Center On Executive Compensation
News

Stanford’s David Larcker on the “Seven Gaping Holes” in Corporate Governance

Despite decades of research and study, our foundational assumptions regarding cornerstones of corporate governance such as independent boards and pay-for-performance might be all wrong, according to a new study by Stanford Graduate School of Business Professor David Larcker. The paper, “Seven Gaping Holes in Our Knowledge of Corporate Governance,” begins with a provocative assertion: “…the dialogue about corporate governance is dominated by rhetoric, assertions, and opinions that—while strongly held—are not necessarily supported by either applicable theory or empirical evidence.” In other words, many of the truths we hold to be self-evident in the world of corporate governance lack real evidence to back them up.

Professor Larcker and his colleague, Brian Tayan, highlight key areas in which they believe study has been inadequate to support “key assumptions relied upon by experts” when advising companies. These include:

  • Boards. The paper notes that although factors such as board independence, diversity and structure have been studied extensively, most research shows only a loose association with positive outcomes. We still don’t know how board practices contribute to board effectiveness or why certain high-profile boards were unaware of major risks until those risks were exposed in a major corporate failure.

  • CEOs. The paper calls into question both the idea of an efficient market for CEO talent (not a new question) and the true value of the CEO to a company (sometimes called “rent-extraction” vs. “pay-for-performance.”) The even older problem of whether pay is truly aligned with performance is also discussed, especially regarding the perhaps unnecessary complexity of modern pay plans. This is reflected in calls by CII and others to simplify CEO pay to the point that performance shares are eliminated entirely and pay comprises only salary and long-term restricted stock.

  • Shareholders and Stakeholders. A particularly interesting point raised in the paper is whether companies even know which shareholders are “better” than others from the standpoint of stock price and long-term performance. Although long-term owners are perceived as preferred, there has not been much study on the impact shareholders have on a corporation. Further complicating this point is the rise of the “stakeholder model” in which the needs of employees, suppliers, citizens, etc. are aggressively incorporated into the priorities of the company. Although it has been said many times that a laser focus on shareholders by US companies leads to short-termism, research has not always borne out that assumption (or refuted it).

The Center has long held that the world of academic research would benefit from closer collaboration with actual practitioners when designing and conducting studies on executive pay, and the Stanford paper agrees, noting that the best research would require access to corporate data and information.

Published on:

Authors: Ani Huang

Topics:

MORE NEWS STORIES

“Supersize” CEO Packages Tripled Since 2018, Says WSJ
Compensation Committee and Board

“Supersize” CEO Packages Tripled Since 2018, Says WSJ

May 24, 2024 | News
What to Do About Low Say on Pay Votes
Shareholder Viewpoints

What to Do About Low Say on Pay Votes

May 24, 2024 | News
Four Ways to “Stress Test” Your Incentive Plan Design
Executive Pay Plan Design

Four Ways to “Stress Test” Your Incentive Plan Design

May 24, 2024 | News

Continue reading this content with the Center On Executive Compensation Membership package