Corporate Integrity

Abstract

This paper defines the term corporate integrity and proposes a framework to assess the existence of corporate integrity. Corporate integrity is defined as a state or condition in which the objectives of the managers and the shareholders of a corporation are undivided and complete. The compensation of the managers and the shareholders is selected as a subset of the objectives. If both the managers' and the shareholders' compensation schemes (returns) are undivided and complete, the corporation exhibits integrity. A rolling corporate integrity index is constructed based on the relationship between manager and shareholder compensation. A case study focussing on the firms comprising the German stock market index DAX shows that only a fraction exhibit corporate integrity.

Keywords: integrity, corporate integrity, corporate governance, executive compensation, shareholder activism