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 • Celebrating our 10th anniversary in 2008

3. CGI Board of Advisors • Nell Minow Editor and Co-founder The Corporate Library • Cynthia Richson President & CEO RCG LLC • 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 • Assoc. 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 Sr. VP and Corporate Counsel, GE Capital Business Asset Funding

7. Martha Doran, Ph.D. • Associate Professor of Accounting, San Diego State University • Director, Center for Accounting in the Public Interest • Previously Controller and CFO

8. Joe Tanimura, J.D., Ph.D. • Assistant Professor of Finance, San Diego State University • Research focuses on the intersection of financial economics and the law • Previously Managing Economist at LECG

9. The Latest Research inCorporate Governance

10. The Latest Research inCorporate Governance:Management

11. Top-Tier Management Journals • Academy of Management Review • Academy of Management Journal • Strategic Management Journal • Administrative Science Quarterly

12. Corporate Governance Journals • Corporate Governance: An International Review • Journal of Management and Governance • Corporate Governance

13. Business Ethics Journals • Business Ethics Quarterly • Business & Society • Journal of Business Ethics

14. Topics • Boards of directors • Top management • Shareholders • Compensation • Ethics and social responsibility • Corporate governance and theory

15. Boards of Directors

16. Boards of Directors – Firm Performance • Review of 105 studies, 1989-2005 • CEO duality – ambiguous results • Insider-outsider ratio – no relationship • Size and stability – mixed results (+/-) • Board ownership – mixed results (+/-) • Director rewards – few recent studies, mixed • Shareholder activism – mixed results (0/+) (Finegold, Benson & Hecht*)

17. Boards of Directors - Structure • Sample of ~1,400 U.S. firms, 19972003 • Decreasing board size (avg. 9.879.37**) • Slightly decreasing CEO duality (avg. 72%66% ns) • Decreasing director interlocks (avg. 11.5%5%**) • Significantly more attorneys, financiers, and retirees; fewer industry experts • Director holdings steady at approximately 1% of outstanding shares (slight inverted U) • Decreasing additional boards (avg. .9.8* since 2000) (Chhaochharia & Grinstein*)

18. Boards of Directors - Process • Researchers have enormous difficulty gaining access to the board room due to two concerns • Confidentiality • Reinforced that interested in process, not content • Researchers were excused when necessary • Signed confidentiality agreements • Changing board dynamics due to observation • Note taking vs. tape recording (LeBlanc & Schwartz)

19. Boards of Directors - Behaviors • Directors’ chances of additional board appoint-ments increase when they • Provide advice and information to CEO • Use “ingratiatory behavior” toward peer directors • Engage in low levels of monitoring and control But • Women and minorities are rewarded less, and actually punished for low monitoring and control (Westphal & Stern*)

20. Boards of Directors - Demographics • Board diversity tends to reflect the customer base (Brammer, Millington & Pavelin-UK) • More women sit on boards 1) of larger firms, 2) of firms with links to firms with women on their boards, and 3) in industries with more female employees (Hillman, Shropshire & Cannella*) • Black directors are more likely to sit on audit and public affairs committees, less likely to be on executive committee; black women are most likely to sit on finance committee (Peterson, Philpot & O’Shaughnessy)

21. Boards of Directors - Globalization • Among the 80 largest transnational corporations • 75% have at least one non-national board member (vs. 36.3% in 1999) • On average, 25% of directors are non-nationals • Non-nationals are a majority in 10% of firms (Staples)

22. Top Management

23. Top Management – Firm Performance • 111 CEOs, computer industry, 1992-2004 • Narcissistic CEOs (photograph prominence, use of “I,” pay vs. second in command, prominence in press releases) are related to • Strategic dynamism and grandiosity • Large numbers of large acquisitions • Extreme and fluctuating firm performance • Their firms’ performance is no better or worse than firms’ without narcissistic CEOs (Chatterjee & Hambrick*)

24. Top Management – CEO Ownership • 231 S&P firms, 1994-99 • CEO ownership in one period is not related to subsequent changes in diversification • Higher levels of diversification are associated with changes in managerial ownership (Goranova, Alessandri, Brandes, Dharwadkar*)

25. Top Management – Female CEOs • 1,624 CEO announcements, 1990-2000 • Investor reactions to female announcements significantly more negative than to male • Women promoted from within are viewed more positively than those from outside • Articles concerning female announcements tend to focus on gender (Lee & James*)

26. Shareholders

27. Shareholders – Ownership Structure and Firm Performance • Meta-analysis of 33 studies, 1998-2006 (cross cultural) • Performance benefits of concentrated ownership are weak in Anglo-American firms • Insider ownership is related to higher firm performance, particularly in Anglo-American firms (Sánchez-Ballesta & García-Meca)

28. Shareholders – Informational Advantages • 6,515 firm-quarter observations, 1983-1991 • A firm’s largest institutional investor—and no other institutional investor—is perceived by the market to have an informational advantage over other investors • Advantage varies with the percentage owned (Schnatterly, Shaw & Jennings*)

29. Shareholders – Collective Action • Authors exhort top 20 pension funds (19 of which are public, holding $3.5T in assets) to use collective action to • Redefine their role • Engage in Principles for Responsible Investment • Amplify their signals to portfolio companies (Thamotheram & Wildsmith)

30. Compensation

31. Compensation – Stock Options and Firm Performance • 950 S&P firms, 1993-2000 • Greater CEO pay in stock options leads to • Larger investment outlays • More variability in investment risk • More variability in firm performance • “Option-loaded” CEOs are associated with more firm losses than firm gains (Sanders & Hambrick*)

32. Compensation – Stock Option Valuation • Executive option holders tend to overvalue unexercisable options • Compensation designers are thus undervaluing stock options in compensation packages by using normative models such as Black-Scholes • Replacing stock options with alternate forms of compensation could be unexpectedly costly (Devers, Wiseman, & Holmes*)

33. Compensation – Pay and Risk Taking • 108 CEOs of IPO firms, 1993-95 • Stock options are negatively associated with risk taking • Downside compensation risk should be considered separately from compensation variability • Employment risk (leading to risk taking) is distinct from compensation risk (leading to risk aversion) • Different forms of compensation are not fungible (Larraza-Kintana, Wiseman, Gomez-Mejia & Welbourne*)

34. Compensation - Environmental Effects • After a major shift (airline deregulation) • Change that increases executive discretion leads to higher pay level and greater performance sensitivity for top management team (TMT) • The higher the magnitude of TMT turnover, the greater the compensation increase (Cho & Shen)

35. Compensation – Monitoring & Incentives • 149 board chairs in three industries • Agency theory considers monitoring (information) and incentives to be boards’ primary manage-ment tools • As boards increase their information, they also • Tie pay to performance • Restrict CEO autonomy (Rutherford, Buchholtz & Brown)

36. Compensation – Director Ownership • 450 S&P 500 firms, 1995-97 • Director stock options and grants were asso- ciated with enhanced firm performance when firms had • Greater investment opportunities • Weaker external monitoring (Cordeiro, Veliyath, & Romal)

37. Compensation – Outside Directors • 1,500 S&P firms, 1997-2000 • Stock-option compensation for outside directors is positively related to R&D intensity • Interaction of percentage of outside directors and stock-option compensation is also positively related to R&D intensity (Deutsch)

38. Ethics and Social Responsibility

39. Ethics and Social Responsibility – Firm Performance • Socially responsible behaviors should be undertaken based on investor demand • While some CSR activities may not maximize the present value of their firm’s future cash flows, they may still maximize the market value of the firm (Mackey, Mackey & Barney*)

40. Ethics and Social Responsibility - Gatekeepers • Accountants, lawyers, and bankers serve as “reluctant guardians” • They have the ability to deter misconduct, but not the incentive • Investors receive the benefits of gatekeeper safeguards, so should bear the costs (Boatright)

41. Ethics and Social Responsibility – Corporate Vote Buying • Legal history of corporate vote buying • Strategic reasons for vote buying • Key principles for directors: Vote buying • Is not illegal • Is protected by the Business Judgment Rule • Should not defraud or disenfranchise any investors • Should include protective measures for investors (Lan & Heracleous)

42. Ethics and Social Responsibility – Marketing Stock • Executives owe all investors fiduciary duty and promise keeping (profit maximization) • “Courting” some shareholders while withholding information from others violates those duties • Executives should treat all shareholders equally (Williams & Ryan, 2007)

43. The Latest Research inCorporate Governance