Past pay generates incentives via the ownership stake that it creates; present pay generates incentives via the link between firm performance and the level of pay; future pay generates incentives via executives’ career concerns. This chapter explains how uncertainty about an executive’s ability and effort generates incentives for the executive to exert effort on behalf of shareholders. These incentives stem from the links between labor-market perceptions of an executive’s ability and the likelihood that he is promoted or fired from his current job, able to gain employment at another firm, and able to find post-retirement work as an independent director. Strong boards can use these links to design compensation schemes that benefit shareholders. This chapter describes career-based incentives using the story of Carl Yankowski, the high-profile CEO of Palm who endured a series of career disappointments.
PurposeThe purpose of this study is to examine whether firm-specific litigation risk affects independent director conservatism in the oversight of financial reporting.Design/methodology/approachThis study considers the enactment of Sarbanes–Oxley Act and the main US stock exchanges' corresponding corporate governance regulations in 2002–2003 as an exogenous shock event to increase board independence. OLS regressions with fixed effects are conducted to test the hypothesis.FindingsChanges in discretionary accruals from the pre-event year (2001) to the post-event year (2004) are more negatively associated with an exogenous increase in board independence for firms with high litigation risk than for firms with low litigation risk.Originality/valueThe results suggest that independent directors are more conservative in overseeing financial reporting when they face higher litigation risk, consistent with the notion that they are still concerned about liability risk although they seldom have to pay damages or legal fees out of their own pockets.
