Corporate Governance

Investigating the Unsolved Mysteries of Boardrooms and C-Suites

More than a decade and 100 papers later, Closer Look finds that there’s no one-size-fits-all answer to questions about corporate governance.

June 06, 2023

| by Dave Gilson Audrey Kim
A blurry photo of a boardroom with figures standing and sitting illuminated by a bright window.

“The whole governance space is complicated… These real problems are very messy and they’re hard to deal with.” | iStock/Prostock-Studio

Management gurus, financial analysts, and B-school profs have been studying the ins and outs of the modern corporation for decades. So you’d think there would be plenty of clear-cut takeaways about issues like executive pay, board structure, and shareholder relations. Wrong.

“There’s a tremendous amount of research” on corporate governance, says David Larcker, a professor of accounting at Stanford Graduate School of Business and the co-director of the Corporate Governance Research Initiative. But, he adds, “A lot of it is just not very good.”

For the past 13 years, Larcker has been separating fact from fallacy in Closer Look, a wide-ranging series of papers that’s explored hot topics from CEO succession to ESG investing and looked under the hood of companies like Uber and Tesla. The 100th paper, published in April, hits a recurring theme: how the “gaping holes in our knowledge of corporate governance” are often filled by “rhetoric, assertions, and opinions that — while strongly held — are not necessarily supported by either applicable theory or empirical evidence.”

Written to be concise and engaging, Closer Looks are read by researchers and investors alike and have been cited by SEC commissioners. “They’re really meant to communicate academic ideas to a broad audience in a way that’s digestible and relevant,” explains Larcker’s coauthor, Brian Tayan, MBA ’03.

“There’s a tremendous amount of research” on corporate governance, says David Larcker. “A lot of it is just not very good.”

Even as they seek to make sense of an often uncertain field, Larcker and Tayan shy away from sweeping conclusions. “The whole governance space is complicated. It’s spread across law, accounting, and finance,” Larcker explains. “These real problems are very messy and they’re hard to deal with.”

The solutions to these problems often depend on individual companies and the people who run them. “The theme that comes up a lot of our pieces is that the context matters,” Tayan says. “The setting matters and there are trade-offs involved in these types of decisions.”

A typical Closer Look ends with a series of questions rather than one-size-fits-all answers. “Sometimes we’ll get responses saying, ‘Hey, I enjoyed reading this, but you didn’t tell us what to do,’” Larcker says. “And I go, ‘That’s exactly right. We want you to think about it.’”

If you’d like to take a closer look at Closer Looks, these nine reports are a good place to start:

Seven Myths of Corporate Governance (2011)

Are CEOs overpaid? Does the structure of a company’s board indicate its quality? Is there such a thing as a “best practice”? When corporate governance decisions are swayed by popular beliefs backed by “self-styled experts,” the welfare of a company and its shareholders may be harmed. In this article, Larcker and Tayan debunk several myths of corporate governance that they find lack rigorous evidence.

Scoundrels in the C-Suite (2016)

When corporate executives break the law, it’s up to their boards of directors to take corrective action. However, when a CEO has an affair with a subordinate, makes an offensive comment, or engages in other behavior that provokes controversy, the way forward is less clear. This article examines how an exec’s personal conduct sets the tone for their company’s culture, what warrants board interference, and whether board members should try to detect executive misconduct in its early stages.)

CEO Health Disclosure at Apple: A Public or Private Matter? (2011)

Less than a year before Apple CEO Steve Jobs died from pancreatic cancer, this article looked at the question of whether companies should disclose their executives’ health problems. Were the latest details of Jobs’ condition a material fact that needed to be shared with shareholders? Or was Apple obligated to respect its cofounder’s privacy so long as he could still perform his job?

Sudden Death of a CEO: Are Companies Prepared When Lightning Strikes? (2012)

“There is no greater test of the viability of a company’s succession plan than the sudden death of its CEO,” Larcker and Tayan write. While some companies maintain a list of candidates in case of emergency, others may start the replacement process from scratch. How a company acts in the wake of its CEO’s unexpected death can provide valuable information about its quality of leadership, as well as insight into the deceased executive’s reputation: some companies’ share prices rise after their CEOs pass on.

Lehman Brothers: Peeking under the Board Facade (2010)

After Lehman Brothers collapsed in 2008, some observers attributed the investment bank’s failure to the ineffectiveness of its board of directors. At first glance, its board structure and composition were quite similar to that of Goldman Sachs, which survived the 2008-9 financial crisis. In this article, Larcker and Tayan ask whether Lehman’s board members lacked sufficient qualifications — and whether this could be a problem in other boardrooms.

The Wells Fargo Cross-Selling Scandal (2019)

Revelations that Wells Fargo had been signing up customers for unwanted accounts and credit cards did incalculable damage to its reputation — even though it involved only $6 million in improper fees. This paper looks at the scandal’s development and dissects the banks’ inner workings to ascertain its causes.

Separation Anxiety: The Impact of CEO Divorce on Shareholders (2013)

When Rupert Murdoch announced in a “zero impact” divorce, shares of News Corp traded 1.4% higher. But when Continental Resources CEO Harold Hamm’s divorce caused his majority stake to be split with his ex, company shares fell 2.9%. These examples, Larcker and Tayan write, “suggest that shareholders should pay attention to matters involving the personal lives of CEOs… when making investment decisions.”

Netflix Approach to Governance: Genuine Transparency with the Board (2018)

The philosophy behind Netflix’s board of directors centered around a level of transparency that would be unusual in many companies. Board members could observe management meetings and had full access to a wide range of internal data. Could such an approach work in other companies? Could it be adopted by a large, more-established firm?

Governance Aches and Pains: Is Bad Governance Chronic? (2016)

Investors value good corporate governance, but, as Larcker and Tayan write, “it is often difficult for outside observers to reliably gauge governance quality.” They look at several high-profile examples of poor governance and ask if shareholders can determine whether a company’s problems are routine or the result of mismanagement in the C-suite or boardroom.

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