David Larcker: “Where Experts Get It Wrong: Independence vs. Leadership in Corporate Governance”

David F. Larcker and Brian Tayan have written an excellent article on the extreme importance of quality of governance processesand contextual aspects that affect them. Here's the introduction; you can download the entire article at the link below.

Over the last few decades, researchers have taken a thorough and critical look at corporate governance from various perspectives. They have studied how legal, social, and market forces influence the control mechanisms that a company adopts to prevent or discourage self-interested behavior by management. They have examined the structure and operations of the board of directors. They have explored processes of governance systems, including strategy development and oversight, risk management, CEO succession planning, performance measurement, executive compensation, the external audit, and the consideration of mergers and acquisitions to determine the relation of each to governance quality and firm outcomes. The result is a vast research literature across many different disciplines that chronicles the association between corporate governance choices and the likelihood of future success or failure.

For the most part, the findings of this research literature are modest. Many observed structuralfeatures of corporate governance have little or norelation to governance quality. For example, there islittle systematic evidence that it benefits a companyto have an independent chairman; maintain fullyindependent audit, compensation, or nominating
and governance committees; restrict its audit firmfrom performing non-audit-related services; orgrant shareholders an advisory vote on compensation.

For other governance decisions—such asa decision to pay directors in cash or stock, or toaward executives golden parachute severance payments—the research results are so mixed as to be effectively
inconclusive. While there is evidence thatgovernance processes are critical to success—suchas proper risk management or a workable CEO successionplan—it is the quality with which processesare designed and implemented rather than the merepresence of a program that determines whether theywill be successful.

The lack of concrete evidence suggests that thecurrent focus in corporate governance might bemisdirected. Instead of debating features of corporategovernance, more attention should be paid tocontextual issues—a company’s leadership, culture,and specific situation. While these are more difficultto measure, they are also likely to have a far
greater impact on governance quality than one-sizefits-all structural requirements. To illustrate this,consider an issue that is hotly debated and oftenmisunderstood: the debate whether to combine orseparate the chairman and CEO roles.

Download the full paper (click download asset at lower right)


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