In this Episode
- David Larcker
- TK Kerstetter
David Larcker likes arguments… but he doesn’t like to take sides. Instead, he prefers to use research to differentiate fact from rumor and to determine what effective governance looks like.
As a senior faculty member at Stanford University’s well-known Arthur & Toni Rembe Rock Center for Corporate Governance, Larcker has tackled many often-debated corporate governance questions over the past 10 years. In this episode, he zeros in on board evaluations and composition.
Most board members today view board evaluations as a check-the-box requirement, which largely fails to open the floor for improvement, says Larcker.
I think it’s a lost opportunity. Here we’ve got a case where you’re asking questions about the process of the board. Do we have the right people? I think it’s where introspection ought to take place.
Host TK Kerstetter and Larcker discuss the effectiveness of peer reviews and the importance of having a strong non-executive chair or lead director in order to drive change in a board’s composition or behavior. When Kerstetter asks Larcker about the next governance issue on his research agenda, the two dive into a familiar discussion: How can we actually measure corporate governance? Larcker goes on to explain how the Rock Center approaches this age-old question to continually bridge the gap between academic research and the real-world happenings of today’s boardrooms.
Click here to view the Rock Center’s 2016 Survey: Board of Director Evaluation and Effectiveness.
You did a great study on board evaluations. When we finished our Investors Board Performance Review Series that we did—bringing in BlackRock, Vanguard, ISS and all the people that influence votes—all of them talked about board composition or, more importantly, board evaluations. It was a great topic for you to do the research on and part of your findings were no surprise. Boards felt they did a great job at oversight of the company; they gave themselves high grades—no surprise there. What was a little bit of a surprise was when we got to the issues of trust or the ability to give honest feedback... only about one-third believed that the company was really doing a good job with that. So, that had to surprise you or maybe disappoint you just a little. Talk about that.
I think disappointment is probably the right word. One of the things we are trying to do at Stanford, as you point out, is look at important topics but bring some data to bear on it so we can have a dialogue or discussion where there are some facts and we can talk around that. Board evaluations have also been one of those “black box” areas. If you are a public company board you are required to do this, but what actually happens? So we’ve been trying to delve into that and this [study] is kind of our first pass at it. I think some boards do a really good job. It’s an opportunity to assess the people we have on the board: Are people behaving correctly? Is the process good? Things like that. I think the majority of boards view it as 'we’ve got to do this, and we’ll have our general counsel or outside counsel bring in a checklist.' He or she will gather this and there will be some general “How’s the board doing?”. Invariably, the board is doing pretty well on these surveys. You’ll get some informal feedback, which might give some diagnostic information where the boards will do something. I think this is a lost opportunity. Here you have a case where you are asking questions about the process of the board (e.g., Do you have the right people?), and I think it is where introspection should take place. Hopefully going forward, the boards will get a lot better.