Governance strategy and costs: board compensation in Sweden
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Governance strategy and costs: board compensation in Sweden Sven-Olof Yrjo¨ Collin1,2 • Yuliya Ponomareva2 Sara Ottosson3 • Nina Sundberg4
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The Author(s) 2016. This article is published with open access at Springerlink.com
Abstract Shareholders are not identical, but differ in their objectives and actions. One difference is the level of delegation of the principal functions to the board, which we suggest can be observed through the level of directors’ compensation. We analyze the difference in board compensation through the concept of governance strategy and suggest two distinct categories of shareholder strategies: the company governance strategy and the financial governance strategy. These strategies create different distributions of governance costs, which we separate into principal costs and agency costs. We claim that the financial governance strategy adopts a higher level of delegation, which implies that the principal costs are assumed by the corporation and that agency costs are higher. This in turn can explain the higher compensation for the directors of the board compared to compensation under the company governance strategy. We test our hypothesis using a three-year panel of Swedish listed corporations and find that shareholders pursuing a financial governance strategy are associated with higher levels of board compensation. These findings suggest the existence of differences in governance strategies, reflected in The authors thank Editor in Chief Roberto Di Pietra and two anonymous reviewers for valuable comments on earlier versions of the paper. We also thank our colleagues in Sweden, at Corporate Governance Research Group at Linnaeus University and Kristianstad University for providing useful insights. We greatly appreciate helpful comments we received at EURAM conference (2014) and at the Academy of Banking, Sumy, Ukraine. The project was financed by the So¨derberg foundation. David Harrison at Proper English AB contributed with language editing. & Sven-Olof Yrjo¨ Collin [email protected] 1
Department of Business Administration and Work Science, Kristianstad University, 291 88 Kristianstad, Sweden
2
School of Business and Economics, Linnaeus University, Va¨xjo¨, Sweden
3
EY, Stockholm, Sweden
4
Swedish Agency for Economic and Regional Growth, Jo¨nko¨ping, Sweden
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governance costs through board compensation, among different types of shareholders in a corporation. Keywords Board of directors Compensation Governance cost Governance strategy Principal cost Sweden
1 Introduction The assumption that shareholders are essentially the same, driven by a single objective of wealth accumulation, has had a strong influence on research in economics. The debates on separation of ownership and control, started by Smith in 1776 (1981), continuing with Marx in 1867 (1906) and Berle and Means (1932), to modern authors like Alchian and Demsetz (1972) have treated owners of the firm as a homogenous group. Guided by the assumption of owners’ homogeneity, modern r
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