The following glossary of terms are frequently used in discussions of corporate governance. Link the Stanford Corporate Governance Research Program glossary of terms to your website: http://www.gsb.stanford.edu/cgrp/research/glossary
Corporate Governance Matters by Professor David Larcker and Brian Tayan
STANFORD, Calif.–(BUSINESS WIRE)–“The debate on the role of boards in the wake of the financial crisis has created a lot of hype and rhetoric about corporate governance,” says David Larcker, who is James Irvin Miller Professor of Accounting and Director of the Corporate Governance Research Program at the Stanford Graduate School of Business and coauthor with Brian Tayan of the new book Corporate Governance Matters (FT Press). According to Larcker, many so-called experts are heavy on opinions about governance, but light on the facts.
“The fight for ‘say on pay’ and proxy access has gotten a lot of ink – but it is unclear whether it will actually create shareholder value.”
“The FDA requires research on drug outcomes before approving a pharmaceutical,” he says. “Shouldn’t experts that prescribe ‘cures for bad governance’ be subject to a similar standard of review?”
In their book, Larcker and Tayan, a researcher at Stanford GSB, challenge the conventional wisdom of the many books, reports, and recommendations of blue-ribbon panels on what constitutes “good” governance. The authors researched hundreds of companies and interviewed many board directors to uncover the real-life consequences of corporate governance practices – from director independence to designing appropriate executive pay packages.
“A lot of people want to measure what’s measurable – we wanted to measure what’s informative,” says Tayan. “For example, certain lightning-rod issues, such as ‘excessive’ risk taking and CEO compensation, get a lot of attention from outside observers, while important issues that are considerably more difficult to assess – such as corporate strategy and succession planning – tend to get the short shrift.”
Trends Getting in the Way of Good Governance
“Our research shows that many emerging developments that were intended to improve governance – purportedly to avert the kind of financial disaster we just experienced – just don’t hold water,” Larcker explains. These include:
“We wrote our book for thinkers – for practitioners who want to see how important governance issues play out in the real world,” says Tayan.
“By integrating several different approaches to the topic – both business and legal – we have created a practical framework for directors that will help them make decisions that lead to organizational success.”
To speak with the authors, contact Davia Temin or Suzanne Oaks at 212-588-8788 or firstname.lastname@example.org.
Stanford Graduate School of Business
Helen Chang, 650-723-3358
This paper investigates the market reaction to recent legislative and regulatory actions pertaining to corporate governance. The managerial power view of governance suggests that executive pay, the existing process of proxy access, and various governance provisions [e.g., staggered boards and Chief Executive Officer (CEO)-chairman duality] are associated with managerial rent extraction. This perspective predicts that broad government actions that reduce executive pay, increase proxy access, and ban such governance provisions are value-enhancing. In contrast, another view of governance suggests that observed governance choices are the result of value-maximizing contracts between shareholders and management. This perspective predicts that broad government actions that regulate such governance choices are value destroying. Consistent with the latter view, we find that the abnormal returns to recent events relating to corporate governance regulations are, on average, decreasing in CEO pay, decreasing in the number of large blockholders, decreasing in the ease by which small institutional investors can access the proxy process, and decreasing in the presence of a staggered board.
We thank the Rock Center for Corporate Governance and Equilar Inc. for providing a portion of the data used in this paper, Michelle E. Gutman for outstanding research assistance, and Robert Daines, Joseph Grundfest, Michael Klausner, and an anonymous referee for helpful comments. Daniel Taylor gratefully acknowledges funding from the Deloitte Foundation. A prior version was circulated under the working title “The Regulation of Corporate Governance.”