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