Academic Research Shows Corporate Governance Effectiveness

June 30, 2004 ( - Two new academic studies point to shareholder value in annual director elections and other corporate governance reforms.

The first paper, co-authored by Lucian Bebchuk, a Harvard Law School professor and director of the school’s corporate governance program, found that companies with staggered board terms deliver less shareholder value than those that hold annual director elections.   In the second report, Samuel H. Szewczyk, an associate professor of finance at Drexel University, co-authored a study that looked into connections between governance and the likelihood of corporate fraud, according to Dow Jones’ coverage of the reports.

Bebchuk’s research paper found staggered board of director election to be one of approximately two dozen shareholder-unfriendly provisions that correlated with lower shareholder value. “A staggered board is not just one among equal, its really quite important in both driving what was already identified in the aggregate and as a stand-alone,” Bebchuk told Dow Jones. “We find it to be a pernicious arrangement.”

Likewise, Szewczyk’s research paper asserted the number of independent, outside directors increased on a board or key committee, the likelihood of corporate wrongdoing decreased.   Published in the June issue of Financial Analysts Journal, the study based its analysis on 133 companies accused of fraud from 1978 and 2001 to a sample of similar “no-fraud companies.”

“The results indicate that board composition and the structure of its oversight committees are significantly related to the incidence of corporate fraud,” the paper said. This becomes extremely important in light of questions about the cost of complying with Sarbanes-Oxley.

“What we need to know is – if there are costs, what are the benefits?” said Szewczyk, who said their paper answers this question in part .

Yet, theresearch also raised questions about how boards compensate themselves.   The paper found the presence of a compensation committee increased the likelihood of corporate fraud, which Szewczyk said might circle back to issues related to hiring compensation consultants.