Optimal Delegation when the Large Shareholder has Multiple Tasks

The paper analyzes the optimal delegation and ownership structure in a setting where the owner of a firm hires a manager to run the firm and to gather information on investment projects. The initial owner has two tasks: monitoring the manager and supervising project choice. Profits depend on both tasks and optimality would require different ownership stakes. A large stake is necessary for monitoring while a small stake is necessary for not interfering with incentives for project choice. Allocating control rights over project choice to the manager can alleviate this conflict. Delegation is optimal despite dissonant preferences, if managerial private benefits are not too small. By delegating authority over project choice and by using an optimal compensation scheme, the large shareholder is able to retain full ownership of the firm and, at the same time, to provide strong incentives to the manager. However, full ownership comes at the price of distorting monitoring and the resulting firing policy. Severance pay plays a key role in the optimal compensation scheme. We interpret delegation as the choice of a dual-board structure where the supervisory board is in charge of monitoring and management board is in charge of project selection.Large Shareholder, Concentrated Ownership, Delegation, Monitoring, Board of directors, Corporate Governance.

Ownership Concentration, Monitoring and Optimal Board Structure

The paper analyzes the optimal structure of board of directors in a firm with ownership concentrated in the hands of a large shareholder who sits on the board. We focus our attention on the choice between one-tier board who performs all tasks and two-tier board where the management board is in charge of project selection and the supervisory board is in charge of monitoring. We consider the case in which the large shareholder sits on (and controls) the supervisory board but not the management board. We show that a two-tier structure can limit the interference of large shareholders and can restore manager’s incentive to exert effort to become informed on new investment projects without reducing the large, shareholder’s incentive to monitor the manager. This results in higher expected profits in a two-tier board than in one-tier board and the difference in profits can be sufficiently high to induce large shareholders to prefer a two-tier board despite the fact that in this case the manager selects his preferred projects rather than the project preferred by large shareholders. The paper has interesting policy implications since it suggests that two-tier boards can be a valuable option in Continental Europe where ownership structure is concentrated. It also offers support to some recent corporate governance reforms, like the so-called Vietti reform in Italy, that have introduced the possibility to choose between one-tier and two-tier structure of boards for listed firms.Board of directors, Dual board, Corporate governance, Monitoring, Project Choice

Ownership Concentration, Monitoring and Optimal Board Structure

The paper analyzes the optimal structure of the board of directors in a firm with a large shareholder sitting on the board. In a one-tier structure the sole board performs all tasks, while in a two-tier structure the management board is in charge of project selection and the supervisory board is in charge of monitoring. We consider the case in which the large shareholder sits on (and controls) the supervisory board but not on the management board. We show that such a two-tier structure can limit the interference of the large shareholder and can restore manager’s incentive to exert effort to become informed on new investment projects without reducing the large shareholder’s incentive to monitor the manager. This results in higher expected profits. The difference in profits can be sufficiently high to make the large shareholder prefer a two-tier board even if this implies that the manager selects his own preferred project. The paper has interesting policy implications since it suggests that two-tier boards can be a valuable option in Continental Europe where ownership structure is concentrated. It also offers support to some recent corporate governance reforms (like the so-called Vietti reform in Italy) that have introduced the possibility to choose between one-tier and two-tier structure of boards for listed firms.board of directors, dual board, corporate governance, monitoring, project choice

Optimal Delegation when the Large Shareholder has Multiple Tasks

We analyze the optimal ownership, delegation and compensation structures when a manager is hired to run a firm and to gather information on investment projects. The initial owner has two tasks: monitoring the manager and supervising project choice. Optimality would require a large ownership stake for monitoring but a small stake for not interfering with managerial incentives. Delegating project choice to the manager can alleviate this conflict if managerial private benefits are not too small. The large shareholder retains full ownership of the firm but monitoring, and the resulting firing policy, are distorted. Severance pay plays a key role in the optimal compensation scheme. Delegation is interpreted as a dual-board structure.large shareholder, delegation, monitoring, board of directors, corporate governance

Ownership or Performance: What Determines Board of Directors' Turnover in Italy?

This paper analyses the turnover of board of directors members on a sample of companies listed on the Milan Stock Exchange in the period 1988-1996. Our aim is to investigate if board members change more frequently when company performance is poor, as the literature suggests, if this relationship is similar for C.E.O.s and other board members, and if and how the ownership structure of Italian companies affects these relationships. We use three different measures of board of directors turnovers: turnover A is the turnover of all board members; turnover B is the turnover of the President, Vice-President, C.E.O. and General Manager; finally turnover C is the turnover of C.E.O.s only. We find that changes in ownership affect turnover and that the relationship between turnover and performance is stronger in companies that have experienced a change in the controlling shareholder.Board of Directors, Corporate governance, Financial agency

Connections and Performance in Bankers' Turnover: Better Wed over the Mixen than over the Moor

In this paper we study top executive turnover in Italian Banks over the period 1993-2001. We relate the probability of survival of top executives (Presidents, CEOs and General Managers) to bank performance and the manager’s local connections, controlling for (observable and unobservable) bank and manager characteristics by exploiting longitudinal information on bank-manager appointments. We measure the extent? of managers’ local connections by the distance between the province of the bank’s headquarters and the manager’s province of birth. We show that top managers tend to be local in the sense that the distribution of this distance is heavily skewed towards zero. On the basis of this evidence, we address two questions. First, we investigate whether connections affect the duration of the appointment at the bank. Second, we ask whether connections entrench managers at the expense of the bank’s performance. We find that connections generally increase the probabilities of managerssurviving at their banks, and that the positive effect of performance on tenure (as amply documented by the executive turnover literature) disappears once connections are taken into account. On the other hand, we provide evidence against the hypothesis that managerial connections contain information valuable for enhancing a bank’s performance. In particular, we find that highly connected boards cause the shorter survival of banks, and that those who benefit from connections are top managers themselves (mostly Presidents and General Managers). This suggests that connections may be collusion devices with which to maintain and share rents.connections, executive turnover, commercial and cooperative banks

Voting in Small Committees

We analyze the voting behavior of a small committee that has to approve or reject a proposal whose return is uncertain. Members have heterogenous preferences: some members want to maximize the expected value while other members have a bias toward project approval and ignore their private information. We analyze different voting games when information is costless and communication is not possible, and we provide insights on the optimal composition of these committees. Our main result is that the presence of biased members can improve the voting outcome by simplifying the strategies of unbiased members. Thus, committees with heterogeneous members can function at least as well as homogeneous committees and in some cases they perform better. In particular, when value-maximizing members hold 51% of votes, the socially optimal equilibrium becomes unique.Voting, Small committees.

Voting in Corporate Boards with Heterogeneous Preferences

We analyze the voting behavior of a board of directors that has to approve (or reject) an investment proposal with uncertain return. We consider three types of directors: insiders, who are biased toward acceptance of the project, independent outsiders who want to maximize the firm's profit and independent outsiders who care about their reputation. We show that the presence of members with heterogeneous preferences can be beneficial and that the partisan behavior of insiders can be used as a sort of coordinating device by uninformed outsiders. Provided that the size of the board is optimal, there is no gain from increasing the number of outsiders above the strict majority despite the fact that each outsider is informed with positive probability. Substituting profit-maximizing directors with directors concerned about their reputation is not an obstacle to profit maximization provided that an appropriate sequential voting protocol is followed. We also show that a proper board composition makes communication between directors irrelevant in the sense that the same outcome is obtained with and without communication. Finally, as information is costly, our model provides some suggestions on the optimal size of boards.Board of directors, Voting, Corporate Governance

Voting in Small Committees

A small committee has to approve/reject a project with uncertain return. Members have different preferences: some are value-maximizers, others are biased towards approval. We focus on the efficient use of scarce information when communication is not guaranteed, and we provide insights on the optimal committee composition. We show that the presence of biased members can improve the voting outcome by simplifying the strategies of unbiased members. Thus, heterogeneous committees perform at least as well as homogeneous committees. In particular, when value-maximizers outnumber biased members by one vote, the optimal equilibrium becomes unique. Finally, allowing members to communicate brings no improvement.voting, small committees, committees composition, communication in committees

Market Competition or Family Ties: Which prevails on Italian CEO pay?

The paper analyzes the interplay of product market competition and governance on CEO compensation in Italian listed firms from 2000 to 2011 and tests the impact of the 2007-08 financial crisis on pay-performance sensitivity. We argue that important differences both in the level of compensation and in its sensitivity to firm performance depend on two conditioning factors: family ownership and source of the competitive pressure. A novel aspect of our paper is that we rely on two definitions of competition: the intensity of import penetration, which accounts for price competition, and the intensity of R&D and advertising expenditures, which captures the oligopolistic nature of competition when products are vertically differentiated. Overall, the compensation of Italian CEOs is positively related to firm performance. Moreover, consistent with our predictions, sensitivity is higher in competitive sectors and the difference between family and non-family CEOs disappear when competition is tough. Family CEOs are significantly less paid than non-family CEOs and their pay is significantly related to firm performance. However, behind this sensitivity we find asymmetric responses to performance changes: while non-family CEOs pay mainly responds to negative changes, family CEOs pay is sensitive only to positive changes. Finally, we find that the 2007 financial crisis reduces the difference between family and non-family CEO by decreasing the level of compensation of non-family CEOs and increasing its responsiveness to performance. Altogether, our results provide supporting evidence to the idea that market competition eventually prevails over family ties even in a family-controlled governance system such as in Italy