Origins of executive pay & corporate governance reform codes : Essays on an institutional approach to corporate governance

Abstract

Typically corporate governance is analyzed and understood on the basis of agency theory. This theory is not only the dominant one in academic research, it is also understood as the dominant lens by which policy makers and practitioners ought to see the field. Nevertheless, in order to provide more conclusive understandings and explanations of corporate governance phenomena this thesis shows the need for a theoretical alternative and offers such an alternative. By further developing an institutional approach, this thesis shows that agency theory is problematic and limited as a theory to understand and explain the wide spectrum of corporate governance problems in theory and practice. The developed alternative also offers a different view on possible alleviations to these problems that are irreconcilable with an agency theoretical approach. The first part of this thesis deals with the question how executive pay can be explained. To find an answer to this question an extensive literature overview is provided and a new theoretical framework is introduced. This framework is tested on a unique dataset comprising over 3800 executive pay packages from 17 different countries. Both the developed framework and the empirical tests of this framework show that: 1) executive pay is an outcome of corporate governance arrangements, 2) executives are in a position to exercise discretion in the pay setting process, and 3) pay setting processes are embedded in socially constructed corporate governance arrangements. The study shows that institutional conditions provide executives with the opportunity to use their discretion to make tradeoffs between the implications of pay levels with the implications of pay that is contingent on performance. In sharp contrast to the agency approach and the mainstream literature, this study concludes that setting executive pay and the discretion executives have to influence their own pay are highly contingent on the socially constructed corporate governance arena in which decisions on executive pay are made. The second part of this thesis explores an institutional approach to corporate governance reforms. In the corporate governance literature national corporate governance arrangements are typically categorised as either belonging to the Anglo-American-shareholder oriented model or to the Rhineland or European-stakeholder model. An the basis of agency theoretical assumptions, amendments to these arrangements are typically understood to be made in favour of the Anglo-American approach. However, on the basis of content analyzes of 38 national corporate governance reform codes, this study identifies 5 different corporate governance philosophies- 5 complementary systems of beliefs on whether and how corporate governance arrangements are structured. The study shows that every country has a distinct and truly unique corporate governance tradition, evidenced by and expressed as its relative endorsement of the philosophies identified. Further analyzes show that countries adopt those corporate governance arrangements that are appropriate given their institutional conditions characterized by their dominant firm ownership structures. Since social actors differ in their understandings of what is appropriate, corporate governance arrangements and solutions to governance problems will differ across countries and firms. Thus, in contrast to supporters of agency theory, the institutional approach advanced here shows that each country has its own unique corporate governance approach and that convergence to the shareholder or any other model is unlikely to occur any time soon.