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The retention of underperforming CEOs and the implications on collusion : Controlling management and preventing collusion by strengthening the independence of the board

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Frame of Image ntrolling Management and Preventing Collusion by Strengthening the Independence of the Board
Hwa Ryung Lee, Fellow at KDI
“An analysis of Korean firm data reveals that there is a higher tendency for CEOs in cartel firms to maintain their posts when the overall industrial performance, and not the individuals’ relative performance, is high. This implies that an incentive for collusion, instead of competition, is created. Meanwhile, the outside directors of cartel firms have more social connections with the CEO in many cases and cast fewer opposing votes than those at competitive firms. Considering that CEO replacement is not pertinent to relative performance when a large proportion of the board of directors is close to the CEO or when there are no dissenting votes, enhancing board independence can deter the inclination to collude.”
Ⅰ. Introduction
Shareholders delegate corporate management activities to the chief executive officer (CEO) with the expectation that he/she will act as a faithful agent and make decisions in their best interests. However, a lack of monitoring and supervision may result in some CEOs maximizing their own interests through the decision-making process. To encourage corporate CEOs to work more diligently for shareholders, an incentive mechanism must be put into place that can offer the proper rewards for the invested efforts.
KDI FOCUS
2
Replacing an underperforming CEO is the basic incentive for stimulating efforts.
Simply put, the best structure for sha


Full Text
Title The retention of underperforming CEOs and the implications on collusion
Similar Titles
Sub Title

Controlling management and preventing collusion by strengthening the independence of the board

Material Type Articles
Author(English)

Lee, Hwa Ryung

Publisher

Sejong : Korea Development Institute

Date 2016-12
Series Title; No KDI FOCUS / No. 77, eng.
Pages 9
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Industry and Technology < Entrepreneurship
Holding 한국개발연구원; KDI국제정책대학원
License

Abstract

An analysis of Korean firm data reveals that there is a higher tendency for CEOs in cartel firms to maintain their posts when the overall industrial performance, and not the individuals’ relative performance, is high. This implies that an incentive for collusion, instead of competition, is created. Meanwhile, the outside directors of cartel firms have more social connections with the CEO in many cases and cast fewer opposing votes than those at competitive firms. Considering that CEO replacement is not pertinent to relative performance when a large proportion of the board of directors is close to the CEO or when there are no dissenting votes, enhancing board independence can deter the inclination to collude.

- Replacing an underperforming CEO is the basic incentive for stimulating efforts.

- Incentive mechanism for CEOs can have an impact on market competition as well as internal corporate management.

- If CEO replacement is not sensitive to relative performance, collusion is more likely than competition.

- As the performance of the overall industry, and not the CEO's relative performance, increases, the chances of CEO replacement at cartel firms declines.

- In the case of owner-family CEOs, relative performance of the CEO does not determine replacement regardless of participation in collusion.

- Underperforming CEOs have more chances of keeping their jobs in a company whose board has a high proportion of outside directors with social connections to the CEO or does not have dissenting outside directors.

- In cartel firms, the boards have a higher proportion of outside directors with social ties to the CEO, and they serve longer terms.

- Outside directors in cartel firms are less likely to oppose board agendas than those in non-cartel firms and are more likely to be replaced if he/she dissents.

- Collusion can be deterred by strengthening independence of the board and implementing proper monitoring and punishment mechanism for underperforming CEOs.