When Principals Conflict: Stakeholder Power, Executive Decision-Making, and the Manipulation of Pension Assumptions

Abstract

Whereas the dominant theoretical perspective in corporate governance research attends to the conflicting interests between shareholders and executives, in practice executives must frequently adjudicate between the demands of multiple principals with conflicting interests. To investigate how executives cope with these conflicts, I examine how much firms claim they will earn on the assets in their defined benefit (DB) pension plans. In a DB arrangement, participating employees forgo wages in the present in order to receive post-retirement income and they rely on executives to properly fund and manage plan assets for future payout. Executives, however, can act opportunistically by increasing the amount they expect the firm to earn on plan assets, effectively lowering their pension expenses and boosting the firm’s earnings. Whether executives do so, I argue, is determined in part by the power and interests of employees and shareholders as well as the decision-making schemas of the CEO. Through a detailed analysis, I show that equity ownership by bank trusts and public pension funds and the presence of a CEO with a background in finance are associated with higher expected rates, while higher rates of firm unionization are associated with lower expected rates of return on such assets.