FMV Cluster: Corporate Governance Research Day

Research Cluster

Speaker:Michel Magnan and Jo Iwasaki
Date: Monday 23 April 2018
Time: 10:00 - 19:00
Location: Matrix Lecture Theatre, Building One

Further details

Michel Magnan, Professor of Accounting, Stephen A. Jarislowsky Chair in Corporate Governance, Concordia University, Montreal, Canada
“Is Executive Compensation Just or Unjust? An Efficiency Perspective”

The justification underlying most executive compensation packages is that, by providing sizable rewards for good performance, incentive plans (both cash-based such as bonuses or equity-based such as stock option or share awards) are conducive to executives making the decisions and taking the actions that will ultimately translate into value creation in the market. Such a definition of just executive compensation reflects an efficiency view that is quite widespread in governance circles. Our analysis purports to revisit the conceptual and empirical underpinnings of the efficiency view of executive compensation by adopting a societal perspective. Conceptually, it is hard to claim unequivocally that actual levels of executive compensation are justified on the basis of efficiency. Empirically, evidence drawn from macro-economic data suggests that high levels of executive compensation, which are driven by performance-based incentives, do not appear to produce expected economic outcomes in terms of firms’ efficiency. For instance, rising executive compensation in the Anglo-Saxon countries (United States, United Kingdom, Canada, Australia and New Zealand) since the mid-1970s does not correlate with a rise in gross domestic product (GDP) per capita. In addition, productivity growth has stalled in most Western economies since the beginning of the current century. We conclude by raising and discussing alternative explanations.

“Risk and the role of Leadership”
Jo Iwasaki, Head of corporate governance, Professional Insights, ACCA

Jo will present findings from ACCA's latest report Risk and the strategic role of leadership. This report illustrates the current practice of board oversight of risk management, based on in-depth interviews with executive and nonexecutive directors. It highlights good practices but also challenges that leaders face and considers way forward.

“Pensions risk, firm risk and the role of CEOs”
Vicky Kiosse, Associate Professor of Accounting, University of Exeter Business School

We examine whether systematic equity risk reflects the risk of defined benefit pension plans in the U.K. The prior literature finds that equity risk reflects the risk of the firm’s pension plan in the U.S. (Jin et al., 2006). We examine whether equity risk, as captured by beta, reflects the risk of a firm’s defined benefit plan in the context of the unique institutional environment and the different accounting standards governing pensions in the U.K. In particular, the existence of the Pension Protection Fund in the U.K., which compensates members of defined benefit pension plans in the event that a company becomes insolvent and provided there are not sufficient assets in the plan and the risk-based levy it charges firms sponsoring pension plans, is likely to have an impact on the relationship between firm risk and pension risk. In addition, defined benefit plans are set up in trusts in the U.K. Further, IAS 19 the accounting standard governing pensions in the U.K. since 2005 provides companies with a choice about the recognition of actuarial gains or losses (i.e., immediate recognition in OCI / P&L or the corridor method) and of pension assets and obligations. More recently, under the revised accounting standard IAS 19R firms are required to recognize actuarial gains or losses immediately in OCI since 2013 and the net pension asset or liability on the balance sheet. The diversity in the recognition of pension-related amounts over time in the U.K. suggests that examining the relationship between firm risk and pension plan risk is interesting. Further, we extend the prior literature on the relation between firm risk and the risk of defined benefit plans by examining the potential role of CEOs. In addition, as mentioned previously defined benefit pension plans in the U.K. are set up in trusts and trustees are typically responsible for pension investment decisions among others (The Pensions Regulator, 2014). For a subsample of companies for which data on pension plan trustees is available, we examine the potential role of insider trustees (e.g., CEOs who are also trustees) on the relationship between firm risk and pension plan risk.

Fani Kalogirou, Lecturer in Accounting and Finance, University of Exeter Business School
“The role of accounting in solving agency conflicts within corporate groups: Evidence from voluntary IFRS adoption in the UK”

One of the most critical decisions top management in corporate groups has to make is the allocation of resources among competing investment opportunities. Information asymmetry between the parent and the subsidiary, however, creates agency conflicts that complicate such allocation. We examine whether accounting information can mitigate those agency costs in a UK setting where a choice existed for subsidiaries to voluntarily adopt IFRS. We find that adopting subsidiaries have greater cash holdings, receive more group borrowings and pay less dividends. These findings are consistent with IFRS adoption reducing agency costs of excess cash. Further, we find that IFRS subsidiaries have greater (lower) capital expenditures when in growing (declining) industries and invest more in innovation and intangible assets.

Gilad Livne, Professor of Accounting, University of Exeter Business School
“Does the Audit Committee Influence Audit Effort? Evidence from Materiality Thresholds and Misstatement Risk Areas”

Taking advantage of new regulation of the auditor’s report in the UK, we examine the relation between twelve audit committee (AC) characteristics and two measures of audit effort: materiality levels and number of misstatement risk areas. We find evidence indicating that when the AC chair or its members concurrently serve on other boards, materiality level is higher and number if risk areas is smaller, but the reverse holds for concurrent service on other ACs. In addition, we find that the frequency of AC meetings is negatively (positively) related to materiality (risk areas). Other AC characteristics are also related to audit effort, although the strength of the relation depends on the measure of effort (materiality or risk areas). Our results identify a channel through which ACs influence the external auditor’s planning and effort.

Gary Abrahams, Lecturer in Economics, University of Exeter Business School
“Group polarisation out of the shadows into the limelight”

This paper explores the psychological phenomena of group polarisation and its impact on group decision making in the context of corporate boards. Group polarisation is a phenomenon which explains that groups after deliberation tend to be more extreme in the direction in which they are already tending. Group polarisation highlights that collaboration can result in opinion extremity which in the context of a corporate board can increase the variance of outcomes and riskiness of decision making. We find that despite unequivocal evidence as to the existence of group polarisation in deliberations, this phenomenon does not appear to be recognised in the governance codes. We theorise as to why that may be the case, identify its importance from both a firm and systemic level and discuss ways in which it can be avoided. We focus on the importance of diversity in the board, but warn that diversity should not in isolation be seen as a panacea for avoiding group polarisation. We conclude that group polarisation needs to be taken out of the shadows and to be recognised as an important behavioural factor that can, and does, affect board decision making in the governance codes.