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  5. Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences

Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences, 2nd edition

  • David Larcker
  • Brian Tayan

Published by Pearson FT Press (July 28th 2015) - Copyright © 2016

2nd edition

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Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences

ISBN-13: 9780134031569

Includes: Hardcover
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  • Hardcover

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This is the most comprehensive and up-to-date reference for implementing and sustaining superior corporate governance. Stanford corporate governance experts David Larcker and Bryan Tayan carefully synthesize current academic and professional research, summarizing what is known and unknown, and where the evidence remains inconclusive.


Corporate Governance Matters, Second Edition reviews the field's newest research on issues including compensation, CEO labor markets, board structure, succession, risk, international governance, reporting, audit, institutional and activist investors, governance ratings, and much more. Larcker and Tayan 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.


This edition presents new or expanded coverage of key issues ranging from risk management and shareholder activism to alternative corporate governance structures. It also adds new examples, scenarios, and classroom elements, making this text even more useful in academic settings. For all directors, business leaders, public policymakers, investors, stakeholders, and MBA faculty and students concerned with effective corporate governance.

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.

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