Do Swedish Firms Pay Their Boards Excessive Compensation? - A study on the economic determinants and effects of excessive board compensation among Swedish firms

Abstract

Corporate governance and board issues have not only gained interest due to well-known governance failures such as the 2001 Enron scandal, rather, the field has been of interest at least since 1776 and the development of Smith’s Wealth of Nations. Due to corporations’ immense contribution to economic activity, their agency problems and costs remain substantial. Naturally, so does the role of boards. In corporate governance contexts, compensation is often viewed as one of the most important incentivizing mechanisms, as well as one of the most important conflicts of interest among firms. By employing a two step model, consisting of a prediction model and regressions, this study determine expected chairman and board member compensation, and whether or not Swedish listed firms overcompensate their board of directors. It further investigates the relationship between excessive compensation levels and ownership structures, more precisely insider and institutional ownership, as well as the effects of excessive compensation levels on future firm performance and risk taking. By running regressions and predicting compensation, our results show a significant average positive excessive chairman compensation of 21%, respective member excessive compensation of 8.56% in relation to the benchmark, over our sample period. Further, our results suggest that insider ownership has significant explanatory power on excessive chairman and member compensation and that the effect of excessive compensation levels is positively significant on future firm performance when testing against CAPM. This has interesting implications in the light of agency theory, suggesting that excessive compensation might not be a result of cronyism. This study contributes to existing research on the field by , as of our knowledge, for the first time, finding results that suggest that the practice of overcompensating chairmen and other board members exists among Swedish firms. It also contributes to already existing research by considering discrepancies between different functions of the board by separating the compensation of the chairman of the board and other directors, which induce more sophisticated conclusions regarding the association to firm performance.