Who's Monitoring the Monitor? Do Outside Directors Protect Shareholders' Interests?

The corporate governance literature is rich with empirical tests of the relation between board composition and firm performance. We consider the effect of board composition on a different measure of performance, the probability a firm will be sued by shareholders. We find firms that are defendants in securities litigation have higher proportions of insiders and of gray directors and have smaller boards than a matched group of firms that are not sued, even when controlling for firm value and industry. The results suggest that boards with higher proportions of outside directors do a better job of monitoring management.     

The effects of increased Interest-rate volatility on LDCs

This paper examines the effects of an increase in the volatility of interest rates on Less Development Countries (LDCs). This examination is accomplished by modeling a representative LDC pursuing an optimal foreign borrowing program over a finite planning horizon. The results suggest that increased volatility may cause LDCs to increase their domestic savings. It is further suggested that it may not be possible to be judge the effects of the greater volatility by observing foreign borrowing.     

How Concept Knowledge Affects Concept Evaluation

Conventional concept testing methodologies are based on the simple assumption that respondents understand the concept when they offer their evaluation of it. Obviously it's an assumption that often will not hold. What happens to the quality of the evaluation at different levels of concept knowledge is the issue addressed in this article by Eric Reidenbach and Sharon Grimes. Their research shows that the level of concept knowledge affects certain elements of the evaluation more than others, and that the evaluation is moderated by the type of innovation and the way it is presented.     

How we're fixing up Tyco

Among all the companies that were touched by scandal in 2002, Tyco was uniquely positioned to serve as a laboratory for governance reform. It had solid manufacturing businesses and, unlike Enron or WorldCom, it was not the victim of massive, systemic accounting fraud. Yes, there was serious malfeasance at the top--exemplified by the $6,000 shower curtain, the $2,200 wastebasket, and the other extravagant items purchased at shareholders' expense for former CEO Dennis Kozlowski's New York apartment. But undergirding the company was a foundation of profitable basic businesses. In this article, Tyco's first-ever senior vice president for corporate governance describes the steps the company is taking to wipe the slate clean and restore share-holders' and employees' trust in its operations. The company began by bringing in a new CEO, Ed Breen; hiring some 60 new senior executives; swapping out the entire board of directors with individuals who boast strong backgrounds in operations as well as in finance; and meticulously, systematically scrubbing all the books. Tyco's new board is clear about who has authority over which transactions and, with three executives within the company reporting directly to it, has a window into day-to-day affairs. Most important, Tyco is creating the conditions for good governance below the senior executive level, including a stronger boundary between finance and operations management. "In the heat of the new economy ... it became unfashionable for [finance] to exercise checks and balances on [operations]," Pillmore explains, which is why a lot of abuses went unchecked at many companies. After more than a year of effort, much of the groundwork for effective governance has been laid at Tyco. Now, the challenge is to get the word out about the reforms and let the effects speak for themselves.     

Contingency Fees, Settlement Delay, and Low-Quality Litigation: Empirical Evidence from Two Datasets

Although flat fees are common for divorces, wills and trusts,and probate, lawyers in personal injury cases generally arepaid by contingency fee or at an hourly rate. Arguments havebeen made that contingency fees increase low-quality, "frivolous"litigation but counterarguments suggest that contingency feesactually limit such litigation and instead it is hourly feesthat increase low-quality litigation. Using a difference indifferences test and data on a cross section of states in 1992,we test whether legal quality is lower under contingency orhourly fees. We also examine medical malpractice claims in Floridausing a time series centered around a law change that limitedcontingency fees. We also examine the impact of fee arrangementson the expected time to settlement. We find that hourly feesencourage the filing of low-quality suits and increase the timeto settlement (i.e., contingency fees increase legal qualityand decrease the time to settlement).     

Don't trust your gut

Making high-stakes business decisions has always been hard. But in recent decades, it's become tougher than ever. The choices facing managers and the data requiring analysis have multiplied even as the time for analyzing them has shrunk. One simple decision-making tool, human intuition, seems to offer a reliable alternative to painstaking fact gathering and analysis. Encouraged by scientific research on intuition, top managers feel increasingly confident that, when faced with complicated choices, they can just trust their gut. The trust in intuition is understandable. But it's also dangerous. Intuition has its place in decision making--you should not ignore your instincts any more than you should ignore your conscience--but anyone who thinks that intuition is a substitute for reason is indulging in a romantic delusion. Detached from rigorous analysis, intuition is a fickle and undependable guide. And while some have argued that intuition becomes more valuable in highly complex and changeable environments, the opposite is actually true. The more options you have to evaluate, the more data you have to weigh, and the more unprecedented the challenges you face, the less you should rely on instinct and the more on reason and analysis. So how do you analyze more in less time? The answer may lie in technology. Powerful new decision-support tools can help executives quickly sort through vast numbers of alternatives and pick the best ones. When combined with the experience, insight, and analytical skills of a good management team, these tools offer companies a way to make consistently sound and rational choices even in the face of bewildering complexity--a capability that intuition will never match.     

Welcome aboard (but don't change a thing)

Cheryl Hailstrom, the CEO of Lakeland Wonders, a manufacturer of high-quality wooden toys, is the first person outside the Swensen family to hold the top job. But she's not a stranger to this 94-year-old company: She'd been the COO of one of its largest customers and had worked with Lakeland to develop many best-selling products. Wally Swensen IV, the previous CEO, chose Cheryl because she knew how to generate profits and because he believed her energy and enthusiasm could take the company to the next level. Yet here she is, nearing her six-month anniversary, wondering why her expansive vision for the company isn't taking hold. She's tried to lead by example: traveling a pounding schedule to visit customers, setting aggressive project deadlines, and proposing a bonus schedule. She has a plan to reach the board's growth goals--going beyond Lakeland's core upscale market and launching into the midmarket with an exclusive toy contract with a new customer. The problem is that while Cheryl's senior managers are giving her the nod on the surface, they're all really dragging their feet. Some fear that offshore outsourcing will hurt their brand, not to mention make for tricky union negotiations. Others are balking at trying a new design firm. Is Cheryl pushing too much change too quickly? Should she bring in outsiders to speedily adopt the changes she envisions and overhaul Lakeland's corporate culture? Or should she keep trying to work with the current team? Commentators Kathleen Calcidise of Apple Retail Stores; executive coach Debra Benton; Dan Cohen, coauthor of The Heart of Change; and consultant Nina Aversano offer advice in this fictional case study.     

Nash and dominant strategy implementation in economic environments

When environments are ‘rich’, single-valued social choice functions which are implementable in Nash strategies are implementable in dominant strategies. Moreover the Gibbard–Satterthwaite impossibility theorem of implementation in dominant strategies has been extended to differential economic environments. Therefore it is important to study implementation for non-rich environments. We characterize for quasi-linear utility functions mechanisms which are implementable in dominant strategies (providing a generalization of the Groves–Clarke mechanisms) and in Nash strategies. This second type of mechanisms differ from the first only by the types of transfers they allow. Properties of these mechanisms such as balancedness, individual rationality and robustness with respect to coalitions are then studied.