Corporate Governance

• Recent post-IPO firms benefit from a board that is comprised of mostly TMT members because of tacit knowledge and entrepreneurial drive to keep the company successful • Original TMT members have "a common understanding of the firm's goals and can help the CEO keep the firm focused" (page 1199)

Kroll et al (2007) The impact of board composition & TMT ownership structure on post-IPO performance Effects of boards

Henderson & Fredrickson (1996) Information processing demands as a determinant of CEO compensation. Compensation

o CEOs are paid in accordance with the information processing demands that their jobs place upon them o 3 factors affect the level The number and interdependence of a firm's business activities (firm's diversification strategy) The technologies the firms employs (approach The management structure (size of its TMT)

Devers et al. 2007. The effects of endowment and loss aversion in managerial stock option valuation. Compensation

o During stock option valuation managers draw on heuristics that financial options theory and models fail to capture • Incentive alignment argument o Contending that mangers are more likely to act in shareholders' interests when goals and risk preferences align • Financial options theory o Given that holders never have to exercise stock options, stock options contain asymmetric risk, offering upside wealth potential void of reciprocal downside threats o Stock option holders, as a rational economic actors, are presumed to explicitly recognize and accept the positive relationship between stock price volatility and stock option value and thus, to seek to increase stock price volatility to enhance the value of their options

Finkelstein et al (2009) Strategic leadership Compensation

o Economics CEOs seek to maximize firm size because (1) size is more controllable than profits (2) bigger firms have greater ability to pay more than smaller firms (Agarwal, 1981) (3) bigger firms offer larger nonpecuniary benefits, such as prestige, to managers (Baumol, 1967; Marris, 1964; Williamson, 1985) Type of firm: Managerially controlled o Neoclassical economists: Executive pay will be significantly related to firm profitability (Ciscel & Carroll, 1980) Type of firm: Externally controlled o Social-psychological Compensation consultants play an important role in setting pay Social comparison theory (Festinger, 1954, Goodman, 1974)

Carpenter & Sanders (2002) TMT compensation: The missing link between CEO pay and firm performance Compensation

o Long term pay structure aligns executives' interests with those of shareholders • 2 forms of pay convergence o External alignment: structure of TMT member compensation takes into account the interests of shareholders o Internal alignment: TMT's total pay has been set fairly with respect to the CEO's pay and critical demands facing their firm (perceived justice)

Jensen & Murphy (1990) CEO incentives: It's not how much you pay, but how Compensation

• "Agency theory predicts that compensation policy will tie the agent's expected utility to the principal's objective...therefore, agency theory predicts that CEO compensation policies will depend on changes in shareholder wealth" • Taken together, then, the evidence regarding CEO compensation as a monitoring mechanism remains unsettled

Davis & Thompson (1994) A social movement perspective on corporate control External control

• "Efficiency" approaches to corporate governance/law limited in ability to explain politics of corporate control & rise of shareholder activism • Political actions exert pressure in addition to capital markets - lead to shareholder activism at diff levels • Use social movement framework to explain the changing capacities of shareholders and managers-as members of classes-to act on their interests in control at the firm, state, and federal level

Aguilera et al (2015) Connecting the dots: Bringing external corporate governance into the corporate governance puzzle

• 4 key elements of effective CG o PMIS: Protection of stakeholder rights and enforceability; Information disclosure; Management of stakeholder relationships; Strategic and ethical guidance • 3 Internal governance mechanisms: o BOM: board of directors, ownership and managerial incentives (executive compensation and contingent pay) • 6 External governance mechanisms: o LMARSM: legal system, market for corporate control, external auditing, rating organizations, stakeholder activism and media • 4 main theories used in CG research o RDT, Institutional theory, Agency theory, Team production theory

Masulis et al (2007) Corporate governance & acquirer returns External control

• Acquirers with more antitakeover provisions experience significantly lower announcement-period abnormal stock returns • Acquirers operating in more competitive industries or separating the positions of CEO and chairman of the board experience higher abnormal announcement returns

Sundaramurthy et al (1997) Board structure, antitakeover provisions & stockholder wealth External control

• Antitakeover provisions (e.g., supermajority, classified boards, fair-price, reduction in cumulative voting, antigreenmail and poison pills) • Negative market reactions to antitakeover provisions vary depending on firms' board structures; separating the positions of CEO and chairperson of the board reduces the negative effect, while increased outsider representation increases negative market reactions

Shleifer & Vishny (1997) A survey of corporate governance

• Argue that corporate governance primarily deals with the agency problem — governance mechanisms provide assurance that managers will strive to achieve outcomes that are in the shareholders best interests • The ways in which suppliers of finance to corporations assure themselves of a getting a return on their investment • Approaches to corporate governance: no governance (i.e., invest based on manager reputation or excessively optimistic expectations about returns); legal protection; concentration of ownership (large shareholdings, takeovers, bank finance)

Bednar (2012) Watchdog or lapdog: Behavioral view of media as corporate governance mechanism External control

• Behavioral view of the media and corporate governance: firms enact largely symbolic governance changes with respect to board independence that essentially protect managerial interests, yet still elicit positive responses from the media • More favorable media coverage may affect CEO job security, executive compensation, and board composition • Largely symbolic actions affect media coverage, raises questions about the effectiveness of the media as a governance control mechanism.

Finkelstein et al (2009) Strategic leadership: Theory and research on executives, top management teams, and boards Board oversight & monitoring

• Board fulfills 2 conceptual roles: boundary spanners and monitoring o Monitoring: hiring/firing senior executives, reviewing approving and evaluating firm strategy, general oversight of firm matters o Composition: board size, division of labor, heterogeneity of directors o Contingencies: uncertainty, firm strategy, firm performance

Tuggle et al (2010) Investigating how org performance and CEO duality affect board members' attention to monitoring Entrenchment & sociopolitical strategies

• Board monitoring behaviors are contextually dependent (not consistent, as assumed in much of agency/governance research) • Finds that deviation from prior performance and CEO duality affect allocation of attention to monitoring function o Drop in performance increases attention, increase in performance reduces it o Duality also reduces monitoring attention, partly due to CEO-chair's control of meeting's agenda and location

Boivie, Graffin, Oliver, & Withers (2015) Come aboard! Exploring the effects of directorships in the executive labor market Effects of boards

• Board service increases the likelihood of promotion to CEO, leads to faster promotions to CEO, and leads to increased compensation at the director's home firm • Third party certification in the executive labor market, access to unique human information, a better understanding of board dynamics, and improved social network

Arthaud-Day et al (2006) A changing of the guard: Executive & director turnover following corporate financial restatements Director exit

• CEOs and CFOs of firms filing a material financial restatement were more than twice as likely to exit as matched sample • The magnitude, ubiquity, and temporal proximity of executive and director turnover following a restatement indicate that such events pose a serious threat to organizational legitimacy, independent of firm performance

Zajac & Westphal (1995) Accounting for the explanations of CEO compensation: Substance and symbolism Entrenchment & Compensation

• Companies may use agency perspective to reduce ambiguity surrounding the adoption of new (symbolic) long term incentive plan for the CEO • The less demographic similarity between CEO and board, the poorer the firm's performance, the greater board power: the more likely agency explanations (instead of HR)

Desender et al (2013) When does ownership matter? Board characteristics and behavior Ownership

• Compares effects of dispersed and concentrated ownership on governance: board independence and audit services are complementary when ownership is dispersed, but not when ownership is concentrated • Ownership concentration and board composition become substitutes in terms of monitoring management

Sinha (2006) Regulation: The market for corporate control and corporate governance External control

• Compares regulation and market for corporate control in 2 sectors: banking (high reg, low takeover) & manufacturing (low reg, high takeover) o Disciplinary top management turnover not related to stock performance in banks (but is in manufacturing) o Outside directors less effective in disciplining top management in banking

Gilson (1990) Bankruptcy, boards, banks, and blockholders: Evidence on changes in corporate ownership and control when firms default. Director exit

• Corporate default leads to significant changes in ownership of firms' residual claims and allocation of rights to manage corporate resources: o On average, only 46% of incumbent directors remain when bankruptcy or debt restructuring ends o Directors who resign hold significantly fewer seats on other boards following their departure o Common-stock ownership becomes more concentrated with large block holders and less with corporate insiders

Lester et al (2008) Former government officials as outside directors: The role of human and social capital Director appointment

• Depth (i.e. government tenure) and breadth (i.e. prestige of position) of human capital increase likelihood of outside director appointment, but that deterioration (time since service) and not being of the party in power will decrease the likelihood • Certain ex-officials are more beneficial than others

Walsh & Seward (1990) On the efficiency of internal and external corporate governance mechanisms

• Describe internal (organizational) & external (market based) mechanisms to align diverse interests of managers & shareholders o Internal: boards (use incentives & dismissal) o External: mkt for corp control, competitive environment, local laws, institutions (formal & informal)

Withers et al (2012) Stay or leave: Director identities and voluntary exit from the board during organizational crisis Director exit

• Directors may play their most important role during organizational crisis; however, they are often more willing to exit than remain on the board of a firm facing a crisis • Decision depends on mix between source of crisis (internal vs. external) & identification with firm and/or role as a director

Beckman et al (2014) Relational pluralism in de novo organizations: Board of directors as bridges or barriers to diverse alliance portfolios? Effects of boards

• Diverse alliance portfolios emerge faster when a board includes members with heterogeneous, multiplex relationships, as well as central network positions • Relational pluralism: a collection of multifaceted ties that shape organizational action through the depth and distribution of expertise and influence • 3 dimensions of relational pluralism (Gulati et al., 2010) o Heterogeneity: the extent to which actors form connections with others from quite different backgrounds o Multiplexity: the extent to which actors are connected by more than one type of overlap o Overlap (authors use term asymmetry): the extent to which the focal actor's relationships are clustered in one group or span different groups

Main et al. 1993. Top executive pay: Tournament or teamwork. Compensation

• Economic theory explanations of the structure of pay among top executives o Tournament theory (Lazear and Rosen, 1981) o Efficiency is secured by the generous top salary acting as an incentive to those lower down the corporate ladder who willingly enter into a self-financing quasi lottery (rank order tournament), where the main prize is the top executive's job • Compressed executive salary structure o Milgrom & Roberts (1988) and Lazear (1989) argue that a compressed executive salary structure reduce sabotage and promote cooperation

La Porta et al (1999) Corp ownership around the world Criticism

• Examines ownership structures in 27 countries - very few companies are widely held (unless there is very good stockholder protection) • Family firms and large shareholders are prevalent in foreign countries (families occupy TMTs; able to expropriate minority shareholders) • The U.S. (where most governance literature is based) is actually the anomaly

Krause, Whitler, & Semadeni (2014) Power to the principals! An experimental look at shareholder say-on-pay voting Compensation

• Examines the dominant assumption in agency theory that shareholders' preferences should not vary with their frames of reference • Integrate agency and prospect theories to show that shareholders are concerned with getting their money's worth out of a CEO—as evidenced by the mediating effect of agency-normative assessment—but this concern primarily manifests when shareholders face a loss position

Zhu, Shen & Hillman (2014) Recategorization into the in-group: The appointment of demographically different new directors and their subsequent positions on corporate boards Director appointment

• Existing directors tend to select a demographically different new director who can be recategorized as an in-group member based on his or her similarities to them on other shared demographic characteristics (i.e., elite educational background, functional background ethnicity, gender, age, etc) • New directors' prior common board appointments with incumbents strengthen the recategorization process • New directors' who are more similar to incumbents on shared demographic characteristics tend to serve on the board longer and are more likely to become committee members and chairs

Kor & Misangyi (2008) Outside directors' industry-specific experience and firms' liability of newness Effects of boards

• Find weak support of outside director industry experience substituting for TMT industry experience, and stronger support for young firms • This relationship weakens as firm age increases.

Westphal & Stern (2007) Flattery will get you everywhere (especially if you are a male Caucasian): how ingratiation, boardroom behavior and demographic minority status affect additional board appointments at US companies Director appointment

• Finds directors increased chance of board appointment via advice and info to CEOs and ingratiatory behavior toward peer directors; ethnic minorities and women were rewarded less for such behaviors • Directors also increased appointment chance by engaging in low monitor and control behaviors; minorities and women were punished more for such behavior

O'Connor et al (2006) Do CEO stock options prevent or promote fraudulent financial reporting? Effects of compensation

• Finds stock options may give good or bad incentives, and the outcome will likely depend on opportunity to make "bad" decisions such as when the CEO is chair or the board has high stock options

Bruton et al (2010) Governance, ownership structure, and performance of IPO firms: The impact of different types of private equity investors and institutional environments Effects of ownership

• Finds support for the agency theory argument that concentrated ownership improves IPOs' performance • Agency relationships are affected by different institutional contexts

Connelly et al (2010b) Marching to the beat of different drummers: Influence of institutional owners on competitive actions Ownership

• Focuses on effect of 2 different types of institutional owners in terms of how decisions are made in the firm. o Dedicated investors encourage strategic competitive actions (building capacities for long-term competition) o Transient investors discourage strategic, and encourage tactical competitive actions (maximize short-term profit)

Connelly et al (2010a) Ownership as a form of corporate governance Ownership

• Focuses on the different motivations between internal and external owners o Internal: executives, boards, non-exec employees o External: block holders, agent owners (institutional investors (dedicated, transient/quasi-indexer)), private equity

Dalton et al (2003) Meta-analyses of financial performance and equity: Fusion or confusion? Criticism

• Found no support for agency theory's proposed relationship between ownership and firm performance o No relationship b/w management equity ownership and firm performance o No relationship b/w higher monitoring large block holders and firm performance o No relationship b/w higher monitoring institutional investors and firm performance o No difference found between types of institutional investors

Dalton et al (2003) Meta-analyses of financial performance and equity: Fusion or confusion? Effects of compensation

• Found no support for agency theory's proposed relationship between ownership and firm performance o No relationship b/w management equity ownership and firm performance o No relationship b/w higher monitoring large block holders and firm performance o No relationship b/w higher monitoring institutional investors and firm performance o No difference found between types of institutional investors

Daily et al (2003) Corporate governance: Decades of dialogue and data

• Governance: "the determination of the broad uses to which organizational resources will be deployed and the resolution of conflicts among the myriad participants in organizations" • Criticisms: empirical dogmatism, overreliance on archival data over primary data, overreliance on agency theory

Zhu (2013) Group polarization on corporate board: Theory and evidence on board decisions about acquisition premiums Effects of boards

• Group polarization - group decision-making bias; decisions going to extremes following discussion • Group polarization results in the board paying an even higher (lower) premium for an acquisition than their experience would suggest • Group polarization was reduced by demographic homogeneity and by minority experience, but magnified when board influence is high.

Zahra & Pearce (1989) Boards of directors and corporate financial performance: A review and integrative model Effects of board

• Identifies an integrative model of the board • 4 board attributes: composition, characteristics, structure, and process=CCSP • 3 critical board roles: service, strategy, and control=SSC

Westphal & Stern (2006) The other pathway to the boardroom: Interpersonal influence behavior as a substitute for elite credentials and majority status in obtaining board appointments Director appointment

• Ingratiation will help those that suffer from social discrimination to get appointed to the board • People can advance through ingratiating behavior (flattery, opinion conformity, and favor rendering) - serves as substitute for lack of appropriate education/social background

Marcel & Cowen (2014) Cleaning house or jumping ship? Understanding board upheaval following financial fraud Director exit

• Low-capital directors are significantly more likely to leave than high-capital directors (consistent with cleaning house)

Finkelstein & Boyd (1998) How much does the CEO matter? The role of managerial discretion in the setting of CEO compensation Compensation

• Managerial discretion was positively related to CEO compensation • The relationship between managerial discretion and CEO compensation was stronger in firms with high performance than in firms with low performance

Stern & Westphal (2010) Stealthy footsteps to the boardroom: executives' backgrounds, sophisticated interpersonal influence behavior and board appointments Director appointment

• Managers' and directors' ingratiatory behavior toward colleagues is more likely to yield board appointments at other firms to the extent that it comprises relatively subtle forms of flattery and opinion conformity (less likely to elicit cynical attributions of motive) • Theorizes that managers and directors with background in politics, law or sales, or an upper-class background, are more sophisticated and successful in their ingratiatory behavior.

Hoskisson et al (2009) Complementarity in monitoring and bonding: More intense monitoring leads to higher executive compensation Effects of boards

• Monitoring and bonding (compensation) are not substitutes; increased monitoring leads to greater compensation to offset managers increased employment and career risk, accordingly • Negative cycle: monitoring leads to increased pay, which in turn leads to increased monitoring due to complaints of excessive pay

Daily et al (2003) Corporate governance: Decades of dialogue and data Criticism

• Offer definition of governance that contrasts focus on control of self-interest & protection of shareholder interests when ownership & control are separate: "the determination of the broad uses to which organizational resources will be deployed and the resolution of conflicts among the myriad participants in organizations" • Outline several criticisms of corporate governance research: empirical dogmatism, overreliance on archival data over primary data, overreliance on agency theory

Kor (2006) Direct and interaction effects of TMT and board compositions on R&D investment strategy Effects of boards

• Outside director not always effective; firms opt for lower levels of R&D investment intensity when their outsider-rich board interacts with a team of managers who have high levels of (1) firm tenure, (2) shared team-specific experience, or (3) functional heterogeneity

Srinivasan (2005) Consequences of financial reporting failure for outside directors: Evidence from accounting restatements & audit committee Director exit

• Outside directors (audit committee members) bear reputational costs for financial reporting failure: o For firms that overstate earnings, the likelihood of director departure increases with restatement severity and directors are less active in present positions, particularly for audit committee directors

Kalyta (2009) Compensation transparency and managerial opportunism: A study of supplemental retirement plans Entrenchment & Compensation

• Pension benefit compensation (less transparent to outsiders because it's more time consuming to collect and was not required to be disclosed until 2006) is driven mostly by things consistent with CEO power, while cash and options are driven more by "economic" variables

Westphal & Bednar (2008) The pacification of institutional investors Entrenchment and ownership

• Political actions to ingratiate powerful institutional owners helps CEOs stay in control and avoid monitoring o Ingratiation: social influence tactics that serve to enhance one's interpersonal attractiveness and gain favor with another person o Persuasion: involves the use of reason or logic to convince others

Westphal & Bednar (2005) Pluralistic ignorance in corporate boards and firms' strategic persistence in response to low firm performance Effects of boards

• Presents a social psychological bias: pluralistic ignorance • In conditions of low performance there is a systematic tendency for outside directors to underestimate extent to which fellow directors share their concerns about current strategy's viability; reduces propensity to express concerns -> decreases likelihood of strategic change

Boivie et al (2012) Time for me to fly: Predicting director exit at large firms Director exit

• Prestige associated with being a director, the ability to have influence, and identification with the director role make directors less likely to exit • Demotivating factors related to the time commitment required, such as holding other board appointments or serving as a CEO at another company, increase the likelihood of director exits • Find that the value of being on the board of a prestigious firm diminishes when the firm experiences events that tarnish its prestige, although these same events decrease the likelihood of director exit when firm prestige is lacking

Morck et al (1988) Management ownership and market valuation Effects of compensation

• Propose curvilinear relationship between insider ownership and performance; managerial equity ownership is beneficial at low levels, but negative at higher levels. [Later disputed by Dalton et al (2003)]

Hillman (2005) Politicians on the board of directors: Do connections affect the bottom line? Director appointment

• RDT provides a compelling logic for the positive association of ex-politicians on boards with market-based performance-firms • Having politicians on the board can reduce uncertainty and provide access to information, legitimacy, and/or resources

Musteen et al (2009) Ownership structure and CEO compensation: Implications for the choice of foreign market entry modes Effects of compensation

• Results suggest that CEOs with greater proportion of pay tied to firm long-term performance are more inclined to choose full-control entry modes over shared-control modes • CEOs with more long-term performance related pay appear to want more control when entering foreign markets

Navissi & Naiker (2006) Institutional ownership & corporate value Effects of ownership

• Share ownership by investors with board representation is positively related to the value of the firm (stock price) at lower levels of ownership

Zhu & Westphal (2014) How directors' prior experience with other demographically similar CEOs affect their appointments onto corporate boards and the consequences for CEO compensation Director appointment

• Shows how CEOs solve the dilemma of appointing dissimilar directors despite their preferences for similar individuals who are likely to support their leadership and decision making • Found CEOs tend to appoint new directors who have prior interlock ties to other similar (demographically) CEOs and tend to rely more on such ties when appointing a demographically different director • New directors' prior ties to similar CEOs can eliminate the negative impact that the dissimilarity between the CEO and the new directors otherwise has on the CEO's compensation

Westphal & Zajac (1998) The symbolic management of stockholders: Corporate governance reforms and shareholder reactions Entrenchment of ownership

• Shows that symbolic corporate actions can engender significant positive stockholder reactions and deter more substantive governance reforms, thus perpetuating power imbalances in organizations

Westphal & Khanna (2003) Keeping directors in line: Social distancing as a control mechanism in the corporate elite Entrenchment & sociopolitical strategies

• The threat of social distance among the 'corporate elite' discourages control and monitoring, which exacerbates the agency problem • Social control theory: If TMTs cede power to board members, they will be shunned by other TMTs (they are often members of other boards)

Dalton et al (2007) The fundamental agency problem and its mitigation Criticism

• The three principal approaches to mitigate the agency problem: o Independence of boards of directors (from management) o Ownership structure of the firm (to align interests or impact monitoring) o Market for corporate control (self-serving executives may lose the firm to acquisition) • Criticisms of agency theory o Applies only to large, for-profit firms with mature capital markets and diffuse shareholders o Not considered the broader context of corporate social responsibility or stakeholder theories o Focus on U.S. & large firms is less about agency theory than corporate governance research

Zhang et al (2008) CEOs on the edge: Earnings manipulation and stock-based incentive misalignment Effects of compensation

• Under certain conditions, incentive-based pay can be detrimental • Specifically, CEOs are more likely to "manipulate firm earnings" unethically with more out-of-the-money options and lower stock ownership

Almandoz & Tilcsik (2015) When experts become liabilities: Domain experts on boards and organizational failure Effects of boards

• Under decision uncertainty, a higher proportion of domain experts on a board may detract from effective decision making, increase organizational failure • Domain expert: directors who primary professional experience is within the focal firm's industry o Negatives: cognitive entrenchment, overconfidence and limited task conflict

Fiss et al (2012) How golden parachutes unfolded: Diffusion/variation of controversial practice Entrenchment & Compensation

• Use institutional theory to demonstrate how golden parachutes (and, by extension, other controversial/contested practices) are propagated throughout the market • Find that increased firm visibility/legal action both result in less extensive severance packages, while packages tend to become more uniform over time and in instances where takeover bids reduce parachute justifiability

Westphal & Zajac (2013). A behavioral theory of corporate governance: Explicating the mechanisms of socially constituted agency Criticism

• Using a rational based economic lens to view corporate governance fails to provide a full picture of corporate governance o Relationships between individuals are largely ignored • Elites exist in a social context and are conditioned by their social context and, therefore, to understand corporate governance we must analyze more than traditional incentive and monitoring structures o The social relationships of corporate leaders inform and shape their decision making • 4 types of social processes o Ingratiation, personal/professional support, social relationships (outside work), reciprocity

Kroll et al (2008) Board vigilance, director experience, and corporate outcomes Effects of boards

• Vigilance without relevant experience is unlikely to ensure board effectiveness (as advisors to top managers) • Show that interaction of industry experience, experience as CEO of an acquiring firm, and experience as board member of an acquiring firm, each with outside director membership, blockholder board membership, and outside board ownership (each of the nine interactions) will have a positive impact on acquirer returns

Goranova et al (2010) Owners on both sides of the deal: mergers and acquisitions and overlapping institutional ownership Effects of ownership

• When a high percentage of institutional owners are mixed between the acquirer and target in an M&A, the firm performs poorer due to less monitoring because overlapping owners focus on aggregate value

Matta & Beamish (2008) The accentuated CEO career horizon problem: Evidence from international acquisitions Effects of compensation

•In-the-money exercisable options and equity holdings accentuate career horizon problem → CEOs don't take risk when they are close to retirement, and this is stronger when the CEO has options that can be exercised and stock holdings.

Hoskisson et al (2002) Conflicting voices: The effects of ownership heterogeneity and internal governance on corporate strategy Ownership

•Pension funds: long term view, own stocks of fewer companies, pressure resistant to market actions, prefer internal innovation, encourage insider directors to have strong equity (agency theory) • Investment funds: short term view, own stocks of more companies, pressure sensitive to market actions, prefer external innovation, underemphasize management controls while overemphasizing financial control