Why Does Corporate Governance

Really Matter? New Book from

Stanford Graduate School of Business
Showcases Research into How Boards
Can Govern Better
Why Does Corporate Governance Really Matter? New Book from Stanford Graduate School of
Business Showcases Research into How Boards Can Govern Better

« Free Stanford GSB Corporate Governance educational material available on “The Market for
Corporate Control”

May 19, 2011 01:47 PM Eastern Daylight Time

Corporate Governance Matters by Professor David Larcker and Brian Tayan

STANFORD, Calif.–(BUSINESS WIRE)–“The debate on the role of boards in the wake of the
financial crisis has created a lot of hype and rhetoric about corporate governance,” says David
Larcker, who is James Irvin Miller Professor of Accounting and Director of the Corporate
Governance Research Program at the Stanford Graduate School of Business and coauthor with
Brian Tayan of the new book Corporate Governance Matters (FT Press). According to
Larcker, many so-called experts are heavy on opinions about governance, but light on the facts.

“The fight for „say on pay‟ and proxy access has gotten a lot of ink – but it is unclear whether it
will actually create shareholder value.”

“The FDA requires research on drug outcomes before approving a pharmaceutical,” he says.
“Shouldn‟t experts that prescribe „cures for bad governance‟ be subject to a similar standard of
review?”

In their book, Larcker and Tayan, a researcher at Stanford GSB, challenge the conventional
wisdom of the many books, reports, and recommendations of blue-ribbon panels on what
constitutes “good” governance. The authors researched hundreds of companies and interviewed
many board directors to uncover the real-life consequences of corporate governance practices –
from director independence to designing appropriate executive pay packages.

“A lot of people want to measure what‟s measurable – we wanted to measure what‟s

informative,” says Tayan. “For example, certain lightning-rod issues, such as „excessive‟ risk
taking and CEO compensation, get a lot of attention from outside observers, while important
issues that are considerably more difficult to assess – such as corporate strategy and succession
planning – tend to get the short shrift.”

Trends Getting in the Way of Good Governance

“Our research shows that many emerging developments that were intended to improve
governance – purportedly to avert the kind of financial disaster we just experienced – just don‟t
hold water,” Larcker explains. These include:

1. Compliance drowning out strategy – “A check-the-box approach is not what we need

from directors. We need instead their best thinking and ability to manage risk
appropriately for corporate growth.”
2. “Federalization of corporate governance” – “As corporate governance becomes
increasingly, and probably inexorably, „federalized‟ through regulations such as Dodd-
Frank, there is a real question as to whether these laws make boards govern better,” he
says. “We‟re still debating whether the 10-year-old Sarbanes Oxley was good for the
economy.”
3. “Shareholder democracy” movement – “The fight for „say on pay‟ and proxy access
has gotten a lot of ink – but it is unclear whether it will actually create shareholder
value.”
4. Rise of proxy advisory firms – “Proxy advisory firms exhibit substantial influence over
the proxy voting process. What is the evidence that their recommendations lead to the
kinds of positive outcomes that stakeholders really care about?”

“We wrote our book for thinkers – for practitioners who want to see how important governance
issues play out in the real world,” says Tayan.

“By integrating several different approaches to the topic – both business and legal – we have
created a practical framework for directors that will help them make decisions that lead to
organizational success.”

To speak with the authors, contact Davia Temin or Suzanne Oaks at 212-588-8788 or
news@teminandco.com.

For information on Corporate Governance Research Program:

http://www.gsb.stanford.edu/cgrp/about/

Contacts
Stanford Graduate School of Business
Helen Chang, 650-723-3358
chang_helen@gsb.stanford.edu