Governance →
- 14 Jan 2013
- Research & Ideas
Few Women on Boards: Is There a Fix?
Women hold only 14 percent of the board seats at S&P 1500 companies. Why is that, and what—if anything—should business leaders and policymakers do about the gender disparity? Research by Professor Boris Groysberg and colleagues shows that male and female board members have very different takes on the issue. Closed for comment; 0 Comments.
- 16 Nov 2012
- Working Paper Summaries
Governing Misvalued Firms
For decades, economists have argued that stocks can get priced irrationally and that this divergence from fundamental value may impact managerial decisions. If overvaluation leads to misbehavior and if strong governance curbs misbehavior, then governance should be particularly valuable in times of overvaluation. This simple yet powerful idea surprisingly has not been explored in the literature. In this paper, the authors fill the gap and ask whether strong corporate governance is especially important during periods of overvaluation when agency costs of managerial misbehavior are high. Results of joint tests of the perverse effects of overvaluation and the ability of governance to counteract them suggest that boards and shareholders looking to create long run value need to increase vigilance and oversight during times when the firm's stock is outperforming. This vigilance is especially important when CEOs have powerful pay-for-performance incentives. Key concepts include: The impact of governance is strongest during times when firms are highly valued. Overvaluation may cause or correlate with misbehavior. Better governance counters the misbehavior. It is important to combine strong pay-for-performance compensation with strong governance and to increase vigilance when firms may be overvalued. Closed for comment; 0 Comments.
- 14 Nov 2012
- Research & Ideas
New Agenda for Corporate Accountability Reporting
Professor Karthik Ramanna explains three ways to make corporate accountability reports potentially more useful to constituencies that include shareholders, communities, bondholders, and customers. Open for comment; 0 Comments.
- 18 Jul 2012
- Research & Ideas
Penn State Lesson: Today’s Cover-Up was Yesterday’s Opportunity
While leaders may rationalize that a cover-up protects the interests of their organizations, the inevitable damage harms their institutions far more than acknowledging a mistake, says professor Bill George. Closed for comment; 0 Comments.
- 11 Jul 2012
- Research & Ideas
Book Excerpt: ’The Future of Boards’
In an excerpt from The Future of Boards, Professor Jay Lorsch discusses why directors are newly questioning their roles. Closed for comment; 0 Comments.
- 11 Jul 2012
- Research & Ideas
The Future of Boards
In The Future of Boards: Meeting the Governance Challenges of the Twenty-First Century, Professor Jay Lorsch brings together experts to examine the state of boards today, what lies ahead, and what needs to change. Open for comment; 0 Comments.
- 31 May 2012
- Working Paper Summaries
Conflict Policy and Advertising Agency-Client Relations: The Problem of Competing Clients Sharing a Common Agency
This paper takes a fresh look at a recurring and often contentious issue in agency-client relations: Should an advertising agency simultaneously serve competing accounts or should the agency be restricted from doing so? Professor Alvin J. Silk traces the evolution and current state of industry practices with respect to conflict norms and policies; reviews the body of conceptual and empirical research that is available about the sources and consequences of conflicts, and outlines some directions for future research to address unresolved policy issues. Key concepts include: Historically, advertising agencies in the US and Europe did not simultaneously serve accounts or clients who were competitors. Safeguards to preserve proprietary information have become an essential component of conflict policies. Rival clients may be served by separate organizational units that are under common control and/or ownership. A family of hybrid conflict policies has evolved that features elements of the split account system long practiced in Japan, augmented by safeguards that serve as partial substitutes for the umbrella prohibition on serving rivals imposed by exclusivity. By relying on safeguards and splitting account assignments among different organizational units within or across a mega-agency or holding company, clients exert a measure of control over those agencies' access to confidential information while also offering them incentives to avoid conflicts of interest. Closed for comment; 0 Comments.
- 21 May 2012
- Research & Ideas
OSHA Inspections: Protecting Employees or Killing Jobs?
As the federal agency responsible for enforcing workplace safety, the Occupational Safety and Health Administration is often at the center of controversy. Associate Professor Michael W. Toffel and colleague David I. Levine report surprising findings about randomized government inspections. Key concepts include: In a natural field experiment, researchers found that companies subject to random OSHA inspections showed a 9.4 percent decrease in injury rates compared with uninspected firms. The researchers found no evidence of any cost to inspected companies complying with regulations. Rather, the decrease in injuries led to a 26 percent reduction in costs from medical expenses and lost wages—translating to an average of $350,000 per company. The findings strongly indicate that OSHA regulations actually save businesses money. Closed for comment; 0 Comments.
- 17 Apr 2012
- Working Paper Summaries
Technology Choice and Capacity Portfolios Under Emissions Regulation
What technologies should firms invest in when emissions are costly? With the European Union Emissions Trading Scheme in the EU, California's Assembly Bill 32, the Regional Greenhouse Gas Initiative in the northeastern US, and now Australia's Clean Energy Bill, more and more firms are having to ask themselves that question when planning their capacity portfolios. This paper uses formal theory to analyze firms' technology choice and capacity portfolios, both when emissions are taxed and when they are regulated under cap-and-trade. David Drake, Paul R. Kleindorfer, and Luk N. Van Wassenhove find that even when average emissions price is assumed to be equivalent to that under an emissions tax, firms are more profitable under cap-and-trade. The emissions price uncertainty under cap-and-trade that many argue will destroy value instead equips firms with a real option that increases value. In addition to comparing profits under emissions tax and cap-and-trade regimes, the authors identify a number of potential adverse outcomes that can arise as a consequence of emissions legislation that should be taken into consideration when formulating future climate policy. Key concepts include: Decreasing a dirty technology's emissions intensity (emissions generated per unit of production) can result in an increase in the emissions intensity of a firm's long-term capacity portfolio. Though a higher emissions tax rate is often assumed to spur greater investment in clean technology, the authors show that there are conditions under which a higher emissions tax rate leads to a decrease in clean technology investment. The share of clean technology in a firm's long-term capacity portfolio can increase in the market price of the goods that they produce, which has implications for sectors made more vulnerable to competition as a consequence of emissions regulation. Though many argue that an emissions tax would be more profitable for firms than a cap-and-trade regime due to the uncertainty in emissions price under cap-and-trade, the opposite is shown to be true. Even when average emissions price is assumed to be the same under both regimes, the uncertainty in emissions price under cap-and-trade equips firms with a real option that increases expected profits. Closed for comment; 0 Comments.
- 25 Jan 2012
- Research & Ideas
A Few Firms Have Outsized Influence in D.C.
New research by Harvard Business School Associate Professor William R. Kerr suggests the number of companies affecting government policy through lobbying may be smaller—but more powerful—than previously thought. Key concepts include: Relatively few companies lobby, larger firms are more likely to lobby than smaller ones, and firms that do lobby are likely to do so year after year. The findings can be explained in part by high fixed costs to enter the lobbying club—both in the costs of hiring well-paid lobbyists and in complying with reporting requirements. The small number of corporations that are consistently influencing government policy do so on a whole host of issues—some of which may be important to them, and some of which may be tangential. Open for comment; 0 Comments.
- 06 Dec 2011
- Working Paper Summaries
What Impedes Oil and Gas Companies’ Transparency?
Oil and gas companies face asset expropriations and corruption by foreign governments in many of the countries where they operate. In addition, most of these companies operate in multiple host countries. What determines their disclosure of business activities and hence transparency? Paul Healy, Venkat Kuppuswamy, and George Serafeim examine three forms of disclosure costs that oil and gas managers could potentially consider. Both the US government and the European Union are currently considering laws that would require oil and gas companies to disclose information about operations in host countries. Key concepts include: Competitive risks are an important factor underlying differences in oil and gas firms' disclosure ratings across the host countries in which they operate. Requiring disclosure of payments to foreign governments is unlikely to increase proprietary costs for oil and gas companies. Mandating disclosures about the performance of oil and gas companies in host countries, however, is likely to increase proprietary costs, particularly risk of expropriations and costs related to product market competition. Companies that are coming from more corrupt home countries tend to be less transparent about their payments to host country governments. Closed for comment; 0 Comments.
- 14 Nov 2011
- Research & Ideas
Creating a Global Business Code
In the wake of corporate scandals, many companies are looking more closely at how to manage business conduct worldwide. Professors Rohit Deshpandé, Lynn S. Paine, and Joshua D. Margolis evaluate standards of corporate conduct around the world. Open for comment; 0 Comments.
- 09 Nov 2011
- Working Paper Summaries
CEO Bonus Plans: And How to Fix Them
Discussions about incentives for CEOs in the United States begin, and often end, with equity-based compensation. After all, stock options and (more recently) grants of restricted stock have comprised the bulk of CEO pay since the mid-1990s, and the changes in CEO wealth due to changes in company stock prices dwarf wealth changes from any other source. Too often overlooked in the discussion, however, is the role of annual and multiyear bonus plans—based on accounting or other non-equity-based performance measures—in rewarding and directing the activities of CEOs and other executives. In this paper, Kevin J. Murphy and Michael C. Jensen describe many of the problems associated with traditional executive bonus plans, and offer suggestions for how these plans can be vastly improved. The paper includes recommendations and guidelines for improving both the governance and design of executive bonus plans and, more broadly, executive compensation policies, processes, and practices. The paper is a draft of a chapter in Jensen, Murphy, and Wruck (2012), CEO Pay and What to Do About it: Restoring Integrity to both Executive Compensation and Capital-Market Relations, forthcoming from Harvard Business School Press. Key concepts include: While compensation committees know how much they pay in bonuses and are generally aware of performance measures used in CEO bonus plans, relatively little attention is paid to the design of the bonus plan or the unintended consequences associated with common design flaws. These recommendations for improving executive bonus plans focus on choosing the right performance measure; determining how performance thresholds, targets, or benchmarks are set; and defining the pay-performance relation and how the relation changes over time. In the absence of "clawback" provisions, boards are rewarding and therefore providing incentives for CEOs and other executives to lie and game the system. Any compensation committee and board that fails to provide for the recovery of ill-gained rewards to its CEO and executives is breaching another of its important fiduciary duties to the firm. Closed for comment; 0 Comments.
- 11 Oct 2011
- Working Paper Summaries
US Healthcare Reform and the Pharmaceutical Industry
The 2010 Patient Protection and Affordable Care Act (ACA) will restructure the US health care market in the coming years. For the pharmaceutical industry, the ACA is likely to prove a mixed blessing. In this paper, Assistant Professor Arthur Daemmrich analyzes the political economy of health care, specifically concerning health care reform. He then considers how the ACA will affect the pharmaceutical sector, both quantitatively in terms of the size of the prescription drug market and qualitatively in terms of industry structure and competitive dynamics. Daemmrich also places the current reforms into historical context and describes the political negotiations that enabled passage of the ACA. Key concepts include: Since the United States is the world's largest prescription drug market and has among the fewest price control mechanisms, the ACA holds significance to pharmaceutical firms internationally. Over the course of its implementation in coming years, the ACA will significantly expand prescription drug use, including at the relative expense of other health services. In 2015, Daemmrich projects pharmaceutical spending between $435 and $440 billion (12.5 percent of total health care spending) and in 2020 it will near $700 billion (14 percent of total health care spending). Congress and the Department of Health and Human Services will be hard pressed to explain increased drug spending to consumers, especially compared to Europe and Japan where reference pricing (capping prices at an average within a therapeutic category or among peer countries) has become the norm. The ACA nevertheless holds the potential for the United States to be the first country to break out of the silo framework that dominates health budgeting in countries using reference price systems and to instead set budgets at the disease (or patient) level, linked to health outcomes. Closed for comment; 0 Comments.
- 07 Oct 2011
- Working Paper Summaries
What Environmental Ratings Miss
Environmental ratings of companies are based on "green" management efforts and the environmental performance of their operations. In this paper, Michael Toffel and Auden Schendler argue that these ratings neglect companies' actions that seek to influence environmental policy, which can have a much broader impact than their internal efforts. As a result, sustainability ratings risk seriously misleading consumers and investors, and can even enable "greenwashing" by allowing corporations to game the system, gaining high rankings for greening their operations despite advocating for less stringent environmental policy. Toffel and Schendler argue that environmental ratings should factor in political contributions, CEO advocacy work, and engagement with non-governmental organizations, among other actions. This would erode the environmental ratings of companies advocating weaker environmental policy, and bolster the ratings of those advocating more stringent environmental policy. Key concepts include: Most major corporate environmental ratings and rankings focus on operational impacts such as pollution levels and regulatory compliance, but fail to incorporate political activities that influence environmental regulation. It is corporate political actions—like lobbying or campaign funding—that can have a vastly greater influence on environmental protection, and arguably represent the greatest impact a company can have on protecting (or harming) the environment. Exclusive focus on operational greening efforts and performance neglects the far greater need for climate regulation to achieve the dramatic overall reductions of greenhouse gas emissions called for by climate science. Closed for comment; 0 Comments.
- 18 Aug 2011
- Working Paper Summaries
Non-Audit Services and Financial Reporting Quality: Evidence from 1978-1980
What are the costs and benefits of auditors providing non-audit services? In this paper, the authors investigate whether high non-audit services (NAS) fees relative to audit fees are associated with poor quality financial reporting. Associate Professor Suraj Srinivasan and colleagues look specifically at a sample of S&P 500 firms during the years 1978-80. The authors thus provide an early history analysis of a long-standing regulatory concern that NAS fees create an economic dependence that causes the auditor to acquiesce to the client's wishes in financial reporting, reducing the quality of the audit. This concern led the Sarbanes-Oxley Act to prohibit auditors from providing most consulting services. The authors find that, contrary to regulatory concerns, NAS are associated with better quality financial reporting: lower earnings management and higher earnings informativeness. Conclusions rely on the specific institutional features of the years 1978-80. Key concepts include: Providing NAS does not automatically lead to weaker audit quality. Greater information systems consulting fees are associated with higher quality financial reporting for various proxies of earnings quality. This area of consulting likely improved the audit firms' knowledge base, leading to improved audit quality. Evidence suggests that the market does not fear an increase in economic dependence from the non-disclosure of NAS. Closed for comment; 0 Comments.
- 09 Aug 2011
- Working Paper Summaries
How Firms Respond to Mandatory Information Disclosure
Companies are facing increasing pressure to reveal information about their operations, including their environmental performance. This research examines which types of organizations are especially likely to reduce their pollution levels once they face mandatory disclosure requirements. Research conducted by Anil Doshi and Michael Toffel of Harvard Business School, and Glen Dowell of the Johnson School of Management at Cornell University compares the responses of companies based on their proximity to headquarters and to corporate siblings, organizational size and the density of their surrounding communities, and whether they are part of publicly- or privately-held firms. Key concepts include: Environmental performance improved more among establishments in the same geographic area as their headquarters, compared with those located far away from headquarters. Environmental performance improved more among establishments located near corporate siblings. Environmental performance improved more among establishments owned by privately held firms than among establishments owned by publicly traded firms. The results suggest that corporate managers and policy makers can predict general trends about which establishments are most (and least) likely to improve their performance once they are required to disclose operational performance. Closed for comment; 0 Comments.
- 19 Jul 2011
- Research & Ideas
Rupert Murdoch and the Seeds of Moral Hazard
Harvard Business School faculty Michel Anteby, Rosabeth Moss Kanter, and Robert Steven Kaplan explore the moral, ethical, and leadership issues behind Rupert Murdoch's News of the World fiasco. Open for comment; 0 Comments.
- 17 May 2011
- Working Paper Summaries
The Consequences of Mandatory Corporate Sustainability Reporting
The number of firms reporting sustainability information has grown significantly in the past decade, both due to voluntary actions and to mandates from several national governments and stock exchange authorities. In this paper, London Business School's Ioannis Ioannou and Harvard Business School's George Serafeim investigate whether mandatory sustainability reporting has any effect on a company's tendency to engage in socially responsible management practices. Key concepts include: The researchers show that mandatory sustainability reporting effectively promotes socially responsible managerial practices. Overall, supervision of managers by boards of directors improves, bribery and corruption decreases, and credibility of managers in society increases. In companies where sustainability reporting is a requirement, employee training becomes a higher priority, and corporate boards supervise management more effectively. These positive results are more pronounced in countries that have stronger law enforcement, countries where assurance of sustainability data is more frequent, and countries that are generally more developed. Closed for comment; 0 Comments.
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.