Foreword to Special Issue: Governance, Policy and the Crisis
Renée Birgit Adams(University of New South Wales, FIRN and ECGI)

The purpose of the two volumes of this special issue on governance, policy, and the crisis is to grapple with some of the questions that arise about the relationship between firm-level governance and policy making around the crisis. Many blame poor firm-level corporate governance for the financial crisis. Senators Cantwell and Schumer’s proposed Shareholder Bill of Rights states that ‘… among the central causes of the financial and economic crisis that the United States faces today has been a widespread failure of corporate governance’ (Cantwell and Schumer 2009, Section 2). The Organisation for Economic Co-operation and Development (OECD) Steering Group on corporate governance identifies weak governance as a major cause of the financial crisis (Kirkpatrick 2009; OECD Steering Group on Corporate Governance 2010), and places much of the blame on board failures in financial firms, in particular.1 In a direct response to the crisis, the UK Treasury commissioned Sir David Walker to conduct a review of corporate governance of the UK banking system.

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Governance and the Financial Crisis*
Renée Birgit Adams(University of New South Wales, FIRN and ECGI)

Should boards of financial firms be blamed for the financial crisis? Using a large sample of data on nonfinancial and financial firms for the period 1996-2007, I document that the governance of financial firms is, on average, not obviously worse than in nonfinancial firms. In fact, using simple governance scores and governance indices as measures, banks and nonbank financial firms generally appear to be better governed than nonfinancial firms. I also document that bank directors earned significantly less compensation than their counterparts in nonfinancial firms and banks receiving bailout money had boards that were more independent than in other banks. My results suggest that measures of governance that have been the focus of recent governance policies are insufficient to describe governance failures attributed to financial firms. Moreover, recent governance reforms may have to shoulder some of the blame placed on boards of financial firms.

*I thank Denis Sosyura, participants at the 2009 Copenhagen Corporate Governance conference, the 2009 Helsinki PhD conference, and the 2010 Asian FA meetings for helpful comments.

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The Governance of Financial Regulation: Reform Lessons from the Recent Crisis*
Ross Levine(Brown University, Providence)

There was a systemic failure of financial regulation: Senior policymakers repeatedly enacted and implemented policies that destabilized the global financial system, and the authorities maintained these policies even as they learned about the deleterious consequences of their policies during the decade before the crisis. The absence of an informed, expertly staffed, and independent institution that evaluates financial regulation from the public’s perspective is a critical defect in the governance of financial regulation – the system associated with selecting, enforcing, and reforming financial policies. I propose a new institution to address this defect.

*James and Merryl Tisch Professor of Economics, Brown University, 64 Waterman Street, Providence RI, 02912, ross_levine@brown.edu. I thank James Barth, John Boyd, Gerard Caprio, Peter Howitt, Randall Kroszner, Glenn Loury, Yona Rubinstein, Andrei Shleifer, Joe Stiglitz, David Weil, and Ivo Welch for helpful conversations and communications. This is an updated version of a paper presented at the BIS’s Ninth Annual Conference on ‘The Future of Central Banking under Post-crisis Mandates’ in Lucerne, Switzerland on 24-25, June 2010, which was distributed as BIS Working Paper 329. The arguments in this paper relate closely to some chapters in ‘The Guardians of Finance: Making Regulators Work for Us’ by James Barth, Gerard Caprio, and Ross Levine, which will be published by MIT Press in 2012. Participants at the Bank for International Settlements, the Boston and Chicago Federal Reserve Banks, the IMF, World Bank, George Washington University, Claremont McKenna College, and Brown University provided insightful comments. I bear full responsibility for the views expressed in the paper.

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How Has CEO Turnover Changed?*
Steven N. Kaplan(University of Chicago Booth School of Business)
Bernadette A. Minton(Ohio State University)

We study CEO turnover – both internal (board driven) and external (through takeover and bankruptcy) – from 1992 to 2007 for a sample of large US companies. Annual CEO turnover is higher than that estimated in previous studies over earlier periods. Turnover is 15.8% from 1992 to 2007, implying an average tenure as CEO of less than 7years. In the more recent period since 2000, total CEO turnover increases to 16.8%, implying an average tenure of less than 6years. Internal turnover is significantly related to three components of firm stock performance – performance relative to industry, industry performance relative to the overall market, and the performance of the overall stock market. The relations are stronger in the more recent period since 2000. We find similar patterns for both forced and unforced turnover, suggesting that some, if not most, turnover labeled as unforced is actually not voluntary. The turnover-performance sensitivity is modestly related to block shareholder ownership and board independence.

*This research has been supported by the Center for Research in Security Prices, by the Lynde and Harry Bradley Foundation and the Olin Foundation through grants to the Center for the Study of the Economy and the State, and the Dice Center for Research in Financial Economics. We thank Stuart Gillan, Chester Spatt, and seminar participants at the 2007 AFA Meetings, Berkeley, NBER Corporate Governance Summer Institute, and the University of Chicago for helpful comments.

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Executive Pay and Performance: Did Bankers’ Bonuses Cause the Crisis?*
Paul Gregg(CMPO, University of Bristol)
Sarah Jewell(School of Economics, University of Reading)
Ian Tonks(School of Management, University of Bath)

This paper examines the pay-performance relationship between executive cash compensation (including bonuses) and company performance for a sample of large UK companies, focusing particularly on the financial services industry, since incentive misalignment has been blamed as one of the factors causing the global financial crisis of 2007-2008. Although we find that pay in the financial services sector is high, the cash-plus-bonus pay-performance sensitivity of financial firms is not significantly higher than in other sectors. Consequently, we conclude that it unlikely that incentive structures could be held responsible for inducing bank executives to focus on short-term results.

*Thanks to the Leverhulme Trust for funding this research through its research centre grant to CMPO, Bristol. This paper has benefited from seminar presentations at the Universities of Amsterdam, Bristol, CASS Business School, Exeter, Leeds, Oxford, Reading and the Asian Finance Association, HKUST June 2010. We are particularly grateful to Renee Adams (the editor), Thomas Kirchmaier and an anonymous referee for comments on an earlier draft. We are also very grateful to Maria Michou and Rajesh Tharyan for help in updating the data used in this study.

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