The Latest Research in Corporate Governance

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The Latest Research inCorporate Governance
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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 in
  1998

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CGI Board of Advisors

• Nell Minow Editor and Co-founder The
  Corporate Library
• Cynthia Richson
• Garry Ridge CEO
  WD-40 Company
• Hugh Friedman Professor of Law University
  of San Diego
• Gail Naughton Dean
  SDSU College of Business

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The Latest Research inCorporate Governance
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Lori Verstegen Ryan, Ph.D.Director

• Professor of Management,
  San Diego State University
• Research focuses on the intersection
  of corporate governance and ethics
• Previously spent 11 years with Honeywell

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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 Senior VP and Corporate
  Counsel, GE Capital Business Asset Funding

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Nikhil Varaiya, Ph.D.

• 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
  

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David DeBoskey, Ph.D., CPA

• 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.

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Event Timetable

• 100-115 Welcome  
• 115-230 Session 1 - Management or Finance
• 230-245 Break 
• 245-400 Session 2 - Law or Accounting
• 445     First shuttle departs from the Hilton 
• 500  Directors Forum reception at USD

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The Latest Research inCorporate
GovernanceManagement

• Lori Verstegen Ryan
• Professor of Management

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Top-Tier Management Journals

• Administrative Science Quarterly
• Academy of Management Review
• Academy of Management Journal
• Strategic Management Journal
• Organization Science
• Journal of Management

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Business Ethics Journals

• Business Ethics Quarterly
• Business Society
• Journal of Business Ethics

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Corporate Governance Journals

• Corporate Governance An International Review
• Journal of Management and Governance
• Corporate Governance

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Topics

• Boards of directors
• Top management
• Shareholders
• Ethics and social responsibility

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• Boards of Directors

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Boards of Directors Identification

• The strength of a directors identification with
  the organization will have a positive
  relationship with resource provision and
  monitoring
• The strength of a directors identification with
  being a director will have a positive
  relationship with resource provision and
  monitoring
• The strength of a directors identification with
  being a CEO will have a positive relationship
  with resource provision, but a negative
  relationship with monitoring
• The strength of a directors identification with
  shareholders will have a positive relationship
  with resource provision and monitoring
• The strength of a directors identification with
  customers and/or suppliers will have
• An inverted-U-shaped relationship with resource
  provision
• A positive relationship with monitoring
• (Hillman, Nicholson Shropshire)

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Boards of Directors Political Officials

• 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 officials opposition party is in power,
  the likelihood of joining a board drops 29
• (Lester, Hillman, Zardkoohi Cannella)

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Boards of Directors Interlock Dangers

• 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)

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Boards of Directors Acquisitions

• 1997-2001 500 acquisitions (100/year)
• Significantly higher returns from acquisitions
  were found to be associated with
• Board vigilance variables
• A higher number of independent outside board
  members
• A higher percentage of blockholder director
  ownership
• Greater outside board member ownership
• Board experience variables
• 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)

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Boards of Directors Demographics

• Over 43 countries
• 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
• Mere presence of women on boards does not
  increase firm value
• Greater gender diversity on boards does increase
  firm value
• (Campbell Mínguez-Vera)

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• Top Management

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Top Management Investor Ingratiation

• 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)

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Top Management Analyst Ingratiation

• 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)

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Top Management Advice Networks

• 224 firmssurveys 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
• Increases in CEOs stock ownership
• Increases in performance-contingent compensation
• Increases in board monitoring
• (McDonald, Khanna, Westphal)

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Top Management Earnings Manipulation

• 1995-2001225 firms with restatements
• No relationship was found between the number of a
  CEOs in-the-money options and earnings
  manipulation
• The larger the number of a CEOs out-of-the-money
  options, the greater the likelihood of earnings
  manipulation
• Lower levels of CEO stock ownership and low firm
  perfor-mance were positively related to earnings
  manipulation
• Both relationships were stronger with longer
  tenured CEOs
• (Zhang, Bartol, Smith, Pfarrer,
  Khanin)

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Top Management Firm Performance

• 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
  business-segment performance, industry effect for
  8, and corporate effect for 7
• (Mackey)

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Top Management Equity Reduction

• 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 firms returns variability nor a high
  level of CEO shareholdings has a demonstrable
  effect on CEOs stock divestitures
• (Matta McGuire)

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Top Management CEO Dismissal

• 1993-1998 204 CEO successions in 184 firms
• (Zhang)

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• Shareholders

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Shareholders Information Advantages

• 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 firms 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 informa-tion advantage
• (Schnatterly, Shaw Jennings)

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Shareholders Portfolio Effects

• 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 investors portfolio, but drops
• Presence of a blockholder is associated with
  lower CEO total compensation
• (Dharwadkar, Goranova,
  Brandes Khan)

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(Dharwadkar, Goranova, Brandes Khan)
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Shareholders Activism and Justice

• 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)

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• Ethics and
• Social Responsibility

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Ethics Ignoring Shareholder Directives

• 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)

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Ethics Hedge Funds

• 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., pred-atory short-selling based on
  circulating false information
• Recommends an industry best practices code of
  conduct
• (Donaldson)

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Ethics Governance in Russia

• 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)

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Social Responsibility Pension Funds

• 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,
  plt.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)

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Ethics Use of Ratings Services

• 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)

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The Latest Research inCorporate Governance