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Corporate Governance Matters
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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.

Promotional Information

Corporate Governance Matters, Second Edition gives corporate board members, officers, directors, and other stakeholders all the knowledge they need to implement and sustain superior governance. Authored by two leading experts, it fully addresses every component of governance. This edition offers new or expanded coverage of key issues ranging from risk management and shareholder activism to alternative corporate governance structures. It also adds new classroom elements, making it even more useful in academic settings.

Updated throughout, this textcarefully synthesizes current academic and professional research, summarizing what is known, what is unknown, and where the evidence remains inconclusive. Along the way, it illuminates many key topics overlooked in competitive texts. Coverage includes:

  • International corporate governance
  • Compensation, equity ownership, incentives, and the labor market for CEOs
  • Optimal board structure, tradeoffs, and consequences
  • Governance, organizational strategy, business models, and risk management
  • Succession planning
  • Alternative corporate governance structures, including family controlled businesses, nonprofits, private equity, and venture capital
  • Financial reporting and external audit
  • The market for corporate control
  • Roles of institutional and activist shareholders
  • Governance ratings, and more

The authors 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.

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

Reviews

Praise for the First Edition of Corporate Governance Matters:

"An outstanding work of unique breadth and depth providing practical advice supported by detailed research."
Alan Crain, Jr., Senior Vice President and General Counsel, Baker Hughes

"Extensively researched, with highly relevant insights, this book serves as an ideal and practical reference for corporate executives and students of business administration."
Narayana N.R. Murthy, Infosys Technologies

"Fascinating, engaging, and full of useful information-a must-read!"
Heidi Roizen, Founder, CEO and Chief Lyrical Officer, Skinny Songs

"A tour de force. David Larcker and Brian Tayan have written an easy-to-read, crucial-to-know overview of corporate governance today."
Stephen A. Miles, Founder and CEO, The Miles Group

"Corporate Governance Matters is sure to become required reading for director education and an essential desk reference for all corporate governance practitioners."
Abe M. Friedman, Managing Partner, CamberView Partners

"David Larcker and Brian Tayan are the premier students and among the most thoughtful authorities on corporate governance."
Arthur Rock, Principal of Arthur Rock & Co.

"Corporate Governance Matters is a comprehensive, objective, and insightful analysis of academic and professional research on corporate governance."
-Professor Katherine Schipper, Duke University, and former member of the Financial Accounting
Standards Board

"They did it! Larcker and Tayan have cracked the code on the connections between corporate governance and corporate performance."
-Ira Kay, Managing Partner, Pay Governance LLC

"When it comes to corporate governance, it seems that everyone has an opinion. David Larcker and Brian Tayan, however, have the facts."
-Professor Joseph A. Grundfest, Stanford Law School

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