1. Global Corporate Governance Colloquia Stockholm, 10-11 June 2016
Executive Remuneration and Controlling Shareholders Roberto Barontini Scuola Superiore Sant’Anna, Pisa Stefano Bozzi Università Cattolica, Rome Guido Ferrarini University of Genoa, University of Nijmegen and ECGI
Global Corporate Governance Colloquia
Stockholm, June 2016 ,

2. Paper’s Purpose
We analyse the relationship between conformity to executive remuneration standards, corporate ownership, and the level and structure of CEO compensation for large European listed companies
Our results show that controlled corporations follow the relevant standards less than widely- held ones
We interpret this ‘conformity gap’ from the perspective of individual corporations and of society as a whole

3. 2. Corporate governance reform
Two waves of reform in Europe: post-Enron and post-great financial crisis
The first wave targeted remuneration governance (including say on pay) and disclosure
The second wave switched focus on pay structures and their alignment with long-term sustainability
At national level, reforms have been mainly implemented through private codes, but there is presently a move towards formal law

4. 3. Our data
Unique database, comprising governance and compensation data:
hand-collected for compensation and governance variables (Annual reports, CG reports, Notes to the financial statements)
financial data from Thompson Reuters
FTSE Eurofirst 300 Index constituents
192 non-financial firms in 2007 and 2010
largest European non-financial companies
from 16 European countries:
UK, France, Germany, Italy, Spain and Switzerland
Continental countries (CONT): Austria, Belgium, Denmark, and Netherlands
Nordic countries (NORD): Finland, Norway, and Sweden
PIG (Portugal, Ireland, and Greece)

5. Governance & Disclosure Variables
Area
Category
Variable
Criteria to research
GOVERNANCE
Remuneration governance Y1
RemCo Existence Y2
RemCo Independence Y3
Consultant Existence Y4
Consultant Independence
DISCLOSURE
Remuneration
Policy Y5
Policy overview (fin.year in review) Y6
Forward-looking policy (future fin. years) Y7
Proportion fixed-variable pay Y8
Performance criteria for bonus Y9
Performance criteria for share plans
Y10
Information on termination payments
Individual disclosure
Y11
Breakdown of pay components for each
executive director
Y12
Breakdown of pay components for each non-
Y13
N. of share-based granted
Y14
N. of share-based exercised
Y15
N. of share-based unexercised
Y_all Mean of all variables

6. Area Category Variable Explanation
GOVERNANCE
Remuneration governance
Compliance_gov
The average for the compliance to each of the criteria Y1-Y4
DISCLOSURE
Remuneration policy
Compliance_rem
The average for the compliance to each of the criteria Y5-Y10
Individual disclosure
Compliance_discl
The average for the compliance to each of the criteria Y11-Y15
OVERALL COMPLIANCE SCORE
Compliance_Score
The average for the compliance to all criteria Y1-Y15

7. 4. CEO compensation
Level of compliance
We study the impact of the ownership type on the level of compliance with respect to the 4 dependent variables (Y_gov, Y_rem, Y_dis, Y_all)
On average, State and Family ownership have a negative impact on the level of all dependent variables. In particular State and Family firms have lower levels of disclosure and governance of remuneration policy.
The 2007 results are confirmed for 2010, even though their magnitude is lower
Why are controlled firms less compliant than widely held ones?

11. Levels of CEO compensation
We study the relationship between the level of CEO compensation, the type of ownership and the level of compliance to best practices
On average, when compared to widely-held firms,
State owned and Family firms firms pay lower Total Compensation (regression 1).
The effect for Family firms is smaller, but still significant (regression 2)

13. Levels of CEO compensation
We study the relationship between the level of CEO compensation, the type of ownership and the level of compliance to best practices
On average, when compared to widely-held firms,
State owned and Family firms firms pay a lower level of Total Compensation (regression 1).
The effect for Family firms is smaller, but still significant, in regression 2
The level of compliance Y_all is strongly correlated to the level of compensation (regression 3), also when combined with the type of ownership (regression 4)
These results are not sensible to the alternative parameters of firm performance used as control variables (ROA, Qratio and stock returns)

14. Level of CEO total compensation, ownership and disclosure

15. Structure of CEO compensation
We then study the correlation between the structure of CEO compensation, the type of ownership and the level of compliance to best practices
On average, the percentage of cash compensation (over Total compensation) is higher in State and Family firms than in widely held firms (for family firms it is significant for 2010)

16. Structure of CEO compensation and ownership

17. Structure of CEO compensation
We then study the correlation between the structure of CEO compensation, the type of ownership and the level of compliance to best practices
On average, the percentage of cash compensation (over Total compensation) is higher in State and Family firms than in widely held firms (for family firms it is significant for 2010)
Incentive-based compensation (Bonus+stock-based) is lower for state-owned firms, while family firms reveal no significant differences vs. WH firms. This evidence is stronger for 2010.

18. Structure of CEO compensation and ownership

19. Structure of CEO compensation
We then study the correlation between ownership type and composition of CEO compensation
On average, the percentage of cash compensation (over Total compensation) is higher in State and Family firms than in widely held firms (for family firms it is significant for 2010)
Incentive-based compensation (Bonus+stock-based) is lower for state-owned firms, while family firms reveal no significant differences vs. WH firms. This evidence is stronger for 2010.
Within incentive-based compensation, the percentage of bonus pay is higher in family and state-owned firms than in widely-held firms.

20. Structure of CEO compensation and ownership

21. Structure of CEO compensation
We then study the correlation between ownership type and composition of CEO compensation
On average, the percentage of cash compensation (over Total compensation) is higher in State and Family firms than in widely held firms (for family firms it is significant for 2010)
Incentive-based compensation (Bonus+stock-based) is lower for state-owned firms, while family firms reveal no significant differences vs. WH firms. This evidence is stronger for 2010.
Within incentive-based compensation, the percentage of bonus pay is higher in state-owned firms
Within stock-based compensation, there are no significant differences among the types of ownership as to stock grant/stock options.
These results suggest that, in paying their CEOs, Family and state- owned firms rely more on cash after the crisis and make less use of bonuses and incentive compensation

22. Structure of CEO compensation and ownership

23. On average, when the overall level of compliance (Y_all) is higher:
Remuneration structure and level of compliance
On average, when the overall level of compliance (Y_all) is higher:
the percentage of cash compensation (over Total compensation) is lower
the percentage of incentive compensation (Bonus+stock-based) over Total compensation is higher
the incidence of bonus within incentive-based compensation is lower
Overall, a better quality of disclosure, governance and remuneration policy (proxied by Y_all) is associated with more incentive-based compensation, mainly driven by stock-based pay. These results are robust to the inclusion of ownership dummy variables

24. 5. Discussion of the conformity gap
Why a conformity gap?
Controlled corporations pay smaller remuneration packages and rely more on fixed pay and cash-based incentives. Possible reasons:
Controlling shareholders monitor the managers more effectively
Incentive pay is less needed or more efficiently managed
The lower pressure to provide CEOs with financial incentives leads to
Less emphasis on remuneration governance
Less attention to the disclosure of remuneration

25. Moreover, controlling shareholders are less interested to appease investor concerns for excessive pay:
They dominate the AGM
They are less worried about minority shareholders’ criticism
Possible alternative explanation:
Lower compliance as a means to facilitate the extraction of PBC
However, the level of compensation at controlled corporations is lower than in dispersed ones (and their performance is better, at least in family-controlled firms)

26. ii. An enforcement problem?
Does the conformity gap derive from weak enforcement or from society’s tolerance of non-compliance by controlled corporations?
Weak enforcement has limited explanatory power:
Public enforcement depends on mandatory rules (e.g. disclosure requirements), but remuneration standards are often subject to ‘comply or explain’
Private enforcement is rare for remuneration issues, which are largely covered by the business judgment rule
Weak enforcement would concern both controlled corporations and dispersed ones

27. 2. We would rather explain the conformity gap by assuming that society tolerates deviations from executive remuneration standards. Possible reasons:
Controlled corporations pay their managers less than widely-held firms
Controlled corporations often perform better than widely-held ones
The appropriation of some PBC is tolerated in most legal systems to compensate controlling shareholders for the costs of their monitoring; what really matters is that PBC consumption is limited to efficient levels (where the gains from better monitoring and management exceed the PBC costs to minority shareholders: Gilson and Schwartz 2013)

28. 6. Conclusions Two main interrelated results Interpretation
Controlled corporations on average comply less than widely-held ones (conformity gap)
Less compliant firms pay their CEOs less and rely more on cash-based compensation
Interpretation
The conformity gap is a consequence of the tighter monitoring by controlling shareholders
Such monitoring reduces the need for financial incentives and therefore the pressure to comply with remuneration best practices
An alternative (but less likely) explanation is that the conformity gap makes the appropriation of PBC easier