Risk Governance: Examining its Impact Upon Bank Performance and Risk

This study examines the emergence of risk governance arrangements in US bank holding companies (BHCs) and tests for their impact upon performance and risk profiles. Following the financial crisis, regulators introduced several new risk governance processes, including the adoption of Risk Appetite arrangements and the establishment of Risk Committees, both board level features. In this study, a research gap is unearthed with respect to risk governance practices and their impact upon BHC performance and risk measures. The motivation of this research is to validate the adoption of these board-level practices in an evidence-based framework. The empirical research method relies on the collection of a unique data set. The sample covers a significant dollar-weighted portion of the US banking system. Multivariate analysis facilitates the testing of risk governance mechanisms to outcome variables, while controlling for firm-specific and standard corporate governance variables. The practical implication of this study with respect to Risk Appetite is clear. BHCs that practice Risk Appetite arrangements exhibit improved performance and lower realised loan losses. In contrast, while some limited evidence is presented that the marketplace may reward BHCs for certain composition aspects of the Risk Committee, the overall results suggest that the requirement for a Risk Committee has little impact to BHC’s operating performance and risk measures. In terms of academic contribution, this study examines two major risk governance mechanisms within a common framework, presenting evidence of a significant and positive impact of the board level articulation of Risk Appetite arrangements to a suite of BHC performance measures and a negative association to loan losses. As the first known empirical research study of Risk Appetite, it confirms that this board level mechanism should be included as an explanatory variable in bank or risk governance related empirical research studies. These findings provide industry practitioners (including BHC chief executive officers and board members) convincing arguments for the immediate adoption of Risk Appetite arrangements. US Regulators, who introduced Risk Appetite requirements in 2014 for larger BHCs, are presented with validation by this study for wider adoption of this risk governance mechanism, even if such practices are voluntarily adopted by BHCs. As signs begin to emerge in the United States of the possible relaxation of the regulatory requirements of certain aspects of the Dodd-Frank Act, this study contributes to this debate in a timely fashion by testing the veracity of two key supervisory-driven risk governance practices aimed at the boardroom in an evidence-based evaluation

Risk governance: Examining its impact upon bank performance and risk-taking

As policy-makers in the United States contemplate a relaxation of financial regulation, our study contributes to this dialogue by testing the veracity of heightened standards of risk governance activities for US bank holding companies (BHCs). Our study examines evidence relating to the adoption of these standards by BHCs following regulatory intervention. We find that board-level risk appetite practices have a profound association upon BHC performance and tail risk. Our estimates show that BHCs which adopt risk appetite practices exhibit a significant improvement in headline performance and reduced tail risk measures. Our research is relevant to academics by identifying the significance of this risk governance practice which has been introduced by global regulators. For practitioners (including board members, risk managers, policy-makers and regulators), our study validates the efficacy of risk appetite frameworks as the future shape of financial regulation is being actively debated in the US

An Examination Of Ceo Reputation Decline And Repair In Response To Deviant Actions

Despite increasing interest in managerial reputation, little research in the management field has attempted to theorize and empirically examine reputation as a dynamic construct. This paper synthesizes prior reputation literature across disciplines to develop a model of reputation change. Using the context of executive termination it is hypothesized that the same managerial outcome (i.e. termination) carries varied meaning to stakeholders depending on the actions leading to and reason for termination and such meaning impacts the level of executive reputation decline and repair. Additionally, drawing on four established theoretical mechanisms in the reputation literature it is hypothesized that various traits, relationships, performance signals, and repudiation activities also influence the reputation repair of executives. Using survival analysis and a sample of 487 CEO terminations, results suggest the strongest influence on reputation repair to be executive traits and relational ties

CEO Compensation after Harvester Director Departure

I examine the effects of board member departures on CEO compensation using a sample of high growth IPO firms. Agency theory predicts that a reduction in board monitoring by harvester directors (VCs and private equity investors) will result in an increase in CEO pay. I find that departures of the last harvester director on a board result in an immediate and lasting increase in CEO equity compensation, while prior departures by other harvester directors are not significant. The results hold even when controlling for other governance mechanisms such as CEO wealth, CEO turnover, board composition, and external blockholder ownership

Board-CEO Ties in the CEO Labour Market: Three Essays

This thesis consists of three essays which examine the effects of company board of directors (board)-Chief Executive Officer (CEO) ties in the externally appointed CEO labour market. Over the last five decades, globalization and outsourcing have generated demand for CEOs with generalist rather than company-specific skills. An intimate knowledge of a company and its operations, gained over years of internal experience and training has been replaced by the need for proven strategic leadership and decision-making skills. As a result, companies have found it easier to acquire these skills in a globally competitive market rather than develop them internally. An unintended consequence has emerged: these outsiders may not be well known to a company’s board. This informational asymmetry can be problematic as a board typically has limited information to assess a prospective outsider CEO. In this context, company directors have the potential to help employing companies fill information gaps through their past professional relationships with prospective outsider CEOs. Do prior relationships with prospective outsiders assist boards to appoint transformational and highly productive CEOs? Or do they serve directors’ own and prospective CEOs’ collusive interests at the expense of the corporation and its investors? Does gender matter in the appointment and pay of a new connected/unconnected CEO? The three essays are predominantly empirical and draw on a working sample of 1,460 public company outsider CEO successions across 22 countries that occurred between 1992 and 2018. This working sample consists of data collected from several financial databases including Bloomberg, BoardEx, Compustat, Datastream, Execucomp and Standard & Poor’s (S&P) Capital IQ (CIQ). The first essay investigates the effect of board-CEO ties on outsider CEO performance as measured by return on assets (ROA), return on invested capital (ROIC), return on sales (ROS) and cumulative market-adjusted total stock returns (CARs). It applies an empirical, variance partitioning analysis that compares the performance of companies led by CEOs that have previously worked with directors (Connected CEOs) to those led by CEOs with no prior working relationships with directors (Non-connected CEOs). The results show that the benefits of these relationships to companies are small and that they are more pronounced in institutional environments where there are lower indicators of institutional and governance transparency. As such, they confirm and extend the findings of the literature on CEO succession events in three ways. First, they show that governance transparency places a moderating effect on the role of prior board-CEO ties in outsider CEO successions. Second, the resultsshow that varying governance transparency may play a role in CEO succession events globally. Finally, they show that CEO-led company performance varies according to whether market- or accounting-based financial metrics are used. The second essay explores the effect of board-CEO ties on the awarding of new outsider CEO compensation. Do board-CEO ties help companies offer compensation that serves their interests and those of their investors? Alternatively, are these ties exploited by CEOs such that they can negotiate compensation predominantly in their own interests against those of investors? The empirical analysis focuses on first-year compensation awarded to the newly appointed outsider CEOs and its key compositional elements: namely, the proportion of fixed relative to variable (i.e. equity or performance-related) remuneration. Results show that in the United States, United Kingdom, Canada and Australia, countries that share common approaches to corporate governance, board-CEO ties are associated with CEOs being awarded a greater proportion of their compensation as fixed and in cash rather than variable and at risk. This outcome favours the CEO, but it may also be acceptable to investors consistently with the hypothesis that board-CEO ties reduce informational risk on the new appointee, thus limiting the need to rely on equity as compensation to align incentives. The results are also consistent with the hypothesis that board-CEO ties empower CEOs to negotiate compensation in their own interests in those countries where the presence of independent directors and dispersed arms’ length institutional investors enables CEOs to bargain with boards over pay. They make several contributions. First, they show that board-CEO ties matter in the awarding of new outsider CEO compensation. Second, they highlight that institutional settings and corporate governance-imposed boundary conditions exist to the role of board-CEO ties in reducing information asymmetry and in the political process where CEO pay is negotiated. Third, the results extend existing arguments for the role of information asymmetry in the awarding of CEO compensation and the managerial power theory (MPT) or hypothesis through the linking of several unique theoretical perspectives. The results demonstrate that institutional theory as it applies in a wide-ranging international context is linked to interpreting the theories of asymmetric information and CEO risk-taking and power in explaining the setting of new outsider CEO compensation. The third essay analyses the effect of board-CEO ties and board gender diversity on the composition of CEO compensation, by gender. Despite overwhelming evidence of a gender pay gap that disadvantages women across the entire labour market, women and men CEOs are paid comparable overall levels of compensation. As the CEO compensation literature has not fully explored whether there are gender differences in the composition of compensation, the paper tests this hypothesis. A theoretical model is developed to account for empirical evidence that women and men occupy different wage bargaining positions when negotiating compensation with companies, in part because of differences in reservation wages. These bargaining positions are important because they anchor wage negotiations and affect the level and composition of compensation offered to a prospective CEO. The essay’s results show that overall compensation for women and men is comparable; however, women CEOs in the United States, United Kingdom, Canada and Australia receive a lower proportion of fixed compensation to overall than men. This finding provides new insights into the existence of a gender pay gap for CEOs, consistent with well-known gender differences in risk preferences and bargaining positioning. In an extended analysis, the essay finds that greater board gender diversity can help women close the gender gap in pay structure. Building on this thesis’s contributions, future research could continue to explore how corporate and institutional transparency affects the functioning labour markets, including those for CEOs. Further research could also investigate more nuanced aspects of board-CEO ties such as the impact of different board structures, including those with independent directors and specific remuneration and nominations, and compensation committees, that recommend and award CEOs

As California goes, so goes the nation? The impact of board gender quotas on firm performance and the director labor market

On September 30, 2018, California became the first U.S. state to introduce a mandatory board gender quota applicable to all firms headquartered in the state. Using a large sample of publicly-listed firms headquartered in the U.S., we find that the introduction of the quota is associated with significantly negative announcement returns to California-headquartered firms. Consistent with the quota imposing frictions, this effect is larger for firms requiring more female directors to comply with the quota. There is also evidence of spillover effects to non-California-headquartered firms. We find evidence in support of two channels through which these spillover effects operate: First, we find spillover effects to be larger for firms operating in industries in which California-headquartered firms lack more female directors to comply with the quota, suggesting that non-California-headquartered firms may lose valuable female directors to California-headquartered firms. Second, we document negative spillover effects for firms headquartered in states dominated by the Democratic Party, consistent with the idea that these firms are more likely to become subject to a board gender quota as well. Finally, we show that, already as of month-end November, female representation on the boards of California-headquartered firms increased. Newly appointed female directors differ significantly in terms of age, independence, and experience from incumbent and leaving female and male directors

Career Experience and Executive Performance: Evidence from Former Equity Research Analysts

This study examines CEOs and CFOs who have prior work experience as equity research analysts. Consistent with backgrounds in forecasting and valuation, we find these executives provide earnings guidance that is more accurate than that of other executives, and their M&A transactions generate significantly higher announcement returns. For available CEOs and CFOs, we examine their track records as research analysts with respect to forecasting accuracy and stock recommendation profitability. We find a positive association between a record of past forecasting accuracy and more accurate earnings guidance, as well as a positive association between past stock recommendation profitability and M&A announcement returns. Beyond these traits, we find these executives provide greater certainty in their answers to analysts during conference calls, especially when answering forward-looking questions. Finally, these executives’ firms exhibit superior accounting and stock return performance. Overall, our evidence suggests early career skill sets can shape top executive performance outcomes