The Return of Trust? Institutions and the Public after the Icelandic Financial Crisis, 2018
Abstract Trust is considered instrumental for economic growth, successful operation of public ins... more Abstract Trust is considered instrumental for economic growth, successful operation of public institutions and social cohesion. We explore how public trust in Icelandic institutions has developed during the recent tumultous financial times, including the failure of the Icelandic banking sector. Using data from Gallup-Iceland’s annual survey of individuals’ trust in institutions, we show that trust in general, and particularly towards political and financial institutions, evaporates following the crisis year of 2008. Although trust varies significantly among different demographic groups, the trend shows how the road to recovering trust in Icelandic institutions post-crisis has proven to be challenging and drawn-out. Apart from law-enforcement agencies, which were relatively unscathed by the financial calamities, no institution has managed to escape the drop in trust, nor have they re-established the pre-crisis level of trust in the minds of the public nearly a decade after the crisis. A notable personal post-crisis exception is the recently elected President of Iceland who has managed to improve trust in his office by the highest margin of all 15 public offices and institutions examined.
The Return of Trust? Institutions and the Public after the Icelandic Financial Crisis, 2018
Abstract Public trust in institutions in Iceland plunged after the country’s banking sector colla... more Abstract Public trust in institutions in Iceland plunged after the country’s banking sector collapsed. The political system wobbled under outrage and anger when the general public took to the streets. The Parliamentary Special Investigation Commission conducted a ground-breaking crisis-induced investigation, delivering a report that was a milestone in Iceland’s history of politics and public administration. Yet, despite this endeavour and the fact that subsequent investigations have disclosed ample information intended to restore trust in institutions, public trust remains unsteady. This chapter addresses the following questions: How has public trust in institutions progressed after the crash? Why is it taking so long for trust to return? In Chapter 3 in this volume, we examine data on public trust in Icelandic institutions from Gallup surveys over the 15 years from 2002 to 2017 in order to identify and explain patterns of trust in the aftermath of the crisis. Our interpretation of theory in this chapter suggests that elements of mistrust inherent in the principal–agent approach to accountability in public administration, implemented in previous New Public Management reforms, undermined the creation of a climate of trust necessary to ensure effective accountability mechanisms. We argue that in the absence of a climate of trust, accountability mechanisms of culpability that conflict with mechanisms of answerability, combined with a succession of post-crisis scandals, mainly explain the slow return of the public’s trust.
The Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability, 2019
The Nordic area today, which has its origins in the two medieval empires of Denmark and Sweden, c... more The Nordic area today, which has its origins in the two medieval empires of Denmark and Sweden, covers five independent countries, Denmark, Iceland, Finland, Norway and Sweden, plus the autonomous or semi-autonomous Faroe Islands, Greenland and the Åland Islands. The Sámi, the only indigenous people in Europe, are scattered across northern Finland, Norway, Sweden and Russia. Their cultural rights are restricted and their political rights to an autonomous economy are nearly nonexistent. 1 The legal cultures and legal systems of the Nordic countries can, as a result of their shared historical background, be divided into the Atlantic 'West Scandinavian' (Denmark, Faroe Islands, Greenland, Iceland and Norway) and the Baltic 'East Scandinavian' (Finland, Sweden and Åland), Danish being the respective historical languages of the law of West Scandinavia and Swedish of East. 2 The Nordic countries started to build a welfare state, after World War II, using a framework coined the Scandinavian model, emphasising aspects such as labour-employer cooperation. 3 The model reached peak prominence in the 1970s, its heavy emphasis on the business-to-consumer-relationship being based on new legislation in contracting, compensation of damages, and consumer protection. Competition law as a tool for consumer welfare gained dominance after three members of the European Free Trade Area (EFTA), Denmark, Finland and Sweden, joined the European Union (EU). Iceland and Norway remained members of EFTA and are connected to the other Scandinavian EU * This chapter draws on research in the ongoing project Sustainable Market Actors for Responsible Trade (SMART, 2016-2020), which receives funding from the European Union's Horizon 2020 research and innovation programme under Grant Agreement No 693642. We thank Beate Sjåfjell for her extensive help.
This paper seeks to reevaluate the hypothesis on negative pay-to-rival-performance sensitivity of... more This paper seeks to reevaluate the hypothesis on negative pay-to-rival-performance sensitivity of executive compensation increasing in the degree of competition and test its validity to date. We use Aggarwal and Samwick's (1999) model of executive compensation contracts in imperfectly competitive product markets. The theory predicts a positive weight on both own and rival performance in compensation contracts aimed towards softening product market competition. According to their model, firms in more competitive industries should place greater weight on rival performance in their compensation contracts than do firms in concentrated industries. When testing earlier results to date, using Standard & Poor's ExecuComp dataset from 1993 to 2001, we fail to reject the hypothesis of non-existing negative pay-to-rival-performance sensitivity increasing in the level of competition. * I would like to thank my advisor, George Johnson as well as Julian Faraway and Peter Katuscak for continuous and helpful guidance while writing the paper. All errors are mine and mine alone.
It is generally accepted that good corporate governance, executive compensation and the threat of... more It is generally accepted that good corporate governance, executive compensation and the threat of litigation are all important mechanisms for incentivizing managers of public corporations. While there are significant and robust literatures analyzing each of these policy instruments in isolation, their mutual relationship and interaction has received somewhat less attention. Such neglect is mildly surprising in light of a strong intuition that the three devices are structurally related to one another (either as complements or substitutes). In this paper, we construct an agency cost model of the …rm in which corporate governance protections, executive compensation levels, and litigation incentives are all endogenously determined. We then test the predictions of the model using a …rm-level data set including governance, executive compensation, and securities litigation variables. Consistent with our predictions, we …nd governance and compensation to be structural substitutes with one another, so that more protective governance structures tend to coincide with lower-powered incentives in executive contracts. Also consistent with our predictions, we …nd executive compensation and shareholder litigation appear to be structural complements to one another, so that higher powered incentives tend to catalyze more frequent litigation. In fact, we estimate that each 1% increase in the incentive component of a CEO's contract predicts 0.3% increase in the likelihood of a securities class action and a $3.4 million dollar increase in expected settlement costs. In addition, the complementarity of executive compensation and litigation allows us to formulate new ways to test for the e¤ects of legal reform, such as the Private Securities Litigation Reform Act of 1995. The results of our preliminary tests appear inconsistent with the claims of the statute's proponents that the PSLRA systematically discouraged non-meritorious litigation without burdening meritorious claims, particularly for …rms with relatively low volatility.
The Return of Trust? Institutions and the Public after the Icelandic Financial Crisis, 2018
Abstract Trust is considered instrumental for economic growth, successful operation of public ins... more Abstract Trust is considered instrumental for economic growth, successful operation of public institutions and social cohesion. We explore how public trust in Icelandic institutions has developed during the recent tumultous financial times, including the failure of the Icelandic banking sector. Using data from Gallup-Iceland’s annual survey of individuals’ trust in institutions, we show that trust in general, and particularly towards political and financial institutions, evaporates following the crisis year of 2008. Although trust varies significantly among different demographic groups, the trend shows how the road to recovering trust in Icelandic institutions post-crisis has proven to be challenging and drawn-out. Apart from law-enforcement agencies, which were relatively unscathed by the financial calamities, no institution has managed to escape the drop in trust, nor have they re-established the pre-crisis level of trust in the minds of the public nearly a decade after the crisis. A notable personal post-crisis exception is the recently elected President of Iceland who has managed to improve trust in his office by the highest margin of all 15 public offices and institutions examined.
The Return of Trust? Institutions and the Public after the Icelandic Financial Crisis, 2018
Abstract Public trust in institutions in Iceland plunged after the country’s banking sector colla... more Abstract Public trust in institutions in Iceland plunged after the country’s banking sector collapsed. The political system wobbled under outrage and anger when the general public took to the streets. The Parliamentary Special Investigation Commission conducted a ground-breaking crisis-induced investigation, delivering a report that was a milestone in Iceland’s history of politics and public administration. Yet, despite this endeavour and the fact that subsequent investigations have disclosed ample information intended to restore trust in institutions, public trust remains unsteady. This chapter addresses the following questions: How has public trust in institutions progressed after the crash? Why is it taking so long for trust to return? In Chapter 3 in this volume, we examine data on public trust in Icelandic institutions from Gallup surveys over the 15 years from 2002 to 2017 in order to identify and explain patterns of trust in the aftermath of the crisis. Our interpretation of theory in this chapter suggests that elements of mistrust inherent in the principal–agent approach to accountability in public administration, implemented in previous New Public Management reforms, undermined the creation of a climate of trust necessary to ensure effective accountability mechanisms. We argue that in the absence of a climate of trust, accountability mechanisms of culpability that conflict with mechanisms of answerability, combined with a succession of post-crisis scandals, mainly explain the slow return of the public’s trust.
The Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability, 2019
The Nordic area today, which has its origins in the two medieval empires of Denmark and Sweden, c... more The Nordic area today, which has its origins in the two medieval empires of Denmark and Sweden, covers five independent countries, Denmark, Iceland, Finland, Norway and Sweden, plus the autonomous or semi-autonomous Faroe Islands, Greenland and the Åland Islands. The Sámi, the only indigenous people in Europe, are scattered across northern Finland, Norway, Sweden and Russia. Their cultural rights are restricted and their political rights to an autonomous economy are nearly nonexistent. 1 The legal cultures and legal systems of the Nordic countries can, as a result of their shared historical background, be divided into the Atlantic 'West Scandinavian' (Denmark, Faroe Islands, Greenland, Iceland and Norway) and the Baltic 'East Scandinavian' (Finland, Sweden and Åland), Danish being the respective historical languages of the law of West Scandinavia and Swedish of East. 2 The Nordic countries started to build a welfare state, after World War II, using a framework coined the Scandinavian model, emphasising aspects such as labour-employer cooperation. 3 The model reached peak prominence in the 1970s, its heavy emphasis on the business-to-consumer-relationship being based on new legislation in contracting, compensation of damages, and consumer protection. Competition law as a tool for consumer welfare gained dominance after three members of the European Free Trade Area (EFTA), Denmark, Finland and Sweden, joined the European Union (EU). Iceland and Norway remained members of EFTA and are connected to the other Scandinavian EU * This chapter draws on research in the ongoing project Sustainable Market Actors for Responsible Trade (SMART, 2016-2020), which receives funding from the European Union's Horizon 2020 research and innovation programme under Grant Agreement No 693642. We thank Beate Sjåfjell for her extensive help.
This paper seeks to reevaluate the hypothesis on negative pay-to-rival-performance sensitivity of... more This paper seeks to reevaluate the hypothesis on negative pay-to-rival-performance sensitivity of executive compensation increasing in the degree of competition and test its validity to date. We use Aggarwal and Samwick's (1999) model of executive compensation contracts in imperfectly competitive product markets. The theory predicts a positive weight on both own and rival performance in compensation contracts aimed towards softening product market competition. According to their model, firms in more competitive industries should place greater weight on rival performance in their compensation contracts than do firms in concentrated industries. When testing earlier results to date, using Standard & Poor's ExecuComp dataset from 1993 to 2001, we fail to reject the hypothesis of non-existing negative pay-to-rival-performance sensitivity increasing in the level of competition. * I would like to thank my advisor, George Johnson as well as Julian Faraway and Peter Katuscak for continuous and helpful guidance while writing the paper. All errors are mine and mine alone.
It is generally accepted that good corporate governance, executive compensation and the threat of... more It is generally accepted that good corporate governance, executive compensation and the threat of litigation are all important mechanisms for incentivizing managers of public corporations. While there are significant and robust literatures analyzing each of these policy instruments in isolation, their mutual relationship and interaction has received somewhat less attention. Such neglect is mildly surprising in light of a strong intuition that the three devices are structurally related to one another (either as complements or substitutes). In this paper, we construct an agency cost model of the …rm in which corporate governance protections, executive compensation levels, and litigation incentives are all endogenously determined. We then test the predictions of the model using a …rm-level data set including governance, executive compensation, and securities litigation variables. Consistent with our predictions, we …nd governance and compensation to be structural substitutes with one another, so that more protective governance structures tend to coincide with lower-powered incentives in executive contracts. Also consistent with our predictions, we …nd executive compensation and shareholder litigation appear to be structural complements to one another, so that higher powered incentives tend to catalyze more frequent litigation. In fact, we estimate that each 1% increase in the incentive component of a CEO's contract predicts 0.3% increase in the likelihood of a securities class action and a $3.4 million dollar increase in expected settlement costs. In addition, the complementarity of executive compensation and litigation allows us to formulate new ways to test for the e¤ects of legal reform, such as the Private Securities Litigation Reform Act of 1995. The results of our preliminary tests appear inconsistent with the claims of the statute's proponents that the PSLRA systematically discouraged non-meritorious litigation without burdening meritorious claims, particularly for …rms with relatively low volatility.
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Papers by Gudrun Johnsen