Archive for August, 2016

What to do with the “Comply or Explain” principle? (II)

In November 2015 I published a comment on an article by Hadjikyprianou, George C. (1) who considered the principle needed some practical reform, because both the quality of the explanations and its oversight by shareholders and supervisory bodies was defective. In order not to steal the shareholders ‘role and to reduce private monitoring costs he suggested that a public institution could create a rating system for the CG practice by public firms.

In 2014 the same concern had also led the EU to publish a recommendation on how to use the “comply or explain” principle, so apparently institutions started offering guidelines for better explanations instead of creating the rating system, (2).


The EU suggested that firms explain what CG guideline they did not abide by, how, why, the decision-making process they followed to decide not to comply (temporarily or not), and what action they were taking so as to follow best CG practices for their “size”.

In July 2016, and partly with the aim to give the EU guideline some additional public exposure, the Spanish SEC equivalent, CNVM, has published a Guide for best practices when applying the “comply or explain” principle, (3). Read more…


Executive Pay moderation: what worked until 1980?

Steven A. Bank, Brian R. Cheffins and Harwell Wells recently made available a draft of their analysis (1) of the levers that kept executive pay at acceptable levels in the USA since the 1940´s and until the early 1970´s.

They start presenting the facts: in that period executive pay didn`t follow the fantastic results firms were producing but remained flat and even declined versus the rank-and-file employees when adjusted for inflation. They nevertheless refer briefly to a different period, in the 1920´s. It is worth also recovering Kevin J. Murphy´s “Executive Compensation: Where We Are, And How We Got There”, where he presents the first wave of hired managers earning very large amounts in the 1920`s thanks to bonuses linked to profits; usually the amounts where similar to what we observe in the 20th century when inflation-adjusted. But as Bank, Cheffins and Wells report, in the 1930´s the story is quite different as some outrageous cases forced legislators to impose disclosure of executive pay. Although pay still increased during this decade, compensation soon started to drop, and particularly during the 1940`s. Stock options started to be common in the 1940´s, its nature of compensation (not capital gain at exercise) was recognized in 1946, but they didn´t represent abnormal amounts so that anemic growth for executive pay remained the rule in the 1950´s and the 1960´s. But executive pay started to rebound in the 1970`s and most relevantly in the 1980´s, thanks to the use of stock option and restricted stock option plans. Even more in the 1990`s. Criticism started to spread; an effort to link pay and performance also became evident, so that higher pay was needed to compensate for the riskier pay structure (as perceived by the executives). Only the crisis after 2008 was enough to stop this growth, although (according at least to part of the academic analysts) the distribution problem and compensation gap between executives and employees persists.


After that, they refer to the governmental efforts to curb and shape executive pay; as in the case of Murphy (2), they see more failures than merits, and they all even see many trends in executive pay having been engendered by pay reforms.

The authors then focus on the core of their study: what were the determinants of executive pay that kept it under control in the 1940-1970 decades? Read more…