Political corporate governance and governance reforms: Consequences from sociological perspectives
M.Sc. (Econ.) Leena Kostiander’s Ph.D. dissertation in management accounting and corporate governance (”Essays on Political Corporate Governance and Governance Reforms: Consequences from Sociological Perspectives”) will be examined at the Aalto University School of Economics, March 17.
Kostiander investigates the meaning and functionality of remuneration guidelines in Finnish state-owned enterprises and the role of remuneration consultants in the remuneration design process. The research contributes to the current debate on “moderating” the rewards of executives and the necessity of political remuneration guidelines. The findings provide new insights into the processes of political remuneration reforms and open up, through unique interview-based data, possibilities to understand interest group politics within the field of executive remuneration and remuneration design.
Political remuneration guidelines do not come without costs
The purpose of the political remuneration guidelines is to create trust in voters that defects in executive remuneration will be corrected. However, strong remuneration guidelines decrease the power of the board of directors and the remuneration committee, which may lead to a dysfunctional board. Remuneration guidelines protect politicians but do not necessarily improve corporate governance. The strong guidelines - with an aim of harmonizing remuneration designs - may decrease management’s motivation to take risks and create shareholder value; they may add pressure to raise fixed salaries and bonuses, encourage opportunistic behaviour by management and rationalise equal bonus levels for all state-owned enterprises regardless of their size and field of operations, raising the remuneration levels in small state-owned enterprises. Both minority shareholders and tax payers will suffer if the remuneration guidelines drive objectives other than shareholder value.
The role of the remuneration consultants is significant in the executive remuneration design process. The research finds that consultants are not independent and may serve the management regardless of the remuneration guidelines. All elements of pay can be used creatively to bypass guidelines, which may increase remuneration. The mechanisms of the consultant market also play a significant role in the remuneration design process because competition between consultancies influences the forms, levels, and structures of remuneration designs, thereby explaining the ever-increasing levels of executive pay. The Finnish remuneration consultancy market is concentrated around one service provider. This seems to lead to a situation in which the competitors must offer more competitive remuneration designs in order to please the customers. This practise may sometimes lead to the remuneration designs that appear excessive from a political perspective.
Focus on social relations and networks
Kostiander argues that it is important to identify the social relations and networks of management, outside experts, and the members of the board of directors when designing remuneration guidelines. If the social relations and networks are disregarded, the remuneration reforms may not work as expected. In that case, it is better to stick with general guidelines that are in line with current international policy than to push strong political guidelines whose economic consequences cannot be politically governed.
Dc. Markus Granlund, Turku School of Economics will act as the opponent and Prof. Seppo Ikäheimo as the custodian.
The dissertation can be bought from the KY bookstore, Runeberginkatu 14-16, 00100 Helsinki.
Media representatives may ask for free copies from the Aalto University School of Economics Marketing and Communications Services by email viestinta-econ [at] aalto [dot] fi or by phoning +358 9 470 38621.
Author’s contact information: Leena Kostiander: tel. +358 40 7024 144, leena.kostiander(at)aalto.fi