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Competition, Monopoly and Corporate Governance

Essays in Honour of Keith Cowling

Edited by Michael Waterson

Competition, Monopoly and Corporate Governance covers three broad themes, each associated with a particular strand of Keith Cowling’s own writings in industrial economics and each represented by four specially commissioned papers.
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Chapter 11: Perspectives on the Governance of Executive Compensation

Martin J. Conyon


Martin J. Conyon 1. INTRODUCTION Corporate governance, broadly conceived, refers to the complementary mechanisms by which enterprises are owned, controlled and directed. As a result corporate governance is central to understanding the performance of firms and the wealth of nations. The primary areas of governance research focus on the role of the Board of Directors; the importance of executive compensation; the role of the market for corporate control and takeovers; and the importance of concentrated shareholdings and monitoring by financial institutions.1 This chapter deals with the governance of executive compensation. Our objective is to explain some contemporary and dominant trends in executive pay. In addition, we discuss competing paradigms (‘managerial power’ versus ‘optimal contracting’) for understanding compensation outcomes at the apex of the modern corporation.2 The recent string of corporate scandals in the United States has catapulted corporate governance to the centre of business debate and raised fundamental questions about trust, integrity and the purpose of the corporation. The allegations of accounting fraud and irregularities at Enron, WorldCom and Global Crossing are by now well known. In addition, recent attention has focused on potentially egregious and avaricious selfdealing by corporate insiders. In June 2002, the Securities and Exchange Commission filed charges against the former CEO of ImClone Systems Inc. Samuel Waksal, for illegal insider trading.3 In September 2002 a report by Tyco International Ltd said that it had uncovered tens of millions of dollars in fraudulent bonuses. Details from the company’s internal investigation, contained in a 100 page filing with...

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