"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 Stanford GSB 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 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:
- 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."
- "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."
- "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."
- 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."