Stefano Bozzi

Directors' Remuneration Before and after the Crisis: Measuring the Impact of Reforms in Europe

In this paper we measure the impact of recent reforms on directors’ remuneration by comparing the remuneration practices at large European listed companies before and after the financial crisis. We analyse the data concerning directors’ remuneration at FTSE Eurofirst 300 Index companies and assess to what extent the changes occurred between 2007 and 2010 reflect the economic crisis determined by the 2008 financial turmoil and the remuneration reforms generated by the same. Our analysis reveals that country-specific characteristics such as corporate governance, firm ownership, and the nature and quality of the legal system still have a relevant impact on the level and structure of directors’ pay.Section I briefly connects our work with previous studies in this area, while section II introduces some core aspects of recent EU and national reforms. In section III, we analyse the data concerning remuneration governance and disclosure, and show that all firms have experienced improvements. However, variations persist reflecting national regulations and practices. Moreover, companies with more dispersed ownership tend to comply better with remuneration governance and disclosure requirements. Our data confirm and extend to Europe theoretical predictions and previous country-specific empirical evidence about the impact of ownership concentration on remuneration governance and disclosure. In section IV, we analyse pay structure and levels. We measure the level of total compensation, the variable component including the estimated value of annual stock grants and stock options. The evolution of total compensation between 2007 and 2010 reveals that pay practices are permeable to the effect of the financial crisis. Board total compensation decreases in most European countries. However, significant differences emerge between financial and non-financial companies, with board compensation at financial firms decreasing rather significantly, while non-financial firms experience less relevant changes. Also the CEO compensation level and structure significantly changed in 2010 relative to 2007, mainly as a result of the reduction in variable cash compensation. This is partly due to the negative performance of firms in 2010. However, our results show that these changes may be also related to other factors, in particular the regulatory pressure on financial firms in the relevant period. Indeed, several items in the pay structure of financial firms go in the direction indicated by regulators, i.e. better focus on the risk implications of pay, appropriate balance between variable and fixed compensation, and a substantial portion of variable compensation awarded in shares or share-linked instruments. Section V concludes by advancing some policy suggestions.

Say-on-Pay in a Context of Concentrated Ownership. Evidence from Italy

We investigate say-on-pay (SOP) voting outcomes in a country (Italy) where ownership structure is concentrated by regressing shareholder dissent on a comprehensive set of independent variables (spanning from remuneration structure and disclosure to corporate governance), coming from the Italian securities and exchange commission (CONSOB) and the listed companies’ industry association (Assonime-Emittenti Titoli) databases. Our main results may be summarized as follows: a) shareholder dissent in Italy is smaller, but still comparable with that found in the UK and the US, where ownership is disperse; b) dissent is negatively correlated with the equity stake held by the largest shareholder; we interpret this evidence as consistent with better monitoring and lower agency costs; c) dissent is, at best, only weakly related with company performance; however, it is positively correlated with CEO remuneration and negatively correlated with the level of disclosure, especially on the variable components of CEO pay; d) dissent is affected by investor activism at the company level, as proxied by the turnout of institutional investors at the AGM and by minority directors (a peculiar feature of Italian CG regulation) sitting on the board of target companies; e) finally, dissent is higher where shareholders’ SOP vote is non-binding, suggesting that the non-binding nature of the SOP vote may not reduce its effectiveness.

Firm Growth and Legal Environment

An effective country‐level legal environment is crucial for promoting access to finance, development, and ultimately economic growth. Based on a sample of large companies listed in Continental Europe in the period 2002–2011, this study suggests that investor protection level is related to firm growth. Specifically, investor protection: a) enhances the growth rate of the firm; b) affects growth sensitivity to leverage and cash flow. These results provide empirical support to recommendations by policy makers advocating for increased investor protection in Europe.