Governance →
- 21 May 2014
- Working Paper Summaries
The Role of the Corporation in Society: An Alternative View and Opportunities for Future Research
Neoclassical economics and several management theories assert that the corporation's sole objective is maximizing shareholder wealth. Despite these theoretical approaches, however, actual corporate conduct in some cases is inconsistent with shareholder value maximization as the sole objective of the corporation. In fact, corporations are now engaging in environmental and social causes with multiple stakeholders in mind and this is especially true for the world's largest corporations. Overall, the author presents an alternative view of the role of the corporation in society where the objective of the corporation is a function of its size. Specifically, the largest corporations are forced to balance different stakeholders' interests instead of simply maximizing shareholder wealth. The author attributes this change in the role of the corporation to the increasing concentration of economic activity and power in a few corporations which has resulted in 1) a few companies having a very large impact on society, 2) corporations and influential actors which are easier to locate, and 3) increasing separation of ownership and control. These events have led to what scholars Berle and Means (1932) predicted more than 80 years ago: both owners and "the control" accepting public interest as the objective of the corporation. Further research on the topics outlined in this paper may increase our understanding of corporate behavior and the role of these corporations in society. Key concepts include: The role of the corporation in society can be a function of the broader economic, social, and political context and as a result evolves over time. Corporations are not a homogeneous group as it is assumed by profit maximization theories. Not all corporations have the same role in society. Increasing corporate engagement on environmental and social goals has redefined the relation between business and society. It remains to be seen whether this trend will continue. Closed for comment; 0 Comments.
- 08 May 2014
- Working Paper Summaries
Corporate and Integrated Reporting: A Functional Perspective
Corporate reporting plays two functions. The first is an "information function" that enables counterparties, such as investors, employees, customers, and regulators, to enter into an exchange of goods and services under specific terms. Companies also benefit from the information function by comparing their performance against peers, thereby informing internal resource allocation decisions. The second is a "transformation function," the result of a company engaging with stakeholders to get their input on the company's resource allocation decisions. The authors argue that integrated reporting is more likely to perform effectively these two functions than separate financial and sustainability reporting. Moreover, as the authors argue, these two functions vary in terms of how important the role of regulation is. Regulation and standard setting is likely to improve the information function but could well impede the transformation function. If regulation is too prescriptive and "rules-based," the risk is that integrated reporting becomes more of a compliance exercise. Key concepts include: Investors need a better understanding of how companies are managing the relationships between financial and nonfinancial performance. Separate financial and sustainability reports are no longer adequate for performing either the information function or the transformation function. Companies need integrated reporting in order to make sure that their corporate reporting process effectively performs the information and transformation functions. Closed for comment; 0 Comments.
- 07 May 2014
- What Do You Think?
How Should Wealth Be Redistributed?
SUMMING UP James Heskett's readers weigh in on Thomas Piketty and how wealth disparity is burdening society. Closed for comment; 0 Comments.
- 01 Apr 2014
- Working Paper Summaries
Opting Out of Good Governance
New disclosure rules of the Security and Exchange Commission (SEC) require that foreign firms listed on US exchanges articulate more clearly their compliance with exchange requirements. In this paper the authors study the extent to which cross-listed firms opt out of corporate governance rules, analyzing which firms opt out of US exchange requirements and the consequences of doing so. Opting out is quite common, with 80.2 percent of cross-listed firms opting out of at least one exchange corporate governance requirement. Firms that opt out appear to adopt weaker governance practices and have fewer independent directors. The decision to opt out appears to reflect the relative costs and benefits of this governance choice. The costs of complying are likely to be higher for insiders who might enjoy certain private benefits when following weak governance practices allowed in their home country. The benefits of complying are likely to be higher for firms that are attempting to raise capital and grow. Consistent with this tradeoff, the data show that firms based in countries with weak corporate governance are less likely to comply, and those that are based in such countries and are expanding and issuing equity are more likely to comply. Opting out of US exchange requirements also has consequences for how the market values cash holdings. For firms from countries with weak governance requirements, cash within the firm is worth significantly less if the firm opts out of more US exchange requirements. Overall, the paper provides insight about the costs and benefits of complying with stringent governance rules and also sheds light on the effect of governance requirements on valuation. Key concepts include: There is considerable variation in the extent to which listed foreign firms agree to comply with the governance requirements of exchanges. The decision to opt out reflects the relative costs and benefits of doing so. Opting out of exchange requirements has consequences for how the market values cash holdings. For firms from countries with weak governance requirements, cash within the firm is worth significantly less if the firm opts out of more exchange requirements. There may be a limit in the extent to which cross-listed firms can effectively borrow the US governance environment. Closed for comment; 0 Comments.
- 12 Mar 2014
- Lessons from the Classroom
Managing the Family Business: Firing the CEO
Firing a CEO is never easy—but the task gets even more difficult in a family business. John A. Davis discusses when to change out the chief executive. Open for comment; 0 Comments.
- 04 Mar 2014
- Working Paper Summaries
Consequences to Directors of Shareholder Activism
Activism by hedge fund and other investors to improve governance and performance of companies has become a significant phenomenon in recent years. In this paper the authors examine a number of career consequences for directors when firms are subject to activist shareholder interventions. Examining 1,868 activism events—all publicly disclosed shareholder activism from 2004 to 2012 conducted by hedge funds or other major shareholders—the authors find that directors exit the board at a higher rate when their firms are targeted by activists. Even directors not specifically targeted by dissident shareholders are also likely to leave the board, as are directors at firms targeted by activism with no board-related demands, let alone a formal proxy fight. Overall, whether departure is voluntary, optimal, or otherwise, the evidence suggests that activism is associated with career consequences for directors. Key concepts include: Shareholder activism imposes career costs on directors. Shareholder activism in companies results in career consequences for directors even if the activism is not directed explicitly at board representation. Directors that receive a greater negative vote percentage in the year of shareholder activism are less likely to remain on the board in the year after activism. Directors are more likely to leave following poor performance when there is shareholder activism targeted at the company. However, there is no evidence of an impact of activism on director reputation as reflected in directorships on other boards. Even directly targeted directors experience no loss in other directorship. Closed for comment; 0 Comments.
- 24 Feb 2014
- Working Paper Summaries
Integrated Reporting and Investor Clientele
As a relatively new phenomenon in the world of corporate reporting, integrated reporting (IR) has gained traction across both the corporate and investor community in the last 10 years. A recent pilot program of the International Integrated Reporting Council, for example, included more than 100 large multinational companies supported by an investor network with more than 40 members. Although IR has the potential to fundamentally change corporate reporting, we still know relatively little about its causes and consequences. Proponents of IR argue that the attraction of long-term investors is a benefit of adopting IR. While anecdotal evidence has suggested the presence of a link, no empirical evidence to date has been provided to establish such a relation. In this paper, the author examines how the practice of IR affects the investor base of the firm. Specifically, analyzing data on more than 1,000 firms between 2002 and 2010, he finds that firms practicing IR have a more long-term investor base and fewer transient investors. In addition, evidence supports a causal mechanism from IR to the investor base of a firm. Investor activism on sustainability issues is shown to be effective in improving IR, but such investor-induced changes in IR do not affect the composition of the investor base. Overall, the paper contributes to emerging scholarship that seeks to understand the causes and consequences of sustainability and integrated reporting. It also contributes to studies examining how companies cater to different types of investors. Key concepts include: Integrated Reporting (IR) is a reporting innovation that serves as an important determinant of the composition of a firm's investor base. Firms that practice IR tend to have fewer transient investors and more dedicated investors who are oriented to the long term. IR is a rare experiment in fundamentally changing corporate reporting. More research is needed on what are the motivations of different firms that practice IR, as well as research on whether and how IR instills 'integrated thinking' inside the firm. Closed for comment; 0 Comments.
- 13 Feb 2014
- Research & Ideas
Managing the Family Business: Leadership Roles
Poorly designed leadership roles set up a family business for failure. John A. Davis offers a system that produces the decisiveness and unity needed for long-term performance. Open for comment; 0 Comments.
- 15 Jan 2014
- Research & Ideas
Managing the Family Business: It Takes a Village
Is it better to lead a family business with one ultimate leader or a team? John A. Davis, an expert on family business management, kicks off a series of articles with a look at governance models. Open for comment; 0 Comments.
- 02 Jan 2014
- Working Paper Summaries
Managing the Family Firm: Evidence from CEOs at Work
According to prior research, firm performance is weaker among companies with CEOs who have a family connection to the firm owners compared with nonfamily CEOs, that is professionals. Given the ubiquity of family firms and the implications for aggregate income and growth, what explains this variation? This paper provides evidence on the causes, features, and correlates of CEO attention allocation by looking at a simple yet critical difference between family and professional CEOs: the time they spend working for their firms. The Indian manufacturing sector makes an excellent case study because family ownership is widespread and the productivity dispersion across firms is substantial. Examining the time allocation of 356 CEOs of listed firms in this sector, the authors make several findings. First, there is substantial variation in the number of hours CEOs devote to work activities. Longer working hours are associated with higher firm productivity, growth, profitability, and CEO pay. Second, family CEOs record 8 percent fewer working hours relative to professional CEOs. The difference in hours worked is more pronounced in low-competition environments and does not seem to be explained by measurement error. Third, estimates with respect to the cost of effort, due to weather shocks and popular sport events, suggest that family CEOs place a higher relative weight on leisure, which could be due to either a wealth effect or job security. Overall, the evidence highlights the importance of how corporate leaders allocate their managerial attention. Key concepts include: Family CEOs work 8 percent fewer hours that nonfamily CEOs (i.e., professionals). The difference in hours worked translates in a 5.8 percent productivity gap between family and professional CEOs. Family CEOs are more responsive to events that increase the cost of providing effort, such as monsoon rains and cricket matches. Behavioral differences may help account for the performance differential between family and nonfamily firms. Closed for comment; 0 Comments.
- 23 Dec 2013
- Research & Ideas
Just How Independent are ‘Independent’ Directors?
A rule in China, which mandates publicly-traded company directors to explain their dissenting votes, provides Tarun Khanna and Juan Ma with rich data looking into the inner workings of how board members interact. Closed for comment; 0 Comments.
- 14 Aug 2013
- Working Paper Summaries
Firm Competitiveness and Detection of Bribery
Bribery is widespread around the world, illegal, detrimental to economic progress and social stability, and at the same time it can have clear economic benefits for a firm. While the benefits of bribery for a firm, through acquisition of contracts or avoidance of government bureaucracy, are intuitive and well documented, the costs after detection are less well understood. In this paper the author examines how the impact on firm competitiveness from the detection of bribery varies with the identity of the initiator, the method bribery was detected, and the firm's response after detection. All three dimensions are significantly associated with the impact on firm competitiveness. In addition, the data suggest that the most significant impact is on employee morale, followed by business relations and reputation, and then regulatory relations. Key concepts include: Internally initiated bribery from senior executives is correlated with higher likelihood of significant impact. Bribery cases detected by the internal control systems of the firm are associated with a lower likelihood of significant impact on the business and regulatory relations of a firm. Firms that responded by firing an employee or ceasing business relations with outside parties that initiated the bribery have lower likelihood of significant impact. Understanding how managers' perceptions of impact on firm competitiveness vary with characteristics of the bribery case is likely to provide with useful evidence on how managers think of the costs of bribery. Closed for comment; 0 Comments.
- 24 Jul 2013
- Op-Ed
Detroit Files for Bankruptcy: HBS Faculty Weigh In
After a long period of economic decline, the city of Detroit filed for bankruptcy protection last week. John Macomber, Robert Pozen, Eric Werker, and Benjamin Kennedy offer their views on some down-the-road scenarios. Closed for comment; 0 Comments.
- 09 Jul 2013
- Research & Ideas
Catching Up With Boards--Jay Lorsch
Few scholars have studied the behavior of boards as extensively as Jay Lorsch. In this interview, Lorsch discusses current issues facing boards including executive pay, underrepresentation of women, and proposals to cleave the roles of CEO and chairman. Closed for comment; 0 Comments.
- 03 Jul 2013
- What Do You Think?
What Are the Limits of Transparency?
Summing Up: What's the proper balance in an organization between transparency and opaqueness? Many of Jim Heskett's readers would err on the side of management forthrightness. Closed for comment; 0 Comments.
- 23 May 2013
- Working Paper Summaries
Board Games: Timing of Independent Directors’ Dissent in China
Independent directors are an integral part of corporate governance. Despite the copious scholarly debates surrounding board independence, however, little progress has been made in studying the inner workings of public boards. Fortunately, the regulatory environment in China offers a rare window to observe the inner workings of independent directors. This paper is one of the first statistical investigations of the circumstances under which so-called "independent" directors voice their independent views. The authors explore the following questions: 1) Why do independent directors dissent? 2) Under which circumstances is an independent director more likely to issue an open dissent? and 3) Does dissent matter sufficiently to affect independent directors' careers and firm performance? Unlike most of the previous models that view boards as a monolithic entity that "shares a common agenda on all matters," this study allows the authors to see boards as consisting of individuals with different utility functions and to examine board behaviors at the individual director level. Key concepts include: Independent directors dissent more when social connections that might hold back a dissent is less constraining on one hand, and when firms have poor performance that might impose threats to independent directors' personal reputations on the other hand. Boards can be reconceptualized: not as monolithic checks on managerial actions, but as social institutions with emergent norms, and sanctions and rewards to (non-)compliance on occasion. The labor market not only rewards independent directors for their superior decision making expertise, but also punishes those who openly challenged listed companies' management teams. For Chinese independent directors, this work suggests an inescapable dilemma whereby the Confucian doctrine of Golden Mean is the only survival guide. That is, independent directors must ensure that their relationships with listed companies are conducted on an open and mutually advantageous basis. On one hand, independent directors need to build a good public reputation for being an active monitor, and on the other hand, they need to establish a good "private" reputation for being friendly with the controlling shareholders and top management. Closed for comment; 0 Comments.
- 07 Feb 2013
- Working Paper Summaries
Which Does More to Determine the Quality of Corporate Governance in Emerging Economies, Firms or Countries?
Governance scholars debate the relative importance of country characteristics and firm characteristics in understanding variations in corporate governance practices of firms in emerging economies. One of the main questions is whether weak or incomplete public institutions dictate the governance quality of firms located in these countries. Results of analysis in this paper provide evidence that many emerging economy firms distinguished themselves above and beyond their home country peers in corporate governance ratings during the last decade. This rise was due primarily to firm-level characteristics. The fact that firm characteristics, and especially fixed effects, played a substantially greater role in emerging economies suggests that there is something happening inside these firms that allowed them to differentiate themselves from their home institutions and peer firms. These findings are important for both investors and firms in emerging economies. Investors will be able to observe corporate governance variance within countries and identify valuable investment opportunities. Also, firms should enjoy a sense of agency in their prospects for growth, unhampered by an environment with weak and incomplete governance institutions or low financial market development. Key concepts include: Firm-level variables play an important role in explaining corporate governance ratings in emerging economies. Firm effects in emerging economies are as important, and often more important, than country effects are in explaining ratings variance. Firms in emerging economies during the last decade had the ability to move separately from their home country peer firms in their corporate governance ratings. Overall, firms in emerging economies have the capability to rise above home country institutions that may be lacking or to distinguish themselves from their peer firms to both improve corporate governance ratings, and hopefully attract greater levels of capital and grow. Closed for comment; 0 Comments.
- 04 Feb 2013
- Research & Ideas
Are the Big Four Audit Firms Too Big to Fail?
Although the number of audit firms has decreased over the past few decades, concerns that the "Big Four" survivors have become too big to fail may be a stretch. Research by professor Karthik Ramanna and colleagues suggests instead that audit firms are more concerned about taking risks. Closed for comment; 0 Comments.
- 31 Jan 2013
- Working Paper Summaries
Boardroom Centrality and Firm Performance
Economists and sociologists have long studied the influence of social networks on labor markets, political outcomes, and information diffusion. These networks serve as a conduit for interpersonal and inter-organizational support, influence, and information flow. This paper studies the boardroom network formed by shared directorates and examines the implications of having well-connected boards, finding that firms with the best-connected boards on average earn substantially higher future excess returns and other advantages. Key concepts include: Board of director networks provide economic benefits that are not immediately reflected in stock prices. Firms with better-connected boards experience significantly higher future excess returns and gains in profitability compared to those with less-connected boards. There is a statistically significant and positive relation between board connectedness and the extent to which the firm's realized earnings exceed the consensus analyst forecast. Network effects appear to be important not only in specific settings or decisions, but they have a more general impact on the economic performance of firms, particularly resource-needy firms. Closed for comment; 0 Comments.
Crony Capitalism, American Style: What Are We Talking About Here?
In essence, crony capitalism conveys a shared point of view-sometimes stretching to collusion-among industries, their regulators, and Congress. The result is business-friendly policies and investments that serve private interests at the expense of the public interest. In this research paper, the author's goal is to add precision and nuance to our understanding of this form of corruption. He does so first by exploring definitions of crony capitalism. He then outlines the toolkit of crony capitalism including 1) campaign contributions to elected officials, 2) heavy lobbying of Congress and rule-writing agencies, and 3) a revolving door between government service and the private sector. The paper next describes the costs of cronyism and concludes with innovative ideas for curbing the excesses of crony capitalism. As the author notes, thorny problems remain: for example, the fact that "the public interest" in matters involving subsidies, tax preferences, and legislative loopholes is often difficult to discern and agree on. Key concepts include: The line between corrupt cronyism and legitimate bargaining among self-interested parties in the halls of government may be blurry. Although the costs to taxpayers of direct and even indirect subsidies can be measured, quantifying the cost of violations of the principle of equal treatment by government, the distortion of market mechanisms, and the undermining of public trust in government and business is vastly more difficult. The US has a long history of attempted campaign finance reform, which is critical to curbing crony capitalism. In the absence of meaningful reform, one corrupting feature of federal campaigns has not changed. Today 85 percent of funding for congressional campaigns comes from large contributors-mainly wealthy individuals and corporations. Among other necessary reforms, we need to take seriously the need to minimize trust-destroying conflicts of interest in Congress and privileged access by influential business interests to Congress and regulatory agencies. In the absence of such reform, the many benefits of the espoused system of democratic capitalism cannot endure. Closed for comment; 0 Comments.