Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences

This is the most comprehensive and up-to-date reference for implementing and sustaining superior corporate governance. Stanford corporate governance experts David Larcker and Bryan Tayan carefully synthesize current academic and professional research, summarizing what is known and unknown, and where the evidence remains inconclusive.   Corporate Governance Matters, Second Edition reviews the field's newest research on issues including compensation, CEO labor markets, board structure, succession, risk, international governance, reporting, audit, institutional and activist investors, governance ratings, and much more. Larcker and Tayan offer models and frameworks demonstrating how the components of governance fit together, with updated examples and scenarios illustrating key points. Throughout, their balanced approach is focused strictly on two goals: to "get the story straight," and to provide useful tools for making better, more informed decisions.   This edition presents new or expanded coverage of key issues ranging from risk management and shareholder activism to alternative corporate governance structures. It also adds new examples, scenarios, and classroom elements, making this text even more useful in academic settings. For all directors, business leaders, public policymakers, investors, stakeholders, and MBA faculty and students concerned with effective corporate governance.

Table of Contents:
Preface     xxi Chapter 1  Introduction to Corporate Governance     1 Self-Interested Executives     3 Defining Corporate Governance     7 Corporate Governance Standards     9 Best Practice or Best Practices? Does “One Size Fit All”?    11 Relationship between Corporate Governance and Firm Performance     12 Chapter 2  International Corporate Governance     19 Capital Market Efficiency     20 Legal Tradition     22 Accounting Standards     23 Enforcement of Regulations     26 Societal and Cultural Values     27 Individual National Governance Structures     29     United States     29     United Kingdom     32     Germany     37     Japan     38     South Korea     41     China     .43     India     44     Brazil     45     Russia     47 Endnotes     49 Interlude     55 Chapter 3  Board of Directors: Duties and Liability     57 Board Responsibilities     57 Board Independence     58 The Operations of the Board     59     Board Committees     60 Duration of Director Terms     64 Director Elections     64 Removal of Directors     66 Legal Obligations of Directors     66     Fiduciary Duty     67     Disclosure Obligations under Securities Laws     70     Legal Enforcement of State Corporate Law (Fiduciary Duties)    70     Legal Enforcement of Federal Securities Laws     71     Director Indemnification and D&O Insurance     72 Endnotes     75 Chapter 4  Board of Directors: Selection, Compensation, and Removal     79 Market for Directors     79     Active CEOs     82     International Experience     83     Special Expertise     84     Diverse Directors     85     Professional Directors     86 Disclosure Requirements for Director Qualifications     87 Director Recruitment Process     89 Director Compensation     91     Ownership Guidelines     96     Board Evaluation     97 Removal of Directors     99 Endnotes     102 Chapter 5  Board of Directors: Structure and Consequences     107 Board Structure     108 Chairman of the Board     112 Lead Independent Director     116 Outside Directors     119 Board Independence     121 Independent Committees     125 Bankers on the Board     126 Financial Experts on Board     127 Politically Connected Boards     128 Employee Representation     128 Boards with “Busy” Directors     131 Interlocked (or Connected) Boards     133 Committee Overlap     135 Board Size     136 Board Diversity     137 Female Directors     138 Summary     141 Endnotes     142 Interlude     150 Chapter 6  Strategy, Performance Measurement, and Risk Management     151 Organizational Strategy     152 Strategy Implementation Process     154 Business Model Development and Testing     156     Example 1: Fast-Food Chain and Employee Turnover     156     Example 2: Financial Services Firm and Investment Advisor Retention     158 Key Performance Measures     159 How Well Are Boards Doing with Performance Measures and Business Models?    163 Risk and Risk Management     164 Risk and Risk Tolerance     165 Risk to the Business Model     167 Risk Management     169 Oversight of Risk Management     171 Assessing Board Performance on Risk Management     173 Endnotes     175 Chapter 7  Labor Market for Executives and CEO Succession Planning     181 Labor Market for Chief Executive Officers     181 Labor Pool of CEO Talent     184 CEO Turnover     186 Newly Appointed CEOs     189 Models of CEO Succession     191     External Candidate     191     President and/or Chief Operating Officer     193     Horse Race     194     Inside–Outside Model     195 The Succession Process     196 How Well Are Boards Doing with Succession Planning?    200 The External Search Process     .203 Endnotes     206 Chapter 8  Executive Compensation and Incentives     211 The Controversy over Executive Compensation     212 Components of Compensation     213 Determining Compensation     217 Compensation Consultants     220 Compensation Levels     221 Ratio of CEO Pay to Other Top Executive Pay     224 Ratio of CEO Pay to Average Employee Pay     227 Compensation Mix     228 Short-Term Incentives     229 Long-Term Incentives     232 Benefits and Perquisites     234 Compensation Disclosure     235 Say-on-Pay     236 Endnotes     240 Chapter 9  Executive Equity Ownership     247 Equity Ownership and Firm Performance     247 Equity Ownership and Risk     250 Equity Ownership and Agency Costs     256 Accounting Manipulation     257 Manipulation of Equity Grants     258     Other Examples of Value Extraction through Timing     260 Equity Sales and Insider Trading     261 Rule 10b5-1     262 Hedging     264 Pledging     268 Repricing and Exchange Offers     270 Endnotes     273 Chapter 10  Financial Reporting and External Audit     279 The Audit Committee     280 Accounting Quality, Transparency, and Controls     280 Financial Reporting Quality     282 Financial Restatements     284 Models to Detect Accounting Manipulations     290 The External Audit     292 Audit Quality     296 Structure of Audit Industry     296 Impact of Sarbanes–Oxley     298 External Auditor as CFO     301 Auditor Rotation     .302 Endnotes     304 Chapter 11  The Market for Corporate Control     311 The Market for Corporate Control     312 Stock Market Assessment of Acquiring and Target Firms     316     Who Gets Acquired?    316     Who Gets the Value in a Takeover?    319 Antitakeover Protections     322 Antitakeover Actions     323     Poison Pills     325     Staggered Board     328     State of Incorporation     330     Dual-Class Shares     331 Warding Off Unwanted Acquirers     334 Endnotes     336 Chapter 12  Institutional Shareholders and Activist Investors     343 The Role of Shareholders     343 Blockholders and Institutional Investors     346 Institutional Investors and Proxy Voting     349 Activist Investors     351     Pension Funds     353     Social Responsibility and Other Stakeholder Funds     355     Activist Hedge Funds     357 Shareholder Democracy and Corporate Engagement     360     Majority Voting in Uncontested Director Elections     360     Proxy Access     361     Proxy Voting     362     Corporate Engagement     363 Proxy Advisory Firms     364 Endnotes     369 Chapter 13  Corporate Governance Ratings     375 Third-Party Ratings     375 Credit Ratings     376 Commercial Corporate Governance Ratings     378     ISS: Corporate Governance Quotient     378     ISS: Governance Risk Indicators     380     ISS: QuickScore     380     GMI Ratings     381     Testing the Predictability of Corporate Governance Ratings     382 Governance Rating Systems by Academic Researchers     383 The Viability of Governance Ratings     388 Endnotes     389 Chapter 14  Alternative Models of Governance     393 Family-Controlled Corporations     393 Venture-Backed Companies     396 Private Equity-Owned Companies     399 Nonprofit Organizations     402 Endnotes     407 Chapter 15  Summary and Conclusions     413 Testing Remains Insufficient     414 The Current Focus Is Misdirected     415 Important Variables Are Clearly Missing     416 Context Is Important     417 Endnotes     418 Index     419   Now fully updated: today's most objective, complete, and actionable guide to corporate governance for every board member, director, officer, investor, and stakeholder.

About the Author :
David Larcker is James Irvin Miller Professor of Accounting at Stanford Graduate School of Business; Director of the Corporate Governance Research Initiative; and Senior Faculty, Arthur and Toni Rembe Rock Center for Corporate Governance. David’s research focuses on executive compensation, corporate governance, and managerial accounting. He has published many research papers and is frequently quoted in both the popular and business press. He received his BS and MS in engineering from the University of Missouri–Rolla and his PhD in business from the University of Kansas. He previously was on the faculty of the Kellogg Graduate School of Management at Northwestern University and The Wharton School at the University of Pennsylvania. Professor Larcker presently serves on the Board of Trustees for the Wells Fargo Advantage Funds. Brian Tayan is a member of the Corporate Governance Research Initiative at Stanford Graduate School of Business. He has written broadly on the subject of corporate governance, including studies and other materials on boards of directors, succession planning, executive compensation, financial accounting, and shareholder relations. Previously, Brian worked as a financial analyst at Stanford University’s Office of the CEO and as an investment associate at UBS Private Wealth Management. He received his MBA from the Stanford Graduate School of Business and his BA from Princeton University. Additional resources and supporting material for this book are available at: Stanford Graduate School of Business The Corporate Governance Research Initiative www.gsb.stanford.edu/cgri-research