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The Latest Research in Corporate Governance

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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 ... – PowerPoint PPT presentation

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Title: The Latest Research in Corporate Governance


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
  • 100-115 Welcome  
  • 115-230 Session 1 - Management or Finance
  • 230-245 Break 
  • 245-400 Session 2 - Law or Accounting
  • 445     First shuttle departs from the Hilton 
  • 500  Directors Forum reception at USD

10
The Latest Research inCorporate
GovernanceManagement
  • 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 directors identification with
    the organization will have a positive
    relationship with resource provision and
    monitoring
  • The strength of a directors identification with
    being a director will have a positive
    relationship with resource provision and
    monitoring
  • The strength of a directors identification with
    being a CEO will have a positive relationship
    with resource provision, but a negative
    relationship with monitoring
  • The strength of a directors identification with
    shareholders will have a positive relationship
    with resource provision and monitoring
  • The strength of a directors 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 officials 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 firmssurveys 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
  • 1995-2001225 firms with restatements
  • No relationship was found between the number of a
    CEOs in-the-money options and earnings
    manipulation
  • The larger the number of a CEOs 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 firms 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 firms 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 investors 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,
    plt.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
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