- 23 Mar 2011
- Working Paper Summaries
Do US Market Interactions Affect CEO Pay? Evidence from UK Companies
CEOs of UK firms receive higher total compensation if their companies have interactions with US product, capital, and labor markets. Moreover, the compensation package is often adopted from American-style arrangements, such as the use of incentive-based pay. Researchers Joseph J. Gerakos (University of Chicago), Joseph D. Piotroski (Stanford), and Suraj Srinivasan (Harvard Business School) analyzed data on the compensation practices of 416 publicly traded UK firms over the period 2002 to 2007. Key concepts include: The reason to compare similarity with the level and style of US pay is because CEOs of US companies typically are among the highest paid in the world. The UK firms' interactions with US markets were measured on four variables: the relative importance of US sales to the firm, the level of prior US acquisition activity, the presence of a US exchange listing, and the US board experience of the firm's directors. All four US market interaction variables correlated with greater pay, but only US operational activities (sales and acquisitions) were associated with pay similar to US-style contracts. The increased compensation alleviates internal and external pay disparities arising from the presence of US operations and businesses, and compensates CEOs for bearing the additional risk and responsibility associated with exposure to foreign securities laws and legal environments. Closed for comment; 0 Comments.
- 22 Apr 2010
- Working Paper Summaries
Audit Quality and Auditor Reputation: Evidence from Japan
High-quality external auditing is a central component of sound corporate governance, yet what determines audit quality? Douglas J. Skinner, of the University of Chicago Booth School of Business, and Suraj Srinivasan, of Harvard Business School, study the Japanese audit market, where recent events provide a powerful setting for investigating the effect of auditor reputation on audit quality absent litigation effects. Specifically, Skinner and Srinivasan analyze events surrounding the collapse of ChuoAoyama, the PricewaterhouseCoopers affiliate in Japan that was implicated in a massive accounting fraud at Kanebo, a large Japanese cosmetics company. Taken as a whole, the researchers' evidence provides support for the view that auditor reputation is important in an economy where the legal system does not provide incentives for auditors to deliver quality. Key concepts include: Auditors' reputation for delivering quality is extremely important. A substantial number of clients dropped ChuoAoyama as the extent of its audit quality problems became apparent, but before it became clear that the firm would be forced out of business. The events at ChuoAoyama and particularly the decision by the Japanese Financial Services Agency (FSA) to suspend the firm's operations can be seen as a watershed event in Japanese audit practice. The FSA used these events to send a message to the Japanese auditing community that the old ways of doing business would no longer be tolerated, and that it was serious about reforming audit practice. Closed for comment; 0 Comments.
- 09 Sep 2009
- Working Paper Summaries
Perspectives from the Boardroom--2009
Chief executives and regulators have been blamed for the current economic crisis, but in some ways what is surprising is that boards have generally escaped notice. Clearly the experience of corporate boards in the downturn has not been explored. To understand what transpired in the boardrooms of complex companies, and to offer a prescription to improve board effectiveness, eight senior faculty members of the HBS Corporate Governance Initiative talked with 45 prominent directors about what has happened to their companies and why. These directors, who serve on the boards of financial institutions and other complex companies, were asked two broad questions: How well did their boards function before the recession? And, what do they believe should be improved as they look to the future? This white paper [PDF] first explains how the interviewees characterize the strengths of their boards, then examines in depth six areas in which they identified shortcomings or needs for improvement: 1) clarifying the board's role; 2) acquiring better information and deeper knowledge of the company; 3) maintaining a sound relationship with management; 4) providing oversight of company strategy; 5) assuring management development and succession; 6) improving risk management. Finally, the paper discusses two issues that appeared not to trouble the interviewees but that the public feels are important: executive compensation and the relationship between the board and shareholders. This paper was written by Jay Lorsch with the assistance of Joseph Bower, Clayton Rose, and Suraj Srinivasan. The interviews were conducted by Joseph Bower, Srikant Datar, Raymond Gilmartin, Stephen Kaufman, Rakesh Khurana, Jay Lorsch, and Clayton Rose. Key concepts include: Regulations and laws offer little guidance about what specifically boards should do, and, given this lack of specificity, most boards have gradually developed an implicit understanding of what their job should be. Directors expressed strong consensus that the key to improving boards' performance is not government action but action on the part of each board. To improve board effectiveness, each board should achieve clarity about its role in relation to that of management: the extent and nature of the board's involvement in strategy, management succession, risk oversight, and compliance. If, as interviewees insisted, each board's effectiveness is directly attributable to its activities, it follows that boards have a responsibility to define their own roles with clarity, and to decide how to perform those roles in light of the nature of the firm, its industry, and its particular challenges. If boards are to decide on their goals and activities, they must expect to invest extended time in hard-headed discussions of both, leading to concrete and actionable conclusions. Boards need to maintain a delicate balance in their relationship with management. They must be challenging and critical on the one hand and supportive on the other. They have to sustain an open and candid flow of communication in both directions. And they must seek sources of understanding their company beyond just management without offending management. Issues of executive compensation and the relationship between boards and shareholders cannot be ignored, if only because they affect public perceptions of business and therefore its social legitimacy. Paper Information Full Working Paper Text Working Paper Publication Date: September 2009 Faculty Unit: Organizational Behavior Closed for comment; 0 Comments.
- 24 Oct 2008
- Working Paper Summaries
Signaling Firm Performance Through Financial Statement Presentation: An Analysis Using Special Items
Do managers' presentation decisions within their financial statements reflect informational motivations (that is, revealing the underlying economics of the firm) or opportunistic motivations (that is, attempts to bias perceptions of firm performance)? The authors examine managers' choices to present special items (such as write-offs and restructuring charges) separately on the income statement rather than aggregated in other line items with disclosure only in the footnotes. Prior research suggests that managers engage in opportunistic reporting in other presentation decisions, and that managers' presentation decisions on the financial statement affects users' judgments. The distinction also matters because current changes in reporting standards are likely to increase the occurrence of "nonrecurring" type charges similar to special items, such as fair value changes. Key concepts include: Managers, in most instances, appear to use the flexibility afforded in the presentation of special items to inform users of the underlying economics of these items. Special items receiving income statement presentation are more transitory than those receiving footnote presentation. These results are consistent with managers using discretion in the financial statement presentation of special items for informational reasons. There is limited evidence that opportunistic motivations underlie this presentation decision. Closed for comment; 0 Comments.
- 24 Sep 2008
- Working Paper Summaries
CEO and CFO Career Penalties to Missing Quarterly Analysts Forecasts
(Previous title: "CEO and CFO Career Consequences to Missing Quarterly Earnings Benchmarks.") This paper investigates whether the failure to meet quarterly earnings benchmarks such as the analysts' consensus forecast matters to CEO and CFO careers, after controlling for both operating and stock return performance and the magnitude of the earnings "surprise" revealed at the earnings announcement. In particular, it evaluates a comprehensive set of career consequences such as the impact on compensation, in the form of bonus and equity grants, and the dismissal of both the CEO and the CFO, conditioned on the failure to meet quarterly earnings benchmarks. Key concepts include: Missing analysts' consensus forecasts can potentially damage senior executives' careers. CEOs and CFOs also experience compensation penalties if their firms fail to meet the analysts' consensus forecast. Most of these career penalties for missing earnings benchmarks have increased in the post-Sarbanes-Oxley environment. Closed for comment; 0 Comments.
Non-Audit Services and Financial Reporting Quality: Evidence from 1978-1980
What are the costs and benefits of auditors providing non-audit services? In this paper, the authors investigate whether high non-audit services (NAS) fees relative to audit fees are associated with poor quality financial reporting. Associate Professor Suraj Srinivasan and colleagues look specifically at a sample of S&P 500 firms during the years 1978-80. The authors thus provide an early history analysis of a long-standing regulatory concern that NAS fees create an economic dependence that causes the auditor to acquiesce to the client's wishes in financial reporting, reducing the quality of the audit. This concern led the Sarbanes-Oxley Act to prohibit auditors from providing most consulting services. The authors find that, contrary to regulatory concerns, NAS are associated with better quality financial reporting: lower earnings management and higher earnings informativeness. Conclusions rely on the specific institutional features of the years 1978-80. Key concepts include: Providing NAS does not automatically lead to weaker audit quality. Greater information systems consulting fees are associated with higher quality financial reporting for various proxies of earnings quality. This area of consulting likely improved the audit firms' knowledge base, leading to improved audit quality. Evidence suggests that the market does not fear an increase in economic dependence from the non-disclosure of NAS. Closed for comment; 0 Comments.