Board Independence and Compensation Policies in Large Bank Holding Companies

Financial Management (Financial Management Association), Autumn, 2000 by Chandra S. Mishra, James F. Nielsen

In Table III, we see several interesting results. In the performance equations, the signs of the board independence, pay-related incentives, and the interactive variables are consistent with those in Table II. In the board independence equations, the sign of the performance variable is positive and statistically significant in the relative tenure equation, indicating that high-performance banks generally have high levels of board independence.

In the pay-related incentives equations, we note a negative coefficient (-0.0953) for the board independence variable when we measure board independence by RELTENURE. In the RELTENURE equation, we also note a negative coefficient for pay-related incentives (-0.0075). Even though these coefficients are not statistically significant, the signs support a substitution relation between the relative tenure of outside directors and CEO's pay-related incentives.

However, when we measure board independence by %OUTDIR, we note a statistically significant positive coefficient (0.1674) for board independence in the pay-related incentives equation, and also a statistically significant positive coefficient for pay-related incentives (2.0900) in the %OUTDIR equation. These results suggest that a complementary relation exists between %OUTDIR and CEO's pay-related incentives.

We examine several other specifications for the three equations, and the signs and the significance of the seven coefficients (board independence, pay-relayed incentives, CEO duality, their products, and performance) are similar in all specifications. For example, when we included the percentage of stock held by institutions and the percentage held by blockholders in the board independence equations (Whidbee, 1997), it did not change the signs or significance of the performance and the pay-related incentives variables.

When we tried using two lagged measures of performance (average ROA over the prior two years and sales growth over the prior five years) in the pay-related incentives equation, it did not change the reported results for the board independence variables. The coefficient on the lagged ROA variable is negative but insignificant, and the coefficient on the prior sales growth variable is negative and significant in all pay-related incentives regressions, indicating that lower growth (performance) firms use higher levels of pay-related incentives.

To test the hypothesis that the sensitivity of performance to the organizational features is different for banks relative to nonfinancial firms, we collected data on 40 nonfinancial and nonutility firms, which were randomly chosen from the Jensen and Murphy (1990b) list. We obtained board and CEO information from proxy reports, and the accounting and ownership data from disclosure statements. All the data are for 1990.

Compared to banking firms, the sample of nonfinancial firms has lower average pay-related incentives ($2.32 vs. $4.27), lower average %OUTDIR (58% vs. 64%), lower average CEO tenure (4.76 years vs. 12.08 years), greater average RELTENURE (2.59 years vs. 1.05 years), lower average CEO duality (87% vs. 95%), lower average ownership by inside directors (1.31% vs. 2.29%), greater average ownership by outside affiliated directors (1.46% vs. 0.94%), greater average ownership by outside independent directors (1.63% vs. 1.32%), and a greater average market-to-book ratio (2.78 vs. 0.88).