Corporate Governance Matters : A Closer Look at Organizational Choices and Their Consequences

This is the most comprehensive and up-to-date reference for implementing and sustaining superior corporate governance. Stanford corporate governance experts David Larcker and Bryan Tayan carefully synthesize current academic and professional research, summarizing what is known and unknown, and where the evidence remains inconclusive. Corporate Governance Matters, Second Edition reviews the field's newest research on issues including compensation, CEO labor markets, board structure, succession, risk, international governance, reporting, audit, institutional and activist investors, governance ratings, and much more. Larcker and Tayan offer models and frameworks demonstrating how the components of governance fit together, with updated examples and scenarios illustrating key points. Throughout, their balanced approach is focused strictly on two goals: to'get the story straight,'and to provide useful tools for making better, more informed decisions. This edition presents new or expanded coverage of key issues ranging from risk management and shareholder activism to alternative corporate governance structures. It also adds new examples, scenarios, and classroom elements, making this text even more useful in academic settings. For all directors, business leaders, public policymakers, investors, stakeholders, and MBA faculty and students concerned with effective corporate governance. Preface xxiChapter 1 Introduction to Corporate Governance 1Self-Interested Executives 3Defining Corporate Governance 7Corporate Governance Standards 9Best Practice or Best Practices? Does "One Size Fit All"? 11Relationship between Corporate Governance and Firm Performance 12Chapter 2 International Corporate Governance 19Capital Market Efficiency 20Legal Tradition 22Accounting Standards 23Enforcement of Regulations 26Societal and Cultural Values 27Individual National Governance Structures 29United States 29United Kingdom 32Germany 37Japan 38South Korea 41China .43India 44Brazil 45Russia 47Endnotes 49Interlude 55Chapter 3 Board of Directors: Duties and Liability 57Board Responsibilities 57Board Independence 58The Operations of the Board 59Board Committees 60Duration of Director Terms 64Director Elections 64Removal of Directors 66Legal Obligations of Directors 66Fiduciary Duty 67Disclosure Obligations under Securities Laws 70Legal Enforcement of State Corporate Law (Fiduciary Duties) 70Legal Enforcement of Federal Securities Laws 71Director Indemnification and D&O Insurance 72Endnotes 75Chapter 4 Board of Directors: Selection, Compensation, and Removal 79Market for Directors 79Active CEOs 82International Experience 83Special Expertise 84Diverse Directors 85Professional Directors 86Disclosure Requirements for Director Qualifications 87Director Recruitment Process 89Director Compensation 91Ownership Guidelines 96Board Evaluation 97Removal of Directors 99Endnotes 102Chapter 5 Board of Directors: Structure and Consequences 107Board Structure 108Chairman of the Board 112Lead Independent Director 116Outside Directors 119Board Independence 121Independent Committees 125Bankers on the Board 126Financial Experts on Board 127Politically Connected Boards 128Employee Representation 128Boards with "Busy" Directors 131Interlocked (or Connected) Boards 133Committee Overlap 135Board Size 136Board Diversity 137Female Directors 138Summary 141Endnotes 142Interlude 150Chapter 6 Strategy, Performance Measurement, and Risk Management 151Organizational Strategy 152Strategy Implementation Process 154Business Model Development and Testing 156Example 1: Fast-Food Chain and Employee Turnover 156Example 2: Financial Services Firm and Investment Advisor Retention 158Key Performance Measures 159How Well Are Boards Doing with Performance Measures and Business Models? 163Risk and Risk Management 164Risk and Risk Tolerance 165Risk to the Business Model 167Risk Management 169Oversight of Risk Management 171Assessing Board Performance on Risk Management 173Endnotes 175Chapter 7 Labor Market for Executives and CEO Succession Planning 181Labor Market for Chief Executive Officers 181Labor Pool of CEO Talent 184CEO Turnover 186Newly Appointed CEOs 189Models of CEO Succession 191External Candidate 191President and/or Chief Operating Officer 193Horse Race 194Inside-Outside Model 195The Succession Process 196How Well Are Boards Doing with Succession Planning? 200The External Search Process .203Endnotes 206Chapter 8 Executive Compensation and Incentives 211The Controversy over Executive Compensation 212Components of Compensation 213Determining Compensation 217Compensation Consultants 220Compensation Levels 221Ratio of CEO Pay to Other Top Executive Pay 224Ratio of CEO Pay to Average Employee Pay 227Compensation Mix 228Short-Term Incentives 229Long-Term Incentives 232Benefits and Perquisites 234Compensation Disclosure 235Say-on-Pay 236Endnotes 240Chapter 9 Executive Equity Ownership 247Equity Ownership and Firm Performance 247Equity Ownership and Risk 250Equity Ownership and Agency Costs 256Accounting Manipulation 257Manipulation of Equity Grants 258Other Examples of Value Extraction through Timing 260Equity Sales and Insider Trading 261Rule 10b5-1 262Hedging 264Pledging 268Repricing and Exchange Offers 270Endnotes 273Chapter 10 Financial Reporting and External Audit 279The Audit Committee 280Accounting Quality, Transparency, and Controls 280Financial Reporting Quality 282Financial Restatements 284Models to Detect Accounting Manipulations 290The External Audit 292Audit Quality 296Structure of Audit Industry 296Impact of Sarbanes-Oxley 298External Auditor as CFO 301Auditor Rotation .302Endnotes 304Chapter 11 The Market for Corporate Control 311The Market for Corporate Control 312Stock Market Assessment of Acquiring and Target Firms 316Who Gets Acquired? 316Who Gets the Value in a Takeover? 319Antitakeover Protections 322Antitakeover Actions 323Poison Pills 325Staggered Board 328State of Incorporation 330Dual-Class Shares 331Warding Off Unwanted Acquirers 334Endnotes 336Chapter 12 Institutional Shareholders and Activist Investors 343The Role of Shareholders 343Blockholders and Institutional Investors 346Institutional Investors and Proxy Voting 349Activist Investors 351Pension Funds 353Social Responsibility and Other Stakeholder Funds 355Activist Hedge Funds 357Shareholder Democracy and Corporate Engagement 360Majority Voting in Uncontested Director Elections 360Proxy Access 361Proxy Voting 362Corporate Engagement 363Proxy Advisory Firms 364Endnotes 369Chapter 13 Corporate Governance Ratings 375Third-Party Ratings 375Credit Ratings 376Commercial Corporate Governance Ratings 378ISS: Corporate Governance Quotient 378ISS: Governance Risk Indicators 380ISS: QuickScore 380GMI Ratings 381Testing the Predictability of Corporate Governance Ratings 382Governance Rating Systems by Academic Researchers 383The Viability of Governance Ratings 388Endnotes 389Chapter 14 Alternative Models of Governance 393Family-Controlled Corporations 393Venture-Backed Companies 396Private Equity-Owned Companies 399Nonprofit Organizations 402Endnotes 407Chapter 15 Summary and Conclusions 413Testing Remains Insufficient 414The Current Focus Is Misdirected 415Important Variables Are Clearly Missing 416Context Is Important 417Endnotes 418Index 419 Now fully updated: today's most objective, complete, and actionable guide to corporate governance for every board member, director, officer, investor, and stakeholder. Now fully updated for the latest research, trends, and regulations, Corporate Governance Matters, Second Edition, offers comprehensive and objective information for everyone seeking to improve corporate governance from directors to institutional investors to policymakers and researchers. David Larcker and Brian Tayan thoroughly examine the choices now available in designing governance systems, explaining what is known about their impact on organizational performance. Avoiding ideology, Larcker and Tayan take an empirical approach that presents conclusions only where evidence supports them, and candidly identifies areas where broad conclusions cannot be drawn. This edition adds new coverage of the governance implications of private equity, hedge funds, sovereign wealth funds, shareholder activists, engaged institutional investors, proxy advisory firms, new rating systems, and emerging "benefit" ("B") corporations. Larcker and Tayan review new research on selecting board members and organizing their work, utilizing equity incentives and clawbacks, assessing CEO risk-seeking behavior, and much more. They have also added a new chapter on alternative governance structures, including family-operated and venture-backed companies. This guide thoroughly addresses key issues ranging from strategic oversight and risk management to succession planning. Thoughtful and measured throughout, it is indispensable for every governance practitioner Introduction To Corporate Governance -- International Corporate Governance -- Board Of Directors : Duties And Liability -- Board Of Directors : Selection, Compensation, And Removal -- Board Of Directors : Structure And Consequences -- Strategy, Performance Management, And Risk Management -- Labor Market For Executives And Ceo Succession Planning -- Executive Compensation And Incentives -- Executive Equity Ownership -- Financial Reporting And External Audit -- The Market For Corporate Control -- Institutional Shareholders And Activist Investors -- Corporate Governance Ratings -- Alternative Models Of Governance. David Larcker, Brian Tayan. Includes Bibliographical References And Index.