"Say on pay" legislation now under debate Washington D.C. can be a useful tool for shareholders to strengthen the link between CEO pay and performance when it comes to golden parachutes, says Harvard Business School professor Fabrizio Ferri. Here's a look at how the collective involvement of multiple stakeholders could shape the future of executive compensation.
Are large shareholders good monitors of management? A public firm's shareholders have extensive legal control rights in the corporation, but in practice much of this control is delegated to managers. In companies with small, dispersed shareholders, owners may find it costly to coordinate and exercise monitoring and control, leaving management with considerable discretion. Large shareholders, however—by concentrating a block of shares in the hands of a single decision-maker—may play a beneficial role in facilitating effective owner control. Yet large shareholders are not without their costs. HBS professor Bo Becker and coauthors develop and test a framework to quantify the impact of large owners (individual non-managerial blockholders, not mutual funds or other institutions) on several key aspects of firm behavior. They show that such shareholders play an important role for corporate governance in sizable U.S. public firms, and can affect several firm policies.
Its legitimacy and effectiveness on the line, the World Bank faces criticism from its constituents and the civil society organizations that serve them. What options and arguments for accountability make the most sense for global governance institutions like the World Bank? HBS professor Alnoor Ebrahim testified before the U.S. House of Representatives on paths to change.
Now that the worst fears about economic meltdown are receding, what should be done about lingering issues such as over-the-top executive compensation? Does government have a role? Is it time we rethink corporate governance? HBS faculty weigh in. From the HBS Alumni Bulletin.
Chief executives and regulators have been blamed for the current economic crisis, but in some ways what is surprising is that boards have generally escaped notice. Clearly the experience of corporate boards in the downturn has not been explored. To understand what transpired in the boardrooms of complex companies, and to offer a prescription to improve board effectiveness, eight senior faculty members of the HBS Corporate Governance Initiative talked with 45 prominent directors about what has happened to their companies and why. These directors, who serve on the boards of financial institutions and other complex companies, were asked two broad questions: How well did their boards function before the recession? And, what do they believe should be improved as they look to the future?
This white paper [PDF] first explains how the interviewees characterize the strengths of their boards, then examines in depth six areas in which they identified shortcomings or needs for improvement: 1) clarifying the board's role; 2) acquiring better information and deeper knowledge of the company; 3) maintaining a sound relationship with management; 4) providing oversight of company strategy; 5) assuring management development and succession; 6) improving risk management. Finally, the paper discusses two issues that appeared not to trouble the interviewees but that the public feels are important: executive compensation and the relationship between the board and shareholders. This paper was written by Jay Lorsch with the assistance of Joseph Bower, Clayton Rose, and Suraj Srinivasan. The interviews were conducted by Joseph Bower, Srikant Datar, Raymond Gilmartin, Stephen Kaufman, Rakesh Khurana, Jay Lorsch, and Clayton Rose.
Published in 2008
Nearly 900,000 organizations in 170 countries have adopted the ISO 9001 Quality Management System standard. This is a remarkable figure given the lack of rigorous evidence regarding how the standard actually affects organizational practices and performance. Proponents claim that quality programs such as ISO 9001 improve both management practices and production processes, and that these improvements, in turn, will increase both sales and employment. Documenting and training proper work practices can also reduce potentially dangerous "work arounds," and thus could reduce the risk of workplace accidents and injuries. Some critics, on the other hand, point to the potential for quality programs such as ISO 9001 to be detrimental to employees by documenting work practices, resulting in routinization that may reduce skill requirements and increase repetitive motion injuries. This paper reports the first large-scale evaluation of how ISO 9001 affects workers, focusing in particular on employment, total payroll, average annual earnings, and workplace health and safety.
The train wreck that was Enron provides key insights for improving corporate governance and financial incentives as well as organizational processes that strengthen ethical discipline, says HBS professor emeritus Malcolm S. Salter. His new book, Innovation Corrupted: The Origins and Legacy of Enron's Collapse, is a deep reflection on the present and future of business.
The Social Accountability 8000 Standard (SA 8000), along with other types of certification standards and corporate codes of conduct, represents a new form of voluntary "private-governance" of working conditions in the private sector, initiated and implemented by companies, labor unions, and nongovernmental activist groups cooperating together. There is an ongoing debate about whether this type of governance represents real and substantial progress or mere symbolism. This paper reviews prior evaluations of private codes of conduct governing workplace conditions, including Ethical Trading Initiative's Base Code, Nike's Code of Conduct, and Fair Trade certification. The authors then discuss several best practices that should be employed in future evaluations of such codes of conduct.
This paper demonstrates some of the benefits and limitations of industry self-policing programs. Many self-regulation programs are operated exclusively by the private sector, often in the hope of garnering goodwill with consumers or staving off more stringent government regulation. Less well known are voluntary self-regulation programs operated by government regulators seeking innovative approaches to further regulatory objectives and to stretch shrinking agency budgets. Little is known about the effects of these programs, or how they might contribute to the overall effectiveness of a regulatory regime. Michael Toffel and Jodi Short seek to determine whether the self-policing required under the U.S. Environmental Protection Agency's Audit Policy affects the behavior of regulators and participating facilities and the relationship between them. Specifically, the researchers examine whether self-policing is associated with improved environmental performance at these facilities and whether regulators reduce their scrutiny over self-policing facilities.
How well do boards of directors respond to shareholder concerns? The recent wave of corporate scandals has raised questions about the effectiveness of boards in their monitoring role. The subsequent reform debate focused on enhancing boards' independence from management, increasing their accountability to shareholders through a different board election system, and improving boards' internal processes and practices. One direct example of this alleged lack of responsiveness to shareholder concerns is the historically low frequency of adoption of non-binding shareholder proposals receiving a majority vote, even when the vote is overwhelmingly in favor of the proposal and has been repeated for a number of years. Ignoring majority-vote shareholder proposals may be increasingly expensive, however, both for the targeted firms and for the individual directors. HBS professor Ferri and coauthors analyze the frequency of implementation of non-binding, majority-vote shareholder proposals and examine the determinants and consequences of the boards' implementation decisions.
How does information flow in security markets, and how do investors receive information? In the context of information flow, social networks allow a piece of information to flow along a network often in predictable paths. HBS professors Lauren Cohen and Christopher Malloy, along with University of Chicago colleague Andrea Frazzini, studied a type of dissemination through social networks tied to educational institutions, examining the information flow between mutual fund portfolio managers and senior officers of publicly traded companies. They then tested predictions on the portfolio allocations and returns earned by mutual fund managers on securities within and outside their networks.
Published in 2007
What difference has civil society activism made to the World Bank? More specifically, how and to what extent have civil society actors furthered the accountability of the World Bank to its constituents? The case of the World Bank is important for 2 main reasons: The Bank has not only been a major target of civil society activism, but it has also been comparatively responsive in developing various forms of engagement with civil society, possibly more than any other multilateral institution. This paper describes key accountability challenges facing the institution and reviews accountability mechanisms currently in place at 4 different organizational levels. It then explores efforts from civil society groups to increase accountability, and notes the successes and failures of these reform efforts.
(Previously titled "Shamed and Able: How Firms Respond to Information Disclosure.") As national governments lose the ability to regulate business activities, interest groups and concerned citizens are turning to private governance to monitor global supply chains, ensure product safety, and provide incentives for improved corporate environmental performance. Proponents hope that private governance incentives will encourage firms to act responsibly, but critics worry that these developments will merely forestall necessary government regulation. Social ratings provide one way to benchmark and compare firms' social performance. But are such ratings schemes effective? This paper investigates the effects of third-party environmental ratings, and finds that firms are particularly likely to respond to such ratings by improving their environmental performance when two circumstances arise simultaneously: (1) when the ratings threaten their legitimacy, and (2) when they face relatively low cost improvement opportunities.
The corporate confession is a paradox, as described in this paper aimed at managers, policymakers, and citizens. Why would a firm that identifies regulatory compliance violations within its own operations turn itself in to regulators, rather than quietly fix the problem? Economic intuition suggests that firms will self-disclose violations only when the cost of doing so is less than the expected cost of hiding violations. However, while the cost of doing so can be increased regulatory scrutiny, there is often almost no expected cost of hiding violations. To explore the complex behavior of corporate self-disclosure, Short and Toffel conducted a large-scale analysis in the context of the U.S. Environmental Protection Agency's Audit Policy. They investigated what factors lead organizations to self-disclose violations that went undiscovered by regulators, and asked whether these self-disclosing organizations were obtaining any unofficial regulatory benefits above and beyond formal penalty mitigation. They also evaluated whether self-policing promotes the regulatory objective of improving compliance records.
Do hedge funds improve management of the companies they invest in? A new study by Harvard Business School professor Robin Greenwood and coauthor Michael Schor argues that, in fact, hedge funds create shareholder value through anticipation of change, not necessarily delivering it.
For HBS professor Andrew McAfee, Wikipedia is a surprisingly high-quality product. But when his concept of "Enterprise 2.0" turned up on the online encyclopedia one day—and was recommended for deletion—McAfee and colleague Karim R. Lakhani knew they had the makings of an insightful case study on collaboration and governance in the digital world.
What role can business managers play in protecting the natural environment? Academic research on when it might "pay to be green" has advanced understanding of how and when firms achieve sustained competitive advantage. The focus of such research, however, has begun to change in light of limits to available "win-win" opportunities and to gaps in regulation. This paper, intended as a book chapter, reviews current literature and explores the potential of self-regulatory institutions to solve environmental problems.
Self-regulation has been all over the news, but are firms that adopt such programs already better on important measures like labor and quality practices? Does adopting a program help companies improve faster? In this Q&A, HBS professor Michael Toffel gives a reality check and discusses the trends for managers.
Boards of professionally sponsored buyouts are more informed, hands-on, and interventionist than public company boards. HBS professor emeritus Malcolm S. Salter argues that this board model could have helped Enron—and perhaps your company as well.
Published in 2006
When Ford Motor Company looked to replace Bill Ford as CEO, it turned not to another auto industry insider but instead to Boeing's Alan Mulally. We talk with Harvard Business School professor Joseph L. Bower to better understand Ford's move and the larger issues of CEO succession.
