Archive for the ‘Closer Look Series’ Category

Where Experts Get It Wrong: Independence vs. Leadership in Corporate Governance [PDF]
Authors: Professor David F. Larcker, Stanford Graduate School of Business, and Brian Tayan, Researcher, Center for Leadership Development and Research, Stanford GSB.
Date: March 14, 2013
Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance and Leadership No. CGRP- 32

Over the last few decades, researchers have taken a thorough and critical look at corporate governance from various perspectives.  For the most part, they have found that structural features of corporate governance have little or no relation to governance quality.

For example, there is no evidence that having an independent chairman benefits companies.  At the same time, there is evidence that CEOs with different personalities require different levels of oversight. 

We examine this issue in greater detail.  We ask:

• Why isn’t more attention paid to contextual considerations in corporate governance?
• Why don’t governance experts base their recommendations on research rather than subjective opinion?
• How can corporate stakeholders take into account the quality of a company’s leadership to design more effective governance systems?

Read the attached Closer Look and let us know what you think!

Keywords: corporate governance, CEO and executive leadership, CEO personality, CEO-Chairman duality

Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters.

“And then a Miracle Happens!: How Do Proxy Advisory Firms Develop Their Voting Recommendations? (PDF)

Authors: David F. Larcker, Allan L.McCall and Brian Tayan, Stanford Graduate School of Business
Date: February 25, 2013
Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance and Leadership No. CGRP- 31

Abstract:

Proxy advisory firms are independent, for-profit consulting companies that provide voting recommendations to individual and institutional investors.  Research shows that these firms have significant influence on voting outcomes.  Given this influence, it is important that investors ensure that the policies of these firms are “accurate”—i.e., that they successfully and reliably differentiate between good and bad future outcomes.

In this Closer Look, we carefully examine the process by which proxy advisory firms formulate their voting policies.  In doing so, we identify serious issues that raise questions about the accuracy of their recommendations.

We ask:

• How exactly do proxy advisory firms determine that a policy is “correct”?
• Who participates in the policy development process with these firms?  How do we know that their opinions are representative of shareholder broadly?
• Why don’t proxy advisory firms disclose the research that supports each of their voting recommendations?

Union Activism: Do Union Pension Funds Act Solely in the Interest of Beneficiaries? [PDF]

–Response from Brandon Rees, Acting Director, AFL-CIO Office of Investment

Authors: Professor David F. Larcker, Stanford Graduate School of Business, and Brian Tayan, Researcher, Center for Leadership Development and Research, Stanford GSB.
Published: December 11, 2012

Union pension funds manage approximately $3.5 trillion in retirement assets on behalf of public and private sector employees covered by collective bargaining agreement.  They are also very active in the proxy process, sponsoring approximately one-third of the shareholder proposals that are included in corporate proxies each year.

Federal and state laws (including ERISA) require that the trustees and administrative bodies that oversee these funds manage their plans “solely in the interest of participants and beneficiaries.”  Furthermore, the U.S. Department of Labor is clear that pension funds are not to use plan assets and their voting rights “to further legislative, regulatory or public policy issues through the proxy process.”

We examine this issue is greater detail, including the types of proposals put forward but union pension funds, the support these proposals receive, and the companies they target.  We ask:

• Are union-sponsored proposals made solely in the interest of their pension beneficiaries?
• How can the public or a pension beneficiary assess the motives of funds that sponsor proxy proposals?
• How do union pension funds determine which positions to advocate and which companies to target?
• Are unions violating their ERISA duties by sponsoring these proposals?

Read the attached Closer Look and let us know what you think!

Shareholder Lawsuits: Where Is the Line Between Legitimate and Frivolous? [PDF]

Authors: Professor David F. Larcker, Stanford Graduate School of Business, and Brian Tayan, Researcher, Center for Leadership Development and Research, Stanford GSB.
Published: November 27, 2012

Shareholders of public companies are not responsible for designing executive compensation packages. Still, a shareholder vote on compensation is required in two circumstances:  when a company wants to establish an equity-based compensation plan, and annually as part of the Dodd Frank requirement shareholders have an advisory “say on pay.”  In deciding how to vote, shareholders rely on information provided in the annual proxy.

Recently, shareholder groups have sued companies for inadequate disclosure.  They allege that the companies provide insufficient disclosure to determine how they should vote on these matters.

We explore this issue in closer detail and ask:

• How much disclosure is too much disclosure?
• If a company follows SEC guidelines, why is this not sufficient?
• When do lawsuits cross the line from legitimate to frivolous?
• If disclosure litigation is successful, what other board decisions would be subject to potential lawsuits?

Read the Closer Look and let us know what you think!

To view the entire collection of Stanford Closer Looks please click here. You can also follow more corporate governance and leadership news at @StanfordCorpGov and  @StnfrdLeadrship.

Is a Powerful CEO Good or Bad for Shareholders  [PDF]

Authors: Professor David F. Larcker, Stanford Graduate School of Business, and Brian Tayan, Researcher, Center for Leadership Development and Research, Stanford GSB.
Published: November 13, 2012

Americans tend to admire powerful leaders.  Powerful leaders are seen as exerting influence over their organizations and shaping outcomes around them.  CEO power can be exercised across a wide spectrum of decisions, including those regarding corporate strategy, operations, acquisitions, organizational design, culture, and governance.

However, it is not clear the extent to which having a powerful CEO is beneficial to an organization.  CEO power can be positive or negative, depending how it is manifested and how it is exercised.

We examine this topic in greater detail, and ask:

•        Are shareholders better or worse off with a powerful CEO?
•        Where should the board draw the line between giving its CEO discretion and providing appropriate oversight?
•        How much power is too much power?

Read the Closer Look and let us know what you think!

To view the entire collection of Stanford Closer Looks please click here. You can also follow more corporate governance and leadership news at  @StanfordCorpGov and  @StnfrdLeadrship .

Fixed or Contingent: How Should “Governance Monitors” Be Paid?  [PDF]
Authors: Professor David F. Larcker, Stanford Graduate School of Business, and Brian Tayan, Researcher, Center for Leadership Development and Research, Stanford GSB.
Published: October 2012

Corporate monitors are important participants in corporate governance systems.  Monitors include the board of directors, the general counsel, and internal and external auditors.  Monitors are paid by the organization but their responsibilities largely or mostly non-managerial.

How should monitors be paid?  Because their objective is to detect and mitigate agency problems, one could argue that they should be paid almost entirely on a fixed-salary basis.  On the other hand, an entirely fixed compensation system might not provide sufficient incentive to perform.

We discuss this issue in greater detail.  We ask:

• Should corporate monitors be paid a bonus?
• If so, what form should it take?
• What performance targets should be used to calculate the bonus?
• Do performance incentives enhance or impede the effectiveness of monitors?

Read the Closer Look and let us know what you think!

To view the entire collection of Stanford Closer Looks please click here. You can also follow more corporate governance and leadership news at @StanfordCorpGov and @StnfrdLeadrship.

Ten Myths of “Say On Pay”
Authors: Professor David F. Larcker,  Stanford Graduate School of Business; Allan McCall, co-founder of Compensia and currently a PhD candidate at the Stanford GSB; Gaizka Ormazabal, Assistant Professor of Accounting at IESE Business School at the University of Navarra; and Brian Tayan, Researcher, Corporate Governance Research Program, Stanford GSB.
Published: July 28,  2012

Say on pay is the practice of granting shareholders the right to vote on a company’s executive compensation program at the annual shareholder meeting.  Under the Dodd-Frank Act of 2010, publicly traded companies in the U.S. are required to adopt say on pay.  Advocates of this approach believe that say on pay will increase the accountability of corporate directors and lead to improved compensation practices.

In recent years, several myths have come to be accepted by the media and governance experts.  These myths include the beliefs that:

1. There is only one approach to “say on pay”
2. All shareholders want the right to vote on executive compensation
3. Say on pay reduces executive compensation levels
4. Pay plans are a failure if they do not receive high shareholder support
5. Say on pay improves “pay for performance”
6. Plain-vanilla equity awards are not performance-based
7. Discretionary bonuses should not be allowed
8. Shareholders should reject nonstandard benefits
9. Boards should adjust pay plans to satisfy dissatisfied shareholders
10. Proxy advisory firm recommendations for say on pay are correct

We examine each of these myths in the context of the research evidence and explain why they are incorrect.

We ask:

* Should the U.S. rescind the requirement for mandatory say on pay and return to a voluntary regime?

Read the attached Closer Look and let us know what you think!

To receive monthly alerts about the Closer Look series, please email the Stanford Corporate Governance Research Program at corpgovernance@gsb.stanford.edu. You can also follow more corporate governance news on Twitter: @StanfordCorpGov .  To view the entire collection of  Stanford Closer Looks please click here.

Monitoring Risks Before They Go Viral: Is it Time for the Board to Embrace Social Media?
Authors: Professor David F. Larcker, Sarah M. Larcker and Brian Tayan, Researcher, Corporate Governance Research Program, Stanford Graduate School of Business.
Published: April 5,  2012

According to Nielsen, social networks and blogs account for the largest percentage of time that individuals spend online, more than email and reading the news.  Given the pervasiveness of social media and the potential impact it can have on corporate activities, some experts recommend that boards of directors pay closer attention to the information exchanged on these sites.

Information gleaned through social media might provide unique and relevant insights that improve decision making.  For example, this information might be used to supplement the traditional key performance indicators that boards use to monitor corporate performance.  Similarly, it might also be used as an “early warning” system to improve risk management.

In this closer look, we examine these issues in detail.  We ask:

• Why haven’t more boards utilized information from social media to improve corporate oversight?
• Should the board formally review social media metrics, or does this represent an encroachment on management?
• Can this information be used to safeguard corporate reputation?

Read the attached Closer Look and let us know what you think!

To receive monthly alerts about the Closer Look series, please email the Stanford Corporate Governance Research Program at corpgovernance@gsb.stanford.edu. You can also follow more corporate governance news on Twitter: @StanfordCorpGov .  To view the entire collection of  Stanford Closer Looks please click here.

Sudden Death of a CEO: Are Companies Prepared When Lighting Strikes? (PDF)
By Professor David F. Larcker and Brian Tayan, Researcher, Corporate Governance Research Program, Stanford Graduate School of Business.
Published: March 6, 2012

It is very difficult for shareholders to know detailed information about CEO succession planning among the companies they have invested in.  Although CEO deaths are rare, the sudden death of a CEO can provide insight into the quality of succession planning and governance of a company.  Whereas some companies are able to appoint a successor immediately, others take weeks or months to do so.

In this Closer Look, we examine this issue in detail.

We ask:

* Why haven’t more companies done a “reality check” on whether they have a truly operational succession plan?
* What can a board learn and what should it do if the market reacts positively to the death of its CEO?
* Should the board revise its succession plan if its CEO engages in risky hobbies or lifestyle habits?

Read the attached Closer Look and let us know what you think!

To receive monthly alerts about the Closer Look series, please email the Stanford Corporate Governance Research Program at corpgovernance@gsb.stanford.edu. You can also follow more corporate governance news on Twitter: @StanfordCorpGov .  To view the entire collection of  Stanford Closer Looks please click here.

• What Is CEO Talent Worth?  (PDF)
  By Professor, David F. Larcker and Brian Tayan, Researcher, Corporate Governance Research Program, Stanford Graduate School of Business, and Usman Liaqat
  January 24, 2012

The topic of executive compensation elicits strong emotions among corporate stakeholders and practitioners. On the one hand are those who believe that chief executive officers in the United States are overpaid. On the other hand are those who believe that CEOs are simply paid the going fair-market rate.

Much less effort, however, is put into determining whether total compensation is commensurate with the value of services rendered.

We examine the issue and explain how such a calculation might be performed. We ask:

* How much value creation should be attributable to the efforts of the CEO?
* What percentage of this value should be fairly offered as compensation?
* Can the board actually perform this calculation? If not, how does it make rational decisions about pay levels?

Read the attached Closer Look and let us know what you think!

To receive monthly alerts about the Closer Look series, please email the Stanford Corporate Governance Research Program at corpgovernance@gsb.stanford.edu. You can also follow more corporate governance news on Twitter: @StanfordCorpGov .  To view the entire collection of  Stanford Closer Looks please click here.