Corporate governance code

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Method

Research strategy

When speaking of method in a research context, one is referring to the techniques and procedures used to analyze data (Saunders, Lewis and Thornhill, 2009). When present-ing research methods, different research choices of which two of the most commonly known distinctions are the qualitative and the qualitative research strategies, are often referred to. The different methods may though be combined, an approach that is also commonly used. However, according to Bryman (2006) the researcher should explicitly indicate what specific and different research questions the different methods are de-signed to answer when using combined methods. Below we will further discuss the dif-ferences between the qualitative and the quantitative research methods.

Qualitative and quantitative data

  • Qualitative method – All data that is not numerical is classified under the term qualitative data. This could for example take shape in the form of interviews or by the studying of policy documents. To be of usefulness, the qualitative data naturally needs to be understood and analyzed (Saunders, Lewis and Thornhill, 2009). The questions answered by the usage of qualitative data is of the type such as “why” or “who” rather than answering questions concerning quantities (Bell, 2000).
  • Quantitative method – Quantitative data consist of data that are quantifiable. Ex-amples of this could be the mean value of daily closing prices of a stock index during a period of time or the correlation between profits and stock returns for a certain company. The analysis of quantitative data is normally pursued through statistical computations and the creation of diagrams (Saunders, Lewis and Thorn-hill, 2009). For example, a hypothesis could be either supported or dismissed by making a statistical test of a quantitative set of data.

According to Saunders, Lewis and Thornhill (2009), the figure below figure 1-1 pro-vides clear distinctions between qualitative and quantitative data.

Choice of research method

This study is mainly based on a qualitative research method. Since the study only in-cludes a total of nine banks, the sample size is too small to pursue any quantitative re-search of greater relevance. The focus is put on annual reports that will be investigated in order to gain an understanding of the policies used when setting remuneration. Part from this, policy documents such as corporate governance codes and recommendations on the setting of remunerations will be used. Such documents cannot be quantified and therefore not be investigated in a quantitative way but can merely be subject for a qua-litative research method.

Method of choosing banks

The banks chosen for this study has been picked based on the size of their group assets, instead of focusing on market value since they are rather skewed since the crisis of 2008. The asset values have been retrieved from Forbes global 2000 index (Forbes, 2010). The study aims at investigate major banks, therefore the largest banks in every respective nation has been chosen. Due to the limited amount of large banks in Sweden and Denmark, the study has been limited to only three banks in respective nation.

 Data collection

There exists mainly two different types of data collection; the collection of primary data and the collection of secondary data.
When refering to secondary data, we are refering to already existing, previously documented data (Saunders, Lewis and Thornhill, 2009). Therefore, when a researcher is using secondary data he is not producing new information by himself, but merely us-ing already existing data previously produced by a third party. Scientific research pa-pers, policy documents and annual reports are some examples of secondary data.
As opposed to secondary data, primary data is newly collected data produced personally by the researchers in hand (Saunders, Lewis and Thornhill, 2009). The advantage of primary data is naturally the uniquness of the data in hand. The producer of the data will be the only one with possession of that specific set of data. However, producing primary data also comes with the responsibility of ensuring that the data is in fact correct. Interviews and questionanaires are examples of primary data.
This study will mainly be based on secondary data. The major part of the data will be gathered from the annual reports of the companies subject for investigation. We will also be using data from respective countries corporate governance codes and other national recommendations concerning remuneration.
The data ratrieved from financial statements are taken from the financial statementsof the Swedish banks Nordea, SEB and Swedbank, The Danish banks Danske Bank, Jyske Bank and Sydbank and the Brittish banks Barclays, HSBC and RBS. We analyze the annual reports for the entire groups during the time period of 2004-2010

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Data processing

The data will be processed in, what we would like to refer to as, a four stage process. The first four stages will involve individual processing of the following areas; statements on remuneration in annual reports, firm performance during the time period of the study and national corporate governance codes. Based on the information given in the annual reports of the three banks in respective country, the individual information for each banks will be merged to provide a national picture of every country. The corporate governance codes of every nation will first be presented individually and then analyzed together with the findings concerning the national banks. Finally the conutry analysis will be merged into a cross-national analysis of the findings in the three nations. This comparison will then be subject for further analysis. The figure below figur 2-2 provides a clear picture of how the data processing will be pursued.
All financial data retrieved from respective banks financial reports have been converted to EUR3. This has been done in order to ease the comparison of the data. When converting we have used the exchange rate of the last day of the concerned calender year.

Literature review

We have previously mentioned the European Union’s position on the remuneration policies of today, the belief that the policies often encourage excessive risk-taking and a short-term focus, and therefore has been a contributing factor to the financial meltdown of 2008. However, the EU does not present any empirical findings supporting their standpoints on the matter. There has however been previous research pursued on the topic. Jensen and Murphy (2004) mention how previous remuneration policies have lead to a short-term focus, and how this often has been inconsistent with the company long-term success. Executives are usually paid according to their performance, which are often measured in terms of the performance of the company stock. Even though this is an arrangement originally believed to mitigate agency problems, making the interests of the managers and executives in line with those of the shareholders (the principal), it has often proved to be counter-productive. The agent (the managers) will have incen-tives to strive for the stock price to be as high as possible, which according to Jensen and Murphy (2004) can result in an agency cost of overvalued equity. This occurs when the equity is valued higher than the intrinsic value of the company, and when the man-agers due to equity-based compensation strive to keep this overvaluation. In order to create a picture of the company performing in accordance with what is required to moti-vate the stock price, the agents tend to pursue actions that will keep the equity overval-ued in the short term, but which may be devastating to the company in the long-term. This may be actions such as using the firm’s overvalued equity as currency to acquire other companies in order to meet growth expectations, use the access to cheap capital for excessive internal spending in risky investments or shift current costs to the future and future incomes to the present by accounting or operating manipulation (Jensen and Murphy, 2004).
Davies (1997) highlights that also the remuneration packages given to lower level em-ployees within financial institutions can result in risk taking that is not in line with a sound balance between risk and return. Many financial sector employees receive a sig-nificant portion of their total income as profit-related bonuses. These employees are also often involved in risk-taking activities, an example are securities traders who deals with a big portion of risk in their everyday job. What may constitute a problem is the fact that the individual employee might not share the perception on risk held by the employer. Therefore, the employee might engage in excessive risk-taking to boost individ-ual performance and hence receive a bigger bonus than otherwise. Another difficulty is the limited liability carried by the employee; he is pursuing the risk while it is the em-ployer who is exposed to it. Therefore, financial institutions are in fact often rewarding risks, even though they might not be in line with the company risk policies (Davies, 1997). This might of course, if things go wrong, result in big losses.

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1 Introduction 
1.1 Background
1.2 Outline of the degree project
1.3 Banks
1.4 Problem discussion
1.5 Research question
1.6 Purpose
1.7 Delimitations
2 Method 
2.1 Research strategy
2.2 Qualitative and quantitative data
2.3 Choice of research method
3 Literature review
4 Frame of reference 
4.1 Corporate governance
4.2 Agency theory
4.3 Corporate governance code
5 Empirical findings 
5.1 Remuneration policies
5.2 Remuneration and annual results
6 Analysis
6.1 Bank-level analysis
6.2 Analysis of the Corporate Governance Codes
6.3 National-level analysis
6.4 Cross-country comparison
7 Conclusion
List of references
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