The Hoover Institute is funded by the usual suspects in the ultra-right, climate change denial, corporate power community: ExxonMobil, Kochs, Scaifes, Donors Trust, etc. Corporate apologist David F. Larker, who does not disclose the funders of his research at the CEO-supporting Rock Center at Stanford Law School, and his colleague Brian Tayan have a new paper published by the Hoover Institute that purports to be about how little we know about what constitutes good corporate governance. It refers to this as “seven gaping holes.” It does not point out that we have had to learn what bad corporate governance is through unfortunate experience: the financial meltdown, the Enron-era accounting frauds, etc. You’d think they might understand the idea that doing the same thing and expecting a different result is the definition of insanity or at least, given their areas of study, the concept of risk-benefit analysis.
This entire paper is just like the talking Barbie that got into trouble for saying, “math is hard.” Larker and Tayan shrug their shoulders and say that it is just too difficult to figure out what makes an effective board, what constitutes independence, what makes effective CEO pay, what constitutes pay for performance, and the role of shareholders and stakeholders.
We note first that items 1 and 2 are the same thing, and items 3 and 4 are the same thing, so whether the holes are gaping or not, there are only five of them.
With regard to board effectiveness, as we have said for more than 20 years, and as the basis of a successful company we created and sold (now called GMI Ratings and part of MSCI), there are no structural solutions that cannot be undermined and it is not useful to rely on anything that fits on a checklist to evaluate the effectiveness or independence of a board. There is only one way to evaluate the effectiveness and independence of the board and that is to look at their decisions, particularly the decisions where there is the greatest potential for conflict of interest between investors and executives. Three top examples: pay (executives want less variability; investors want more), financial disclosures (executives want less transparency; investors want more), and acquisitions (executives would rather buy new shiny toys than improve operations; investors know that as many as 70 percent of acquisitions fail to add value).
Excessive CEO pay is not just a failure to tie pay to performance; it is the clearest indicator that the…