Total Shareholder Return Research Articles

The elusive linkage between CEO pay and performance

ObjetivoDiscutimos o trabalho de Aguinis et al. (2018). Acreditamos que as suas hipóteses são provavelmente verdadeiras, mas a sua metodologia apresenta deficiências e os dados apresentados não suportam as conclusões.Design/metodologiaAnalisamos e comentamos o trabalho de Aguinis et al. (2018).ResultadosOs dados não demonstram adequadamente a existência de uma distribuição de poder-lei porque suas análises não consideram as condições externas que afetam o resultado da empresa e os autores fazem uso impróprio das variáveis dependentes. As análises não mostram que as recompensas dos CEOs seguem uma distribuição da lei do poder porque não tomam em consideração as mudanças no nível ou na composição da remuneração sobre o tempo. As análises não mostram falta de sobreposição entre as duas distribuições, porque não têm em conta a forma como os CEOs são pagos pelos resultados e porque utilizam a retribuição média calculada sobre a antiguidade do CEO.Limitações/implicaçõesUma análise mais convincente da hipótese proposta requer o uso do desempenho total dos acionistas como uma variável de resultados organizacionais e um número muito mais específico de variáveis de controle.Implicações práticasOs autores incentivam os profissionais a pensar mais em termos de uma distribuição da lei de potência quando se define o salário do CEO. Suas análises indicam que os profissionais já pensam em termos dessa distribuição e distribuem as recompensas de forma proporcional a ela. Além do mais, os resultados derivados da teoria da lei de poder podem ser erroneamente usados como uma desculpa para pagar menos para o CEO médio.Implicações sociaisAgregamos uma outra perspectiva no pagamento ao CEO.Originalidade/valorNossa perspectiva é apoiada pelo nosso pesquisa e experiência de consultoria em projetos de remuneração para CEOs.

Introducing LIVA to Measure Long-Term Firm Performance

In this paper we introduce lifetime (or long-term) investor value appropriation (LIVA) to measure firm performance, defined as the ex post value of discounted cash flows over a firm’s lifetime (or several decades). Unlike other commonly used measures of firm performance, such as return on assets, Tobin’s q, economic profit, or total shareholder return, LIVA captures long-term returns vis- à-vis the cost of capital, profitable growth, as well as the size of the economic impact in a single metric. Moreover, we show that LIVA can be equivalently operationalized using cash flow data, accounting profits, or shareholder return data. Finally, two exploratory empirical studies illustrate how LIVA can be operationalized and provide new strategic insights beyond currently used measures.

The Value-Extracting CEO: How Executive Stock-Based Pay Undermines Investment in Productive Capabilities

The business corporation is the central economic institution in a modern economy. A company’s senior executives, with the advice and support of the board of directors, are responsible for the allocation of corporate resources to investments in productive capabilities. Senior executives also advise the board on the extent to which, given the need to invest in productive capabilities, the company can afford to make cash distributions to shareholders. Motivating corporate resource-allocation decisions are the modes of remuneration that incentivize and reward the top executives of these companies. A sound analysis of the operation and performance of a modern economy requires an understanding of not only how much these executives are paid but also the ways in which the prevailing system of executive pay influences their decisions to allocate corporate resources. In the United States since the last half of the 1980s the overriding goal of U.S. corporations has been to “maximize shareholder value,” with corporate performance measured by a company’s “total shareholder return”: percentage stock-price appreciation plus dividend yield. Also since the 1980s, the most important components of the total compensation of senior executives have been modes of stock-based pay in the forms of stock options and stock awards. This stock-based pay is structured to incentivize executives to make corporate allocation decisions that will boost the stock prices of the companies that employ them and reward them for achieving that objective. There are three drivers of stock prices: innovation, speculation, and manipulation. The first critical question that this paper addresses is which of these drivers, individually or in combination, contribute to a company’s stock-price performance. Then we can ask the second critical question: Does executive compensation reflect the success of the company in value creation, or the power of senior executives to engage in value extraction? The “value- extracting CEO” hypothesis posits that, in the United States, a significant portion of senior executive compensation rewards them for making decisions that foment speculation and manipulate stock prices, and thereby extract value for their own personal gain. In section four of the paper, I invoke the theory of innovative enterprise to support this hypothesis and debunk the dominant ideology that companies should be run to “maximize shareholder value.” Finally, I elaborate the policy implications for controlling the power of the value-extracting CEO, including a) banning stock buybacks, b) requiring executive compensation that rewards innovation rather than speculation and manipulation, and c) placing stakeholders representing households as taxpayers, workers, and consumers on boards of directors of publicly listed companies, along with shareholders who represent households as savers. An intellectual precondition for these reforms is the rejection of the ideology that companies should be run to maximize shareholder value, which means replacing agency theory with innovation theory as a mode of analyzing how the operation of an economy, supported by the strategies and structures of the business enterprises within it, can attain the objectives of stable and equitable economic growth.

Accounting Information and Corporate Risk-Taking

We examine how accounting information influences corporate risk-taking. We predict that transparent accounting disclosure can influence corporate risk-taking by enabling managers to better evaluate risks and by enabling investors to better monitor managers' risk appetite. We test this prediction by orchestrating the mandatory adoption of IFRS around the world, enforcement reforms around the world, and the introduction of quarterly reporting in the European Union as exogenous shocks to firms’ accounting information environment, which made disclosure more relevant and comparable, reliable as well as more timely. Our findings provide evidence that these changes in the accounting information environment are associated with a decline in corporate risk-taking. For firms subject to enforcement reforms this effect is unconditional. For firms’ adoption of IFRS or quarterly reporting, this effect is conditional upon whether these reforms are strongly enforced. We also document that the decline in risk-taking after the changes in the accounting information environment is associated with an increase in total shareholder return.

RISK AVERSION IN THE BOARD ROOM. AN ANALYTICAL APPROACH ON CORPORATE GOVERNANCE OF GERMAN STOCK-LISTED COMPANIES

According to the agency theory, a positive relationship between company performance and good corporate governance should exist. A broader study of the author of this paper examines a sample of German stock-listed companies whereas Germany can be seen as one of the most highly regulated countries concerning corporate governance. The overall purpose of the author’s study is to analyze the effect of supervisory board characteristics and procedures on firm performance. Several corporate governance variables such as number of committees, board independency, supervisory board compensation, personal risk liability, etc. are examined regarding their effects on firm performance in terms of firm growth and profitability. Two different approaches were selected: (1) a quantitative data analysis, based on financial figures and corporate governance variables, and (2) a survey of supervisory board members out of this sample. The total sample consists of 128 German stock-listed companies. The financial data are obtained from the financial databases providers ThomsonOne and Morningstar. The corporate governance data are also collected from annual reports and from corporate governance compliance statements. According to the German Corporate Governance Codex (DCGK) each stock-listed company has to explain their compliance with the DCGK rules. Thus, the DCGK represents a benchmark of good corporate governance and allows collecting objective and comparable quantitative data to estimate the corporate governance level. The main data analysis methods are bivariate analysis and tests for statistical differences (t-test), the latter in particular to find differences between groups clustered by their 5-years total shareholder return (TSR) growth resulting in a TSR top-30 group and TSR bottom-30 group. While the fulfilment of good corporate governance standards over all shows no significant effect on firm performance, this paper focusses on the findings that risk aversion in the board room is increasing as a result of governance regulations and that growth outperformers have a lower degree of risk aversion. It is concluded that an own-risk deductible in the DO Supervisory Board; Principal–Agent Theory; Risk Aversion; Firm Performance; DOI: http://dx.doi.org/10.5755/j01.eis.0.10.16191

Impact of shareholder-value pursuit on labor policies at Japanese joint-stock companies: Case of Nikkei Index 400

This article aims at finding out how the shareholder-value pursuit has affected labor policies at large Japanese listed enterprises. It concentrates on the issue of labor bifurcation, whereby the proportion of nonregular employees has grown rapidly over the last two decades, currently approaching the numbers of regular employees. The externalities of increased returns to stockholders during the last two decades have been the changes in the related domains of management and labor, which I explain through the application of the political economic theory. This theory underlines the importance of inclusion into a “political bloc” for being eligible for economic benefits. Consequently, I argue that increased returns to politically privileged shareholders have been achieved at the expense of a growing proportion of unprivileged nonregular employees. The research corroborates the positive correlation between the total shareholder return and the proportion of nonregulars. On the other hand, foreign stockholding does not appear to be significantly correlated with the increase in nonregular employment. In turn, the study has found that the proportion of nonregular employees is significantly correlated with domestic ownership that characterizes higher managerial entrenchment.

Form Over Substance? An Investigation of Recent Remuneration Disclosure Changes in the UK

In 2013 new regulations that required enhanced disclosure in remuneration reports were enacted in the UK. Using a sample of FTSE 100 companies from 2011-2013, this paper:1) describes voluntary and mandated disclosure behaviour in response to the enhanced disclosure requirements; and 2) examines the subsequent effect of mandated disclosure on executive remuneration and firm performance. We find that voluntary disclosure was more focused on presentation over substantiative content changes. In addition, mandatory disclosure on relative increase in Chief Executive Officer (CEO) and employee pay was subject to management discretion, as firms could self-select their employee comparator groups. Moreover, mandated disclosure in the first year of the post-reform period did not enhance the link between CEO pay and firm performance, nor curb the degree by which CEO pay was in excess of the average salary earned by employees. The difference between change in total shareholder returns and change in pay also did not improve in the mandated disclosure period. Therefore the new disclosure regime did not result in a fairer pay in society or promote a fairer distribution of profit. Finally, firms that had higher prior advisory dissent votes on pay continued to reward their CEOs with higher total and cash pay, and continued to have high CEO-to-employee pay ratios. Taken together, we question whether the new enhanced disclosure regime is effective in its aim to improve the pay and performance link and curb excessive CEO pay.

Total Shareholder Returns from Petroleum Companies and Oilfield Services (2004-2014): Capital Gains and Speculation Dissected to Aid Corporate Strategy and Investor Decisions

This study compares the long-term shareholder returns of diversified oil and gas majors, Canadian oil sands producers, US shale oil and gas producers and oilfield services companies during a decade of volatile oil and gas prices (2004-2014). Total shareholder returns (TSR) are analyzed for individual companies, for each peer group, and for the petroleum sector as a whole. We attempt to identify the factors that contributed to TSR growth and decline over the performance period 2004-2014. We specifically compare the performance of each peer group during two relatively stable periods, namely 2004-2007 (Period 1), and 2009-2013 (Period 2). In Period 1, the average TSR for all peer groups was higher than in Period 2. The increase or loss of TSR is in our study broken down into capital gains and dividends. The observed decline of TSR during Period 2 was mainly influenced by stock prices that reflected a slower growth in retained earnings that supports the capital gains. All peer groups had slower increases in retained earnings in 2009-2013 as compared to 2004-2007. Remarkably, during the two oil price crises of 2008 and 2014 all companies maintained an increase in retained earnings. For the 20 companies evaluated, further in-depth analyses of speculative investor valuations are included in our study, as well as implications for future corporate strategies and investor decisions.

Relationship between CEO pay and total shareholder return: An empirical analysis in the Italian context

This study examines the relationship between CEO Pay and total shareholder return, using data between 2008-2014 from Italian listed firms (FTSE MIB). We perform panel data regression analysis of CEO compensation on financial performance, and in this way we refer to research made by Gigliotti (2013), but we extend it considering the Total Shareholder Return instead of accounting based performance. TSR has become a crucial measure in a pay-for-performance approach for different reasons. Our results indicate that there is not a significant relationship between CEO compensation and corporate performance during 2008-2014. These results contribute to our understanding of the pay for performance mechanism in times of financial disturbance, highly relevant to the existing debate considering CEO compensation

The relationship between debt levels and total shareholder return of JSE-listed platinum companies

The purpose of this study is to investigate empirically whether there is a positive correlation between debt levels and total shareholder return (TSR) of platinum JSE-listed companies. The study field comprised annual analyses for 12 companies listed under the Platinum and Precious Metals sector on the JSE Ltd for the 14-year period 2000 to 2013. The results of the study were inconclusive as a statistically significant positive correlation between changes in debt levels and changes in TSR could only be found in two of these years. The core audience of the study will be the management of South African platinum companies considering changes in their capital structure, and investors considering investment in a listed platinum company. The contribution of the study is therefore to add to the body of literature on capital structure decisions from a South African platinum mine context.

The relationship between CEO performance-based compensation and shareholders value creation: a cross national analysis

The objective of the paper is to develop deeper insight into how the firm's incentive systems are designed and, whether the CEOs compensation pay-to-performance schemes really align the incentives of executives and shareholders. Logit and Stepwise regressions on executive compensation data over 2004-2008 of 231 listed companies' belongings to four countries from the Anglo-American and the Euro-continental corporate governance models show that pay-to-performance incentives serve likely shareholders as they tend to create value. Moreover, sensitivity analyses point out that their effects on the long term total shareholder return are far from unanimous. They often depend on the context in which they are planned and executed. More specifically, they are even large than the property rights are stripped, the institutional ownership is less restricted, the governance quality is better, the investor protection is high, and the legal system is common law one.

Impact of foreign directors on board meeting frequency

We find that UK firms are increasingly having fewer board meetings mainly because of the significant increase in the proportion of foreign non-executive directors on the board. The combination of low meeting frequency and the presence of foreign non-executive directors is correlated with lower total shareholder returns and increases the agency conflicts through excess compensation of the CEO and chairman, which are not related to firm value creation. Our results suggest that a trade-off between increased board diversity coupled with reduced monitoring through fewer meetings, weakens the internal governance mechanism, reduces the advisory role benefits of foreign non-executive directors who are likely to possess international expertise, and significantly exacerbate agency conflicts.

Investigating board diversity in South Africa

The issue of board diversity has been widely debated. Given the lack of conclusive empirical evidence, this study investigated the relationship between gender and race board diversity and the financial performance of South African companies. The sample covered 1 542 annual observations over the period 2002 to 2012. The percentage of female and black directors of companies listed on the Johannesburg Stock Exchange increased significantly over the research period. Board diversity differed considerably across industries. A statistically significant positive relationship existed between the percentage of both female and black directors and earnings per share. In contrast, a statistically significant negative relationship was found between the percentage of both female and black directors and total shareholder return. Given the lack of a clear business case, the question arises as to how board diversity on the JSE can be encouraged. The researchers recommend that more attention should be given to the development and mentoring of diverse board candidates.

The EVA Paradox: Why So Many Firms Mess with Success

Nearly three-fourths of firms that adopt EVA or similar value-based management programs end up dropping them within five years of adoption, even though those firms are seeing the shareholder value gains promised by these programs. The reward to shareholders for sticking it out is significant; companies on the programs for longer than five years outperform their sector peers by an average eight percentage points per year in total shareholder returns. Companies that dropped their plan within five years also outperformed their market peers by a lesser, but still significant amount.So why would firms performing so well under a value-based management program discard it? A review of the literature and interviews revealed five main reasons for dropping their programs:o The incentive plan didn’t pay out for one or more yearso Managers or board members felt the measure was too complicatedo The measure was repeatedly, significantly changed from year-to-yearo The program champion left the firmo The program lost momentum after initial flurry of gainsThe longest-term adopters consistently did three things well:o Measurement: They developed a simple, but robust version of EVA (one that needed little modification over time)o Communications: They continually invested in financial literacy via steady training and reporting; managers and directors understood ito Incentives: They incorporated the value-based measure into a value-sharing incentive planFirms that successfully integrated all three elements into their management system found that each element reinforced the others, making it more likely that the program would survive a departure of its champion, or the higher expectations created by initial successes.

Методы управления стоимостью коммерческого банка

Александр Маркович Карминский - Национальный Исследовательский Университет "Высшая Школа Экономики". Электронная почта: akarminsky@hse.ru
 Управление, нацеленное на создание стоимости (Value-Based Management) – концепция управления, направленная на качественное улучшение оперативных и стратегических решений на всех уровнях компании за счет концентрации усилий всех лиц, принимающих решения, на ключевых факторах стоимости. Из множества альтернативных целевых функций в рамках концепции Value-Based Management выбирается стоимость компании. Подход максимизации акционерной стоимости в настоящее время является наиболее важным комплексным инструментом управления. В отличие от небанковских учреждений, банки обязаны обеспечить свой бизнес собственным капиталом. Следовательно, резервы собственного капитала – необходимое условие для роста банковского бизнеса. А так как более высокая биржевая стоимость акций облегчает доступ к собственному капиталу, ориентация на рост акционерной стоимости особенно важна для банков. Кроме того, доходность акционерного капитала российских банков является низкой по сравнению с международной практикой, и это, в сочетании с ростом конкуренции и глобализацией в банковском секторе, делает еще более важным принятие мер, направленных на защиту интересов акционеров. В работе рассматриваются различные подходы к управлению стоимостью банка. Представлен подход на основе определения и управления ключевыми факторами стоимости. Обзорно представлены подходы проектирования интеллектуальной системы управления с ориентированностью на риск-менеджмент. В работе рассмотрены модели анализа изменения благосостояния собственников компании (TSR, TBR), модели добавленной стоимости (EVA), внутренней нормы доходности (CFROI).

Indian business leadership: Broad mission and creative value

While general models of business leadership have drawn extensively on American companies, we find that two distinctive leadership principles have emerged among Indian companies. We conducted interviews in 2007–09 with top executives, primarily the chief executive, of 102 of the 150 largest companies listed on the Mumbai stock exchange. Though aware of Western leadership principles and applying some of them, Indian business leaders have developed their own guiding principles that emphasize 1) broad mission and purpose, servicing the needs of stockholders but also focusing on family prosperity, regional advancement, and national growth; and 2) creative value propositions, devising new products and services to meet the needs of large numbers of low-income consumers with extreme efficiency. Business leaders in the U.S. have long stressed total shareholder return, and while business leaders in India also focus on owner interests, Indian business leaders have embraced goals extending beyond their company's financial calculus.

The Effect of Relative Performance Evaluation on Investment Efficiency and Firm Performance

This study examines the effect of relative performance evaluation (RPE) on managers’ investment decisions and firm performance. Principal-agent theory suggests that RPE use in CEO compensation plans can improve incentive alignment when firm performance is affected by common shocks, thus motivating managers to increase shareholder wealth. I test this theory using contract details explicitly disclosed in proxy statements. I find that RPE firms are generally less likely to over- or under-invest than non-RPE firms, consistent with RPE use improving incentive alignment. I also find some evidence that RPE firms have higher total shareholder return (TSR) than similar non-RPE firms when contracting specifically on TSR. In addition, the positive effects of RPE on firm performance increase with the extent of common risk for firm and peer performance. Together, these results suggest that RPE use in CEO compensation plans reduces agency costs and improves incentive alignment.

Relationship between EVA (Economic Value Added) and Share Prices of Select Companies in BSE-SENSEX - An Empirical Study

In todays competitive world, corporate companies all around the world are trying to maximize the wealth of their shareholders in order to gain market value as well as satisfy their stakeholders. With the gaining popularity of value based performance measures like Economic Value Added (EVA), Total Shareholder Return (TSR), Cash Value Added (CVA) etc., many corporate companies in India have started assessing their value in terms of these measures. This paper investigates the relationship between EVA and share prices of select companies in BSE-SENSEX for a period of six years from 2008 to 2013. The study focuses on the explanatory power of EVA with respect to share prices of the selected companies. In turn, the performance of the selected companies belonging to different sectors in BSE-SENSEX was analyzed using EVA. The volatile nature of the capital markets characterized by various speculative activities have a greater influence on share prices, eventually undermining the impact of performance metrics on them. Thus, the findings of the study enumerates that EVA does not have a considerable explanatory power on share prices.

Energy 360: E&P Challenges and Opportunities: Rhapsody in "C"

President's column Last month, my column set the course for my new term as SPE president by encouraging our 124,000 members to be very proud of their professions, which provide energy for human progress. As the ExxonMobil ad says: You have “changing the world” in your job description. In this column, I will describe the challenges and opportunities that our members and the exploration and production (E&P) industry face. Solutions to the challenges will come through SPE, a catalyst for innovation and rapid global sharing of incremental and radical improvements. In the process, we will help our industry become E&P 2.0. Cs Everywhere Have you noticed that everything critical to respond to, address, and improve on in E&P seems to start with the letter C? We see changes all around, increasing complexity costs relentlessly rising, correct petroleum engineering forecasts few and far in between because of insufficient cross-discipline collaboration with the industry’s capital efficiency and competitiveness taking a beating. E&P investor focus is firmly on value rather than volume. Investors want to see a high TSR (total shareholder return), a positive net cash flow after dividend, and a strong return on investment—basically more bang for each invested buck. Unlike a few years ago, a strong production growth outlook (for example, to 2020) no longer earns you a premium valuation in the marketplace and short-termism is rather prevalent. Local communities in which we operate rightly expect more from us to earn their trust and a constant and relentless focus on HSSE-SR (health, safety, security, environment, and social responsibility) every day is what it takes. With absolutely no short cuts allowed. Then, there is the joint global challenge around climate change, sustainable development, and the notion of a carbon bubble (that there is an upper limit to how much fossil fuel can be burned and CO2 emitted if the planet is to stay below 2°C relative to preindustrial levels.) Compounding the issues, we have the industry big crew change going on with attempts to navigate success with less experienced leaders and professionals. At the April 2014 Cambridge Energy Research Associates (CERA) Week in Houston, the buzz was: “A new sense of reality has set in. The cost side now exceeds the income side in many E&P projects and USD 100/bbl is the new USD 20/bbl. Industry needs USD 100/bbl for field development projects to fly.” Core Challenge On the positive side, we are teaming up as an industry every day to deliver more than 90 million BOEPD and 350 Bcf/D. We just have to do it more safely, more cheaply, more quickly, more sustainably, and with higher margins and returns to be competitive. That is the core challenge and that is the core opportunity for us, our employers, and for the E&P ecosystem as a whole (universities, research and development, service companies, oil companies, and more.) It is a mission to share for the industry and all of SPE’s 124,000 members and staff. For the next 50-plus years, hydrocarbons will continue to fuel the world and it is our duty to take every integral part of E&P to the next level in order to relentlessly improve the sustainability and competitiveness of our business.

Детерминанты создания акционерной стоимости российскими компаниями

Авторы: Андрей Борисович Анкудинов- Электронная почта: ankudia@mail.ru
 Олег Владимирович Лебедев - Электронная почта: lebolegan@yandex.ru
 В работе представлены результаты эмпирического исследования детерминант создания акционерной стоимости. Анализ основан на панельных данных; выборка сформирована по данным 107 крупнейших российских публичных компаний нефинансового сектора за период 2004-2012гг. Метод исследования состоял из двух частей, сначала проведен регрессионный анализ детерминант создания акционерной стоимости в терминах стоимостных мультипликаторов цена/балансовая стоимость, цена/прибыль, а также совокупной акционерной доходности, затем проведена оценка детерминант вероятности превышения стоимостными мультипликаторами среднерыночных показателей и получения совокупной акционерной доходности выше средней по рынку. Результаты исследования показывают, что макроэкономическая конъюнктура выступает более мощным детерминантом создания акционерной стоимости по сравнению с индивидуальными характеристиками компании. Доходность активов, леверидж, инвестиционные расходы, уровень рисковости компании позитивно коррелированы с индикаторами создания акционерной стоимости. Государственные компании торгуются с некоторым дисконтом, а представленные в структуре собственности крупным акционером-нерезидентом – с некоторой премией к рынку. Размер, возраст компании, отраслевые эффекты статистически значимо связаны с индикаторами создания акционерной стоимости. Индивидуальные характеристики компаний имеют большое значение в относительной оценке стоимости компании рынком и существенно меньшее значение в объяснении совокупной акционерной доходности.