Inhoudsopgave
1. Introduction............................................................................................................................................... 2
2. Executive compensation............................................................................................................................. 2
3. Corporate Scandals and financial misconduct............................................................................................. 3
4. Board of directors I.................................................................................................................................... 3
5-6. Board of Directors II................................................................................................................................ 5
7. Shareholder activism I................................................................................................................................ 6
8. Shareholder activism II............................................................................................................................... 8
10. Payout policy......................................................................................................................................... 10
11. Passive ownership.................................................................................................................................. 12
12. Common ownership............................................................................................................................... 13
13. Ethical decision making.......................................................................................................................... 14
14. Guest Lecture “Green Finance”............................................................................................................... 15
15. Guest lecture “ESG Assurance”............................................................................................................... 16
16. CSR History, Measures and Criticism....................................................................................................... 17
17. CSR and shareholder’s interest............................................................................................................... 20
18. CSR and Firm value I: Investors............................................................................................................... 22
19. CSR and Firm value II: Customers and Employees....................................................................................23
20. Impact of CSR on Environment and Society.............................................................................................26
Blue: papers we need to know
Green: important BONUS assignments
Purple: Podcasts
,1. Introduction
Corporate Goverance: Large toolbox of internal and external mechanisms ensuring that the
firm is running according to its objective determined by shareholders/stakeholders.
Moral hazard: once a contract is signed, the agent starts to behave less responsibly/ in their
own interest
Adverse selection: when a prinicipal can’t distinguish between the “good and bad” guy.
Mitigate agency problems complete contracts!!
Agency costs:
- Monitoring costs costs of observing the agent and keeping a record of his
behavior
- Bonding costs cost in order to signal credibly to the principal
- Residual loss agent may not make decisions that maximize firm value
Agency problem:
- Perquisites (belongingen) consumption by management
- Empire building FCF problem; manager pursuing growth rate rather than
shareholders maximization
Expropriation of minority shareholders
- Tunneling: Firm A sells to Firm B at too low price
- Transfer pricing: Firm B overcharge for service/products to firm A
- Nepotism: Appointing family members to top management
- Infighting: Fighting among large (family) shareholders
2. Executive compensation
Compensation: base salary, bonus (backward looking easy to manipulate.), Long term
incentive plan (stock options), retirement plan, insurance
US: base salary is minor whereas equity pay is important
EU: Base salary is quite important
Germany: bonus payment is important
Directors unwilling to challenge CEO because: friendship ties, value connections, avoid bad
atmosphere.
Measuring sensitivity executive pay:
β: Measuring average pay performance
sensitivity.
Paper: Are CEOs rewarded for Luck? (Bertrand, Mullainathan, 2001)
Measurements: (1) Oil prices in the oil industry, (2) industry-level exchange rates for firms in
traded good sector, (3) industry mean performance as proxy for economic fortune.
2
, Skimming theory: CEO can take control of compensation process and set their own pay in
good times.
Methodology: estimate performance due to luck
Regress executive pay on luck-related performance
Regress executive pay on luck and governance
Findings:
- Luck plays a huge role in executive pay
- CEO is at least as much rewarded for luck as general
- Pay for luck is weakend by corporate governance (Even more if shareholders are on
the board)
o Skimming story more believable
- because pay for luck is mitigated by governance ruling out alternative explanation
How can good corporate governance reduce the ability of skimming? due to better
monitoring/supervision by the board.
3. Corporate Scandals and financial misconduct
Who monitors the firm? ALL stakeholders
After fraud is revealed, we find an AR about 20% 2 days after event. short sellers
anticipate on discovery of financial fraud and help to uncover it
Top detector fraud:
1. Analyst 5. Shareholder 9. SEC
2. Auditor 6. Industry regulator 10. Short-seller
3. Competitor/client 7. Law firm
4. Employee 8. Media
4. Board of directors I
Board responsible for:
- Hiring managers, measure performance
- Define/approve major business decisions
- Overseeing executive compensation
Duality: One person chairman & CEO
Advantage Duality Disadvantage Duality
Strong leadership Reduce board independency (less people to
monitor the CEO)
No rivalry between CEO/ Chairman Increasing CEO entrenchment
Single spokesperson problem Monitoring executive directors and leading
the task management
Conventional independence director is independent if she has neither financial nor
familial ties to the CEO or the firm.
Social ties could have a large impact on a director’s monitory and disciplinary capacity. (e.g.
CEO and board members studied together, military service together or same regional origin).
This could have a positive and negative effect.
3
1. Introduction............................................................................................................................................... 2
2. Executive compensation............................................................................................................................. 2
3. Corporate Scandals and financial misconduct............................................................................................. 3
4. Board of directors I.................................................................................................................................... 3
5-6. Board of Directors II................................................................................................................................ 5
7. Shareholder activism I................................................................................................................................ 6
8. Shareholder activism II............................................................................................................................... 8
10. Payout policy......................................................................................................................................... 10
11. Passive ownership.................................................................................................................................. 12
12. Common ownership............................................................................................................................... 13
13. Ethical decision making.......................................................................................................................... 14
14. Guest Lecture “Green Finance”............................................................................................................... 15
15. Guest lecture “ESG Assurance”............................................................................................................... 16
16. CSR History, Measures and Criticism....................................................................................................... 17
17. CSR and shareholder’s interest............................................................................................................... 20
18. CSR and Firm value I: Investors............................................................................................................... 22
19. CSR and Firm value II: Customers and Employees....................................................................................23
20. Impact of CSR on Environment and Society.............................................................................................26
Blue: papers we need to know
Green: important BONUS assignments
Purple: Podcasts
,1. Introduction
Corporate Goverance: Large toolbox of internal and external mechanisms ensuring that the
firm is running according to its objective determined by shareholders/stakeholders.
Moral hazard: once a contract is signed, the agent starts to behave less responsibly/ in their
own interest
Adverse selection: when a prinicipal can’t distinguish between the “good and bad” guy.
Mitigate agency problems complete contracts!!
Agency costs:
- Monitoring costs costs of observing the agent and keeping a record of his
behavior
- Bonding costs cost in order to signal credibly to the principal
- Residual loss agent may not make decisions that maximize firm value
Agency problem:
- Perquisites (belongingen) consumption by management
- Empire building FCF problem; manager pursuing growth rate rather than
shareholders maximization
Expropriation of minority shareholders
- Tunneling: Firm A sells to Firm B at too low price
- Transfer pricing: Firm B overcharge for service/products to firm A
- Nepotism: Appointing family members to top management
- Infighting: Fighting among large (family) shareholders
2. Executive compensation
Compensation: base salary, bonus (backward looking easy to manipulate.), Long term
incentive plan (stock options), retirement plan, insurance
US: base salary is minor whereas equity pay is important
EU: Base salary is quite important
Germany: bonus payment is important
Directors unwilling to challenge CEO because: friendship ties, value connections, avoid bad
atmosphere.
Measuring sensitivity executive pay:
β: Measuring average pay performance
sensitivity.
Paper: Are CEOs rewarded for Luck? (Bertrand, Mullainathan, 2001)
Measurements: (1) Oil prices in the oil industry, (2) industry-level exchange rates for firms in
traded good sector, (3) industry mean performance as proxy for economic fortune.
2
, Skimming theory: CEO can take control of compensation process and set their own pay in
good times.
Methodology: estimate performance due to luck
Regress executive pay on luck-related performance
Regress executive pay on luck and governance
Findings:
- Luck plays a huge role in executive pay
- CEO is at least as much rewarded for luck as general
- Pay for luck is weakend by corporate governance (Even more if shareholders are on
the board)
o Skimming story more believable
- because pay for luck is mitigated by governance ruling out alternative explanation
How can good corporate governance reduce the ability of skimming? due to better
monitoring/supervision by the board.
3. Corporate Scandals and financial misconduct
Who monitors the firm? ALL stakeholders
After fraud is revealed, we find an AR about 20% 2 days after event. short sellers
anticipate on discovery of financial fraud and help to uncover it
Top detector fraud:
1. Analyst 5. Shareholder 9. SEC
2. Auditor 6. Industry regulator 10. Short-seller
3. Competitor/client 7. Law firm
4. Employee 8. Media
4. Board of directors I
Board responsible for:
- Hiring managers, measure performance
- Define/approve major business decisions
- Overseeing executive compensation
Duality: One person chairman & CEO
Advantage Duality Disadvantage Duality
Strong leadership Reduce board independency (less people to
monitor the CEO)
No rivalry between CEO/ Chairman Increasing CEO entrenchment
Single spokesperson problem Monitoring executive directors and leading
the task management
Conventional independence director is independent if she has neither financial nor
familial ties to the CEO or the firm.
Social ties could have a large impact on a director’s monitory and disciplinary capacity. (e.g.
CEO and board members studied together, military service together or same regional origin).
This could have a positive and negative effect.
3
