Posts Tagged ‘corporate governance educational and teaching material’

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.

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.

• What Does It Mean for an Executive To Make $1 Million? (PDF)
  By Professor, David F. Larcker,  Allan L. McCall, Stanford GSB Phd candidate in accounting, and Brian Tayan, Researcher, Corporate Governance Research Program, Stanford Graduate School of Business
  December 14, 2011
• Companion PowerPoint presentation for use in teaching:  What Does It Mean for an Executive To “Make” $1 Million? (PowerPoint)

The press and other third-party observers frequently discuss executive compensation.  However, executive compensation figures are not always what they seem.  Executive pay packages contain a diverse mix of cash and non-cash incentives, payable in one or multiple years and subject to accruals, estimates, and restrictions that often render their ultimate value quite different from their expected value.  Even total compensation figures disclosed in the annual proxy comingle forward- and backward-looking amounts as well as fixed and contingent payments that make it difficult for investors to understand what compensation has been promised to executives and what they eventually earn.

We untangle the mess and examine three basic methods for calculating compensation: expected value, earned value, and realized value.

We discuss the applicability of each, illustrating concepts with real examples and summary statistics.

Why don’t companies voluntarily disclose these figures so stakeholders can better evaluate incentives and pay for performance?

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.

• Are Current CEOs the Best Board Members? (PDF)

• Related: 2011 Corporate Board Survey from Stanford Rock Center and Heidrick & Struggles

By many measures, current CEOs should be the best candidates to serve on boards of directors.  They have extensive strategic, operational, and risk management expertise, as well as experiences and leadership attributes that are important for a firm’s long-term success.

 However, there is currently no widely accepted, rigorous study that demonstrates that current CEOs are better board members or that companies with CEO directors benefit in terms of improved advice or monitoring.  In fact, recent survey data suggests that active CEOs might not always be the best board members because of the time constraints of their full time job and personality attributes that may make it difficult for them to contribute constructively to a boardroom environment.

 We examine this issue in closer detail and ask:

 1.       Should companies reassess the importance of this criteria when looking for new board members?

2.       Does the requirement for CEO-level experience limit the pool of available directors, particularly diversity candidates who may be less likely to have this experience?

3.       If the availability of CEO directors is low, should professional directors be recruited to fill the gap?

4.       Do the positive qualities of a retired CEO deteriorate, or do they never become outdated?

 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 at http://twitter.com/#!/StanfordCorpGov.To see all of the Stanford Closer Look series, click here.

CGRP17 – Seven Myths of Executive Compensation (PDF)
by Stanford Graduate School of Business Professor David F. Larcker and researcher Brian Tayan, MBA 2003

Executive compensation has become one of the most contentious topics in corporate governance. However, public perception about executive pay suffers from many misconceptions. These include the notions that:

1. The ratio of CEO-to-average-worker pay is a useful statistic:

2. Compensation consultants cause pay to be too high:

3. It is easy to tell whether a compensation package encourages “excessive” risk taking:

4. Performance metrics and targets tie directly to the corporate strategy:

5. Discretionary bonuses should be eliminated:

6. Proxy advisory firms know how to evaluation compensation contracts:

7. The numbers in the financial statements for executive options accurately capture their cost and value :

We examine these myths in close detail and explain why they are false. Problems of excessive compensation and poorly structured contracts will not be remedied by artificial changes and congressional mandates. Why don’t experts rely on the research to arrive at informed and fact-based solutions? :

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

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.

• Market for Corporate Control  (Powerpoint Presentation) 
  Authored by Professor David F.  Larcker and BrianTayan, Researcher, GSB Corporate Governance Research Program/MBA ’03.

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.

Examples include:

-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: http://www.gsb.stanford.edu/cgrp/research/powerpoint_presentations.html

• CGRP15 – Tesla (PDF) by Authors: Professor David F. Larcker and Brian Tayan, MBA ’03

In June 2010, Tesla Motors raised over $225 million in an initial public offering that valued the electric car manufacturer at $2 billion.  It was the first time a U.S. automobile company went public since Ford Motor in 1956.

The evolution of Tesla—first incorporated in 2003 by engineers Martin Eberhard and Marc Tarpenning—in some ways has been unique, given the nature of its business.  At the same time, Tesla has faced organizational challenges that are common to most public and private corporations.

We examine the prominent features of the company’s governance system as it has evolved from inception to IPO, including the board of directors, antitakeover protections, and executive compensation program.  In each case, the system changed to match the current needs of the company.

We ask:

• Many experts prescribe a one-size-fits-all approach to governance.   Why don’t they do a better job of taking into account the company’s specific situation and needs?
• Now that Tesla is public, how might we expect its governance system to change in the future?

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

Topics, Issues and Controversies in Corporate Governance: 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. To see the full series of  Stanford Closer Looks go here.

The Resignation of David Sokol: Mountain or Molehill for Berkshire Hathaway? (PDF)
by Authors: Professor David F. Larcker and Brian Tayan, MBA ’03

Additional related information:
-Berkshire Hathaway Audit Committee Report (Link)
-Questions and Answers From 2011 Annual Shareholders Meeting (Link)

Given its size, Berkshire Hathaway has had a relatively clean record on governance-related matters. This track record speaks to the quality of its governance system and the ability of its “trust-based” model to work.

For these reasons, it came as a shock to many when Warren Buffett announced the sudden resignation of David Sokol in March 2011.  Sokol, CEO of Berkshire Hathaway’s energy subsidiary, was widely considered the front-runner on a short list of potential successors to one day succeed Buffett.  More bizarre were the circumstances surrounding the announcement.  Just days before recommending to Buffett that Berkshire Hathaway purchase specialty chemical company Lubrizol in a $9.7 billion deal, Sokol accumulated common stock in Lubrizol worth $10 million.

The matter raised significant issues for the Berkshire board of directors:

1. Did Sokol violate the company’s insider trading policy?
2. Did Sokol’s actions reveal shortcomings in the company’s governance system that need to be addressed?
3. What will be the long-term impact of these events on company’s reputation?

More broadly, the matter raises questions that are general to all organizations.  How extensive must events be before a company decides that governance changes are required?

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

Topics, Issues and Controversies in Corporate Governance: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. To see the full series of  Stanford Closer Looks go here.