A Law to Keep the CEO at Bay

The behavior of top executives has always been research matter for scholars. Such interest has been revived over the last decade, as a consequence of the many business scandals that embroiled some of the biggest corporations, both in the US and the EU.

Many studies find that excessive concentration of power in the position of the CEO, with consequent phenomena of managerial opportunism (as investigated by agency and moral hazard theory), is the main reason behind substandard performance, extraction of value at the expense of minority shareholders, and the falsification of financial information, in order to conceal the potential risk of default. These issues should be considered with reference to the corporate model and ownership structure. For instance, the scientific literature has stressed how in the US model, such risks are the direct consequence of the separation between ownership and management that is typical of the American public company. Under those circumstances, shareholders have limited power, as top executives acquire extensive powers, while the board often becomes a purely formal body. In our paper titled "CEO-Board Relationships in a post-Sarbanes-Oxley Era and the Moderating Effect of the Board of Directors", we have explored in depth the relation between the characteristics of a given CEO (and his/her power) and corporate performance. In parallel, we have analyzed if and to what extent boards can hamper the negative effects coming from excessive concentration of power in the hands of the company leader. Also, the work looks at how such relations have changed since the Sarbanes Oxley Act (Sox) was passed in 2002. This norm has been a reference for legislation on corporate governance worldwide, especially in terms of the responsibility of company actors, especially the CEO, with respect to what the company says to financial markets. Consistently with the objectives of the law, the thesis of our work is that it has influenced the behaviors of CEOs and their controllers, board members. To this end, we build a dataset for the main 500 US corporations (S&P500) relative to the 2000-2006 time period, i.e. three years before and three years after the coming into effect of the law. The results point to an actual impact of the regulation on the behavior of corporate elites. Firstly, results show a reduction of the incidence of value expropriation by the CEO since 2003. Also, they highlight a change in attitude by corporate directors. In particular, larger boards of administration, and especially those that include members who are CEOs in other companies (reputed directors), now tend to perform more effective and stringent controls. In particular, reputed directors, since they are subject themselves to the more demanding Sarbanes-Oxley regulations in their own companies, tend to be more attentive and responsive to the demands of good corporate governance. The study has a several theoretical and practical implications, strengthening the idea that the assumptions of the theory of agency are not universal, but are influenced by the set of incentives and context conditions. Among these, the norms on corporate governance, although often considered an administrative burden, are effectively able to steer the behavior both of top executives and their controllers.