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Director Ownership and Corporate Performance Sanjai Bhagat University of Colorado, Boulder

Explore the relationship between CEO ownership, board structures, and corporate performance, with a focus on internal and external control mechanisms. Understand the incentives driving CEOs and senior managers to act in the best interest of shareholders.

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Director Ownership and Corporate Performance Sanjai Bhagat University of Colorado, Boulder

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  1. Director Ownership and Corporate Performance Sanjai Bhagat University of Colorado, Boulder Dennis C. Carey SpencerStuart Charles M. Elson University of Maryland Law School http://bus.colorado.edu/faculty/bhagat “Media Clippings” “Barron’s”

  2. Why might the CEO (and other senior managers) act in the best interest of shareholders? INTERNAL: External Control Mechanisms • Capital markets. • Mergers, tender offers, proxy fights. • Large shareholders will monitor. • Institutional investors (shareholder proposals). • Managerial labor market. • Product markets: Bankruptcy (not very efficient). • Shareholder lawsuits.

  3. Why might the CEO (and other senior managers) act in the best interest of shareholders? Internal Control Mechanisms • Self-interest: Managers also own shares. • Management compensation contracts. • Board of directors • Board members are elected by shareholders. • Is the Board nominating committee unduly influenced by the CEO? • Independent board members will monitor. • Bhagat-Black (2000): Evidence not quite supportive. • Self-interest of board members: Board members own shares.

  4. Sample: 1724 publicly-listed U.S. companies during 1992-1996. Large firms: S&P 500 Annual sales (roughly) over $3 billion. Small firms: S&P Small-Cap 600 Annual sales (roughly) under $0.4 billion.

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  6. Average Number of Shares Granted to A Corporate Director in U.S. During 1992-1996 All Firms Small Large 300 . 250 200 Number of Shares Granted 150 100 50 0 1 2 3 4 5 Year: 1=1992, 5=1996

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  12. Table 4, Panel A Larger companies are more likely to compensate their directors with stock. Table 4, Panel B Smaller companies are more likely to compensate their directors with stock option. Companies with greater growth prospects are more likely to compensate their directors with stock option.

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  15. Table 8 Poorer performing companies are more likely to experience discipline-related CEO turnover.

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  18. Table 9 Poorer performing companies are more likely to experience discipline-related CEO turnover, especially if the median director’s ownership of (dollar value) stock and stock-option increases.

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