Transcript Slide 1

The Latest Research in
Corporate Governance
SAN DIEGO STATE UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION
Who we are
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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
CGI Board of Advisors
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Nell Minow
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Cynthia Richson
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Garry Ridge
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Hugh Friedman
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Gail Naughton
Editor and Co-founder
The Corporate Library
CEO
WD-40 Company
Professor of Law
University of San Diego
Dean
SDSU College of Business
The Latest Research in
Corporate Governance
SAN DIEGO STATE UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION
Lori Verstegen Ryan, Ph.D.
Director
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Professor of Management,
San Diego State University
Research focuses on the intersection
of corporate governance and ethics
Previously spent 11 years with Honeywell
Paul Graf, J.D.
Associate Director for Law and Finance
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Professor of Law,
San Diego State University
Research focuses on board assessment and accountability
Previously Senior VP and Corporate
Counsel, GE Capital Business Asset Funding
Nikhil Varaiya, Ph.D.
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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
David DeBoskey, Ph.D., CPA
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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.
Event Timetable
1:00-1:15
1:15-2:30
2:30-2:45
2:45-4:00
4:45
5:00
Welcome
Session 1 - Management or Finance
Break
Session 2 - Law or Accounting
First shuttle departs from the Hilton
Directors Forum reception at USD
The Latest Research in
Corporate Governance:
Management
Lori Verstegen Ryan
Professor of Management
SAN DIEGO STATE UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION
Top-Tier Management Journals
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Administrative Science Quarterly**
Academy of Management Review*
Academy of Management Journal*
Strategic Management Journal*
Organization Science
Journal of Management
Business Ethics Journals
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Business Ethics Quarterly
Business & Society
Journal of Business Ethics
Corporate Governance Journals
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Corporate Governance: An International Review
Journal of Management and Governance
Corporate Governance
Topics
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Boards of directors
Top management
Shareholders
Ethics and social responsibility
Boards of Directors
Boards of Directors – Identification
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The strength of a director’s identification with the organization will
have a positive relationship with resource provision and monitoring
The strength of a director’s identification with being a director will
have a positive relationship with resource provision and monitoring
The strength of a director’s identification with being a CEO will
have a positive relationship with resource provision, but a negative
relationship with monitoring
The strength of a director’s identification with shareholders will
have a positive relationship with resource provision and monitoring
The strength of a director’s identification with customers and/or
suppliers will have
 An inverted-U-shaped relationship with resource provision
 A positive relationship with monitoring
(Hillman, Nicholson & Shropshire)
Boards of Directors – Political Officials
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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 official’s opposition party is in power, the likelihood of
joining a board drops 29%
(Lester, Hillman, Zardkoohi & Cannella*)
Boards of Directors – Interlock Dangers
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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*)
Boards of Directors – Acquisitions
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1997-2001: 500 acquisitions (100/year)
Significantly higher returns from acquisitions were found
to be associated with
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Board vigilance variables
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Board experience variables
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A higher number of independent outside board members
A higher percentage of blockholder director ownership
Greater outside board member ownership
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*)
Boards of Directors – Demographics
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Over 43 countries:
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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:
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Mere presence of women on boards does not increase firm
value
Greater gender diversity on boards does increase firm value
(Campbell & Mínguez-Vera)
Top Management
Top Management – Investor Ingratiation
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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**)
Top Management – Analyst Ingratiation
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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*)
Top Management – Advice Networks
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224 firms—surveys 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
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Increases in CEOs’ stock ownership
Increases in performance-contingent compensation
Increases in board monitoring
(McDonald, Khanna, & Westphal*)
Top Management – Earnings Manipulation
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1995-2001—225 firms with restatements
No relationship was found between the number of a CEO’s
in-the-money options and earnings manipulation
The larger the number of a CEO’s out-of-the-money
options, the greater the likelihood of earnings manipulation
Lower levels of CEO stock ownership and low firm performance were positively related to earnings manipulation
Both relationships were stronger with longer tenured CEOs
(Zhang, Bartol, Smith, Pfarrer,& Khanin*)
Top Management – Firm Performance
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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 businesssegment performance, industry effect for 8%, and
corporate effect for 7%
(Mackey*)
Top Management – Equity Reduction
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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 firm’s returns variability nor a high
level of CEO shareholdings has a demonstrable
effect on CEOs’ stock divestitures
(Matta & McGuire)
Top Management – CEO Dismissal
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1993-1998: 204 CEO successions in 184 firms
(Zhang*)
Shareholders
Shareholders – Information Advantages
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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 firm’s 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 information advantage
(Schnatterly, Shaw & Jennings*)
Shareholders – Portfolio Effects
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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 investor’s portfolio, but drops
Presence of a blockholder is associated with lower CEO total
compensation
(Dharwadkar, Goranova, Brandes & Khan)
(Dharwadkar, Goranova, Brandes & Khan)
Shareholders – Activism and Justice
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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)
Ethics and
Social Responsibility
Ethics – Ignoring Shareholder Directives
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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)
Ethics – Hedge Funds
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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., predatory short-selling based on circulating false information
Recommends an industry “best practices” code of conduct
(Donaldson)
Ethics – Governance in Russia
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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*)
Social Responsibility – Pension Funds
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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, p<.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)
Ethics – Use of Ratings Services
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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)
The Latest Research in
Corporate Governance
SAN DIEGO STATE UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION