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Abstract
This thesis consists of three essays which examine the effects of company board of directors
(board)-Chief Executive Officer (CEO) ties in the externally appointed CEO labour market.
Over the last five decades, globalization and outsourcing have generated demand for CEOs
with generalist rather than company-specific skills. An intimate knowledge of a company and
its operations, gained over years of internal experience and training has been replaced by the
need for proven strategic leadership and decision-making skills. As a result, companies have
found it easier to acquire these skills in a globally competitive market rather than develop them
internally. An unintended consequence has emerged: these outsiders may not be well known
to a company’s board. This informational asymmetry can be problematic as a board typically
has limited information to assess a prospective outsider CEO. In this context, company
directors have the potential to help employing companies fill information gaps through their
past professional relationships with prospective outsider CEOs. Do prior relationships with
prospective outsiders assist boards to appoint transformational and highly productive CEOs?
Or do they serve directors’ own and prospective CEOs’ collusive interests at the expense of
the corporation and its investors? Does gender matter in the appointment and pay of a new
connected/unconnected CEO?
The three essays are predominantly empirical and draw on a working sample of 1,460
public company outsider CEO successions across 22 countries that occurred between 1992 and
2018. This working sample consists of data collected from several financial databases including
Bloomberg, BoardEx, Compustat, Datastream, Execucomp and Standard & Poor’s (S&P)
Capital IQ (CIQ).
The first essay investigates the effect of board-CEO ties on outsider CEO performance
as measured by return on assets (ROA), return on invested capital (ROIC), return on sales
(ROS) and cumulative market-adjusted total stock returns (CARs). It applies an empirical,
variance partitioning analysis that compares the performance of companies led by CEOs that
have previously worked with directors (Connected CEOs) to those led by CEOs with no prior
working relationships with directors (Non-connected CEOs). The results show that the benefits
of these relationships to companies are small and that they are more pronounced in institutional
environments where there are lower indicators of institutional and governance transparency.
As such, they confirm and extend the findings of the literature on CEO succession events in
three ways. First, they show that governance transparency places a moderating effect on the
role of prior board-CEO ties in outsider CEO successions. Second, the resultsshow that varying
governance transparency may play a role in CEO succession events globally. Finally, they
show that CEO-led company performance varies according to whether market- or
accounting-based financial metrics are used.
The second essay explores the effect of board-CEO ties on the awarding of new outsider
CEO compensation. Do board-CEO ties help companies offer compensation that serves their
interests and those of their investors? Alternatively, are these ties exploited by CEOs such that
they can negotiate compensation predominantly in their own interests against those of
investors? The empirical analysis focuses on first-year compensation awarded to the newly
appointed outsider CEOs and its key compositional elements: namely, the proportion of fixed
relative to variable (i.e. equity or performance-related) remuneration. Results show that in the
United States, United Kingdom, Canada and Australia, countries that share common
approaches to corporate governance, board-CEO ties are associated with CEOs being awarded
a greater proportion of their compensation as fixed and in cash rather than variable and at risk.
This outcome favours the CEO, but it may also be acceptable to investors consistently with the
hypothesis that board-CEO ties reduce informational risk on the new appointee, thus limiting
the need to rely on equity as compensation to align incentives. The results are also consistent
with the hypothesis that board-CEO ties empower CEOs to negotiate compensation in their
own interests in those countries where the presence of independent directors and dispersed
arms’ length institutional investors enables CEOs to bargain with boards over pay. They make
several contributions. First, they show that board-CEO ties matter in the awarding of new
outsider CEO compensation. Second, they highlight that institutional settings and corporate
governance-imposed boundary conditions exist to the role of board-CEO ties in reducing
information asymmetry and in the political process where CEO pay is negotiated. Third, the
results extend existing arguments for the role of information asymmetry in the awarding of
CEO compensation and the managerial power theory (MPT) or hypothesis through the linking
of several unique theoretical perspectives. The results demonstrate that institutional theory as
it applies in a wide-ranging international context is linked to interpreting the theories of
asymmetric information and CEO risk-taking and power in explaining the setting of new
outsider CEO compensation.
The third essay analyses the effect of board-CEO ties and board gender diversity on the
composition of CEO compensation, by gender. Despite overwhelming evidence of a gender
pay gap that disadvantages women across the entire labour market, women and men CEOs are
paid comparable overall levels of compensation. As the CEO compensation literature has not
fully explored whether there are gender differences in the composition of compensation, the
paper tests this hypothesis. A theoretical model is developed to account for empirical evidence
that women and men occupy different wage bargaining positions when negotiating
compensation with companies, in part because of differences in reservation wages. These
bargaining positions are important because they anchor wage negotiations and affect the level
and composition of compensation offered to a prospective CEO. The essay’s results show that
overall compensation for women and men is comparable; however, women CEOs in the United
States, United Kingdom, Canada and Australia receive a lower proportion of fixed
compensation to overall than men. This finding provides new insights into the existence of a
gender pay gap for CEOs, consistent with well-known gender differences in risk preferences
and bargaining positioning. In an extended analysis, the essay finds that greater board gender
diversity can help women close the gender gap in pay structure.
Building on this thesis’s contributions, future research could continue to explore how
corporate and institutional transparency affects the functioning labour markets, including those
for CEOs. Further research could also investigate more nuanced aspects of board-CEO ties
such as the impact of different board structures, including those with independent directors and
specific remuneration and nominations, and compensation committees, that recommend and
award CEOs.
