Posts Tagged ‘Stanford Closer Look Series’

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.

We thank Professor Bainbridge for letting us post his comments on this blog. The referenced Closer Look is found here.

What would happen if the NCAA adopted Dodd-Frank?  Professor Bainbridge, 10/3/2011 [ http://www.professorbainbridge.com/professorbainbridgecom/2011/10/what-would-happen-if-the-ncaa-adopted-dodd-frank.html ]

• The NCAA Adopts “Dodd-Frank”: A Fable  (PDF)
  Stanford Graduate School of Business – Corporate Governance Research Program, Professor David F. Larcker and researcher Brian Tayan, MBA 2003

 In recent years, NCAA football has been rocked by a string of high-profile violations, including those at USC, Ohio State, the University of Miami, and Auburn.  In many ways, these violations were similar to the governance breakdowns at financial and other corporations leading up to the financial crisis of 2008 and 2009.

In the corporate world, Congress responded to the financial crisis by enacting the Dodd-Frank Wall Street Reform Act, which among other things imposed various governance requirements on all publicly traded companies.

What would happen were the NCAA to adopt these same provisions and require them of all universities and their football programs?

In this fictitious tale, we explore what such a set of rules would look like.

We ask:

* If these requirements would not work in an athletic setting, should we expect them to work in business? 
* Why are the governance provisions of Dodd-Frank legally required, rather than voluntarily adopted by individual companies?
* Why does Dodd-Frank place such emphasis on executive compensation and disclosure?  Will its compensation requirements reduce governance failures?

Read the 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.

 CGRP16 – Seven Myths of Corporate Governance (PDF) by Professor David F. Larcker and Brian Tayan, MBA '03

In recent years, there has been much discussion over how to improve governance systems broadly. In the process, certain myths have developed that continue to be accepted, despite a lack of robust supporting evidence.

These myths include the beliefs that:

1. The structure of the board always tells you something about the quality of the board

2. CEOs in the U.S. are overpaid

3. Pay for performance does not exist in CEO compensation contracts

4. Companies are prepared to replace the CEO if needed

5. Regulation improves corporate governance

6. The voting recommendations of proxy advisory firms are correct

7. Best practices are the solution to bad governance

We examine each of these myths in closer detail and explain why they are false.

So long as these myths are accepted by practitioners and the public, how can we expect managerial behavior and firm performance to improve? Read the attached Closer Look and let us know what you think!

Larcker and Tayan are the authors of recently published book: Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences, FT Press

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 click here.

• 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.

Closer Look Series: Topics, Issues and Controversies in Corporate Governance, No. CGRP-10, By David F. Larcker, James Irvin Miller Professor of Accounting, Director of Stanford Graduate School of Business Corporate Governance Research Program And Brian Tayan, MBA ’03, Stanford GSB; Date: 9-15-2010

• Sensitivity of CEO Wealth to Stock Price: A New Tool For Assessing Pay for Performance (PDF)

In recent years, there has been considerable debate as to whether CEO compensation is actually correlated with performance in U.S. companies. This issue is known as “pay for performance.” While the debate is often heated, there tends to be little in the way of concrete analysis to inform conclusions.

We explain an important new method for measuring pay for performance. This involves examining the sensitivity of CEO equity ownership to potential large-scale changes in the stock price. We explain how the convexity of this relationship can give shareholders and stakeholders a better understanding of the incentives that the company is offering to its CEO. We also explain that it is important to review this information in the context of the company’s strategy to determine whether potential payments are appropriate and whether they encourage “excessive” risk taking.