The Rise of Independent Directors in the United States, 1950-2005: Of Shareholder Value and Stock Market Prices

Gordon, Jeffrey N.

doi:10.2139/ssrn.928100

Cited by 116 publications

(91 citation statements)

References 20 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…Institutional-level changes in an organization's environment provide elaboration opportunities that shape the timing of the adoption of structural variants. In the context of the shareholder value logic, following the Enron and WorldComm scandals, the adoption of Sarbanes Oxley legislation significantly affected the language and practice of corporate governance (Gordon, 2007). The passage of Sarbanes Oxley (SOX) triggered a new regime of corporate governance, where board independence received increasing board attention.…”

Section: Hypothesesmentioning

confidence: 99%

The Structural Elaboration of Board Independence: Executive Power, Institutional Logics, and the Adoption of CEO-Only Board Structures in U.S. Corporate Governance

Joseph

Ocasio

McDonnell

2014

AMJ

165

152

View full text Add to dashboard Cite

This study builds on structural elaboration theory by developing a model to explain the adoption of board structures that appear to conform to the prevailing institutional logic, but which in fact contradict it. We test our theory with the case of CEO-only board structures, a formal increase in board independence that prior research has shown to lead to greater CEO entrenchment rather than increased shareholder value. Using an event history analysis of the Fortune 250 over a 27-year period, we examine three mechanisms that drive its adoption: executive interests, executive power, and elaboration opportunities. We show that the CEO-only structure is more likely to occur in firms in which a higher proportion of insiders predate the CEO, and in which the CEO has greater formal power and agenda control. We also find that powerful CEOs are more likely to realize the structural change following institutional opportunities, such as the passage of Sarbanes-Oxley (SOX), and organizational contingencies, such as positive changes in firm performance. By exploring the mechanisms leading to the proliferation of the CEO-only structure, our study contributes to sociopolitical perspectives on corporate governance, as well as to theories of institutional logics and structural elaboration. AbstractThis study builds on structural elaboration theory by developing a model to explain the adoption of board structures that appear to conform to the prevailing institutional logic, but that in fact contradict it. We test our theory with the case of CEO-only board structures, a formal increase in board independence that prior research has shown to lead to greater CEO entrenchment rather than increased shareholder value. Using an event history analysis of the Fortune 250 over a 27-year period, we examine three mechanisms that drive its adoption: executive interests, executive power and elaboration opportunities. We show that the CEO-only structure is more likely to occur in firms where a higher proportion of insiders predate the CEO and where the CEO has greater formal power and agenda control. We also find that powerful CEOs are more likely to realize the structural change following institutional opportunities like the passage of Sarbanes Oxley and organizational contingencies like positive changes in firm performance. By exploring the mechanisms leading to the proliferation of the CEO-only structure, our study contributes to socio-political perspectives on corporate governance as well as to theories of institutional logics and structural elaboration.A key proposition underlying much of corporate governance research, both from agency theory and socio-political perspectives, is that inside directors are beholden to the CEO and that a greater proportion of inside directors on the board indicates greater CEO power and board control (Hermalin & Weisbach, 1998;Lynall, Golden & Hillman, 2003;. Underlying this proposition is the idea that outside directors can more capably monitor the CEO's activities, whereas inside directors are prone ...

show abstract

Section: Hypothesesmentioning

confidence: 99%

The Structural Elaboration of Board Independence: Executive Power, Institutional Logics, and the Adoption of CEO-Only Board Structures in U.S. Corporate Governance

Joseph

Ocasio

McDonnell

2014

AMJ

165

152

View full text Add to dashboard Cite

show abstract

“…13 Low market valu- 13 The reliance of directors on market prices has presumably increased over time as more directors are now independent of the firm and hence have little direct information on its operations (see Gordon (2007)). …”

Section: Corporate Governancementioning

confidence: 99%

Market-Based Corrective Actions

Bond¹,

Goldstein²,

Prescott³

2009

Rev. Financ. Stud.

230

126

View full text Add to dashboard Cite

Many economic agents take corrective actions based on information inferred from the market prices of firms' securities. Examples include directors and shareholder activists intervening in the management of firms and bank supervisors taking actions to improve the health of financial institutions. We provide an equilibrium analysis of such situations in light of a key problem: if the agent uses market prices when deciding on a corrective action, prices adjust to reflect this use and potentially become less revealing. We show that there is a strong complementarity between market information and the agent's information, so that a market-based corrective action leads to the agent's preferred outcome only when the information gap is not too large. We demonstrate that the type of security being traded matters, and discuss other measures that can increase the efficiency of learning from the market.

show abstract

“…(Wallman, 1998: 810) [H]ow do we govern firms so as to increase social welfare (as proxied by maximization of shareholder value across the general market)? (Gordon, 2007(Gordon, : 1469 As these statements indicate, SWM is a rule-utilitarian element of a capitalist system that is intended to provide long-term benefits to society. …”

mentioning

confidence: 99%

“…Profit maximizing behavior on the part of unregulated monopolies, to choose an obvious example, clearly does not enhance efficiency, aggregate economic welfare, or social welfare. Nor would anyone claim that social welfare is maximized with respect to every individual shareholder wealth maximizing decision (Gordon, 2007). Indeed, most economists would agree that some decisions that increase firm wealth-e.g., disposing of toxic wastes from a tannery into a pit near Woburn, Massachusetts 7 -clearly do not.…”

mentioning

confidence: 99%

Shareholder Wealth Maximization and Social Welfare: A Utilitarian Critique

2013

View full text Add to dashboard Cite

Many scholars and managers endorse the idea that the primary purpose of the firm is to make money for its owners. This shareholder wealth maximization objective is justified on the grounds that it maximizes social welfare. In this article, the first of a two-part set, we argue that, although this shareholder primacy model may have been appropriate in an earlier era, it no longer is, given our current state of economic and social affairs. To make our case, we employ a utilitarian moral standard and examine the apparent logical sequence behind the link between shareholder wealth maximization and social welfare. Upon close empirical and conceptual scrutiny, we find that utilitarian criteria do not support the shareholder model; that is, shareholder wealth maximization is only weakly linked to social welfare maximization. In view of the dubious validity of this sequential argument, we outline some of the features of a superior corporate objective-a variant of normative stakeholder theory. In the second article, we will advance and defend our preferred alternative and then discuss some institutional arrangements under which it could be implemented.KEY WORDS: shareholder wealth maximization (SWM), corporate objective function, normative corporate governance, utilitarianism, social welfare "If you will pardon me for being personal, it makes a great difference in my attitude toward my job as an executive officer of the General Electric Company whether I am a trustee of the institution or an attorney for the investor. If I am a trustee, who are the beneficiaries of the trust? To whom do I owe my obligations?"-Owen D. Young, former Chairman of GE (Dodd, 1932(Dodd, : 1154 T HE ISSUE ARTICULATED BY MR. YOUNG decades ago is still relevant today and is one that a considerable number of scholars have devoted themselves to, not in terms of particular companies, but for corporations in general. This article addresses the underlying question, one that lies at the very core of corporate governance for both practicing managers and business scholars: what should be the objective of corporations in a market capitalist economy? Put somewhat differently, what should managers, who govern these firms, strive to achieve?https://www.cambridge.org/core/terms. https://doi.org/10.5840/beq201323215Downloaded from https://www.cambridge.org/core. IP address: 52.183.12.225, on 28 Apr 2019 at 03:44:10, subject to the Cambridge Core terms of use, available at Business Ethics QuarterlyWe aim to answer these questions in two separate articles. This first article will demonstrate the weaknesses of the conventional corporate objective-shareholder wealth maximization (SWM)-from a utilitarian perspective. It will focus on the apparent logic behind SWM as part of a set of institutions intended to produce maximal social welfare, the ultimate goal of utilitarian moral thought. After finding each of the four interconnected arguments that make up that logic quite weak, we suggest a path toward a credible alternative corporate objective. The second ...

show abstract

The Rise of Independent Directors in the United States, 1950-2005: Of Shareholder Value and Stock Market Prices

Cited by 116 publications

References 20 publications

The Structural Elaboration of Board Independence: Executive Power, Institutional Logics, and the Adoption of CEO-Only Board Structures in U.S. Corporate Governance

The Structural Elaboration of Board Independence: Executive Power, Institutional Logics, and the Adoption of CEO-Only Board Structures in U.S. Corporate Governance

Market-Based Corrective Actions

Shareholder Wealth Maximization and Social Welfare: A Utilitarian Critique

Contact Info

Product

Resources

About