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Very little sophisticated research exists on the size, quality, and efficiency of the labor market for CEO talent. Our paper attempts to shed light on the CEO labor market by considering the perspectives of the directors who are directly responsible for hiring and firing the CEOs of the largest publicly traded corporations in the U.S. We find that directors overwhelmingly believe that the CEO job is exceptionally challenging and only a handful of executives are qualified to run their company and others in their industry. This suggests that the labor market for outstanding CEO talent is significantly tighter and more competitive than governance experts might realize, with important implications for compensation, succession planning, and other governance issues.

Two decades ago, McKinsey advanced the idea that large U.S. companies are engaged in a “war for talent” and that to remain competitive they need to make a strategic effort to attract, retain, and develop the highest-performing executives. To understand the contribution of the human resources department to company strategy, we surveyed 85 CEOs and chief human resources officers at Fortune 1000 companies. In this Closer Look, we examine what these senior executives say about the contribution of HR to the strategic efforts and financial performance of their companies. We ask: • What role does HR play in the development of corporate strategy? • Does HR have an equal voice or is it junior to other members of the senior management team? • Do boards see HR and human capital as critical to corporate performance? • How do boards ascertain whether management has the right HR strategy? • How adept are companies at using data from HR systems to learn what programs work and why?

Shareholders pay considerable attention to the choice of executive selected as the new CEO whenever a change in leadership takes place. However, without an inside look at the leading candidates to assume the CEO role, it is difficult for shareholders to tell whether the board has made the correct choice. In this Closer Look, we examine CEO succession events among the largest 100 companies over a ten-year period to determine what happens to the executives who were not selected (i.e., the “succession losers”) and how they perform relative to those who were selected (the “succession winners”).We ask: Are the executives selected for the CEO role really better than those passed over? What are the implications for understanding the labor market for executive talent? Are differences in performance due to operating conditions or quality of available talent? Are boards better at identifying CEO talent than other research generally suggests?The Stanford Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance and executive leadership. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the books “Corporate Governance Matters” and “A Real Look at Real World Corporate Governance.”

Many believe that the selection of the CEO is the single most important decision that a board of directors can make. In recent years, several high profile transitions at major corporations have cast a spotlight on succession and called into question the reliability of the process that companies use to identify and develop future leaders. In this Closer Look, we examine seven common myths relating to CEO succession. These myths include the beliefs that:1. Companies Know Who the Next CEO Will Be2. There is One Best Model for Succession3. The CEO Should Pick a Successor4. Succession is Primarily a “Risk Management” Exercise5. Boards Know How to Evaluate CEO Talent6. Boards Prefer Internal Candidates 7. Boards Want a Female or Minority CEOWe examine each of these myths and explain why they do not always hold true. We ask:• Why aren’t more companies prepared for a change at the top?• Would directors make better hiring decisions if they had better knowledge of the senior management team?• Would they be more likely to hire a CEO from within?• Would they be more likely to hire a female or minority candidate?• How many succession should a director participate in before he or she is considered “qualified” to lead one?Topics, Issues and Controversies in Corporate Governance. The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the books Corporate Governance Matters and A Real Look at Real World Corporate Governance.

In March 2013, Lululemon Athletica removed its inventory of women’s black yoga pants from its stores because recent shipments of the product were “too sheer.” For a company reliant on a reputation for quality, the news was devastating. Worse, the recall set off a series of PR related disasters that were largely of the company’s own making. We examine these events in greater detail, and ask:• Why are companies so ill-prepared to manage risk?• How can companies develop a reliable way to track and respond to risk?• How can companies better manage social media risk?• When do risk-related matters become a board-level issue? The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance and executive leadership. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the books Corporate Governance Matters and A Real Look at Real World Corporate Governance.

This Closer Look illustrates the relation between executive compensation and organizational risk through the context of the financial crisis of 2008. We demonstrate that the incentives that bankers had to increase firm risk not only increased but increased substantially in the years preceding the financial crisis. We ask: • How well do boards understand the relation between compensation and risk? • How much attention do directors pay to the risk-taking incentives provided by CEO wealth? • Do boards consider the relation between incentives and the risk tolerance of the firm? • How much risk should an executive be encouraged to take? The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the books Corporate Governance Matters and A Real Look at Real World Corporate Governance.

According to Nielsen, social networks and blogs account for the largest percentage of time that individuals spend online, more than email and reading the news. Given the pervasiveness of social media and the potential impact it can have on corporate activities, some experts recommend that boards of directors pay closer attention to the information exchanged on these sites. Information gleaned through social media might provide unique and relevant insights that improve decision making. For example, this information might be used to supplement the traditional key performance indicators that boards use to monitor corporate performance. Similarly, it might also be used as an “early warning” system to improve risk management.In this closer look, we examine these issues in detail. We ask: Why haven’t more boards utilized information from social media to improve corporate oversight? Should the board formally review social media metrics, or does this represent an encroachment on management? Can this information be used to safeguard corporate reputation?Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

Shareholders of public companies are not responsible for designing executive compensation packages. Still, a shareholder vote on compensation is required in two circumstances: when a company wants to establish an equity-based compensation plan, and annually as part of the Dodd Frank requirement shareholders have an advisory “say on pay.” In deciding how to vote, shareholders rely on information provided in the annual proxy.Recently, shareholder groups have sued companies for inadequate disclosure. They allege that the companies provide insufficient disclosure to determine how they should vote on these matters.We explore this issue in closer detail and ask: How much disclosure is too much disclosure? If a company follows SEC guidelines, why is this not sufficient? When do lawsuits cross the line from legitimate to frivolous? If disclosure litigation is successful, what other board decisions would be subject to potential lawsuits?Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

Americans tend to admire powerful leaders. Powerful leaders are seen as exerting influence over their organizations and shaping outcomes around them. CEO power can be exercised across a wide spectrum of decisions, including those regarding corporate strategy, operations, acquisitions, organizational design, culture, and governance.However, it is not clear the extent to which having a powerful CEO is beneficial to an organization. CEO power can be positive or negative, depending how it is manifested and how it is exercised.We examine this topic in greater detail, and ask: Are shareholders better or worse off with a powerful CEO? Where should the board draw the line between giving its CEO discretion and providing appropriate oversight? How much power is too much power?Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

This case is a follow up to Keller Williams (A) HR-29A, and explains the actions taken by Keller Williams in response to the residential real estate market downturn in 2008 and 2009. The case explains the programs and initiatives put in place by the company to boost agent count, increase productivity, and reduce expenses throughout the organization. It also explains how the company relied on these initiatives to not only survive the market downturn but to thrive, achieving success by leveraging the strengths of the company’s operating model, core principles, and values.

The press and other third-party observers frequently discuss executive compensation. However, executive compensation figures are not always what they seem. Executive pay packages contain a diverse mix of cash and non-cash incentives, payable in one or multiple years and subject to accruals, estimates, and restrictions that often render their ultimate value quite different from their expected value. Even total compensation figures disclosed in the annual proxy comingle forward- and backward-looking amounts as well as fixed and contingent payments that make it difficult for investors to understand what compensation has been promised to executives and what they eventually earn.We untangle the mess and examine three basic methods for calculating compensation: expected value, earned value, and realized value. We discuss the applicability of each, illustrating concepts with real examples and summary statistics.Why don't companies voluntarily disclose these figures so stakeholders can better evaluate incentives and pay for performance?Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

There is a consistent pattern that emerges when a company suffers from a major governance failure: the stock price falls, the company faces lawsuits, and there is elevated turnover in both the executive suite and the boardroom. The impact on the careers of the former executives and directors of these companies is less clear. Recent experience suggests that many CEOs and directors of failed companies are able to retain outside directorships – and even obtain new ones – following their forced departures.1. Should this be a concern for shareholders? 2. What is the standard by which the culpability of an executive or director should be measured? When are they too tainted by their experience to serve at other companies?3. Is it plausible that officers and directors involved in an accounting or ethical problem can learn valuable lessons from the experience?Read the attached Closer Look and let us know what you think.Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

By many measures, current CEOs should be the best candidates to serve on boards of directors. They have extensive strategic, operational, and risk management expertise, as well as experiences and leadership attributes that are important for a firm’s long-term success. However, there is currently no widely accepted, rigorous study that demonstrates that current CEOs are better board members or that companies with CEO directors benefit in terms of improved advice or monitoring. In fact, recent survey data suggests that active CEOs might not always be the best board members because of the time constraints of their full time job and personality attributes that may make it difficult for them to contribute constructively to a boardroom environment. We examine this issue in closer detail and ask: 1. Should companies reassess the importance of this criteria when looking for new board members? 2. Does the requirement for CEO-level experience limit the pool of available directors, particularly diversity candidates who may be less likely to have this experience? 3. If the availability of CEO directors is low, should professional directors be recruited to fill the gap? 4. Do the positive qualities of a retired CEO deteriorate, or do they never become outdated? Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

In June 2010, Tesla Motors raised over $225 million in an initial public offering that valued the electric car manufacturer at $2 billion. It was the first time a U.S. automobile company went public since Ford Motor in 1956.The evolution of Tesla - first incorporated in 2003 by engineers Martin Eberhard and Marc Tarpenning - in some ways has been unique, given the nature of its business. At the same time, Tesla has faced organizational challenges that are common to most public and private corporations. We examine the prominent features of the company’s governance system as it has evolved from inception to IPO, including the board of directors, antitakeover protections, and executive compensation program. In each case, the system changed to match the current needs of the company.Many experts prescribe a one-size-fits-all approach to governance. Why don’t they do a better job of taking into account the company’s specific situation and needs? Now that Tesla is public, how might we expect its governance system to change in the future? Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

The board of directors has a long list of responsibilities in all areas of governance. However, to many, the fundamental obligations of the board are simple and distill down to two: 1) evaluate and approve the corporate strategy and 2) hire and fire the CEO. The Hewlett-Packard Company has had four leadership changes over the last twelve years. It has also faced numerous strategic changes, as well as controversies and challenges at the senior management and board levels.We examine these issues and ask: Does the board of directors understand the skills and experiences needed to run the company? Have they settled on a corporate strategy? Why has the board repeatedly appointed an external, rather than internal, executive as CEO?Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

In recent years, there has been much discussion over how to improve governance systems broadly. In the process, certain myths have developed that continue to be accepted, despite a lack of robust supporting evidence. These myths include the beliefs that: 1. The structure of the board always tells you something about the quality of the board; 2. CEOs in the U.S. are overpaid; 3. Pay for performance does not exist in CEO compensation contracts; 4. Companies are prepared to replace the CEO if needed; 5. Regulation improves corporate governance; 6. The voting recommendations of proxy advisory firms are correct; 7. Best practices are the solution to bad governance. We examine each of these myths in closer detail and explain why they are false. So long as these myths are accepted by practitioners and the public, how can we expect managerial behavior and firm performance to improve? Read the attached Closer Look and let us know what you think! Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

Many institutional investors rely on a proxy advisory firm to assist them in voting the company proxy and fulfilling their fiduciary responsibility to vote in the interest of beneficial shareholders. The largest and most influential proxy advisory firm is Institutional Shareholder Services (ISS). The recommendations of ISS are not inconsequential. Academic and professional research suggests that a recommendation by ISS can change the outcome of a vote by 15 to 20 percent, depending on the matter of the proposal.At the same time, there is little evidence that proxy advisory recommendations are correct or that they improve corporate outcomes. In fact recent research suggests that they might actually decrease shareholder value.We examine these issues as they relate to ISS guidelines for exchange offers and option repricings: Do proxy advisors have appropriate incentive to verify that their recommendations are correct?Should board members require evidence that ISS guidelines are value increasing before they adjust their policies to gain a favorable recommendation?Proxy advisory firms enjoy significant barriers to entry and little competition. Is this desirable for shareholders?Related Research Paper on SSRN: The Role of Proxy Advisory Firms in Stock Option Exchanges; Authors: David F. Larcker , Allan L. McCall and Gaizka Ormazabal , Stanford Graduate School of Business: http://ssrn.com/abstract=1811130.Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

Executive compensation has become one of the most contentious topics in corporate governance. However, public perception about executive pay suffers from many misconceptions. These include the notions that:1. The ratio of CEO-to-average-worker pay is a useful statistic:2. Compensation consultants cause pay to be too high:3. It is easy to tell whether a compensation package encourages “excessive” risk taking:4. Performance metrics and targets tie directly to the corporate strategy:5. Discretionary bonuses should be eliminated:6. Proxy advisory firms know how to evaluation compensation contracts:7. The numbers in the financial statements for executive options accurately capture their cost and value:We examine these myths in close detail and explain why they are false. Problems of excessive compensation and poorly structured contracts will not be remedied by artificial changes and congressional mandates. Why don’t experts rely on the research to arrive at informed and fact-based solutions?Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

Companies include equity in a compensation package to align the interests of management with those of shareholders. It is not uncommon for an executive who has been employed at a company for many years to accumulate a substantial dollar ownership position in the company. With a concentration of wealth in a single financial asset, the executive may want to limit his or her exposure by hedging a portion of the position through financial instruments or pledging shares as collateral for a loan. While there are many reasons why a board may want to allow an executive to hedge or pledge an equity ownership position, there are also many reasons why this may be a cause for concern. We examine these issues in detail. Can boards explain why they do or do not allow executive hedging? If an executive has hedged the equity position, why does the board continue to grant new equity and not cash? Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

In July 2006, Barracuda became the largest investor in Tarco International. In a meeting with management, Barracuda’s managing director advised that strong measures needed to be taken to improve operating performance. If management failed, Barracuda would force a sale of the company. In response, the board of Tarco hired FD, a leading financial communications consultancy specializing in strategic investor relations. The board asked FD to compile extensive research on the Tarco’s shareholder base, investor perception of the company and management performance, predictive voting on potential proxy proposals, and tactics used by Barracuda in previous activist engagements. Armed with this data, the board had to decide what steps to take, if any, to keep Barracuda at bay and ensure that Tarco retained the support of its investors.Also see CG20B Sharks in the Water: Battling an Activist Investor for Corporate Control (B).

In January 2004, the Royal Dutch/Shell Group of Companies announced that it would reduce its estimate of proved oil reserves by nearly 4 billion barrels, or 20 percent. The announcement set off a series of events, including a drop in the company’s share price, internal and external investigations, and the resignation of several senior officers. During this period, details came to light about the sometimes bitter disputes among company officials over its reserve practices. Company officials had to decide what changes to make to restore public confidence in the organization.