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New in Stanford Closer Look Series: Ten Myths of “Say On Pay”

Thursday, June 28th, 2012

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.

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New in Stanford Closer Look Series: Seven Myths of Executive Compensation

Tuesday, June 21st, 2011

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.

 

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Why Does Corporate Governance Really Matter? New Book from Stanford Showcases Research into How Boards Can Govern Better

Thursday, May 19th, 2011
May 19, 2011 01:47 PM Eastern Daylight Time 

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:

  1. Compliance drowning out strategy – “A check-the-box approach is not what we need from directors. We need instead their best thinking and ability to manage risk appropriately for corporate growth.”
  2. “Federalization of corporate governance” – “As corporate governance becomes increasingly, and probably inexorably, ‘federalized’ through regulations such as Dodd-Frank, there is a real question as to whether these laws make boards govern better,” he says. “We’re still debating whether the 10-year-old Sarbanes Oxley was good for the economy.”
  3. “Shareholder democracy” movement – “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.”
  4. Rise of proxy advisory firms – “Proxy advisory firms exhibit substantial influence over the proxy voting process. What is the evidence that their recommendations lead to the kinds of positive outcomes that stakeholders really care about?”

“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 news@teminandco.com.

For information on Corporate Governance Research Program: http://www.gsb.stanford.edu/cgrp/about/

Contacts

Stanford Graduate School of Business

Helen Chang, 650-723-3358

chang_helen@gsb.stanford.edu

 

 

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Posted in Accounting & Audit, Blockholders, Board of Directors, CEO Succession, Corporate Governance, Corporate Governance Ratings, Corporate Governance Research, Disclosure & Transparency, Executive Compensation, Market for Corporate Control, Proxy Access, Research, Shareholder and Activism, Strategy & Risk | Comments Off

Do ISS Voting Recommendations Create Value? (Stanford Closer Look Series)

Tuesday, April 19th, 2011

Do ISS Voting Recommendations Create Value? (PDF)
Authors: Professor David F. Larcker and Brian Tayan, MBA ’03

Many institutional investors rely on a proxy advisory firm to assist them in voting the company proxy and fulfilling their fiduciary responsibility to vote in the interest of beneficial shareholders.  The largest and most influential proxy advisory firm is Institutional Shareholder Services (ISS).  The recommendations of ISS are not inconsequential.  Academic and professional research suggests that a recommendation by ISS can change the outcome of a vote by 15 to 20 percent, depending on the matter of the proposal.

At the same time, there is little evidence that proxy advisory recommendations are correct or that they improve corporate outcomes.  In fact recent research suggests that they might actually decrease shareholder value.

We examine these issues as they relate to ISS guidelines for exchange offers and option repricings:

Do proxy advisors have appropriate incentive to verify that their recommendations are correct?

  • Should board members require evidence that ISS guidelines are value increasing before they adjust their policies to gain a favorable recommendation?
  • Proxy advisory firms enjoy significant barriers to entry and little competition.  Is this desirable for shareholders?

Read the attached Closer Look, and let us know!

Related Research Paper on SSRN: The Role of Proxy Advisory Firms in Stock Option Exchanges
Authors: David F. Larcker , Allan L. McCall and Gaizka Ormazabal , Stanford Graduate School of Business

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.

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The market reaction to corporate governance regulation

Friday, March 11th, 2011

Journal of Financial Economics
Article in Press, Accepted Manuscript Available online 10 March 2011.
Authors: David F. Larckernext terma, Corresponding Author Contact Information, E-mail The Corresponding Author, Gaizka Ormazabala, E-mail The Corresponding Author and Daniel J. Taylorb, E-mail The Corresponding Author

a Graduate School of Business, Rock Center for Corporate Governance, Stanford University, 655 Knight Way, Stanford, CA 94305 b The Wharton School, University of Pennsylvania

Abstract

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.

star, openWe 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.”

Corresponding Author Contact InformationCorresponding author:

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