DEEP Insight

Why Good Governance Matters Premium

Boards need to close the rifts left by the crisis and be open to change, for the long-term success of business.

This executive dossier includes the following articles:

Recommendations to Meet Future Governance Challenges Premium

How Boardroom History Is Writing Its Future

Lorsch, Jay W.

There have been significant, positive changes in boardroom practices over the past 25 years. However, there is still work to do, says the author, whose expertise in corporate governance matters was tapped for lawsuits involving the Tyco and Enron fiascos at the dawn of this new century. Drawing on decades of research and experience, the author outlines the major problems that boards have faced over the past quarter century and the solutions proposed to overcome them. He warns of the negative, unintended consequences of some of these solutions, many of which were not thought through carefully and may be based on false premises. Finally, he offers four recommendations for directors, CEOs, shareholders and other stakeholders on how to meet future governance challenges within the wider context of business. Put simply, there needs to be open communication between all parties and a consensus on the ultimate purpose of the firm.

6 Items for the Top of Every Board's Agenda Premium

Renewing the Board's Mission

Canals, Jordi

The role of boards of directors is in the spotlight. Can boards do a better job at protecting their companies? There's certainly good reason to think so. Today, some experts are calling for tougher regulations on boards and a larger role for shareholders in key strategic decision-making. Others advocate for more professional board directors. Neither of these solutions is enough. What is needed is a clearer vision of the firm's overarching purpose, as well as aligning and measuring its long-term success. Also required is a drastic rethink of how the board can add long-term value to the company it serves. Such changes will be necessary not only to shape up corporate governance practices, but also to safeguard the future of capitalism itself.

Transparency, a Rising Trend in Listed Companies Premium

The Age of Activism

Campa, José Manuel

Good corporate governance cannot guarantee that good decisions will always be made: running a business is fraught with risk and managers can -- and often do -- make mistakes. What good governance does do is ensure there is accountability and that decisions are taken in an appropriate manner. The recent experience of publicly traded companies has shown that good governance requires both transparency and fluid communication between the major interest groups -- that is, between top management and the board of directors; between the board and shareholders; and between shareholders and society at large.

Are Voting Guidelines Ruling Your Business? Premium

Proxy Advisors

Ormazábal, Gaizka; McCall, Allan L.

Recent legislative and regulatory decisions giving shareholders more influence over the governance of U.S. listed companies has motivated corporate boards and management to engage with shareholders -- with unintended consequences. There has been a dramatic rise in the number of proxy issues that have to be voted on by shareholders. Under SEC rules, many institutional investors have a fiduciary obligation to cast a vote on every item that comes before them, leading many to outsource their voting decisions to proxy advisors. The two largest proxy advisory firms -- Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis) -- control most of the proxy advisory market and have thousands of institutional clients, meaning that the corporate governance policies of these two companies affect a significant proportion of shareholder votes. The authors studied proxy voting on 264 stock option repricings for 251 individual firms and found that those repricings that were more aligned with proxy advisory firm guidelines experienced lower stock returns, weaker operational performance and a higher likelihood of executive and employee turnover. This negative impact on shareholder value suggests that there is a need to better understand the role of proxy advisors' recommendations on other more important voting issues such as executive compensation, director elections or equity compensation plans. The regulatory debate on the U.S. proxy advisory industry is important worldwide, as the SEC's regulatory choices are a benchmark for other national and regional regulatory bodies.

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