Seven Myths of Corporate Governance

Abstract

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.

Keywords: corporate governance, board of directors, governance structure, executive compensation, pay-for-performance, say-on-pay, CEO succession, corporate governance regulations, corporate governance research, corporate governance best practices

JEL Classification: G30, G34, G39