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Strategy, Corporate Governance, and Incentive: Impact on

Performance

STIE YAI

Johnny JermiasPhD CPA, CMA

Professor

UPI YAI

Seminar UKI 2015

Outline

• Introduction• Publishing in Scopus Journals• Efforts-Measurement-Incentive Linkages• Performance measurement framework• Balanced Measures• Strategy-Control Structure• Strategy-Governance-Incentive• Research Efforts & Results• Conclusions

Introduction: Background

• ..\published paper\Accounting and Finance published 2014.pdf

• ..\published paper\BAR two.pdf• ..\published paper\Accounting Perspective

2012.pdf• ..\published paper\AOS one.pdf

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Publishing in Scopus journals

Characteristics of topics that have a good chance to be accepted: Address real world/societal problem Fills significant gap/advances theory Produced novel/new/unexpected results Address hard to solve research

issues/introduces new procedures

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Publishing in Scopus Journals Effective ways to learn how to publish in Scopus Journals: Follow the process of your PhD thesis Find experienced and successful co-

authors Ask for guidance from experts in your field No access or difficult to find Experts are extremely busy

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Publishing in Scopus journals

Two factors to generate significant/ meaningful topics: Process to generate research ideas Following and critically looking at the literature Keeping up to date of real world issues Working with colleagues

Ability to differentiate significant/meaningful topics Awareness of existing literature

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Role of thesis supervisor Thesis supervisor should be able to: Minimize the risk of undertaken research topics

that have little chance of successful completion Help students obtain correct data on the first

attempt Eliminate outcome dependence research Reduce the temptation to abandon the main

research topic as the research progress Set the time schedule for each milestones

(literature review, hypotheses, research design, data collection, data analyses, first draft, final draft)

Introduction: Accounting Scandals

WORLD.COM

Introduction: Background• Enron scandal:

– Adopted mark-to-market accounting: contract between Enron and Blockbuster Video was recognized as income for US $ 110 billion (Rp. 1.1 trilliun) although it has not been realized,

– Excecutive compensation was based on the inflated income (Healy and Palepu, 2003).

– Share price: $90/share (June 2000) to $0.10/share (October 2001).

– Shareholders’ loss: US $11 billion (Rp 110 triliun). – Arthur Andersen (big five accounting firm) liquidated– Triggered the enactment of Sarbanes-Oxley Act (2002)

Introduction: Background• Bre-X scandal: Bre-X mineral Ltd, • headquarter: Calgary, Alberta, Canada• Announced that it has discovered gold reserves in

Busang (Kalimantan) • Investors used this information: Stock price: US

$0.05/share (1994) became US $286.50/share (October 1995).

• Total market capitalization US $6 billion. • 1997: stock price close to zero.• Shareholders’ loss: Ontario Municipal Employee

Retirement Board $45 million; Quebec Public Sector Pension Fund $70 million; Ontario Teachers Pension Plan $100 million (Goold & Willis, 1997).

Introduction: Agency Theory

•Agency Theory:–Separation between ownership and control creates agency problems– Information asymmetry between P-A (Agents take advantage of their superior information)–Agents’ efforts are unobservable–Agents are self-interested individuals–Dislike work (trade-off between work and pleasure)

•Minimize agency problems: monitoring or incentives

Simon

Fraser

University

Simon

Fraser

University

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Efforts-Measurement-Incentive

Outcome of manager’s decision and effort

RiskAversion

DecisionMaking Effort

ReceivesPay

Technology, etc)

Contextual Variables(Culture,

Technology, etc)

External Factors

PreparePerformance

Report

Accounting

Pays ManagerPays Manageron the

Basis of thePerformance

Report

Top Management

Managers

Unobservable

Observable

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Performance Measurement Framework

1. What counts, gets

measured

3. What gets done, getsrewarded

4.What gets rewarded,

reallycount

Competitive Strategy

2. What gets measured, gets done

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BalancedMeasures

2. Quantitative/Qualitative

1. Lead/Lag

4, Objective/Subjective

3. Financial/Non-Financial

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Strategy-Control-Incentive Linkages

Objectives

Strategy Planning/Control

Execution and Evaluation

Reward/Penalty

FeedbackRevise Revise

Strategy-Governance

Innovative

Strategy

CentralizedTight ControlAuthocratic

Freedom/Empowerment

Democratic

Efficiency

Strategy-Governance Structure-Incentive Linkages

Innovative: Unique product/service, rapid changes environment, R&D intensive, first mover, quasi-monopoly, premium price,

Inside directors dominant, CEO/Chairman of BOD separation, output control

TextText

TextText

IncentiveCompensationCompensation

GovernaanceGovernaanceStructureStructure

StrategyStrategy

Equity compensation, Performance-linked Compensation (outcome-based), Long-term incentive plan

Strategy-Governance Structure-Incentive Linkages

Efficiency: Standardized products, long product life cycle, slow changes, economies of scale, follower, market driven price,

Outside directors dominant, CEO/Chairman of BOD duality, behavior control

TextText

TextText

IncentiveCompensationCompensation

GovernaanceGovernaanceStructureStructure

StrategyStrategy

Fixed payment, Short term incentive, Salary-based compensation

Strategy-Measurement-Control

CPV

Goals

BehavioralControl

Output Control

CPV

Strategy

Increase Productivity

Maximize Shareholder Value

Increase Revenue Growthand profitability

Increase Customer Satisfaction

IncreaseDistributor Satisfaction

AchieveOperational Excellence

Enhance CustomerRelationship Management

Improve Employee Satisfaction

Enhance organizational competence

Financial

Customer

InternalProcess

Learning &Growth

IncreaseInnovation

Strategy Map

Training andknowledge sharing

Add Your Title here

Implementation

Link IVFormulation

(Link I)

Formulation

(Link II)

Formulation (Link III)

Outcome (Link V)

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Research Efforts & Results

Research FrameworkResearch Framework

Add Your Title here

PerformanceOrganizationalVariable

(CG, INC)

CompetitiveStrategy

Environment

Implementation

Link IVFormulation

(Link I)

Formulation

(Link II)

Formulation (Link III)

Outcome (Link V)

Research Efforts & Results

• Need to examine the influence of competitive strategy on the design of corporate governance and executive compensation, and in turn, performance•How the fit among strategy, types of governance structure, and types of compensation affects firm performance

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Research Efforts & Results

Example

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Antecedent Variable

Strategic Orientation

Organizational Variable

Outcome Variable

Dynamic CompetitiveEnvironment

Stable CompetitiveEnvironment

Innovation

Efficiency

CG: UnstructuredInc: PBI

CG: StructuredInc: SBI

PerformanceStrategyFormulation

ManagerialDecisions

Outcome

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Research Efforts &Research Efforts & Results: Results: A&FA&F (20(201414))

PERFORMit = γ0 + 1 PLCit + 2 MSOWN it + 3 PLTIPit + 4 STRAit + 5 STRAit*PLCit + 6STRAit*MSOWNit + 7 STRAit*PLTIPit + 8 MTGSit + 9 MTGSFEEit + 10 RETYRSit + 11 SIZEit + itWhere,PERFORMit : One year total return to shareholders (TRS1YR) PLCit : Percentage of incentive-based compensation to total compensation.MSOWNit : Percentage of the firm’s shares owned by the named executive officers.PLTIPit : The amount paid out to the executives under the firm’s long term incentive plan as a percentage of total compensation. STRAit : An indicator equal to 1 for cost leadership firms and 0 for product differentiation firms.

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Fraser

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A&FA&F (20(201414))Simon

Fraser

UniversityRegression Analyses: DV: Market Return

Variables Prediction Coefficient Z-values

Intercept ? -7.49 -0.23

PLC + 1.71 3.79***

MSOWN + 3.04 3.31***

PLTIP + -0.88 -2.41**

STRA ? 55.06 1.44

STRA*PLC - -1.03 -2.03**

STRA*MSOWN - -3.28 -1.88**

STRA*PLTIP - 1.49 2.90***

MTGS + -1.83 -1.47*

MTGSFEE + 0.08 0.22

TERTYRS - 0.01 0.20

SIZE + -8.10 -3.17***

R2 0.06

Wald Chi 45.77***

Sample Size 749

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A&FA&F (20(201414))Simon

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A&FA&F (2(2014014))Simon

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Figue 2: The Effects of Business Strategy on the Relationship between Equity-based

Compensation and Performance

-100

0

100

200

300

400

0 50 100Percentage of Equity-Based

Compensation

Perf

orm

an

ce

InnovativeEfficiency

Research Efforts & ResultsEuropean Accounting Review

(2007)Table 3

Regression results of ROA and ROS on independent and control variables using dichotomous and continuous measures of innovative effortsa

Variables Prediction Dichotomous INOV Continuous INOV (t-statistics)b (t-statistics)

ROA ROS ROA ROS (1) (2) (3) (4) (5) ___

Intercept ? 0.000 0.000 0.000 0.0001.992** 1.689* 1.642* 1.369

INOV + 0.096 0.077 0.494 0.4980.467 0.383 1.693 1.757

ENV - 0.086 0.122 -0.114 -0.139 0.664 0.936 -1.018 1.234

INOV*ENV - -0.560 -0.516 -0.918 -0.897 -2.352** -2.221** -3.041*** -3.066***

SIZE ? -0.078 -0.137 -0.065 -0.127 -0.839 -1.455 -0.706 -1.375

LEV ? -0.077 -0.027 -0.063 -0.017 -0.759 -0.263 -0.631 -0.173

R2 0.159 0.139 0.180 0.17F 4.118*** 3.538*** 4.788*** 4.512*** Sample size 116 116 116 116

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Research Efforts & Research Efforts & ResultsResults(EAR 2007)(EAR 2007)

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Figure 2: The Effects of Corporate Governance on the Relationship

between Strategy and Performance

-1000

100200300400

0 50 100Degree of Centralized

Power

Perf

orm

an

ce

EfficiencyInnovative

BPKP August 4, 2009

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Conclusion Find interesting topic, significant contribution to

the existing literature Find good co-author(s) Know the target journal (journal have different

styles) Expose your work to your peers (present in

good conferences) Don’t be defeated by reviewers’ comments Length from idea generation to first draft: 1-2

years Length of review process: 1-4 years

Good luck

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