Amid Corporate Scandals And Conflicts Of Interest, Increased Board Independence Is An Oft-Prescribed Remedy. Shareholders, Investors: Hypothesis Literature Review, TCD, Ireland

Amid corporate scandals and conflicts of interest, increased board independence is an oft-prescribed remedy. shareholders, investors, and the public have begun to lose confidence in many of the parties involved in company oversight. the question of whether the total compensation granted to CEOs accurately reflects their performance has made CEO compensation a continuing source of controversy. The compensation committee is responsible for ensuring that executive pay is commensurate with their performance.

They are also responsible for devising and managing the various compensation packages. There are numerous factors that can jeopardize the governance of the compensation committee, and the presence of social relationships between its members and the chief executive officer is one of them. The purpose of this study is to analyze the social ties between the compensation committee and the CEO and to determine how the nature of these relationships influences the CEO’s compensation and the level of oversight of the compensation committee as a whole.

Under New York Stock Exchange regulations, the compensation committee must, at a minimum, review and approve compensation-related goals and objectives for the chief executive officer (“CEO”), evaluate the CEO’s performance in light of these goals and objectives, and determine and approve the CEO’s compensation either as a committee or in conjunction with the other independent directors (O’Brien, Wahlquist, & Shapiro, 2020). According to the Sarbanes-Oxley Act, which went into effect in 2002, it is strongly recommended or, in some cases, required that companies’ three primary committees, the compensation, nomination, and audit committees, be composed of independent board members.

Following the Sarbanes-Oxley Act, a director is deemed independent only if he or she or a member of his or her immediate family is neither presently nor formerly employed by the company. Additionally, they are not affiliated with the company through their directorship (Hoitash, 2010). Although board members can meet the formal definition of independence through assignment rules and regulations, they are frequently still strongly connected to management on a social level.

For the compensation committee to operate efficiently, its members must exercise independent judgment and provide robust oversight of executive decisions. However, social ties between committee members and the CEO can generate conflicts of interest, diminishing the compensation committee’s objectivity and independence.

This study focuses on educational ties, in which committee members and CEOs attended the same university; professional ties, in which committee members and CEOs previously worked together; and non-professional ties, such as shared club memberships. CEOs may appoint “friendly” directors to committees, such as those with favorable social connections that can compromise overall oversight.

Prior research indicates that CEOs are compensated more favorably by independent committees with social connections (Bruyneels & Cardinals, 2013) (Hwang & Kim, 2009) (Hoitash, 2010). In light of these findings, examining the influence of professional, non-professional, and educational social ties between the CEO and the compensation committee and the subsequent effects is crucial.