poor performance is a matter of efficiency of the company's internal governance mechanisms. Namely, acoording to agency theory assumptions in companies that exhibit efficient board and ownership structures poorly performing CEOs will eventually be replaced.

The basic hypothesis states that poorly performing CEOs will eventually be dismissed. More precisely, it is assumed that the relationship between company performance and forced departures will be negative and significant while there is supposed to be no relationship between natural turnover and company performance.

Company performance can be operationalized in terms of market based or in terms of accounting based performance. Most studies were able to corroborate the negative relationship to turnover for both measures. However, accounting based performance measures by some scholars are seen to be more discretionary and therefore less reliable as compared to stock market based measures of performance.

Further variations of performance measures concern the relative performance evaluation (RPE) Hypothesis. Namely, as some scholars argue, company performance can only be assessed relative to companies that face the same external shocks. Therefore, accurate performance measures are those which account for e.g. industry or geographic differences.

Based on agency theory, corporate boards that are not dependent on the incumbent CEO are assumed to be better monitors of the CEOs actions. Therefore, higher board independence is hypothesized to be associated with more efficient monitoring. However, research on the matter has led to rather inconclusive results as not all studies were able to corroborate the positive relationship between board independence and forced CEO departure.

As a consequence, it remains to be examined whether there are other features than board member characteristics that are influential in the monitoring activity of corporate boards. Namely, corporate boards do not act as a homogeneous whole. Rather, most decisions are made in board sub-committees which are specialized in certain tasks and which unify board members that are experts in certain topics. From the point of view of CEO turnover two committees seem to be particularly important in evaluating the CEO. The one is the nomination committee and the other is the audit committee. Nomination committee members are responsible for the appointment-assessment-dismissal process of top executives. Audit committees on the other hands, are concerned with the companies financial health and the integrity of financial reports. As they collect information on the decision initiatives and performance of top managers they are supposed to provide transparency and exert influence on the CEO departure decisions.

Corporate owners who have a large stake in the company are supposed to have incentives to vigilantly monitor the actions of the CEOs. However, not all owners share the same preferences and not all owners behave the same.

Institutional owners and large blockholders are supposed to have a positive effect on the internal monitoring of the CEOs. That is, most studies find a positive relationship between either the presence or the level of institutional shareholdings and large blockholder ownership.
Similarly, some studies also find that the probability of turnover is associated with ownership of directors. That is, scholars find that there is a negative relationship between equity ownership by officers & directors and the probability of CEO departure in the event of poor company performance.

On the other hand, managerial ownership although supposed to align the interests of managers and shareholders is found to lead to a lower sensitivity of turnover to performance. This finding has been termed in the literature "the managerial entrenchment hypothesis" or "the negative ownership effect".

Technically, the effect of ownership structure on CEO turnover and/or the sensitivity between CEO turnover and performance has been measured as either the presence of a certain ownership type (dummy variable) or as the level of ownership concentration (ownership percentage).
However, there are two issues that remain to be tested. Firstly, the influence of owners might not only depend on the percentage of their ownership but also on their representation on corporate boards. Owners that have an own board representative might be more influential than corporate owner with a high level of ownership but no own board representative.
Furthermore, the preferences of owners might not only differ across ownership types but also across nationalities of the various ownership groups. Typically, owners with an Anglo-Saxon background are supposed set different priorities in terms of performance and to scrutinize the actions of the CEOs more severely than domestic owners.