Transcript Slide 1
The Latest Research in
Corporate Governance
SAN DIEGO STATE UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION
Who we are
The Corporate Governance Institute (CGI) is
a research and education center dedicated
to the study and application of responsible
corporate governance principles worldwide
Founded as a joint venture of San Diego
State University and the Corporate Directors
Forum
Celebrating our 10th anniversary in 2008
CGI Board of Advisors
Nell Minow
Cynthia Richson
Garry Ridge
Hugh Friedman
Gail Naughton
Editor and Co-founder
The Corporate Library
President & CEO
RCG LLC
CEO
WD-40 Company
Professor of Law
University of San Diego
Dean
SDSU College of Business
The Latest Research in
Corporate Governance
SAN DIEGO STATE UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION
Lori Verstegen Ryan, Ph.D.
Director
Assoc. Professor of Management,
San Diego State University
Research focuses on the intersection
of corporate governance and ethics
Previously spent 11 years with Honeywell
Paul Graf, J.D.
Associate Director for Law and Finance
Professor of Law,
San Diego State University
Research focuses on board assessment and accountability
Previously Sr. VP and Corporate
Counsel, GE Capital Business Asset Funding
Martha Doran, Ph.D.
Associate Professor of Accounting,
San Diego State University
Director, Center for Accounting
in the Public Interest
Previously Controller and CFO
Joe Tanimura, J.D., Ph.D.
Assistant Professor of Finance,
San Diego State University
Research focuses on the intersection
of financial economics and the law
Previously Managing Economist
at LECG
The Latest Research in
Corporate Governance
SAN DIEGO STATE UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION
The Latest Research in
Corporate Governance:
Management
SAN DIEGO STATE UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION
Top-Tier Management Journals
Academy of Management Review
Academy of Management Journal
Strategic Management Journal
Administrative Science Quarterly
Corporate Governance Journals
Corporate Governance: An International Review
Journal of Management and Governance
Corporate Governance
Business Ethics Journals
Business Ethics Quarterly
Business & Society
Journal of Business Ethics
Topics
Boards of directors
Top management
Shareholders
Compensation
Ethics and social responsibility
Corporate governance and theory
Boards of Directors
Boards of Directors – Firm Performance
Review of 105 studies, 1989-2005
CEO duality – ambiguous results
Insider-outsider ratio – no relationship
Size and stability – mixed results (+/-)
Board ownership – mixed results (+/-)
Director rewards – few recent studies, mixed
Shareholder activism – mixed results (0/+)
(Finegold, Benson & Hecht*)
Boards of Directors - Structure
Sample of ~1,400 U.S. firms, 19972003
Decreasing board size (avg. 9.879.37**)
Slightly decreasing CEO duality (avg. 72%66% ns)
Decreasing director interlocks (avg. 11.5%5%**)
Significantly more attorneys, financiers, and retirees;
fewer industry experts
Director holdings steady at approximately 1% of
outstanding shares (slight inverted U)
Decreasing additional boards (avg. .9.8* since 2000)
(Chhaochharia & Grinstein*)
Boards of Directors - Process
Researchers have enormous difficulty gaining
access to the board room due to two concerns
Confidentiality
Reinforced that interested in process, not content
Researchers were excused when necessary
Signed confidentiality agreements
Changing board dynamics due to observation
Note taking vs. tape recording
(LeBlanc & Schwartz)
Boards of Directors - Behaviors
Directors’ chances of additional board appointments increase when they
Provide advice and information to CEO
Use “ingratiatory behavior” toward peer directors
Engage in low levels of monitoring and control
But
Women and minorities are rewarded less, and
actually punished for low monitoring and control
(Westphal & Stern*)
Boards of Directors - Demographics
Board diversity tends to reflect the customer base
(Brammer, Millington & Pavelin-UK)
More women sit on boards 1) of larger firms, 2) of firms
with links to firms with women on their boards, and 3) in
industries with more female employees
(Hillman, Shropshire & Cannella*)
Black directors are more likely to sit on audit and public
affairs committees, less likely to be on executive
committee; black women are most likely to sit on finance
committee
(Peterson, Philpot & O’Shaughnessy)
Boards of Directors - Globalization
Among the 80 largest transnational corporations
75% have at least one non-national board
member (vs. 36.3% in 1999)
On average, 25% of directors are non-nationals
Non-nationals are a majority in 10% of firms
(Staples)
Top Management
Top Management – Firm Performance
111 CEOs, computer industry, 1992-2004
Narcissistic CEOs (photograph prominence, use of “I,”
pay vs. second in command, prominence in press
releases) are related to
Strategic dynamism and grandiosity
Large numbers of large acquisitions
Extreme and fluctuating firm performance
Their firms’ performance is no better or worse than firms’
without narcissistic CEOs
(Chatterjee & Hambrick*)
Top Management – CEO Ownership
231 S&P firms, 1994-99
CEO ownership in one period is not related to
subsequent changes in diversification
Higher levels of diversification are associated
with changes in managerial ownership
(Goranova, Alessandri, Brandes, Dharwadkar*)
Top Management – Female CEOs
1,624 CEO announcements, 1990-2000
Investor reactions to female announcements
significantly more negative than to male
Women promoted from within are viewed more
positively than those from outside
Articles concerning female announcements tend
to focus on gender
(Lee & James*)
Shareholders
Shareholders –
Ownership Structure and Firm Performance
Meta-analysis of 33 studies, 1998-2006 (cross
cultural)
Performance benefits of concentrated ownership
are weak in Anglo-American firms
Insider ownership is related to higher firm
performance, particularly in Anglo-American firms
(Sánchez-Ballesta & García-Meca)
Shareholders – Informational Advantages
6,515 firm-quarter observations, 1983-1991
A firm’s largest institutional investor—and no
other institutional investor—is perceived by the
market to have an informational advantage over
other investors
Advantage varies with the percentage owned
(Schnatterly, Shaw & Jennings*)
Shareholders – Collective Action
Authors exhort top 20 pension funds (19 of
which are public, holding $3.5T in assets) to use
collective action to
Redefine their role
Engage in Principles for Responsible Investment
Amplify their signals to portfolio companies
(Thamotheram & Wildsmith)
Compensation
Compensation –
Stock Options and Firm Performance
950 S&P firms, 1993-2000
Greater CEO pay in stock options leads to
Larger investment outlays
More variability in investment risk
More variability in firm performance
“Option-loaded” CEOs are associated with more
firm losses than firm gains
(Sanders & Hambrick*)
Compensation – Stock Option Valuation
Executive option holders tend to overvalue
unexercisable options
Compensation designers are thus undervaluing
stock options in compensation packages by
using normative models such as Black-Scholes
Replacing stock options with alternate forms of
compensation could be unexpectedly costly
(Devers, Wiseman, & Holmes*)
Compensation – Pay and Risk Taking
108 CEOs of IPO firms, 1993-95
Stock options are negatively associated with risk taking
Downside compensation risk should be considered
separately from compensation variability
Employment risk (leading to risk taking) is distinct from
compensation risk (leading to risk aversion)
Different forms of compensation are not fungible
(Larraza-Kintana, Wiseman, Gomez-Mejia & Welbourne*)
Compensation - Environmental Effects
After a major shift (airline deregulation)
Change that increases executive discretion leads
to higher pay level and greater performance
sensitivity for top management team (TMT)
The higher the magnitude of TMT turnover, the
greater the compensation increase
(Cho & Shen)
Compensation – Monitoring & Incentives
149 board chairs in three industries
Agency theory considers monitoring (information)
and incentives to be boards’ primary management tools
As boards increase their information, they also
Tie pay to performance
Restrict CEO autonomy
(Rutherford, Buchholtz & Brown)
Compensation – Director Ownership
450 S&P 500 firms, 1995-97
Director stock options and grants were associated with enhanced firm performance when
firms had
Greater investment opportunities
Weaker external monitoring
(Cordeiro, Veliyath, & Romal)
Compensation – Outside Directors
1,500 S&P firms, 1997-2000
Stock-option compensation for outside directors
is positively related to R&D intensity
Interaction of percentage of outside directors
and stock-option compensation is also positively
related to R&D intensity
(Deutsch)
Ethics and
Social Responsibility
Ethics and Social Responsibility –
Firm Performance
Socially responsible behaviors should be
undertaken based on investor demand
While some CSR activities may not maximize
the present value of their firm’s future cash
flows, they may still maximize the market value
of the firm
(Mackey, Mackey & Barney*)
Ethics and Social Responsibility Gatekeepers
Accountants, lawyers, and bankers serve as
“reluctant guardians”
They have the ability to deter misconduct, but
not the incentive
Investors receive the benefits of gatekeeper
safeguards, so should bear the costs
(Boatright)
Ethics and Social Responsibility –
Corporate Vote Buying
Legal history of corporate vote buying
Strategic reasons for vote buying
Key principles for directors: Vote buying
Is not illegal
Is protected by the Business Judgment Rule
Should not defraud or disenfranchise any investors
Should include protective measures for investors
(Lan & Heracleous)
Ethics and Social Responsibility –
Marketing Stock
Executives owe all investors fiduciary duty and
promise keeping (profit maximization)
“Courting” some shareholders while withholding
information from others violates those duties
Executives should treat all shareholders equally
(Williams & Ryan, 2007)
The Latest Research in
Corporate Governance
SAN DIEGO STATE UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION