Lucky CEOs and Lucky Directors

by Lucian Bebchuk, Yaniv Grinstein and Urs Peyer for The Harvard Law School Forum, December 7th, 2010.

The December issue of the Journal of Finance features our article Lucky CEOs and Lucky Directors. This study integrates two discussion papers we circulated earlier, Lucky CEOs, and Lucky Directors.

Our study contributes to understanding the corporate governance determinants and implications of backdating practices during the decade of 1996-2005. Overall, our analysis provides support for the view that backdating practices reflect governance breakdowns and raise governance concerns. (For recent expressions of the opposite view that backdating did not reflect governance breakdowns, see the recent op-edby WSJ columnist Holman Jenkins, who argues that backdating was a “meaningless accounting violation.”)

In particular, we find that:

  • (i) Opportunistic timing has been correlated with factors associated with greater influence of the CEO on corporate decision-making, such as lack of a majority of independent directors, a long-serving CEO, or a lack of a block-holder with a “skin in the game” on the compensation committee;
  • (ii) Grants to independent directors have also been opportunistically timed and that this timing was not merely a by-product of simultaneous awards to executives or of firms’ routinely timing all option grants;
  • (iii) Lucky grants to independent directors have been associated with more CEO luck and CEO compensation;
  • (iv) Rather than being a substitute for other forms of compensation, gains from opportunistic timing were awarded to CEOs with larger total compensation from other sources; and
  • (v) Opportunistic timing was not driven by firm habit but rather, for any given firm, the use of such timing was itself timed to increase its profitability for recipients. (continue reading... )
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