Board-CEO Ties in the CEO Labour Market: Three Essays

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Copyright: Valentine, Andrew
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 An intimate knowledge of a company and its operations, gained over years of internal experience and training has been replaced by the need for proven strategic leadership and decision-making skills.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.
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