1 / 40

The Latest Research in Corporate Governance

The Latest Research in Corporate Governance. 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

underwoodm
Download Presentation

The Latest Research in Corporate Governance

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. The Latest Research inCorporate Governance

  2. 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 in 1998

  3. CGI Board of Advisors • Nell Minow Editor and Co-founder The Corporate Library • Cynthia Richson • Garry Ridge CEO WD-40 Company • Hugh Friedman Professor of Law University of San Diego • Gail Naughton Dean SDSU College of Business

  4. The Latest Research inCorporate Governance

  5. Lori Verstegen Ryan, Ph.D.Director • Professor of Management, San Diego State University • Research focuses on the intersection of corporate governance and ethics • Previously spent 11 years with Honeywell

  6. Paul Graf, J.D.Associate Director for Law and Finance • Professor of Law, San Diego State University • Research focuses on board assess- ment and accountability • Previously Senior VP and Corporate Counsel, GE Capital Business Asset Funding

  7. Nikhil Varaiya, Ph.D. • Professor of Finance, San Diego State University • Research focuses on mergers and acquisitions, valuation, and strategic management • Previously chairman of the board, University & State Employees Credit Union

  8. David DeBoskey, Ph.D., CPA • Assistant Professor of Accountancy, San Diego State University • Research focuses on executive compensation, corporate transparency and accountability, and audit quality • Previously CFO and Senior Vice President of CareAdvantage, Inc.

  9. Event Timetable 1:00-1:15 Welcome   1:15-2:30 Session 1 - Management or Finance 2:30-2:45 Break  2:45-4:00 Session 2 - Law or Accounting 4:45     First shuttle departs from the Hilton  5:00  Directors Forum reception at USD

  10. The Latest Research inCorporate Governance:Management Lori Verstegen Ryan Professor of Management

  11. Top-Tier Management Journals • Administrative Science Quarterly** • Academy of Management Review* • Academy of Management Journal* • Strategic Management Journal* • Organization Science • Journal of Management

  12. Business Ethics Journals • Business Ethics Quarterly • Business & Society • Journal of Business Ethics

  13. Corporate Governance Journals • Corporate Governance: An International Review • Journal of Management and Governance • Corporate Governance

  14. Topics • Boards of directors • Top management • Shareholders • Ethics and social responsibility

  15. Boards of Directors

  16. Boards of Directors – Identification • The strength of a director’s identification with the organization will have a positive relationship with resource provision and monitoring • The strength of a director’s identification with being a director will have a positive relationship with resource provision and monitoring • The strength of a director’s identification with being a CEO will have a positive relationship with resource provision, but a negative relationship with monitoring • The strength of a director’s identification with shareholders will have a positive relationship with resource provision and monitoring • The strength of a director’s identification with customers and/or suppliers will have • An inverted-U-shaped relationship with resource provision • A positive relationship with monitoring (Hillman, Nicholson & Shropshire)

  17. Boards of Directors – Political Officials • 1988-2003: 66 former cabinet secretaries, 74 former senators, and 96 former representatives • 36% of sample joined firms as outside directors • 11 individuals accounted for 32% of board seats • Longer government tenure increases the likelihood of joining a board (depth) • Cabinet secretaries are 2.1 times more likely than senators to join a board; representatives are 58% less likely than senators (breadth) • After a large spike in likelihood of taking a board seat in year 1, it drops significantly (deterioration) • If the official’s opposition party is in power, the likelihood of joining a board drops 29% (Lester, Hillman, Zardkoohi & Cannella*)

  18. Boards of Directors – Interlock Dangers • 244 firms with director interlocks to 30 firms accused of fraud between 1998 and 2002 • Linked firms lost an average 1% of market value within 2 days of fraud allegation announcement, $49B overall • 18% (45) of linked firms suffered significant reputational penalties ($39B for 45 firms) • Penalties were more likely when the interlocking director held audit or governance chair positions in the linked firm • The likelihood of escalated penalties diminished when the linked firm exhibited certain “effective” corporate governance structures (heavily independent board, inside director ownership, mutual fund/public pension fund ownership) (Kang*)

  19. Boards of Directors – Acquisitions • 1997-2001: 500 acquisitions (100/year) • Significantly higher returns from acquisitions were found to be associated with • Board vigilance variables • A higher number of independent outside board members • A higher percentage of blockholder director ownership • Greater outside board member ownership • Board experience variables • Directors experienced in the target industry • Directors with prior CEO experience with acquisitions • Directors with prior board experience with acquisitions • The interaction of the two heightens returns further • Previous CEO experience with acquisitions is not significant except as it enhances board effects (Kroll, Walters & Wright*)

  20. Boards of Directors – Demographics • Over 43 countries: • More women sit on boards in countries with more women in senior management and greater earnings equality • Fewer women sit on boards in countries with long traditions of female elected political officials (Terjesen & Singh) • Over 68 Spanish companies 1995-2000: • Mere presence of women on boards does not increase firm value • Greater gender diversity on boards does increase firm value (Campbell & Mínguez-Vera)

  21. Top Management

  22. Top Management – Investor Ingratiation • 803 dyads of top managers and institutional investors (II) • 88% of complimented fund managers received praise for their funds’ performance or their professional reputations • Over the past twelve months (1) complimenting IIs three times more than average, (2) expressing agreement with IIs three more times, and (3) doing two more personal favors for IIs: • Reduces the likelihood of CEO/chair separation by 62% • Raises the rate at which CEO compensation increases by 37% • Reduces the rate at which compensation risk increases by 59% (Westphal & Bednar**)

  23. Top Management – Analyst Ingratiation • 986 analyst surveys, each covering up to three analyst/ firm dyads • The greater the earnings shortfall, the more favors top management grants to analysts • The greater the favors granted, the less likely the analyst will downgrade the stock • Analysts who downgrade a stock receive significantly fewer favors thereafter • Analysts who see a fellow analyst receive reduced favors from a firm are less likely to downgrade that firm (Westphal & Clement*)

  24. Top Management – Advice Networks • 224 firms—surveys from CEO and at least one outside director • The likelihood rises that CEOs seek advice from executives at other firms who are a) non-friends or b) from disparate functional areas with • Increases in CEOs’ stock ownership • Increases in performance-contingent compensation • Increases in board monitoring (McDonald, Khanna, & Westphal*)

  25. Top Management – Earnings Manipulation • 1995-2001—225 firms with restatements • No relationship was found between the number of a CEO’s in-the-money options and earnings manipulation • The larger the number of a CEO’s out-of-the-money options, the greater the likelihood of earnings manipulation • Lower levels of CEO stock ownership and low firm perfor-mance were positively related to earnings manipulation • Both relationships were stronger with longer tenured CEOs (Zhang, Bartol, Smith, Pfarrer,& Khanin*)

  26. Top Management – Firm Performance • 1992-2002: 92 “mobile” CEOs across 52 firms • Adds to the “performance variance decomposition” literature • The CEOs in these firms account for 29% of the variance in firm performance, corporate effect for 8%, and industry effect for 6% • The CEOs account for 13% of the variance in business-segment performance, industry effect for 8%, and corporate effect for 7% (Mackey*)

  27. Top Management – Equity Reduction • 1997-1999: 208 U.S. CEOs • Firm-specific downside risk is strongly correlated with CEOs’ stock divestitures and their magnitude • Firm performance is negatively correlated with CEOs’ stock divestitures and their magnitude • Neither the firm’s returns variability nor a high level of CEO shareholdings has a demonstrable effect on CEOs’ stock divestitures (Matta & McGuire)

  28. Top Management – CEO Dismissal • 1993-1998: 204 CEO successions in 184 firms (Zhang*)

  29. Shareholders

  30. Shareholders – Information Advantages • 1983-1991: 6,515 firm-quarter observations • On average, IIs hold 28% of firm shares, largest holds 7%, firms have 28 institutional investors • Only a firm’s largest institutional holder is perceived as having an information advantage, based on an increased buy/ask spread • The greater the percentage of shares held by the largest institutional investor, the greater the perceived informa-tion advantage (Schnatterly, Shaw & Jennings*)

  31. Shareholders – Portfolio Effects • 1993-2002: 533 firms • Average blockholder stake $86M • Blockholders’ monitoring effectiveness decreased with larger average holdings, more blockholdings, firm significance in the portfolio, and greater turnover • CEO compensation is high when the firm is a high proportion of the investor’s portfolio, but drops Presence of a blockholder is associated with lower CEO total compensation (Dharwadkar, Goranova, Brandes & Khan)

  32. (Dharwadkar, Goranova, Brandes & Khan)

  33. Shareholders – Activism and Justice • 1999-2005: 1,719 shareholder resolutions (IRRC) • Justice issues constituted 34-50% of resolutions (peaking in 2001-2002)—e.g., EEO, economic development, environment) • Employee-to-community ratio 9 to 1 • Many justice-related issues considered ordinary business and excluded; some phrased instrumentally (Logsdon & Van Buren)

  34. Ethics and Social Responsibility

  35. Ethics – Ignoring Shareholder Directives • 2000-2004: 281 anti-takeover-recission proposals approved by shareholder majority vote (207 enacted) • Firms with outsider-dominated (80%+) boards are more likely to enact • Smaller outsider-dominated boards are more likely to enact than larger • Larger non-outsider-dominated boards are more likely to enact than small • High levels of CEO ownership reduce the likelihood of enactment • Outsider tenure, blockholder presence, and director stock ownership are not significant factors (Howton, Howton & McWilliams)

  36. Ethics –Hedge Funds • Philosophical analysis of the “hedge-fund regulation problem” • “Intentional opaqueness” protects strategies from theft, but could also harm “duped” investors and the overall market • Regulation could stifle fund managers’ incentives and violate intellectual property rights • A few behaviors lend themselves to regulation, e.g., pred-atory short-selling based on circulating false information • Recommends an industry “best practices” code of conduct (Donaldson)

  37. Ethics – Governance in Russia • Traditional agency theory norms should not be used to evaluate the ethics of business behavior in Russia • Both market-based norms and Russian cultural norms must be taken into account • Integrative Social Contracts Theory is better applied, recognizing the Russian “micro social contract” • Global corporate governance “hypernorms” should be recognized, otherwise allowing for local variations (McCarthy & Puffer*)

  38. Social Responsibility – Pension Funds • 2001-2001: 540 UK firms (80% of largest firms) • Corporate social performance (CSP) is measured by an index of employment, environment, and community factors • CSP is correlated to the degree to which shares are held by pension funds (marginal significance, p<.06) • CSP is strongly correlated to holdings by internally managed pension funds • CSP is strongly correlated to holdings by private pension funds; significance is accounted for by internally managed private pension funds • CSP is correlated to holdings by internally managed public pension funds (not to externally managed or public funds overall) (Cox, Brammer & Millington)

  39. Ethics – Use of Ratings Services • Commercial ratings are not linked to firm performance • Commercial ratings are not linked to shareholder voting (or ISS voting recommendations) • Investors validate ratings by buying services • Firms modify their corporate governance structures and processes to conform to ratings • Firm performance may suffer (Ryan, forthcoming)

  40. The Latest Research inCorporate Governance

More Related