Business And Management

Running Head: BUSINESS AND MANAGEMENT 1

Business and Management

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(Summary and Critical Analysis of articles)

Lin, Dan; Hsien-Chang Kuo; Lie-Huey Wang, “Chief Executive Compensation: An

empirical study of fat cat”, International Journal of Business & Finance Research 2013,

Vol. 7 Issue 2, p27-42. 16p.

Summary

“Chief Executive Compensation: An Empirical Study of Fat Cat CEOs” by Lin Dan et

al. is a research report on the “fat cat problem.” Most of the financial firms (especially those

hit buy the financial slump of 2007.2008) suffer financial crisis because of their

compensation plans for their CEO and other top executives. Most of these firms peg

performance to the compensations they offer the said people. As a result, the handsome

compensations put the CEOs and the top executives under pressure to deliver for the

company and the stakeholders of the firms. The CEOs therefore engage in excessive risk-

taking with short-term gambles that are always volatile as opposed to the long-term

objectives. This is creating the “fat cat problem” where the executive compensations continue

to soar as their performances slump. Despite the disturbing increase in the CEOs

compensation by the America financial firms, the compensations are never uniform amongst

the firms. The reports posits that it is hell-bent the market factors (managerial labour market,

firm size and current performance, human capital etc.) and power and preferences of the CEO

and the board. The reports discusses the “fat cat problem” in two folds. The “fat cat CEOs”

are those that perform dismally when compared to the weight of the compensations they

receive. On the other hand, the “fat cat companies” are the companies that perform dismally

but give their CEOs and top executives high compensations. This is indicative of a lacking

link between pay and performance in that companies are not paying based on performance.

Critical Analysis

According to the hypotheses of the report, both the age and tenure of the CEOs

positively impacts on the compensations they receive. In addition, the shareholding CEOs are

said to liken lower compensations because they values the general growth of the company

that will essentially the value of the shares shoot. The hypotheses suggest a negative

relationship between the CEO’s compensation and the CEO’s shareholding. An additional

hypothesis posits that an increase on the board size positively affects the compensations of

the CEO. These are effectively represented by the model specification method. Empirical

analysis of the results of the method with the fat cat companies indicate that the latter is still

increasing at an increasing rate. It is important that the conclusion of the paper borrow

directly from the findings and analysis. It is in tandem with the hypotheses proposed above it.

The conclusion rightfully calls for public review of the pay-performance link to set effective

standards that do no cause financial problems like happened in the 2007/2008 financial

depression.

Vijay Jog and Shantanu Dutta, “Searching for the Governance Grail”, Canadian

Investment Review, Spring 2004, pp.33-43.

Summary

“Just like Chief Executive Compensation: An Empirical Study of Fat Cat CEOs” by

Lin Dan et al., ““Searching for the Governance Grail” by Vijay Jog and Shantanu Dutta looks

studies the existing link between firms’ performance or the CEO compensations and the

effectiveness of the corporate governance. There paper by Vijay Jog and Shantanu Dutta

alludes to the widely held notion that good performance is always the result of good

governance, and that effectively management firms properly compensate their CEOs. The

two authors collected and presented results that suggest otherwise. The results prove that the

notion is wrong and misleading in that the relationship between good governance and

corporate performance as well as the CEO compensation is not always intuitive. Because

governance is broad to the extent of lacking a proper definition, any existing relationship

between the three must always be in the wrong direction.

Critical Analysis

The paper hypothesizes three things. There lacks the definitive relationship between

the CEO compensation and the performance of the firm hence triggering a possible review if

any. The governance mechanism variables are interdependent. Performance, ownership and

government structures are related, but they independently affect the compensation of the

CEO. It means therefore that governance and performance need not to be related to affect the

compensation that the corporate CEOs receive. If they do as some researchers posit then they

will always affect it in the opposite direction. To this, the conclusion of the paper is a

reflection of the research findings. However, the hypothesis falls short from the real

conclusion of the piece. The third hypothesis should have stated that the three elements are

actually not related even though they can independently affect the compensation.

Akhibe, Aigbe; Madura, Jeff. “Impact of anti-takeover amendments on corporate

performance”, Applied Financial Economics. Dec96, Vol. 6 Issue 6, p519-529. 11p.

Summary

“Impact of anti-takeover amendments on corporate performance,” by Aigbe Akhibe

and Jeff Madura is informed by the observed immediate share price changes of companies

upon the announcement of takeovers. As a result, the paper hypothesized that the general

corporate performances are always adversely affected by antitakeover amendments. Just like

the takeover of corporates that essentially leads to change in stakeholders, antitakeover

amendments to affects the corporate performances. Change in corporate controls can

sometimes be good or bad depending on the execution of the entire process. In most case, it is

accompanied by immediate adverse results prompting the need for shark repulsion.

Sometimes, it creates a conducive bargaining environment for the stakeholders with the

interested acquirers setting pace for even a higher better bargain. The negative side is that it

can easily make firms to undergo hostile acquisition. It is introduces complacency within the

management team calling for improve performance monitory. The performance monitoring

of the running of the company introduces additional agency cost hence cutting the profits that

the firm makes. The paper clarifies that the antitakeover amendments affects the corporate

performances in various ways both positively and adversely.

Critical Analysis

According to the hypothesis of the paper, antitakeover amendments always create

adverse effects to the corporate performance. Aigbe Akhibe and Jeff Madura conducted

extensive research with many companies to find out the effect they experienced with the

adoption of the amendments. The reserved payed keen interest on the immediate effect on the

share prices of these companies. It is realised that it triggers poor spending decisions that

potentially adversely influences the shareholder wealth. The findings and the valuations of

the findings indicate that companies that fail to adopt the amendments are always prone to

taking risk shift decisions. These are decisions that show that the stakeholders are ready to let

the company with another management and therefore prevents them from making long-term

decisions. The paper contradicts the hypothesis by concluding that that firms that adopts the

antitakeover amendments always realise growth because they often concentrate on

implementing long-term goals. Even if they are interested in the takeover, the management

always make decisions that would ensure the growth of the entity to guarantee them a higher

takeover bid or bargain.

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