ROCK CENTER FOR CORPORATE GOVERNANCE AT STANFORD UNIVERSITY
WORKING PAPER SERIES
"Seven Myths of Corporate Governance"
Rock Center for
Corporate Governance at Stanford University Closer Look Series: Topics,
Issues and Controversies in Corporate Governance No. CGRP-16
DAVID F. LARCKER,
Stanford University - Graduate School of Business
Email:
Larcker_David@gsb.stanford.edu
BRIAN TAYAN,
Stanford University - Graduate School of Business
Email:
tayan_brian@gsb.stanford.edu
In recent
years, there has been much discussion over how to improve governance systems
broadly. In the process, certain myths have developed that continue to be
accepted, despite a lack of robust supporting evidence. These myths include
the beliefs that:
1. The structure of the board always tells you something about the quality
of the board
2. CEOs in the U.S. are overpaid
3. Pay for performance does not exist in CEO compensation contracts
4. Companies are prepared to replace the CEO if needed
5. Regulation improves corporate governance
6. The voting recommendations of proxy advisory firms are correct
7. Best practices are the solution to bad governance
We examine each of these myths in closer detail and explain why they are
false. So long as these myths are accepted by practitioners and the public,
how can we expect managerial behavior and firm performance to improve?
Read the attached Closer Look and let us know what you think!
The Closer Look series is a collection of short case studies through which
we explore topics, issues, and controversies incorporate governance. In each
study, we take a targeted look at a specific issue that is relevant to the
current debate on governance and explain why it is so important.
Larcker and Tayan are co-authors of the book Corporate Governance Matters,
FT Press 2011.
"Seven Myths of Executive Compensation"
Rock Center for Corporate Governance at Stanford
University Closer Look Series: Topics, Issues and Controversies in Corporate
Governance No. CGRP-17
DAVID F. LARCKER,
Stanford University - Graduate School of Business
Email:
Larcker_David@gsb.stanford.edu
BRIAN TAYAN,
Stanford University - Graduate School of Business
Email:
tayan_brian@gsb.stanford.edu
Executive
compensation has become one of the most contentious topics in corporate
governance. However, public perception about executive pay suffers from many
misconceptions.
These include the notions that:
1. The ratio of CEO-to-average-worker pay is a useful statistic:
2. Compensation consultants cause pay to be too high:
3. It is easy to tell whether a compensation package encourages “excessive”
risk taking:
4. Performance metrics and targets tie directly to the corporate strategy:
5. Discretionary bonuses should be eliminated:
6. Proxy advisory firms know how to evaluation compensation contracts:
7. The numbers in the financial statements for executive options accurately
capture their cost and value:
We examine these myths in close detail and explain why they are false.
Problems of excessive compensation and poorly structured contracts will not
be remedied by artificial changes and congressional mandates. Why don’t
experts rely on the research to arrive at informed and fact-based solutions?
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