Structural exchange pays off, reciprocity, cycles and board compensations in UK firms


Speaker:Olivier Godechot, Paris Institute of Political Science
Date: Wednesday 24 February 2016
Time: 14:30 - 16:00
Location: Kolade Teaching Room, Building One

Further details

Levi-Strauss’s structural theory of kinship has shown that elementary rules of kinship are a way of banning incest, of exchanging women and of organizing structural solidarity among the clans of a same community. This solidarity can be achieved through three structural forms: restricted exchanged (2-cycles), delayed restricted exchange (delayed 2-cycles) and generalized exchange (3-cycles and more). We investigate whether those three forms of structural exchange may also produce some outcomes in contemporary societies, by studying cycles in board interlocks and its consequence on board pay. We study three forms. 1) Direct reciprocity: two executive board members of two firms sit as non-executive board members of one another’s firm (i.e. “cross directorship”); 2) Delayed reciprocity: one executive board member of firm A becomes a non-executive board member of firm B at least one year after one executive board member of firm B previously sat as a non-executive board member of firm A, 3) 3-cycles and more: one executive board member of firm A sits as a non-executive board member of firm B who has one executive board member who sit on board of firm C as a non-exec, who has one executive board member who sit on board of firm A. We argue that those three forms are ways of subverting the classical hierarchy of corporate governance according to which non-executive board members are meant to monitor executive board members and have them act solely in favour of shareholders. Hence this structural solidarity may profit directly to those who are tied by such links. We study 2000 boards in UK each year from 2000 to 2010. We show that those cycles, although not very frequent, are more frequent than those calculated by chance and that direct reciprocity, delayed reciprocity and 3-cycles have a positive impact on board member and CEO pay, especially on the base salary. There’s no impact of 4-and-more-cycles. In 2003, the Combined Code on corporate governance was introduced which discourages such direct reciprocity. The code was revised in 2005 and it placed greater emphasis on the need for independent directors. We find, post 2005, that this form of tie disappears among FTSE 350 firms but remains in small firms. Its impact on pay also disappears. The positive impact of other indirect ties tend to remain (delayed and 3-cycles) and some firms tend to switch to these less visible form of exchange.