(Bad) Governance at The University

For good corporate governance, it's important that the independent directors on the board are really independent. In particular, they shouldn't have business relationships with the company other their board service. If they did, it would make it hard for them to rein in the CEO, for fear that they'd lose the business.

There's been tons of work on this topic both in the academic and practitioner literatures. But I haven't seen much on similar relationships for universities. I'm sure that a lot's been done- I just haven't seen it.

Until now.

There's a good illustration in the Boston Globe of directors at Suffolk University (actually, trustees, which serve a similar role for a university) with significant business ties to the school. It turns out they just awarded the University president a 2.8 million dollar pay package. Of course, there were "good reasons" for doing so. Here's the lede from the story:

Boston lobbyist Robert Crowe was key among the Suffolk University trustees who made David J. Sargent the highest paid university president in the nation in 2006, with a $2.8 million compensation package. Less than a year later, Sargent renewed a $10,000-a-month contract with Crowe's lobbying firm to represent Suffolk's interests in Washington.

This month, as controversy flares over Sargent's pay, the job of publicly defending it falls on George Regan, himself a new appointee to the Suffolk Board of Trustees as well as the beneficiary of a $366,000 annual contract with the university.

Read the whole thing here.

Is this necessarily a bad thing? Not really - it could be perfectly innocent, and it's not surprising that trustees of a university might have significant business ties to the university. After all, they tend to be prominent alumni with a long history with the school. But, when you have those ties, a pay package like that is going to get far greater scrutiny than it would otherwise. Or as Ricky Ricardo would have said, "they got some 'splainin to do".

As an aside, if you want to see some excellent examples of affiliated directors in the corporate world (along with other examples of bad governance), there's no better place to go than Michelle Lederer's Footnoted.org. She's made a career out of scouring through company documents to find some truly outrageous examples of corporate mis-governance.

I think the president of Unknown University considered having some trustees with business ties to the school, but we didn't have enough money to pay the required graft.

"Bonuses" and "Maluses"

One of the problems with bonuses is that they create asymmetric payoffs - there's typically an upside for some actions, but no downside (yes, I know, there's the settling up in the labor market, etc., but that's a story for another piece). To deal with this, at least one firm (UBS) has started using "maluses" along with bonuses

"Just as bonuses (Latin for “good”) are paid out for good performance, maluses (“bad”) will be meted out if the bank subsequently makes losses or if the employee misses performance targets, UBS said. The maluses could wipe out all previously agreed share bonuses and two thirds of all cash bonuses under stringent new rules designed to align the interests of executives and traders with those of shareholders."

This concept is aslo called a "clawback", and embedding it in compensation packages so that a person has a downside component is a great idea. Looks like something we'll end up discussing in class.

HT: Proxyland, ("corporate governance and other oxymorons"), a blog worth reading.

Jonathan Macey on Director Capture

Jonathan Macey is one of the "Big Dogs" of academic writing in corporate governance. He is the Sam Harris Professor of Corporate Lay, Corporate Finance, and Securities Law at Yale (and Deputy Dean of the Law School. He's written a boatload of books on the topic, and over a 150 articles in scholarly journals. In this piece (where he's guest blogging at the Icahn Report, he discusses the concept of "regulatory capture."

In the academic world, particularly among political scientists and economists, "capture" occurs when decision-makers such as corporate directors favor certain vested interests such as incumbent management, despite the fact that they purport to be acting in the best interests of some other group, i.e. the shareholders. The problem of capture and the theories associated with the idea of capture are most closely associated with George Stigler, and the free-market Chicago School of Economic thought. Among the more interesting and important theories of Stigler and other proponents of capture theory is the idea that capture is not only possible, in many contexts it is inevitable.

Read the whale thing here

Analysts' Recommendations and CEO Dismissals

Here's a pretty interesting governance piece, highlighted recently on the Wall Street Journal's Dealbook: Chief Executives Beware- Analysts May Seal Your Fate:

An academic study found corporate boards are more likely to be influenced by the recommendations of equity analysts following the 2002 rule change that separated the analysts from investment bankers. The study conducted by professors at the Paul Merage School of Business at the University of California in Irvine and at the Jesse H. Jones Graduate School of Management at Rice University in Houston, found that this increase in trust in analysts meant that boards are more likely than in the past to fire an under-performing chief executive based in part on analyst recommendations.

The paper is titled CEO Dismissal: The Role of Investment Analysts as an External Control Mechanism, and it's authored by Margarethe Wiersema (of UC-Irvine) and Yan Zhang (of Rice University). It's a pretty good example of the way that regulatory changes affect the impact of various monitoring agents. My take on it is that post SOX, boards are much more likely to "yank the cord" on CEOs following a whole host of "bad news" events (earnings disappointments, product recalls, etc...). I bet that'd make for an interesting research topic for someone (offered free of charge - I'm not going to pursue it).

You can read a PDF of a working paper version of paper here.

The Annual Korn-Ferry Board of Directors Study

Whether you're a researcher or practitioner in the field of corporate governance, the annual Korn-Ferry Survey of boards of directors is a must read (I even cited an earlier version in my dissertation years ago). Here's a bit from the overview in the beginning of the survey

...It is more work and less play for today’s corporate directors, and, perhaps surprisingly, they seem to like it that way. A high level of job satisfaction is one of the trends identified in the 34th Annual Korn/Ferry International Board of Directors Study, which also found that directors serve on fewer boards but work longer hours.

In addition, boards are actually smaller today. According to analysis of information reported in the proxies of 891 FORTUNE 1000 companies, we found that boards average 10 directors in size, with only two being full-time company employees. Women and minorities have been very successful in achieving directorships,
when viewed historically over three decades. But, the proxy data reflects that their numbers per board remain small and growth appears stalled.

Our survey shows that the placement of restrictions on the number of boards on which a director may serve remains fairly high in North America and Europe, and, perhaps not surprisingly given this fact, we found a loosening of mandatory retirement rules.

The image of a director’s job also may be improving. Recruitment remains challenging, especially for companies in North America, but boards appear to be having greater success recruiting directors with specialized skills.

Read the whole thing (for free) here.