This book is different from other corporate governance books
on the market, in that it's really evidence driven, the way
we structure the book is around facts and evidence.
So what we do with each section is we start with an idea.
We explain how it works, and what the positives and
negatives are of different approaches to governance. And then we look at the data on how prevalent
certain things are out there in the market.
And we follow it up with academic research which tests
whether these things are positive or negative. And we draw our conclusions from that.
A lot of the books that are on the market today are really
opinion-based. So they start with a central premise, and
then the author spends the majority of the book defending
why that premise is correct.
A lot of it is based on that person's opinions, and, in some
cases, biases. But they're not really evidence driven, and
in many cases, those conclusions may or may not be true.
But they're not really tested. I think the most surprising finding from the
book is that a lot of the focus is misdirected in governance
today. A lot of the attention is placed on features.
So, for example, what's the structure of the board of
directors, how much compensation is paid to CEOs and things
like that and a lot less attention is paid on the factors
that really matter. And these are the processes by which the company
actually makes decisions.
So, for example a lot less attention is played, is paid to
the strategy and risk management functions and those are
areas where boards can really stand to improve. Another area where boards could stand to improve
is with its CEO succession.
A lot of CEO succession planning within corporations is, was
shown to be a more check the box solution and not really
what we expected. We expected that companies would have operations
plans in place.
Things that they could do if the CEO suddenly stepped down
and they needed to find somebody right away and I think
going forward a lot can improve with a new focus on the
features and of how governance are run rather than just the
superficial factors. I think the most surprising finding of the
research is that, how little impact the research has actually
had on practice, there's tons of academic research across accounting,
finance, economics, corporate strategy and things like that,
lots of careful thought but I don't think that research has
had that much impact in a way people actually think about
it. You know, the Blue Ribbon Panels that are
filled with clearly well known people, very smart, very
successful and you read the reports there�s actually not
much discussion of the research that either supports or doesn't
support some of the findings.
I think one of things that we hope the book does is provides
a synthesis of the research in a digestible form that the
press, directors, lawyers, government regulators and alike
can actually see that there is a body of work out there that
informs and you don't have to do it yourself, it's already
being done as part of the scholarship and universities so
we're actually a little surprised how little impact it's
sort of had in these things. Other kind of more practical things that,
that we found surprising are the inability of boards to
actually put in, put in operational succession plans, this
is a, a really a key part of risk management, and it's, it's
a pretty, it's a pretty serious part of, of what boards do.
I mean, ultimately they evaluate and invent the strategy of
the organization and they kind of hire and fire the top
management. And, and so, you know, one of the two issues
seems to be lacking a little bit.
The boards are struggling with, with lots of things with
regard to CEO pay. Now that's not surprising in and of itself,
but, the SEC has recently, required boards to talk about, are
the pay practices motivating managers to do excessive
risk taking. That sounds like something like board will
evaluate. But I think we don't really know at this point
how do you define excessive risk taking you know, what
would it look like you know and then the issue is, you know,
how can you evaluate that and so, we actually have some
proposals, you know sort of hopefully informed guesses about
new ways to think about pays, how much incentive are you
really providing and when you are in a situation
you start worrying about excessive risk taking.
One of the examples that we have in the, in the book has to
do with Eli Lily and they, they went through and did a very
detailed assessment of, of excessive risk taking.
And there response was to basically take out all the, lots
of the incentive contracts. They got rid of stock options.
The capped of bonuses and things like that. Now, that may be fine for Eli Lilly but you
kind a wonder about what happens if a lot of companies did
that. I mean if the incentives that actually drive
the innovation that really motivates people.
And I think taking these things out is not necessarily a
good result for sure, to mitigate risk, but substantially
reduce the returns for companies as well. We employed a very rigorous and methodical
methodology and it took a long time to do that.
I mean, this book was almost 3 years in the making and with
each feature in governance we went through and collected all
the literature both from academics and professionals. We looked at the data that was available and
we looked through the popular press to find examples
of things that companies are specifically doing in these
areas. And we also added interviews that we conducted
with third party experts, consultants, lawyers, and practitioners
including directors and executives. And we took all that information and digested
it together in a way that, we believe, gives the most comprehensive
look at, all areas of governance.
In the media shareholder discussions and things like that,
there's, I think there's lots of things that are, that are
missing. First off, I think people are trying to do
the right thing, you know.
You want to highlight and penalize people where they've had
bad governance, and they're doing kind of bad things.
I think that, that's a good thing. The issue is what mechanism do you want to
use to isolate the ones that are the, the good ones from
the bad ones? I think what's missing is everybody, or most
people out there are, are really trying to find, here's
a very, very simple yard stick for measuring corporate
governments. Do you have this many directors of this type
or is the pay of this form?
Things like that, but I think the problem is it's a lot more
complicated than that, there are certain differences in
organizations and people, corporate strategies, things like
that, that basically make a simple yard stick a place to
start but not a place to end up. You have to think more carefully about what
are the choices and it's not a one size fits all set of choices
for evaluating corporate governance.
Boards faced lots sensitive issues. And, and the issues that are really sensitive
are varied over time.
In the, 1990s, 2000, early 2000s you know, we had lots of
audit failures. The board was very concerned about, are, is
the audit function appropriate?
Do we have sufficient internal controls? The audit committee of the board was under
tremendous scrutiny.
I think now what's, what you see is that the Comps H.
Committee is the, is the committee and the decisions that
they're making are the ones under tremendous scrutiny.
Is CEO pay too high, are we paying the people the right form
and there's lots of people on the outside both media but
also proxy advisory firms that are weighting in on this and
it's actually now is going to share holder vote through the
so called say on pay. So, I'd say that's a tremendous sensitive
issue for the boards.
The other issues that are sensitive are risk management.
Do we actually know what's going to happen if we have some
sort of hiccup in the, the inputs or the outputs of the
firm? You know if we have an earthquake in Japan,
how, how's it effect where their going to be able to get
our raw materials.
Do we have plans in place and things like that?
What happens to us, if all of a sudden interest rates go up
or we lose a major customer, you know, what is our strategy
capable of dealing with that? So lots of boards are trying to deal with
risk management and one key part of it that we've seen certainly
around the country recently is succession planning.
Do they actually have somebody that can plug, that can plug
in, do we know who that person is. How comfortable do we feel about that as we?
Yeah we place management. I think what's going to happen going forward
is I think the next committee of the board is the nominating
governors committee.
There's tremendous scrutiny now about if we have sufficient
diversity on board, do we have the right board members.
You know the people had come up for evaluation for new board
memberships. We actually come up through the govern, the
nominating governance committee.
So how that committee operates, are they doing the right
thing? Are they picking the right people?
Those kind of things, I think, are, are clearly on the
horizon. The book has lots of important takeaways.
One of them is that I think you wanna be very cautious
following blue ribbon panel recommendations, or, you know,
things that you read in the press. Or what are perceived to be best practices.
And when we look at these things in the book from a research
perspective, a lot of these things just don't hold up, some
of them are clearly fine, some of them, not. So I think the book really lays it out in
a pretty neutral way.
And gets in there and says, what do we actually know about
things like, should the CEO and chairman of the board be
separated? You know, what do we know about how you should
structure pay, and things like that?
But I think the, the primary message of the book is you have
to think a little harder about governance choices.
You just can't follow these, these standard recommendations.
Yeah in terms of pressing the developments, the thing we
worry about is for lack of a better term, the federalization
of corporate governments. We've certainly seen Starbaines Axially go
into place, it was directed mostly at the accounting function
and other features of the board but more recently the
Dodge Frank bill, which has been passed in some form although
is being litigated, really opens up the board to lots
of inquiries that are basically imposed on them by the
government. So one of the things is they're opening up
a proxy access on the rubric of shareholder democracy.
So if, if you've, you're a shareholder you oughta be able to
vote, you know, in America an, and have some impact on these
things with regard to directors that are elected and things
like that, one of the proposals is if you own 3% you or a, a
group have collectively owned 3% of the company for 3 years
you can nominate 25% of the board for, for elections.
So instead of having elections which are mostly uncontested
except in proxy contests you have a situation here where the
outsiders can bring board members to forward for potential
election to the board. Now, that's something that's being imposed
on our companies, that's not something that they would do necessarily
of their free will, and you kind of wonder is that
a, is that a good consequence or not, basically, we've actually
done a little research around this and we find that those
kind of proposals seem to be greeted with big negative
stock price responses for companies that look like they're
going to be subject to these, to these criteria.
So there's a case where you know, the government has, in
some sense, decided, that's a good idea, have kinda passed
this thing. But it's cert-, the research results are suggesting
that maybe it's not such a good idea.
So hopefully, you know, the research like that will inform,
regulators in the government, you know, what might be a good
thing to do. But I think, right now, in the administration,
there's a lot of interest in, you know, imposing.
Governance criteria on company that really could have been
voluntarily adopted and weren't. And the, you know, the, I don't know, the
trillion dollar question is, is that good or not?
Is it better to have regulation or is it better to let the
market operate? Of course, that's the age old question in
economics. And I think here's a case where I think we
can weigh in a little bit on this.
But I think the federalization of corporate governance is a
big.