Geoffrey Owen

The Changing Role of the Chairman: Impact of Corporate Governance Reform in the United Kingdom 1995-2005

Based on twenty-five semi-structured interviews with company chairmen, we were able to establish that there is resounding support for the split of the positions of chairman and CEO. In addition, chairmen play a key role in making the board a success, partly by establishing the right tone and procedure at the top. The chairmen we interviewed believe that the quality of boards has improved over the last ten years and that directors take their responsibilities more seriously. However, the drive for better corporate governance, though generally welcome, has in some respects become counterproductive.

Towards a Liberal Utopia

Towards a Liberal Utopia? is a free-market manifesto for the next fifty years covering a diverse range of policy areas, including health, education, social security, pensions, labour markets, tax policy, Europe and the environment. In addition to these visions of the future, Ralph Harris describes the success of the IEA in changing the climate of opinion in its first 50 years. Given the impact that the ideas of IEA authors have had on policy-making in the last 50 years - for example in trade union reform, removal of exchange and rent controls, the control of inflation, independence of central banks and the development of road user charging - Towards a Liberal Utopia? is essential reading for those keen to learn about the ideas that should dominate the policy agenda in the coming decades.

Kevin J. Murphy on Executive Compensation: Is Europe Catching Up with the US, and Should it Do So?

Executive compensation has risen sharply over the last few years in both Europe and the US, although the level of compensation in the US is still considerably higher than in Europe. The steep rise in compensation is driven in part by the ratchet effect induced by more stringent disclosure rules, and in part by inefficiencies in, and governance failure of, the CEO hiring process.

Sean O’Hare on UK Compensation Trends

While the UK is in general following the compensation trends set in the US, its shareholder approval process of top management compensation is less formal and mechanical. In turn, this allows more firm-specific flexibility. Changes to the UK tax law that considerably lower the ceiling on tax-favoured pension arrangements from April 2006 will have an important impact on the compensation structure of UK executives in the near future.

Paul Davies on Boards of Directors: the European Perspective

UK company legislation has traditionally had a paradox at its heart. While it has been highly prescriptive in terms of laying out the residual rights of shareholders, it is silent on the role of the board of directors. This gap has been filled in recent years by the introduction of the combined code on corporate governance. The implications of the code, with its emphasis on the monitoring role of non-executive directors, are to push the UK towards a de facto two-tier board system. Similarly, many European countries are introducing choice, between one- and two-tier boards, as to the optimal board structure.

Andrei Shleifer asks Is There a Major Problem with Corporate Governance in the United States

The distinction between civil law and common law countries comes down to the question of who has the ultimate trust of society, lawmakers (legislators) or law enforcers (judges). It is argued that common law, which puts much more trust in law enforcers and gives much greater discretion to the courts, is better placed to protect shareholders, and so fosters the development of efficient capital markets. The current tendency under Sarbanes-Oxley for more prescriptive capital market rules might be counterproductive.

Steven N. Kaplan on the State of US Corporate Boards and Governance: What is Right and Wrong?

Since 1980, the structure and overall performance of US corporate boards appear to have improved in terms of setting executive compensation, monitoring CEOs and independence of top management. The large increase in the equity component of executive compensation has been an important part of this shift as it has significantly increased senior managers’ focus on the creation of shareholder value. US boards, however, have performed less well in a number of key areas, particularly monitoring accounting manipulation and effectively valuing the options granted to senior executives. Recent reforms have had a positive effect on these issues (although they have imposed a substantial increase in compliance costs, particularly in the short term). Boards can still go further in improving executive compensation by restricting the liquidity of options grants and expensing all stock options.

Roberta Romano on Institutional Shareholders and Corporate Governance in the US

Public sector funds like CalPERS and NYCERS are the most activist investors in the US. They mainly employ voting initiatives to make their voice heard. However, empirical studies demonstrate that such initiatives have no impact on corporate performance; in cases where funds are entitled to subsidies for their voting initiatives they actually destroy – on average — shareholder value.

Michael Jensen on Agency Costs of Overvalued Equity

Michael Jensen addressed the agency costs of overvalued equity, a subject that is both in contrast and a complement to his earlier work on the agency costs of just the contrary, undervalued equity. Historically, he has been a strong proponent of the proposition that the maximisation of shareholder value is the objective of the firm, and he still is.

Joshua Ronen on Financial Statement Insurance

It is suggested that financial statement insurance against omissions and misrepresentations can be an effective tool to improve both the quality of audits and financial statements, while reducing the equilibrium amount of losses. By delegating the hiring decision of auditors to the insurance company, the inherent conflict of interest between auditors and the management that hires them will be solved. Both the insurance coverage and premium paid will be publicised. This will work as an effective signal of the quality of audits and should help companies with good financial statements to lower their cost of capital.