Monthly Archives: September 2011

Executive Pay Through a Peer Benchmarking Lens

The following post comes to us from Subodh Mishra, Vice President at Institutional Shareholder Services, and is based on an ISS white paper by Daniel Cheng, available here.


The enhanced executive compensation disclosures mandated by the U.S. Securities and Exchange Commission in 2006 have provided a significant new data set for investors and companies to analyze and benchmark pay practices across a broad set of U.S. corporate issuers.

Moreover, precisely how companies choose to benchmark their pay practices has received much attention following the outcry over Wall Street payouts and the recent promulgation of legislation requiring most U.S. issuers put their pay to a precatory shareholder vote.

Against this backdrop, Executive Pay Through a Peer Benchmarking Lens summarizes key findings from ISS Corporate Services’ study of almost 15,000 Def 14A filings over the past four years. Drawing on ISS’ executive compensation database, the focus of the analysis is on both pay levels as well as the processes by which companies benchmark their pay relative to peers.


Mechanisms of Board Turnover: Evidence from Backdating

The following post comes to us from Frederick Bereskin of the Department of Finance at the University of Delaware and Clifford Smith, Professor of Finance and Economics at the University of Rochester.

In our paper, Mechanisms of Board Turnover: Evidence from Backdating, which was recently made publicly available on SSRN, we examine a set of events that involve observable corporate misdeeds: stock option backdating. These misdeeds were generally revealed within a narrow window of time, required the complicity of the board, and in many cases directors benefited directly through backdated grants. Examining board turnover associated with stock option backdating thus enables us to gain more insight about the mechanisms by which directors depart their boards. Although information that would allow us to identify each of these five steps is not publicly available, events that are typically available include the following: (1) whether a director resigns, (2) whether a director appears on the proxy as nominated for reelection, and (3) whether a director is reelected. Additionally, there are press releases that sometimes accompany these decisions, but these announcements must be interpreted with care. For example, when a director does not appear on the proxy, the board and/or nominating committee might have chosen not to renominate the individual for reelection or the director might have declined to stand for reelection (an event that is frequently disclosed, especially if driven by a director retirement policy). However, a director who will not be renominated often is permitted to announce that he or she has chosen to resign or not to seek reelection.


Corporate Governance Matters: Lessons for Practitioners

David Larcker is the James Irvin Miller Professor of Accounting and Director of the Corporate Governance Research Program at Stanford University. This post discusses a book co-authored by Professor Larcker; more information is available here.

Brian Tayan and I recently co-authored a book, titled Corporate Governance Matters, which takes an organizational perspective, rather than a legal perspective, on the important topic of modern corporate governance. Our purpose is to examine the choices that organizations can make in designing governance systems and the impact those choices have on executive decision-making and the organization’s performance. The book relies on an extensive body of professional and scholarly research, and aims to correct misconceptions and cut through the considerable rhetoric surrounding corporate governance. We hope the book provides a framework that enables practitioners to make sound decisions that are well supported by careful research.

Our book covers a wide range of topics regarding corporate governance. These include a discussion of the environment in which the organization competes to understand how various forces influence the mechanisms it adopts to discourage self-interested behavior by management. In addition, we spend considerable time examining the board of directors, including the structure, processes, and operations of the board, along with the board’s functional responsibilities, such as oversight and risk management, succession planning, compensation, accounting and audits, and the consideration of mergers and acquisitions. We also examine the role of the institutional investor to understand how diverse shareholder groups and third-party proxy advisory firms influence governance choices. The book also includes an assessment of commercial and academic governance ratings systems.

Many of the conclusions of the book are phrased in the negative. While the lack of positive correlations may disappoint some, this has important implications for the current debate on governance and your evaluation of the types of governance systems that organizations might require. Some of the central lessons we draw in the book including the following:


OECD Guidelines for Multinational Enterprises Revised for 2011

Recently, 42 countries agreed to a revised version of the Organisation for Economic Co-operation and Development’s Guidelines for Multinational Enterprises. This group includes the 34 OECD countries plus Argentina, Brazil, Egypt, Latvia, Lithuania, Morocco, Peru and Romania. The Guidelines are a non-binding code of conduct aimed at promoting more responsible conduct among the international business community.

This latest update of the guidelines was prompted by the growing complexity and globalization of the world economy. Non-adhering countries, and multinational business enterprises in those countries, have become an increasingly important part of that economy. This, along with more pressing concerns, including the financial crises, concerns over climate change, and a renewed focus on international development, helped motivate a review of Guidelines, the fourth since their initial adoption in 1976 and the first since 2000.

The initial call for review came in 2009 at the annual meeting of National Contact Points, which are entities in each country responsible for implementing the Guidelines. Consultation took place with members of the business community, trade unions, non-governmental organizations, non-adhering countries, and international organizations. The final guidelines were adopted on May 25, 2011.


Good Monitoring, Bad Monitoring

The following post comes to us from Yaniv Grinstein of the Department of Finance at Cornell University and Stefano Rossi of the Department of Finance at the Imperial College Business School. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In our paper, Good Monitoring, Bad Monitoring, which was recently made publicly available on SSSRN, we estimate the value of monitoring in publicly traded corporations by exploiting as a “natural experiment,” an unexpected and controversial decision of the Delaware Supreme Court that significantly tightened scrutiny over board decisions in Delaware-incorporated firms in 1985. We analyze the impact of the decision on stock returns using matching and differences-in-differences techniques. We find that, compared with appropriately matched non-Delaware firms, Delaware-incorporated firms in high-growth industries lost, while firms in low-growth industries gained significantly around the announcement of the decision.

These results are robust, and are further corroborated by an out-of-sample test. A later regulatory reform to the Delaware Code that essentially reversed the effects of the Supreme Court decision had opposite results: firms in high-growth industries gained and firms in low-growth industries lost significantly. We interpret these results as implying that “one-size-fits-all” models represent inadequate solutions to the corporate governance problem.


Separation of Chair and CEO Roles

Matteo Tonello is Director of Corporate Governance for The Conference Board, Inc. This post is based on a Conference Board Director Note by Richard Leblanc of York University and Katharina Pick of Claremont Graduate University.

In light of required disclosure about board leadership structure, the decision of whether or not to separate the chairman and chief executive roles remains a hot governance topic for public companies, boards, and shareholders. This report examines some of the academic literature surrounding the debate and proposes that board effectiveness is affected by the chairman’s industry knowledge, leadership skills, and influence on board process rather than by the particular leadership structure chosen.

Since the early 1980s, much attention has been paid to corporate boards of directors and how their structures improve (or undermine) organizational performance. Among the most hotly debated structural features of the board is the combination (or separation) of the chair and CEO roles. As of February 2010, Securities and Exchange Commission (SEC) rules require listed companies to disclose their board leadership structure and explain why they have determined that such a leadership structure is appropriate, given their specific characteristics or circumstances. [1]


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