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Interview with Vicente Cuñat

How did it feel to win the Jaime Fernández de Araoz Award?

Winning the Award has been a great experience on both a professional and a personal level. It has increased the impact the article has had on the non-academic public, and is recognition for work that we put a great deal of effort into. It also gave Maria Guadalupe and me the opportunity to meet the Fernández de Araoz family, which was an extremely gratifying experience. I think that the “Jaime Fernández de Araoz Award” will certainly provide momentum for research into company finances. We must therefore be grateful for the dedication of the Fernández de Araoz family and the support of HRH the Prince of Asturias.

What would you highlight about the article which won the Award?

It is a piece of work on an important area; how companies adjust their executive incentive schemes when changes arise in the competitive environment in which they operate. The article is therefore empirical and has a pragmatic, very applied approach. At the same time the work is very rigorous in terms of the techniques we used to analyse the data. Company decisions are complex in nature, many factors which are difficult to measure have a bearing on them and generally speaking it is difficult to reach conclusive empirical conclusions. In our case, to reach valid conclusions we were very careful to use changes in competition that the companies had not foreseen. The results demonstrate that unforeseen changes in competition lead to greater use of incentive schemes. Competition makes salaries more sensitive to profits, and increases the demand for talent and the movement of executives between companies.

What light can research into company finance shed on executive remuneration?

There is major debate within the business environment, amongst the media and at the political level on the nature of executive remuneration and its relationship with good corporate governance. The amounts and types of executive remuneration have changed dramatically over the last two decades. It is important to establish to what extent we are seeing a battle for talent, an adjustment to a new economic environment, or simply greater extraction of income, because depending on the diagnosis made, economic policy recommendations and business strategy recommendations are very different. Research into “Corporate Finance” must guide this debate. For example, our article indicates that good competition policy can discipline companies more effectively than direct regulation of executive remuneration or good corporate governance.

Have areas such as good corporate governance experienced a renaissance?

The area of good corporate governance acts at the level of interaction between the different participants in a company. Among other things, it looks at conflicts of interest between shareholders, creditors, managing groups, workers, etc., seeking to find the mechanisms that allow these interests to be aligned with each other. We know that good or bad corporate governance has an effect on investor confidence in companies and thus on their capacity to invest and create value. The importance of bringing incentives into line between the different participants in a company has been understood for some time, and has been examined in literature studies on classic corporate finance and problems of agency. In this respect the subject is not a new one; what has changed over recent years is our discovery that good corporate governance has a very high economic value, and this is what has generated greater interest in the area of good corporate governance.

Can the economic impact of good corporate governance be quantified?

There are a number of indications that good corporate governance is important and creates value. The first indication that good corporate governance creates value is the recent appearance of financial scandals linked to sub-standard company management (Enron, Worldcom, Tyco, Parmalat, etc.), which have made it clear that bad corporate governance can be extremely costly. This has resulted in a number of reactions, among them the attempt to improve regulation of corporate governance (Sarbanes Oxley Act, U.K. Companies Act, the Olivencia Code…). And also an attempt to deepen knowledge of good governance and particularly to measure or define what the determining factors of these crises are. To some extent these crises have been what have sparked renewed interest in good corporate governance. The second indication that good corporate governance creates value is the increasing interest on the part of some investment funds in good corporate governance as a standard for choosing their portfolios. There are even investment funds whose strategy is to buy good governance and sell bad governance. For all these reasons the academic world has renewed its interest in the area of good governance, and so the number of scientific contributions to the study of good corporate governance has increased dramatically in recent years.

Do we know much about company finance in Spain?

Research into company finance in Spain is in rude health. A large number of Spanish researchers are engaged in high-quality studies, both in the theory and applied fields. What could be improved is access to data on Spanish companies. Generally speaking, little data on companies is gathered in Spain and this data is not systematically compiled in databases. When databases do exist, researchers often cannot access them. There is no culture of company transparency, nor are the benefits for society from access to quality economic data perceived.