Academic Roundup – July 2007

Manifest-I presents a summary of recently released academic papers on international corporate governance and corporate social responsibility issues.

The Special Interest Race to CEO Primacy and the End of Corporate Governance Law
Steven Ramirez, professor of law, Loyola University of Chicago School of Law

This paper argues that recent fears US corporate governance has moved towards a “dictatorship of the CEO” and away from shareholder primacy are well founded. The author argues that there is currently no mechanism to ensure that optimal governance standards prevail: the Securities and Exchange Commission is subject to the distortions implicit in a politicised regulatory agency; state legislatures show little concern about achieving optimal governance standards; and courts seem to guess at the best corporate governance outcomes rather than rely upon available financial and economic science.

Furthermore, it is argued, there is little sign of any factors pushing corporate governance towards optimal standards, and shareholders seem not to lock governance law into their investment decisions. The paper suggests that lawmakers are beholden to the views of the powerful and the organised and – there not being an effective investor lobby – outcomes are decided decisively in favour of chief executive power. At both federal and state level, it is argued, governance outcomes seem best explained by special interest influence.

Therefore, the paper concludes, solutions must be aware of the need to create legal structures that can resist the influence of special interest. The US system as it stands, the paper argues, seems rigged for self-destruction, which is likely to be as a result of either crises or international competition.

Learning, CEO Power and Board-of-Director Monitoring: Evidence from CEO Tenure
Harley Ryan Jr and Lingling Wang, Georgia State University; and Roy Higgins III, Bentley College

This paper finds that board monitoring of the chief executive negatively relates to chief executive tenure: the board meets less frequently, and indeed is more likely to have an abnormally low number of meetings. Boards are also found to be less likely to fire chief executives with longer tenure, and when making a retention decision consider a longer history of performance.

The paper suggests that there is an optimal equilibrium in which boards make trade-offs between the costs and benefits of monitoring. Although the evidence supports a bargaining equilibrium in which tenured chief executives appear to exert some influence over directors, the paper suggests it may be that this influence is part of the cost of retaining managerial talent. One possible interpretation of these results is that talented chief executives are in short supply.

The Small World of Investing: Board Connections and Mutual Fund Returns
Lauren Cohen, Yale School of Management; Andrea Frazzini, University of Chicago; and Christopher Malloy, London Business School. NBER Working Paper No. 13121

This paper suggests that social networks – particularly those developed through education – are important to the information flow between companies and investors in the US, with portfolio managers placing higher bets on firms they are connected to through their network. Furthermore, managers do significantly better on these holdings relative to non-connected holdings.

Returns, the paper finds, are concentrated around corporate news announcements, consistent with mutual fund managers gaining an informational advantage through education networks. The advantage for members of these networks, the paper argues, is that they are formed on average decades before private information is transferred, and are most often independent of this information.

Beyond Good and Evil: Towards a Solution of the Conflict between Corporate Profits and Human Rights
William Bradford, University of Florida – Warrington College of Business

This paper starts from the position that the wave of corporate scandals in the early years of the new century, along with an increasingly sophisticated human rights movement, has drawn the discussion on corporate governance – and corporate social responsibility – into new arenas. The debate between shareholder and stakeholder theory, the author contends, is now also being fought in judicial, legislative and regulatory arenas.

It might appear, suggests the paper, that vastly divergent interests, normative commitments and worldviews of companies on the one hand and human rights NGOs on the other mean conflict is inevitable and co-operation impossible. However, it is argued, despite the apparent intractability of these two opposed visions, not only is co-operation possible, but a model of governance based upon self-interested co-operation can produce both corporate profitability and protection of human rights.

To reach such a state of interdependence – a partnership, rather than a battle – the paper argues that it would be helpful to advance the debate beyond simple characterisation of NGOs as good and companies as evil, and recognise that contemporary political economy requires profit to protect human rights, and human rights to protect profits.

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