What is the Relation (if any) Between a Firm’s Corporate Governance Arrangements and its Financial Performance?

Roberto Wessels, University of Groningen, Netherlands
Tom J. Wansbeek, University of Groningen, Netherlands
Lammertjan Dam, University of Groningen, Netherlands

We present a model to test the null hypothesis that firms organize their corporate governance arrangements optimally given the constraints they face. Following the literature, the model rejects the null if the conditional correlation between governance and performance is significantly different from zero. Our model provides a clean test of this hypothesis by controlling for measurement errors in all observed variables and avoiding simultaneous equation biases by casting our model as a reduced-form bivariate equation. We model governance, performance and the constraints on the firm’s investment decisions as latent variables. We estimate of the conditional correlation between our measures of corporate governance and firm financial performance to be statistically speaking equal to zero. This result therefore provides empirical support for the in-equilibrium view of corporate governance arrangements.

Keywords: corporate governance; optimal firm behavior; endogeneity; structural models; latent variables

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Say-on-Pay: Is Anybody Listening?

Stephani A. Mason, DePaul University, USA
Ann F. Medinets, Rutgers Business School, USA
Dan Palmon, Rutgers Business School, USA

There is an ongoing debate about whether executives receive excessive compensation, and if so, how to control it. Several countries have instituted say-on-pay rules (shareholders’ right to vote on executive compensation) to reduce excessive compensation. However, determining the effectiveness of say-on-pay is difficult because its tenets vary by country due to political, institutional, cultural, economic, and social factors. Policy issues like say-on-pay are complex, ill-structured problems without definitive assumptions, theories, or solutions. Existing say-on-pay research is inconclusive, since some studies find no change in CEO compensation around its adoption, whereas other studies show that say-on-pay lowers CEO pay or changes its composition. This paper chronicles the history of say-on-pay, compares its implementation by groups (e.g. shareholders-initiated versus legislated and binding versus advisory), discusses the complexities of using say-on-pay to address excessive executive compensation, and recommends future research directions.

Keywords: executive compensation; say-on-pay; compensation regulation; shareholder activism; shareholder proposals; corporate governance

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