1. Comment on Ferrarini’s Conformity Gap & Ownership Structure
GCGC 2nd in Stockholm
– 11.
Comment on Ferrarini’s Conformity Gap & Ownership Structure
OK-RIAL SONG
Seoul National University School of Law

2. Background Pay as an Incentive Scheme (Ferrarini maybe)
Prefer performance-based compensation
Monitoring by controlling shareholder as substitute
Three Recent Approaches
Pay as private benefit of controlling family (in CO)
Large gap b/w family CEO and professional management
Paid lower than widely-held firms
Pay as agency cost of management (in WH)
Management able to set their own pay
Emphasis on stock-based pay but just windfall (or manipulated)
High CEO pay w/ no incentive effect
Pay as short-term interest of top managers
Disclosure / Shareholder Voice / Decision Process

3. Finding & Interpretation
Compliance with Rules on Compensation
Y_gov (decision process) & Y_rem / Y_dis (disclosure)
Set up compliance index or conformity gap
Also look at other features of compensation style
Finding
When ownership is concentrated, less comply with rules, pay less & less rely on stock-based compensation
Controversial is causation b/w gap & ownership
Interpretation on Conformity Gap
Based on traditional incentive or monitoring scheme story
Controlled companies are incentivized by controlling shareholder
Thus less need for financial incentive
Regulators should abstain from enhancing

4. On Conformity Gap Q1. What can you measure by compliance index?
More compliance means better monitoring or powerful incentive?
Story is based on traditional agency problem framework
Sufficient incentive by controlling shareholders
Firms do not comply b/c they do not need to do
Controlling shareholder is substitute for other monitoring tools
Assumes that rules aim at or have effect of aligning incentive to shareholders
Recent reform had something to do this?
Aligning incentive is very hard to achieve by legal rules
More focus on independent decision process & more disclosure
Conformity index also consists of these two elements

5. On Numbers of Finding Q2. Conformity Gap Are Correctly Estimated?
Under-Estimation of Y_gov
Composition of Y_gov
Y1 & 2 : Existence of independent compensation committee
Y3 & 4 : Use of external or independent consultant
Listed companies tend to have compensation committee irrespective of ownership structure
Controlling shareholder, for some reason, may be reluctant to use outside consultant
Check where such big difference of Y-gov comes from
If Y3 & Y4 makes such difference, Y_gov tells little on independent decision process
Independent directors are really independent?

6. On Numbers of Finding Q2. Conformity Gap Are Correctly Estimated?
Under-Estimation of Y_rem & Y_dis
Possibility of firms w/ controlling shareholder
Many of Y5 ~ Y15 related to stock-based compensation
Data tells firms w/ controlling shareholder use less stock-based compensation
If no stock-based compensation is counted 0 then Y_rem & Y_dis of controlled firms may be under-estimated
Table 3 : Only Y_rem significantly changed after crisis
Disclosure tendency or attitude, Y_dis, does not change
Maybe only some policies are added in the same disclosure
If so, Y_rem cannot capture compliance

7. On Interpretation
Q3. Private Benefit Extraction Story Is Not Convincing?
Rejecting Private Benefit Extraction Story
Family control is associated with high performance
But nothing to do with non-disclosure
At best again family control under good law v. bad law
Suggestion
Distinguish pay of family CEO v. professional CEO in controlled firms
Higher gap implies more extraction
Regress the gap to e.g. shareholder protection index
Bad law or poor enforcement allows controlling shareholder to extract private benefit

8. Another Story on Pay in CO
Pay Less & Use of Less Powerful Incentive
Explanation from Private Benefit Story?
Why firms w/ controlling shareholders pay less?
Good law & social pressure in some countries
Family w/ long-term perspective may put off realizing gain (benevolent controlling shareholder)
Controlling shareholders have many other ways of stealing
Averaging of high pay for family CEO & low pay for other professional managers
Why controlling shareholder prefers bonus to stock-based compensation?
Cannot sell stock : Realizing gain is remote or impossible
Gain from stock-option is determined by market while they can decide or at least have influence for bonus

9. Miscellaneous State-Owned v. Family-Owned Empirical Issues
Look like much difference w/ incentive structure
What makes their compliance & pay style similar?
Suggest to try again w/ only family-owned firms
Empirical Issues
Always endogeneity problem
Multi-collinearity problem
Ownership & Compliance is significantly correlated
Not sure how much important