The following glossary of terms are frequently used in discussions of corporate governance. Link the Stanford GSB Center for Leadership Development and Research glossary of terms to your website here.
Corporate Governance Matters by Professor David Larcker and Brian Tayan
STANFORD, Calif.–“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 Center for Leadership Development and Research 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.”
Stanford Graduate School of Business
Helen Chang, 650-723-3358
Overview: A well-functioning governance system consists of more than just the board of directors and the external auditor. It includes all disciplining mechanisms—legal, regulatory, and market driven—that influence management to act in the interest of shareholders.
-Labor market. Failure leads to CEO termination.
-Capital market. Failure leads to higher cost of capital.
-Regulatory environment. Violations lead to litigation.
Similarly, the “market for corporate control” puts pressure on the CEO to perform, or risk sale of company to new owners.
The entire series of presentations, to date, can be found here.