Where Experts Get It Wrong: Independence vs. Leadership in Corporate Governance

introduction Over the last few decades, researchers have taken a thorough and critical look at corporate governance from various perspectives. They have studied how legal, social, and market forces influence the control mechanisms that a company adopts to prevent or discourage self-interested behavior by management. They have examined the structure and operations of the board of directors. They have explored processes of governance systems, including strategy development and oversight, risk management, CEO succession planning, performance measurement, executive compensation, the external audit, and the consideration of mergers and acquisitions to determine the relation of each to governance quality and firm outcomes. The result is a vast research literature across many different disciplines that chronicles the association between corporate governance choices and the likelihood of future success or failure.1 For the most part, the findings of this research literature are modest. Many observed structural features of corporate governance have little or no relation to governance quality. For example, there is little systematic evidence that it benefits a company to have an independent chairman; maintain fully independent audit, compensation, or nominating and governance committees; restrict its audit firm from performing non-audit-related services; or grant shareholders an advisory vote on compensation. For other governance decisions—such as a decision to pay directors in cash or stock, or to award executives golden parachute severance payments—the research results are so mixed as to be effectively inconclusive. While there is evidence that governance processes are critical to success—such By david f. larcker and Brian tayan