Not all Directors have the Same Value

WHEN THE CEO HAS MUCH POWER, THE IMPORTANT POSITIONS ON THE BOARD ARE HELD BY PEOPLE COMPLIANT TO HIM, IF INSTEAD HIS POWER IS LIMITED THEY GO TO MORE COMPETENT DIRECTORS, ACCORDING TO A RESEARCH BY WAGNER, FEDASEYEU AND A COAUTHOR

There is much research about how executives are compensated, but very little is known about board members in firms. Hannes Wagner, Associate Professor of Finance at Bocconi University, has investigated whether their functions and compensations reflect their qualifications. To which extent are the latter related to the member’s expertise? Do they depend on friendliness toward a CEO instead? The question is dealt with in Do Qualifications Matter? New Evidence on Director Compensation, a paper he is writing with Viktar Fedaseyeu (Bocconi University) and James S. Linck (Southern Methodist University, Dallas).

“The board of a firm is a bit of a black box”, Wagner says. “There are two reasons for this. First, until recently collecting this kind of data meant to manually search through annual reports. Second, people incorrectly thought that every board member was given broadly the same amount of money”.

Wagner, Fedaseyeu and Linck studied functions and compensations for a sample of 13,329 outside directors that held board positions in 1,777 US firms between 2006 and 2010. They found that people on the same board are paid differently and the compensation gap is explained by the function they perform. “So, the question becomes: what determines the allocation of functions? We found out that when the CEO’s power is low, more qualified directors are given more board functions. But a powerful CEO can bias the selection of people into the positions that are designed to monitor his actions. We find that a powerful CEO does not select the best qualified people, but those who are expected to be compliant towards him”.

On top of this, there is another type of compensation given in a discretionary fashion to some board members. It can amount to millions of dollars. “No previous paper has analyzed it. Less than 10% of firms have this type of reward, but the firms that have it are those where the CEO has more power. Directors who have a joint working history with the CEO are more likely to receive this special variable compensation”. Although based on a small number of observations, the paper analyzes what happens to firm value after the sudden and unexpected death of an experienced director: it decreases. The market, at least, values human capital.

Read the other stories on the topic of Human Capital:

We Are Who We Hire    
Gig Economy: What Rights for Workers?  
The Chosen People who Invested on Themselves
Not only CEOs, the Importance of the Manager
Investing Time in Children Pays
Uncertain Victor, Better Candidates
The Importance of Incentives
The Consequences of Uncertainty on Families
Autonomy in Decision Making: the Right Balance is Required
The Geography of Human Capital

 

by Claudio Todesco