Thursday, May 19, 2011

Why Does Corporate Governance Really Matter?

New book (Corporate Governance Matters by Professor David Larcker and Brian Tayan) from Stanford Graduate School of Business showcases research into how boards can govern better.

"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 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 authors David Larcker or Brian Tayan, please contact Davia Temin or Suzanne Oaks at (212) 588-8788 or news@teminandco.com.

About David F. Larcker

Larcker is James Irvin Miller Professor of Accounting at the Stanford Graduate School of Business. He directs the Corporate Governance Research Program at the Stanford Graduate School of Business and is senior faculty of the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford University. Previously, he was professor of accounting at the Wharton School of the University of Pennsylvania and professor of accounting and information systems at the Kellogg Graduate School of Management at Northwestern University. He received his PhD in business from the University of Kansas and his BS and MS in engineering from the University of Missouri, Rolla.

About Brian Tayan

Brian Tayan is a researcher with the Corporate Governance Research Program at the Stanford Graduate School of Business. He received his MBA from the Stanford Graduate School of Business and his BA from Princeton University.

About the Corporate Governance Research Program

The Stanford Graduate School of Business launched the Corporate Governance Research Program (CGRP) in 2006 to generate new insights, and advance the intellectual understanding and teaching of corporate governance around the world. The CGRP further seeks to bridge the gap between theory and practice of corporate governance by engaging academics, regulators, and professionals who can apply this knowledge to both classrooms and organizations around the world. Located in the heart of California?s Silicon Valley, the Stanford Graduate School of Business has built an international reputation based on its innovative programs, which include the two-year MBA, one-year Sloan Master?s Program, PhD, executive education, and faculty research.

About the Rock Center for Corporate Governance

The Arthur and Toni Rembe Rock Center for Corporate Governance is a joint initiative of Stanford Law School and Stanford Graduate School of Business, created with the idea that advances in the understanding and practice of corporate governance are most likely to occur in a cross-disciplinary environment where leading academics, business leaders, policy makers, practitioners, and regulators can meet and work together. The Rock Center's goal is to conduct research and tap this wealth of expertise to advance the practice and study of corporate governance.