The governance of director compensation

Author

Lily FANG
Sterling HUANG, Singapore Management UniversityFollow

Publication Type

Journal Article

Version

acceptedVersion

Publication Date

5-2024

Abstract

The average total compensation of directors in U.S.-listed companies was $342,030 in 2020, 5.06 times the median household income. Directors set their own pay, giving rise to potential self-dealing. We argue and document that in the presence of self-dealing, external mechanisms such as legal standards act as effective means of governance. Following a landmark Delaware court ruling that subjected director pay to a more stringent legal standard, Delaware-incorporated firms reduced director compensation relative to non-Delaware firms and experienced positive and non-transient stock price reactions. Our results indicate that proper governance of director compensation enhances firm value.

Keywords

Determinants, Director compensation, Natural experiment, Seinfeld v. Slager, Self-dealing

Discipline

Accounting | Corporate Finance | Human Resources Management

Research Areas

Corporate Governance, Auditing and Risk Management

Publication

Journal of Financial Economics

Volume

155

First Page

1

Last Page

14

ISSN

0304-405X

Identifier

10.1016/j.jfineco.2024.103813

Publisher

Elsevier

Citation

FANG, Lily and HUANG, Sterling. The governance of director compensation. (2024). Journal of Financial Economics. 155, 1-14.
Available at: https://ink.library.smu.edu.sg/soa_research/2042

Copyright Owner and License

Authors

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Additional URL

https://doi.org/10.1016/j.jfineco.2024.103813