research@hec - Issue #35 - (Page 6)

governance research hec Corporate governance: The independence of top-ranking executives lies at the heart of performance David Thesmar and his co-authors demonstrate that the independence of top executives (rather than middle managers) from their CEO has an impact on corporate performance. David Thesmar Biography David Thesmar joined HEC Paris in 2005. He is a graduate of the École Polytechnique and the École Nationale de la Statistique et de l'Administration Économique, with a Master's from the London School of Economics and a PhD in economics from the École des Hautes Etudes en Sciences Sociales. In 2007 he won the HEC Researcher of the Year Award and the prize for the Top Young Researcher in France, presented by Le Monde and the Cercle des Économistes (where he is now a member). 6 David Thesmar has had an interest in corporate governance since the early 2000s. "It was at the time of the post-internet bubble, when a terrible series of scandals had broken out on the other side of the Atlantic, with stories about CEOs abusing company funds, and then the Enron affair was revealed. In France, meanwhile, Jean-Marie Messier was being endlessly pursued by the shareholders of Vivendi Universal," he recalls. "There was a debate raging in the world of academia and beyond about the principles of good governance: how can companies be run in the interests of shareholders rather than its leaders?" INITIAL ATTEMPTS TO PROVIDE AN EXPLANATION PROVED UNSUCCESSFUL Economists initially responded with the hypothesis that boards of directors had not played their role properly. Directors, who are nominated by shareholders at general meetings, are responsible for selecting company leaders and overseeing that they act in the interests of the shareholders, as well as occasionally offering limited assistance on strategic guidelines. According to David Thesmar, however, it is very difficult for directors to monitor leaders effectively. "The directors at Vivendi, where the boss embarked on a catalogue of risky acquisitions, should have intervened much earlier." Various researchers * O c t o b e r - N o v e m b e r 2013 have tried to determine the reasons for this, with some speculating that directors were not independent enough. "Directors are often linked in one way or another to company heads: they might be lawyers for the company, or work in the investment banks where the firm is a client, or they may have social relations with the CEO. Earlier research has focused mainly on such questions and on looking for ways to measure the independence of directors." DIRECTORS WITH LITTLE INFLUENCE But the results of this research have so far proved inconclusive: regardless which measures were taken to ensure independence, there was no great impact on corporate performance. David Thesmar says this is not surprising. "In a large company, the board of directors does not meet very often and ultimately the directors lack the legitimacy to challenge the CEO. The directors are seldom on the scene, lack access to much information about what is happening in the company. They do not even sit on the executive committee or take part in the firm's operations. The supposed counter-balance of directors cannot be exercised. Excepin venture capital, where the balance of power is more equal because venture capitalists are 50 years-old and the entrepreneurs 30, and because their firm does not make any profit."

Table of Contents for the Digital Edition of research@hec - Issue #35

Cover & Contents
R&D collaboration: How to find the best university-firm match
Decision-making: Why do we underestimate rare events?
Corporate governance: The independence of top-ranking executives lies at the heart of performance

research@hec - Issue #35