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Corporate governance in the United Kingdom and the United States

Final Activity Report Summary - CORPORATE GOVERNANCE (Corporate Governance in the United Kingdom and the United States)

The proposed research had three main themes. These research projects are summarised as follows.
1. Ownership and control project.
The Researcher provided a social network analysis of the ownership and control of U.S. and U.K. firms. The analysis was based on recent advances in computational graph theory. In particular, the small-world network structure of ownership and control in these economies was to be investigated. Theoretical arguments for modelling ownership and control as a complex networks were advanced. The research led to scientific papers. Conyon and Muldoon (2008) analysed the 'small world' model of ownership and control. A small world is a network whose actors are linked by a short chain of acquaintances (short path lengths), but at the same time have a strongly overlapping circle of friends (high clustering). They simulated a set of corporate worlds using an ensemble of random graphs introduced by Chung and Lu (2002a, 2002b). They found that the corporate governance network structures analysed were more clustered ('clubby') than would be predicted by the random-graph model. Interlocking boards, where a member of one board sits on the board of directors of another firm, are important. Path lengths, though, are generally not shorter than expected. In addition, they investigated the role of ?nancial institutions that are potentially important conduits creating connectivity in corporate networks. They found such institutions give rise to systematically different network topologies.

2. Executive Compensation project.
The Researcher provided a study of executive compensation in the U.S. and the U.K. particularly the role compensation consultants. The results from the Researcher's Academy of Management Perspectives paper (2009) can be summarised as follows. First, CEO pay is generally greater in firms that use compensation consultants, consistent with a rent-extraction theory of executive pay. Second, the amount of equity used in the CEO compensation package, such as stock options, is greater in firms that use consultants. This is consistent with alignment of manager and shareholder interests. Third, there is little evidence that using consultants with potential conflicts of interest, such as supplying other business to client firms, leads to greater CEO pay or the adverse design of pay contracts. This is the first empirical evidence on the role of executive compensation consultants and is informing the scholarly and policy debate about CEO pay on both sides of the Atlantic. However, the Researcher cautions strongly about the interpretation of the results. First, consultants can affect other aspects of firm compensation policy not just the level of CEO pay. For example, consultants might affect the use and type of performance standard in the pay contract. Second, the use of consultants might be endogenous, meaning that other factors drive the use of consultants and hence the estimated relation between CEO pay and consultants might be altered.

3. Corporate Governance Course Project.
The Researcher proposed to develop a course in Corporate Governance that was delivered to graduate and MBA students. The course would consist of a set of academic readings as well as case studies to illustrate key points. This course has been successfully delivered a number of times to MBA and Masters students in Paris and Singapore. The syllabus and book of readings is available on request to the administration at ESSEC.