CEO compensation and board of directors in European public utilities of the energy sector

The recent corporate scandals and the rise of financial crisis have led up to the light the issue of corporate governance and CEO compensation. Researchers, business people and politicians have focused on this topic analyzing the elements that can increase firm and social wealth, give incentives and reduce agency costs between managers and shareholders. Although most of the studies focus on unregulated firms, this topic is more controversial and interesting in public utility case. After the privatization, most of public utilities listed, opening their capital to private investors that want that firm maximizes shareholder wealth. Nevertheless, these companies still work in a regulated environment which creates constraints on their behaviours and their governance. Moreover, directors have relationships with governments and politicians that can distort their decisions. Using a unique dataset that includes governance, financial and market regulation variables I study corporate governance and CEO incentives in the energy sector. The first chapter analyses the determinants of CEO compensation. In theory, the variable part of CEO compensation is an instrument that better aligns CEO interests with those of the shareholders. Contrary to the previous studies in unregulated case, I find a negative relation between the number of independent directors and the variable part of CEO compensation. This conclusion leads to deepen the role of independent directors. Since independent directors do not have connections with the company, they should be particularly effective in controlling CEOs’ actions, avoiding rent expropriation. The second chapter analyses the effects of board composition on firm performance, growth and dividend policy. I find that greater board independence reduces future firm performance and does not affect firm growth and dividends policy. The third chapter examines CEO pay for performance sensitivity across regulated and unregulated firms within the energy sector. The study analyzes also the effect of different regulatory frameworks, in order to understand if external (regulation) and internal (compensation) incentives are powerful mechanisms that motivate CEOs.