corporate scandal and system assignment
Pick a corporate scandal that happened within the last decade. First, summarize what happened. Then, discuss the corporate governance system of this company that failed to prevent this scandal from happening. Finally, discuss what you would have done differently if you were a decision-maker in this company (director, executive, shareholder, etc.) How would you prevent this scandal from happening? Refer to our lectures and your readings about corporate governance mechanisms. There is not a page limit but your answer should be at least four pages (double-spaced). Let me know if you have any questions. Good luck!
This compelling finding indicates that senior
executives interests may be more closely tied to
debt holders than is commonly recognized. In-
deed, CEOs in Sundaram and Yermacks sample
tended to behave (manage) more conservatively
as they agednot simply to maximize annual bo-
nus income, but instead to safeguard the value of
their pensions and deferred compensation. But
what if their compensation was heavily weighted
toward stocks rather than inside debt? A recent
study of almost a thousand companies (New Yorker,
Nov. 12, 2007, p. 34) found that CEOs whose com-
pensation was made up mostly of stock options
tended to make investments and acquisitions that
were riskier than those made by other executives.
Not surprisingly, Sundaram and Yermack be-
lieve that the study of debt-based incentives to
senior managers is a fruitful area for further inves-
tigation in executive compensation. For instance,
do executives with ample inside debt seek mergers
that reduce firm risk? Why do some firms have
more generous pension formulas than others? Do
pension plans influence decisions about CEO suc-
cession? These and other important questions re-
main to be answered. The fact that our knowledge
about the impact of different components of ex-
ecutive compensation plans is still limited has
both academic and policy implications. If nothing
else, it also serves to underscore that deferred
compensation schemes for executives ought to be
more transparent than is currently the case in the
United States.
Source: Sundaram, R. K., & Yermack, D. L. (2007). Pay me
later: Inside debt and its role in managerial compensation,
Journal of Finance, 62(4), 15511588.
How Do Corporate Boards Evolve?
Research Brief by Kathleen Rehbein, Associate
Professor of Management, Marquette University
W
hat do we really know about the forces driv-
ing board formation? There has been sub-
stantial debate about the determinants of
board attributes. On one side of the debate are the
researchers who believe that boards evolve effi-
ciently so that they address any potential agency
problems. According to these researchers, board
composition reveals the tendency of corporations
to select value-maximizing governance attributes
that ensure that managerial interests are aligned
with shareholder preferences. Yet other scholars
believe that the traits of boards reveal the natural
inclination of CEOs to create boards that maxi-
mize their discretion at the expense of sharehold-
ers. That said, board attributes may also reflect a
firms stage of growth or its need to acquire certain
resources given the demands of the external en-
vironment.
Understanding the determinants of board at-
tributes is important for addressing concerns about
their ability to execute corporate oversight. A
recent study by Audra Boone (University of Kan-
sas), Laura Field (Penn State University),
Jonathan Karpoff (University of Washington),
and Charu Raheja (Wake Forest University) be-
gins the process of identifying the determinants of
board size and independence in young companies.
This study examines whether boards are struc-
tured efficiently or reflect a managers ability to
dominate the board for personal gain. Boone and
her colleagues depart from previous studies by
investigating how boards evolve in young compa-
nies that have just gone public. Earlier studies
have tended to focus on boards in large, estab-
lished firms. Yet corporate governance features
may well be affected by a firms phase of organi-
zational growth.
According to Boone and her colleagues, there
are three possible explanations for differences in
board structure (i.e., its size and independence).
The scope of operations perspective argues that
board structure will depend on the complexity of
a firms operations, stemming from the number of
product lines or geographic markets. As a firms
complexity increases, more specialized board ser-
vices are required. Consequently, the demand for
independent directors who can provide expertise
on a range of business topics increases with firm
complexity.
An alternative perspective is that the monitor-
ing requirements of a firms business affect a
boards attributes. As a managers opportunities to
2008 63Research Briefs
engage in self-serving activities increase, more
monitoring is required by the board to protect
shareholder interests. The cost of monitoring will
also affect the composition of the board: As mon-
itoring costs increase, the number of outside di-
rectors will decline along with the overall size of
the board.
Finally, the negotiation perspective predicts
that board attributes will depend on the bargain-
ing power of the CEO. When CEOs have substan-
tial influence their preference will be for a board
that consists of more insider directors and affili-
ated outside directors.
To test these theories, Boone and her col-
leagues studied 1,019 industrial firms that went
public in the United States between 1988 and
1992 over a 10-year period. To measure the com-
plexity of operations, they examined firm size,
firm age, and number of business segments. To
assess a managers potential to extract private ben-
efits, they examined measures such as free cash
flow, industry concentration, and takeover de-
fenses. Monitoring costs were evaluated by exam-
ining a firms market-to-book ratio, high research
and development costs, return variance, and CEO
ownership. A CEOs negotiating influence was
determined by his or her tenure and ownership. A
CEOs bargaining constraints were assessed by ex-
amining outside director ownership, venture cap-
ital presence, and the firms underwriter rank.
Interestingly, the results showed that a broad
combination of factors affects the composition of
the board. In general, the results support the idea
that firms select value-maximizing governance
features. The significance of the size and age of the
firm as well as its number of business segments
validates that the complexity of firm operations
has a positive impact on the size and indepen-
dence of the board. In terms of the monitoring
perspective, the measures of monitoring benefits
and costs significantly affect the size of a firms
board. This implies that the number of board
members increases in order to constrain managers
who have enough discretion to pursue personal
benefits. The size of the board also increases if
monitoring costs are relatively low, so that board
members are in a position to effectively oversee
the actions of management. On the other hand,
the results for the negotiation perspective were
mixed. While most of the evidence supported the
premise that firms structure boards efficiently, the
fact that the number of independent directors was
not affected by monitoring benefits and/or costs
raises questions about the natural development of
optimal board features. Likewise, when a CEO
had substantial influence and faced few decision-
making constraints, the board was less indepen-
dent.
This study provides some very important in-
sights about board attributes of entrepreneurial
firms. But it also raises some questions. Given the
finding that corporate governance reflects a firms
unique competitive environment, Boone and her
colleagues question the usefulness of current pol-
icies that create broad governance guidelines.
They also raise questions about other forces that
might be driving the formation of boards. Indeed,
resource dependence theory, institutional theory,
and social network theories may suggest other
factors that may be important in predicting board
attributes. And while Boone and her colleagues
grouped all outsiders in one category, there can be
considerable variation among outside directors in
terms of their expertise (general vs. specialized) as
well as their relationship with top management.
Future studies may want to examine how the
characterization of outside directors varies over
time. This may also provide insights about the
efficiency of a boards structure. Finally, what are
the dynamic aspects of board development? Do
board features change as the firm goes through
different phases of organizational growth? If
boards are structured efficiently, board composi-
tion should change as the challenges and oppor-
tunities a firm encounters evolve. Alternatively, a
boards composition may persist over time, chang-
ing only incrementally despite the changing de-
mands in its competitive environment. It will be
up to future scholars to answer these important
questions.
Source: Boone, A. L., Field, L. C., Karpoff, J. M., & Raheja,
C. G. (2007). The determinants of corporate board size and
composition: An empirical analysis. Journal of Financial Eco-
nomics, 85, 66 101.
64 FebruaryAcademy of Management Perspectives
