Lucky CEOs and Lucky Directors

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THE JOURNAL OF FINANCE•VOL.LXV,NO.6•DECEMBER2010Lucky CEOs and Lucky DirectorsLUCIAN A.BEBCHUK,YANIV GRINSTEIN,and URS PEYER∗ABSTRACTWe study the relation between opportunistic timing of option grants and corporategovernance failures,focusing on“lucky”grants awarded at the lowest price of thegrant month.Option grant practices were designed to provide lucky grants not only toexecutives but also to independent directors.Lucky grants to both CEOs and directorswere the product of deliberate choices,not ofﬁrms’routines,and were timed to makethem more proﬁtable.Lucky grants are associated with higher CEO compensationfrom other sources,no majority of independent directors,no outside blockholder onthe compensation committee,and a long-serving CEO.T HE OPPORTUNISTIC TIMING of executives’option grants—via backdating,“spring-loading”based on the use of inside information,or otherwise—has attracted a great deal of attention.The SEC and a small army of private law ﬁrms hired by companies have investigated past grant practices.More than200 companies have come under scrutiny,and dozens of executives and directors have been forced to resign.Work inﬁnancial economics has contributed substantially to identifying the existence of opportunistic timing.The literature on the timing of option grants begins with the seminal work by Yermack(1997),who shows that stock prices exhibited negative abnormal returns prior to a grant date and positive abnor-mal returns afterward.Aboody and Kasznik(2000)and Chauvin and Shenoy (2001)suggest that these return patterns were partly due to the manipulation ofﬁrms’information disclosures,while Lie(2005)provides evidence that back-dating was an important cause of the abnormal stock returns preceding and following grant dates.Collins,Gong,and Li(2005),Heron and Lie(2007),and Narayanan and Seyhun(2006)show that the patterns of pre-and postgrant ∗Bebchuk is with the Harvard Law School and the National Bureau of Economic Research, Grinstein is with the Johnson School of Management,Cornell University,and Peyer is with IN-SEAD.This paper integrates two discussion papers circulated earlier,“Lucky CEOs”and“Lucky Directors.”For helpful comments and conversations,we are grateful to an anonymous referee and associate editor,John Graham(the Editor),Nadine Baudot-Trajtenberg,John Bizjak,Alma Cohen, Charles Hadlock,Randy Heron,Ira Kay,Erik Lie,MP Narayanan,and workshop participants at the NBER corporateﬁnance meeting,the American Economic Association and American Law and Economic Association annual meetings,the University of Delaware Symposium on Backdating of Stock Options,The University of Virginia Law and Finance Conference,Harvard,the Herzlia Interdisciplinary Center,London Business School,Tel-Aviv University,and Yale School of Manage-ment.Forﬁnancial support,we would like to thank the John M.Olin Center for Law,Economics, and Business,the Harvard Law School Program on Corporate Governance,and the Guggenheim Foundation.23632364The Journal of Finance Rreturns were inﬂuenced by the adoption of the Sarbanes-Oxley Act(SOX), which is consistent with the existence of backdating given that SOX made backdating more difﬁcult.In this paper,we contribute to understanding the corporate governance de-terminants and implications of opportunistic option timing practices.Overall, our analysis provides support for the view that opportunistic timing practices reﬂect governance breakdowns and raise governance concerns.In particular, weﬁnd that:opportunistic timing was correlated with factors associated with greater CEO inﬂuence on corporate decision-making,such as a lack of a ma-jority of independent directors or a long-serving CEO;grants to independent directors were also opportunistically timed,and this timing was not merely a byproduct of simultaneous awards to executives or ofﬁrms routinely timing all option grants;and lucky grants to independent directors were associated with more CEO luck and CEO compensation.We alsoﬁnd that,rather than being a substitute for other forms of compensation,gains from opportunistic timing were awarded to CEOs with larger total compensation from other sources,and opportunistic timing was not driven byﬁrm habit but rather,for any given ﬁrm,the use of such timing was itself timed to increase its proﬁtability for recipients.We study the universe of all at-the-money,unscheduled option grants awarded to the CEOs and independent directors of public companies during the decade of1996to2005.Our investigation focuses on“lucky”grants,which are grants given at the lowest price of the month.Opportunistic timing can result in an abnormally high fraction of grants being“lucky grants.”In our sample,about15%of the grants to CEOs and11%of the grants to directors were lucky before the adoption of the SOX.We contribute to prior and current work on opportunistic timing by investigating several questions and hypothe-ses that are relevant to assessing the corporate governance signiﬁcance and the determinants of opportunistic timing practices.To begin,we provide theﬁrst evidence that grants to independent directors were affected by opportunistic timing in ways that link director luck and CEO luck.Even though the existence of opportunistically timed option grants to ex-ecutives is widely recognized,it has generally been assumed that independent directors,who play an important oversight role in the current model of corpo-rate governance,did not beneﬁt directly from such timing.We show,however, that awards to independent directors were themselves opportunistically timed. We further show that the timing of director grants was not a mere byprod-uct of director grants being awarded at the same time as executive grants.In particular,for any givenﬁrm and CEO,weﬁnd that the odds of a CEO grant being lucky were signiﬁcantly higher when the independent directors of the ﬁrm received grants on the same date.In addition,director grant events not coinciding with awards to executives were also opportunistically timed and, moreover,were more likely to be lucky when the CEO received a lucky grant in the same or prior year.We also show that the timing of director grants was not a byproduct ofﬁrms routinely timing all option grants;all of our results concerning director luck continue to hold when one removes from the data(the small number of)ﬁrms that provided lucky grants to all grant recipients.ByLucky CEOs and Lucky Directors2365 providing evidence that timing practices were structured in a manner consis-tent with making independent directors beneﬁciaries of these practices,we contribute an important input for assessing the role of independent directors both in connection with opportunistic timing practices and more generally. Our second contribution is to provide theﬁrst analysis of the relation be-tween opportunistic timing and total reported compensation.We test,but do notﬁnd support for,the hypothesis that gains from opportunistic timing were a substitute for other means of compensation.Controlling for size,performance, tenure,and otherﬁrm and CEO characteristics that determine compensation, CEOs beneﬁting from lucky grants also received signiﬁcantly higher total com-pensation from other sources.Also,consistent with the hypothesis that inde-pendent directors who received lucky grants themselves were less inclined to provide a check on compensation decisions,weﬁnd that total CEO compensa-tion was higher(controlling for standard compensation determinants)inﬁrms that granted lucky grants to independent directors.In the course of analyzing the relation between total reported compensation and gains from opportunistic timing,we derive estimates of the latter.In con-trast to suggestions that the potential gains to CEOs from opportunistically timed grants might have been rather limited(see,for example,Walker(2006)), our(conservative)estimates indicate that these gains were rather signiﬁcant. We estimate that the gain to CEOs from lucky grants due to opportunistic tim-ing exceeded,on average,20%of the reported value of the grant,and added, on average,more than10%to the CEO’s total reported compensation for the year.1Our third contribution is to identify an association between opportunistic timing of CEOs’and independent directors’grants and certain aspects ofﬁrm governance and management.In particular,weﬁnd that opportunistic timing was correlated with variables associated with CEO inﬂuence over the internal decision-making processes:the lack of a majority of independent directors on the board and long CEO tenure.In addition,weﬁnd that a majority of inde-pendent directors on the board is only effective at reducing CEO luck if the independent directors themselves did not receive lucky grants.We furtherﬁnd that,although the existence of an independent compensation committee was not itself associated with a reduced likelihood of opportunistic timing,an inde-pendent committee with at least one large blockholder on it was associated with such a reduction.Our results highlight that the effectiveness of independent directors could well depend on factors other than their formal classiﬁcation as independent.21Bernile and Jarrell(2009),Narayanan,Schipani,and Seyhun(2007),and Walker(2006)es-timate the gains from opportunistic timing in samples of between50and150ﬁrms that have come under scrutiny.In contrast,we study the issue for the entire set of grants to CEOs at public companies.2Bizjak et al.(2009)and Collins,Gong,and Li(2009)ﬁnd a correlation between timing and lack of a majority of independent directors on the board.Unlike the current paper,however,these studies do not investigate how the association between board independence and timing depended on independent directors receiving lucky grants,they do not identify the association weﬁnd between opportunistic timing and CEO tenure as well as that between opportunistic timing and2366The Journal of Finance RTheseﬁndings complement existing research concerning the link between opportunistic timing of CEO grants and certain aspects of governance such as board interlocks(Bizjak,Lemmon,and Whitby(2009)),the quality of theﬁrm’s auditor(Heron and Lie(2009)),and the composition of the compensation com-mittee(Yermack(1997)).Ourﬁndings also complement and reinforce research showing that director independence is associated with improved compensation and disclosure(e.g.,Chhaochharia and Grinstein(2009)and Beasley(2000)), that CEO tenure is correlated with increased CEO inﬂuence on compensa-tion decisions(e.g.,Core,Holthausen,and Larcker(1999)and Harford and Li(2007)),and that outside blockholders improve compensation arrangements (Bertrand and Mullainathan(2000,2001)).Finally,with prior work focusing on cross-sectional differences amongﬁrms, we contribute by providing a time-seriesﬁxed-effect panel data analysis of opportunistic timing,controlling for unobservableﬁrm and CEO characteristics that could be correlated with opportunistic timing.This analysis allows us to test the hypothesis that,among theﬁrms engaged in opportunistic timing, such timing was merely the product of routine.Inconsistent with this view,we ﬁnd that for any given CEO andﬁrm,grants to both CEOs and directors were more likely to be lucky in months in which the potential payoffs from such luck were relatively higher.Thus,the period in which opportunistic timing occurred was itself opportunistically timed.This pattern is consistent with the view that opportunistic timing reﬂects an economic decision that is sensitive to payoffs rather than a practice habitually followed by someﬁrms.Althoughﬁrms did not commonly engage in opportunistic timing on all pos-sible occasions,we doﬁnd evidence of signiﬁcant persistence.The odds of a CEO’s grant being lucky were signiﬁcantly higher,controlling for CEO and ﬁrm characteristics in our data set,when a preceding grant to the CEO was lucky as well.These results indicate that,beyond the characteristics we iden-tify as associated with opportunistic timing,there are additional unobservable traits ofﬁrms and CEOs that led to a higher tendency for opportunistic timing. The remainder of this paper is organized as follows.Section I describes our data and provides summary statistics.Section II analyzes the relation between CEO luck and the luck of independent directors.Section III studies the rela-tion between gains from lucky grants and reported compensation from other sources.Section IV investigates the relation between option timing and gov-ernance arrangements,the level of CEO inﬂuence,and payoffs from getting a lucky grant.Section V concludes.I.Data and Summary StatisticsA.Data SourcesWe construct a data set of option grants awarded to CEOs and independent directors between1996and2005using Thomson Financial’s Insider Trading the composition of the compensation committee,and they do not study the association between governance and the timing of director grants.Lucky CEOs and Lucky Directors2367 database,which includes all insiders’ﬁlings of equity transactions in Forms 3,4,5,and144.In the course of constructing this data set,we use procedures similar to those used by Heron and Lie(2007,2009)and Narayanan and Seyhun (2008).Our data set includes observations with a cleanse indicator of R(“data veriﬁed through the cleansing process”),H(“cleansed with a very high level of conﬁdence”),or C(“a record added to nonderivative table or derivative table in order to correspond with a record on the opposing table”).We combine any duplicate grants that are awarded on a given date to a given individual in a given company.The price data come from the CRSP database,and we require stock returns to be available for the entire month of the grant date.From this sample we eliminate grants that are scheduled,as they might be less likely to have been opportunistically timed.A grant is deﬁned as scheduled if an additional grant was awarded on the same date plus/minus1day in the preceding year(Heron and Lie(2007)).We further eliminate grants that were given in months where theﬁrm’s stock went ex-dividend;to the extent that ﬁrms schedule grants after an ex-dividend date,the grant price might fall below the stock prices preceding the ex-date even in the absence of any backdating or spring-loading.In addition,because someﬁrms schedule grants to directors on the date of the annual shareholder meeting,we use annual meeting dates from the Investor Responsibility Research Center(IRRC)database(available for about25%of the sampleﬁrms)and eliminate all director grants falling within+/−1day of the annual meeting.Finally,we check whether the strike price of the grant is“close enough”to the closing price of the grant date,or to the closing price1day before or after the grant,where a“close enough”price is deﬁned as a price that is within1% of the strike price.The date with the nearest closing price to the strike price is then deﬁned as the effective grant date.3In our analysis,we focus on two important groups of individuals that receive option grants.Theﬁrst group includes the CEO.Following Heron and Lie (2007),we deﬁne an individual as a CEO if he or she is identiﬁed in the Thom-son database either as a CEO or the president of the company(role code CEO or P).The second group comprises independent directors,who play a key oversight role in current corporate governance.An individual is considered an indepen-dent director if he or she is deﬁned as a director in the Thomson database(role code D)and is not deﬁned as having any other role in the company.4We deﬁne our unit of observation as a grant event.In the CEO sample,a grant event is deﬁned as a day in which the CEO receives one or more option grants.In the director sample,a grant event is deﬁned as a day in which one or more directors receive one or more option grants.3Consistent with Heron and Lie(2007),we alsoﬁnd a large fraction of grants whose strike price does not coincide with the grant-date price.Heron and Lie discuss the possible reasons for deviation of the grant-date price from the strike price.4For the set of companies for which we also have information from IRRC,the data set of directors that we construct is practically identical to the set that would obtain using the independent classiﬁcation provided by the IRRC database.In particular,more than99%of the directors we classify as independent directors using the above algorithm are also classiﬁed as independent by the IRRC.2368The Journal of Finance ROur CEO grant events sample contains19,036CEO grant events in5,819ﬁrms.In our CEO sample,4,510CEOs have one grant event,1,874have two, 1,050have three grant events,and1,386have four or more grant events.Our director grant events sample contains25,888grant events in6,441different ﬁrms.The average number of directors getting a grant in a grant event is3.07.B.Lucky Grant EventsThe literature on the opportunistic timing of option grants(starting with Yer-mack(1997))and the more recent literature on backdating(Lie(2005),Heron and Lie(2007,2009),and Narayanan and Seyhun(2006,2008))has focused on the existence of negative pregrant stock returns and/or positive postgrant stock returns as the basis for detecting and investigating abnormal grant date patterns.5In contrast,our strategy is to examine at-the-money grants on days in which the stock prices were at the bottom of the price distribution.6In particular,in this paper we use the grant month as the examined“look-back”period-–that is,we focus on grants that were given at the lowest price of the month.We call these grants“lucky”grants.7We compare the incidence of lucky grants relative the benchmark case in which the grant date is chosen without regard to the price distribution.8While our choice of period allows us to focus on manipulation instances that were likely of greatest economic signiﬁcance for CEOs and shareholders,our analysis does not fully capture instances of opportunistic timing based on short look-back periods.Narayanan and Seyhun(2008)demonstrate that,especially during the post-SOX period,there have likely been numerous instances in which grants were misdated by a few days,often by just1or2days.Thus,our 5The tendency of grant dates to rank low rather than high in the distribution of prices is noted by Heron and Lie(2007)and Narayanan and Seyhun(2008),but these studies include pre-and postgrant returns,not price ranks,as the main tool of analysis.6Bebchuk,Grinstein,and Peyer(2006a)discuss in detail the potential advantages and disad-vantages of focusing on price ranks compared with pre-and postgrant returns.7Bebchuk,Grinstein,and Peyer(2006a,2006b)extend the analysis in this paper by investigating the entire rank distribution of grants during the month,the calendar quarter,and the calendar year.8Although we refer to the benchmark as one of“random selection”of grant event dates,this is not meant to involve a strictly random assignment but rather one in which grant dates are selected on the basis of factors that are independent of price-rank considerations.It might be suggested that,to the extent that(i)there are some considerations that leadﬁrms to concentrate awards early in the month and(ii)stock prices trend upward over time,the benchmark probability should be adjusted upward.However,the actual distribution of option grant event dates is symmetric around the middle of the month.Grant events occurred on average on day15.94of the month in the CEO sample,and on day15.96of the month in the director sample,and roughly the same number of grant events occurred before and after the median trading day of the month in both samples.The upward trend of stock prices is,on average,slow relative to the volatility,so prices at the beginning and end of a month do not signiﬁcantly differ in their odds of being the lowest price of the month.To be cautious,however,we conduct robustness checks that verify that our results hold when controlling for the location of the grant date within the calendar month(see footnote21 for further details).Lucky CEOs and Lucky Directors23690%2%4%6%8%10%12%14%t s e h g i H )y k c u l ( t s e w o LFigure 1.Frequency of Grants at Lowest and Highest Stock Price of the Month.analysis investigates an important subset of opportunistic timing practices,but not all of them.The ﬁgure above shows the percentage of grant events in our sample that were at the lowest price of the month and at the highest price of the month.About 12%of the CEO grant events were reported to be given at the lowest price of the month,whereas only 4%of the grant events were reported to be given at the highest price of the month.Similarly,about 9.5%of director grant events were given at the lowest price of the month compared to 6%at the highest price of the month.9Thus,there is a clear asymmetry between the incidence of grant event dates at the lowest and highest prices of the month.10To get an estimate of the number of grant events that were opportunistically timed in both samples,we compare the actual number of lucky grant events to9Notethat,on average,our sample ﬁrms have less than 20trading days each month where the prices are different in all days.The number of days during the month in which there is actual trading is less than 20in many cases,and in many cases the highest (or lowest)price of the month obtains on 2or more trading days.Thus,under random assignment,the expected fraction of grants on the highest price day of the month is not simply 5%but,on average,higher.10This asymmetry exists not only between the incidence of grant events at the lowest and the highest price of the month but also between other price levels at the bottom and top of the price distribution.Overall,we observe a clear monotonic relation between the rank of the price in a month and the percentage of grants given at that rank.To illustrate,in the CEO grant events sample,the frequency of grant events is the highest at the lowest price of the month (12%),second highest at the second lowest price of the month (9%),and third highest at the third lowest price level (8%).Conversely,the frequency of grant events is lowest at the highest price level (4%),second lowest at the second highest level (5%),and so forth.See Bebchuk et al.(2006a,2006b)for a full set of descriptive statistics.These papers also offer a regression analysis identifying the extent to which days with the lowest price of the month are more likely be chosen as grant dates.2370The Journal of Finance Rthe expected number of grant events that would have been lucky if grant events were allocated randomly during the month.For every month,we calculate the expected number of grant events that would have been lucky if grant events were randomly assigned over the trading days during the month.11This estimation is done by calculating for each individual grant event,assuming random assignment,the probability of being granted at the lowest price of the month,and then aggregating these probabilities across all grant events.Due to the large number of grant events involved,a random assignment is highly unlikely to deviate signiﬁcantly from the expected number we calculate.We conduct this analysis both for the sample of director grant events and for the sample of CEO grant events.Table I shows our estimation results.We estimate that over the full sample period of1996to2005,1,163lucky CEO grant events and804lucky director grant events(about50%and33%of all lucky grant events,respectively)were due to opportunistic timing.12The percentage of CEO lucky grant events that were lucky due to oppor-tunistic timing was about55%before SOX and35%afterward.The percentage of director grant events that were lucky due to opportunistic timing was about 36%before SOX and25%after SOX.Since a large fraction of lucky grant events owes its status to opportunistic timing,lucky grant events can provide a useful basis for studying the factors likely to be associated with such timing.Table I also gives us a sense of the magnitude of the discount in exercise price that opportunistic timing could produce.For lucky director grant events (lucky CEO grant events),the grant price was11%(12%)lower,on average, than the median price of the month.Table II provides our estimates of the number ofﬁrms associated with oppor-tunistic timing of CEO and director grant events.Our estimation methodology includes calculating the difference between the actual and expected number of grant events given on the lowest price day of the month.1311The scenario of random assignment also assumes that,after the day is randomly selected,the distribution of prices among the month’s different days is not affected by the actions that insiders are expected to take.The probability of a day being the lowest price day is computed using the ratio of the number of days in the grant month that have the lowest price to the total number of trading days in thatﬁrm’s stock during the grant month.12Our estimate for opportunistically timed grant events at the lowest price of the month is more conservative than theﬁgure estimated by Heron and Lie(2009)for the total number of opportunistically timed grants.As we discuss above,we do not attempt to capture“small-scale”backdating in which grants were misdated within a short period of time.In contrast,the Heron-Lie methodology,which is based on the comparison of pre-and postgrant returns,attempts to capture such instances of manipulation as well.See also Bebchuk et al.(2006a,2006b),who estimate deviation from random assignment using rank distribution over longer periods.13As before,we base the calculation of the expected number of lucky grant events on the chance that a particular grant event occurs on the lowest price day of the month(i.e.,number of lowest price days per month divided by number of trading days per month).Forﬁrms that have two grant events,the expected number is based on the chance that at least one of the two grant events is given on the lowest price day of the month;similar logic applies for more grants events and for the analysis ofﬁrms with multiple grant events.Lucky CEOs and Lucky Directors2371Table IEstimating the Incidence of Opportunistic TimingThe table shows the actual number of grant events that fell on the lowest day of the month in the director grant sample and the CEO grant sample.It also shows the number of grant events expected to fall on the lowest day of the month if the grant date was randomly selected.We estimate the probability of observing a grant event on the lowest price of the month by counting the number of days in the month where the price is the lowest and dividing it by the total number of trading days of the stock in that month.The table compares the estimate to the actual number of grant events that were the lowest.We also show the average ratio of the exercise price to the median stock price in the month.Grant events before the Sarbanes-Oxley Act(SOX)are ones whose grant event date was before September1,2002,and grants after SOX are ones whose grant event date was on or after September1,2002.The sample consists of26,209option grant events to directors and19,036grant events to CEOs between1996and2005.Incidences of Lucky Grant EventsCEO Grant Events Director Grant Events OverallActual number of grant events2,3292,473Actual/total12.2%9.4% Expected number of grant events1,1661,669Actual−expected1,163804 (Actual−expected)/actual49.9%32.5% (Actual−expected)/total 6.1% 2.8% Exercise price/median stock price0.880.89 Observations19,03626,209Before SOXActual number of grant events1,7411,707Actual/total14.5%10.9% Expected number of grant events7851,098Actual−expected956609 (Actual−expected)/actual54.9%35.7% (Actual−expected)/total8.0% 3.5% Exercise price/median stock price0.870.88 Observations11,99815,709After SOXActual number of grant events588766Actual/total8.4%7.3% Expected number of grant events381571Actual−expected207195 (Actual−expected)/actual35.3%25.4% (Actual−expected)/total 2.9% 1.7% Exercise price/median stock price0.910.91 Observations7,03810,500Panel A indicates that the number ofﬁrms with one or more lucky CEO grant event exceeds the estimated number of suchﬁrms under random assignment by722.Thisﬁgure implies that about12%of allﬁrms in our sample had lucky CEO grant events due to opportunistic timing.Panel B indicates that the number ofﬁrms with one or more lucky direc-tor grant event exceeds the estimated number of suchﬁrms under random。

世界商业名人语录

世界商业名人语录1. "The best way to predict the future is to create it." - Peter Drucker (《The Effective Executive》)预测未来的最好方法就是创造未来。

2. "Success is not the key to happiness. Happiness is the key to success. If you love what you are doing, you will be successful." - Albert Schweitzer成功不是幸福的关键，幸福才是成功的关键。

如果你热爱自己所做的事情，你就会成功。

3. "The only place where success comes before work is in the dictionary." - Vidal Sassoon唯一一个成功出现在工作之前的地方就是字典里。

4. "Innovation distinguishes between a leader and a follower." - Steve Jobs (《The Innovation Secrets of Steve Jobs》)创新区分了领导者和追随者。

5. "Your time is limited, don't waste it living someone else's life." - Steve Jobs (Stanford University Commencement Speech, 2005)你的时间有限，不要浪费在过别人的生活上。

6. "The best revenge is massive success." - Frank Sinatra最好的报复就是巨大的成功。

从优秀到卓越.未删节版].Good.To.Great.-.Jim.Collins

Good to Great “Why Some Companies Make the Leap... and Others Don’t"Harper Business, 2001, New York, NY.Review By-Swarup BoseTable of ContentsAbout the Author (3)Thesis (3)Chapter 1. Good is the Enemy of Great (4)Chapter 2.Level 5 Leadership (5)Chapter 3. First Who....Then what.. (6)Chapter 4. Confront the brutal facts (7)Chapter 5. Hedgehog Concept (9)Chapter 6. Cultural Discipline (10)Chapter 7. Technological Accelerators (11)Chapter 8. The Flywheel And the Doom Loop (12)Chapter 9. From Good To great To built to Last (14)Learnings from Good to great (15)Critique (16).About the Author :Jim Collins is a student and teacher of enduring great companies -- how they grow, how theyattain superior performance, and how good companies can become great companies. Havinginvested over a decade of research into the topic, Jim has co-authored three books, including theclassic Built to Last, a fixture on the Business Week bestseller list for s eliminated wastefulluxuries, like executive dining rooms, corporate jets, lavish vaca tion spots, etc., for the good ofthe co mpany - to other people, external factors, and good luck. All 11 of the featured companieshad this type of leadership, charactmulti-year research projects and works with executives fromthe private, public, and social sectors.Jim has served as a teacher to senior executives and CEOs at corporations that include: StarbucksCoffee, Merck, Patagonia, American General, W.L. Gore, and hundreds more. He has alsoworked with the non-corporate sector such as the Leadership Network of Churches, JohnsHopkins Medical School, the Boys & Girls Clubs of America and The Peter F. DruckerFoundation for Non-Profit Management. Jim invests a significant portion of his energy in large-scale research projects -- often five or moreyears in duration -- to develop fundamental insights and then translate those findings into books,articles and lectures. He uses his management laboratory to work directly with executives and todevelop practical tools for applying the concepts that flow from his research.In addition, Jim is an avid rock climber and has made free ascents of the West Face of El Capitanand the East Face of Washington Column in Yosemite Valley.Thesis :Collins and his team identified 11 companies that followed a pattern of "fifteen-year cumulativestock returns at or below the general stock market, punctuated by a transition point, thencumulative returns at least three times the market over the next fifteen years." Public companieswere selected because of the availability of comparable data. Fifteen-year segments were selectedto weed out the one-hit wonders and luck breaks. While these selection criteria exclude "neweconomy" companies, Collins contends that there is nothing new about the new economy, citingearlier technology innovations of electricity, the telephone, and the transistor.Having identified the companies that made the leap from Good To Great, Collins and his team setout to examine the transition point. What characteristics did the Good To Great companies havethat their industry counterparts did not? What didn't the Good To Great companies have?Collins maps out three stages, each with two key concepts. These six concepts are the heart ofGood To Great and he devotes a chapter to explaining each of them.• Level 5 Leadership• First Who... Then What• Confront the Brutal Facts• The Hedgehog Concept• A Culture of Discipline• Technology AcceleratorsCollins characterizes the Level 5 leader, as "a paradoxical blend of personal humility and professional will." The Level 5 leader is not the "corporate savior" or "turnaround expert". Mostof the CEOs of the Good To Great companies as they made the transition were company insiders.They were more concerned about what they could "build, create and contribute" than what theycould "get - fame, fortune, adulation, power, whatever". No Ken Lay of Enron or Al Dunlap ofScott Paper, the larger-than-life CEO, led a Good To Great company. This kind of executive is "concerned more with their own reputation for personal greatness" than they are with "setting the company up for success in the next generation".In this book, Jim Collins also challenges the notion that "people are your most important asset"and postulates instead that "the right people are." I don't know that I yet completely agree with his philosophy that it's more important to get the right people on the bus and then see where it goesthan it is to figure out where to go and get the right people on the bus who can get you there. However, he makes his point clearly and you can decide if you agree with him.This nearly 300-page book is packed with leading edge thinking, clear examples, and data to support the conclusions. It is a challenge to all business leaders to exhibit the discipline requiredto move their companies from Good To Great.Chapter 1: Good is the Enemy of GreatCollins and his assembled crew started their research using the companies that rank in the top 500in total annual sales. Then, by analyzing the returns they narrowed down the list to companiesthat experienced mediocrity for a period of time, but then changed course for the better and outperformed not just other companies in the same industry, but the overall market by several times. Other factors were also considered, until they finally had the list narrowed down to eleven “superstar” corporations: Abbott, Circuit City, Fannie Mae, Gillette, Kimberly- Clark, Kroger, Nucor, Phillip Morris, Pitney Bowes, Walgreens, and Wells Fargo. He then explored what goesinto a company’s transformation from mediocre to excellent. Based on hard evidence and volumes of data, the book author (Jim Collins) and his team uncovered timeless principles on how the good-to-great companies like produced sustained greatresults and achieved enduring greatness, evolving into companies that were indeed ‘Built to Last’.Good to Great is centers on a comparative analysis of eleven companies. Collins selects once-dull organizations, such as Kimberley Clark and Gillette that subsequently outperformed.The usual fault of such manuals is their obvious prescriptions. Of course successful firms keptclose to their customers and motivated employees. But unsuccessful firms didn’t fail because they rejected these objectives. They failed because they couldn’t achieve them. Collins penetrates these banalities because he questions the congratulatory self-description of winning businesses. For example, most of his eleven companies didn’t have visionary CEOs determined to turn the business round Few were aiming at the cover page of Fortune, most were consensus builders from inside the organization. Collins' research says the CEO's at the time companies become great aren't egotistical business leaders. Rather, they tend to be reserved people who channel their ego into building their companies. Collins is a little vague on exactly how you get other employees and key players tochannel their egos into building the company. The hope is that, if you select the right people, they'll do what's best for the company rather than for themselves.Finding something you can be passionate about is the other key. And, all employees must be passionate about the endeavor. Because most employees won't get jazzed about making the CEO and shareholders wealthy, a company should have a purpose beyond just making money. Collins says a company should have 'core values.'Collins says it doesn't matter what these 'core values' are, just that they exist. He says Philip Morris is happy to provide the strongest brand recognition of 'sinful' products. Maybe, they're rebelling against political correctness, or health, or whatever. If it works for them, it's cool. Fannie Mae, on the other hand, prides itself on providing mortgages to new, less-affluent homeowners and helping people buy homes. That sounds good, and is probably true, but it reads a little bit like a publicity statement.Chapter 2: Level 5 Leadership In this chapter Collins describes what he refers to as “level 5” leadership as explained in the table below. Every good-to-great company had “Level 5” leadership during pivotal transition years, where Level 1 is a Highly Capable Individual, Level 2 is a Contributing Team Member, Level 3 is the Competent Manager, Level 4 is an Effective Leader, and Level 5 is the Executive who builds enduring greatness through a paradoxical blend of personal humility and professional will. Level 5 leaders display a compelling modesty, are self-effacing and understated. In contrast, two thirds of the comparison companies had leaders with gargantuan personal egos that contributed to the demise or continued mediocrity of the company. Level 5 leaders are fanatically driven, infected with an incurable need to produce sustained results. They are resolved to do whatever it takes to make the company great, no matter how big or hard the decisions. One of the most damaging trends in recent history is the tendency (especially of boards of directors) to select dazzling, celebrity leaders and to de-select potential Level 5 leaders. Potential Level 5 leaders exist all around us, we just have to know what to look for. The research team was not looking for Level 5 leadership, but the data was overwhelming and convincing. The Level 5 discovery is an empirical, not ideological, finding.The 5th Level Leader – 5th Level Leaders have a combination of strong will and personal humility. The 5th Level Leader demonstrates an unwavering resolve and sets the standard for building great companies. In balance, he/she demonstrates a compelling modesty, relies on inspired standards and channels ambition into the company, and not into the self. The 5th Level Leader “looks in the mirror, not out the window” when focusing on responsibility and does just the opposite when apportioning credit for success of the company.When a leader’s energy is “in balance” they are driven neither by ego nor fear. They are moving at a speed that allows them to feel themselves, as well as those around them. They realize more than anyone else, that “the less you control, the more you can do”. Leadership greatness is about being a conduit of energy, not a single generator of it.Collins asked a critical question: Can 5th Level Leadership be taught? Well, yes and no. To the extent someone is gifted with these innate capabilities, they certainly have a head start. For any leader it is a matter of degree. It is about growing into the role of a 5th Level Leadership leader.It is interesting to note that most 5th Level Leaders did not live extravagant lifestyles. They had sound family and community relationships. They had healthy and long-term marriages. Most of them are highly spiritual people who have attributed much of their success to good-luck and God rather than personal greatness. These men and women were servant leaders, not self-serving ones.The five levels are as follows :Level 5 ExecutiveBuilds enduring greatness through a paradoxical blend of personal humility and professional will. Level 4Effective LeaderCatalyzes commitment to and vigorous pursuit of a clear and compelling vision, stimulating higher performance standards.Level 3Competent ManagerOrganizes people and resources towards the effective and efficient pursuit of predetermined objectives.Level 2Contributing Team MemberContributes individual capabilities to the achievement of group objectives and worked effectively with others in a group setting.Level 1Highly Capable IndividualMakes productive contributions through talent, knowledge skills, and good work habits.Humility + Will = Level 5Professional Will and Personal Humility creates superb results, a clear catalyst in the transition from good to great. Demonstrates a compelling modesty, shunning public adulation; never boastful. Demonstrates an unwavering resolve to do whatever must be done to produce the best long-term results, no matter how difficult. Acts with quiet, calm determination; relies principally on inspired standards, not inspiring charisma, to motivate. Sets the standard of building an enduring great company; will settle for nothing less. Channels ambition into the company, not the self; sets up successors for even greater success in the next generation. Looks into the mirror, not out the window, to apportion responsibility for poor results, never blaming other people, external factors, or bad luck. Looks out the window, not in the mirror, to apportion credit for the success of the company - to other people, external factors, and good luck.All 11 of the featured companies had this type of leadership, characterized by a CEO who displayed determination and a strong will to be the best, yet who also showed humility. These level 5 leaders eliminated wasteful luxuries, like executive dining rooms, corporate jets, lavish vacation spots, etc., for the good of the company. Also, when asked about the success of the company, they were quick to give complete credit to the other workers in the company, rather than themselves. Yet these CEOs rose above their peers. Collins dubs them "Level 5" managers. By this definition, each was humble to a fault and hid from the limelight. At the same time, though, all of them went to extraordinary lengths to make their companies great. For Darwin E. Smith of Kimberly-Clark, that required jettisoning the core business when he sold its paper mills. For George Cain at Abbott, it meant firing his own relatives. These leaders' ambition was "first and foremost for the company," writes Collins. They were "concerned with its success, rather than their own riches and personal renown." Chapter 3: First Who ... then WhatIt deals with confronting the facts of expertise and market know- how, and then assembling together a first- class team of dedicated workers and management to achieve goals. In these “goodto great” companies, they all shared several things in common. First and foremost, they were not afraid to admit that they lacked the necessary skills to succeed in certain markets. Instead of pretending to know everything, these companies brainstormed until they had a short list of what they knew they could do better than anyone else. They didn’t bother acquiring other companies, where they had no expertise, or trying to learn new skills, or anything like that. Instead, they focused in on what they were best at, then hired individuals who were skilled in the same area and who would be most likely to work relentlessly toward a goal. Collins' point is "...not just about assembling the right team - that's nothing new. The main pointis to first get the right people on the bus (and the wrong people off the bus) before you figure out where to drive it. The second key point is the degree of sheer rigor needed in people decisions in order to take a company from good to great.". Regarding people decisions he has the following to say:1. When in doubt, don't hire - keep looking. (Corollary: A company should limit its growthbased on its ability to attract enough of the right people.)2. When you know you need to make a people change, act. (Corollary: First be sure youdon't simply have someone in the wrong seat.)3. Put your best people on your biggest opportunities, not your biggest problems.(Corollary: If you sell off your problems, don't sell off your best people.)Good-to-great leaders understand three simple truths:If you begin with the “who,” rather than the “what,” you can more easily adapt to a changing world.If you have the right people on the bus, the problem of how to motivate and manage people largely goes away.If you have the wrong people, it doesn’t matter whether you discover the right direction—you still won’t have a great company. Great vision without great people isirrelevant.Chapter 4: Confront the Brutal FactsThis chapter deals with the Stockdale Paradox .Another defiance of conventionality is encapsulated in the so-called Stockdale paradox. Admiral Stockdale survived a long period of imprisonment in Vietnam. He had determination to survive, but claimed that it was ‘the optimists’ who failed to see it through. The Stockdale paradox contrasts those who focus with determinationon a realistic objective with the fantasists whose slogan is that if you can dream it, you can do it. Retrain faith that you will prevail in the end, regardless of the difficulties and at the same time confront the most brutal facts of your current reality, whatever they might be. It says:1. Lead with questions, not answers2. Engage in dialogue and debate, not coercion.3. Conduct autopsies, without blame.4. Build red flag mechanisms that turn information into information that cannot be ignored.Next, even before they had settled on a business plan, these CEOs surrounded themselves with smart, hard-working people who were not afraid to face their shortcomings and hurdles--the "brutal facts," as Collins puts it--but who had faith they would ultimately win. After settling on a course, the companies on the list never lost sight of what they did best, and they maintained tough standards for their people. New hires either fit right in--or were quickly ejected. Then, through perseverance and the careful use of technology, the enterprises lifted off. "The process resembles relentlessly pushing a giant heavy flywheel in one direction, turn upon turn, building momentum until a point of breakthrough, and beyond," Collins concludes. Good-to-Great companies maintain unwavering faith that they can and will prevail in the end, regardless of the difficulties, and at the same time have the discipline to confront the most brutal facts of their current reality – whatever that might be.All good-to-great companies began the process of finding a path to greatness by confronting the brutal facts of their current reality. When a company starts with an honest and diligent effort to determine the truth of its situation, the right decisions often become self-evident. Good decisions are impossible without an honest confrontation of the brutal facts.Why Kroger Beat A&PThe Great Atlantic and Pacific Tea Company (also known as A&P) had the perfect business model for the first half of the twentieth century, when two world wars and an economic depression imposed frugality upon Americans: cheap, plentiful groceries sold in utilitarian stores. However, in the more affluent second half of the century, Americans began demanding bigger stores, more choices, fresh baked goods, fresh flowers, banking services and so forth. They wanted superstores that offered almost everything under one roof. To f ace the brutal facts about the mismatch between its past model and the changing world, A&P opened a new store called Golden Key, where it could experiment with new methods and models and learn what customers wanted. It sold no A&P-branded products, experimented with new departments, and began to evolve toward the more modern superstore. A&P began to discover the answer to the questions of why it was losing market share and what it could do about it. But A&P executives didn’t like the answers they got, so they closed the store, rather than diverge from their ages-old business ideas. Meanwhile, the Kroger grocery chain also conducted experiments and, by 1970, discovered the inescapable truth that the old-model grocery store was going to become extinct. Rather than ignore the brutal truth, as A&P did, the company acted on it, eliminating, changing, or replacing every single store that did not fit the new realities. It went block-by-block, city-by-city, state-by- state, until it had rebuilt its entire system. By 1999, it was the number one grocery chain in America.Let the Truth Be HeardOne of the primary tasks in taking a company from good to great is to create a culture wherein people have a tremendous opportunity to be heard and, ultimately, for the truth to be likewise heard. To accomplish this, you must engage in four basic practices:Lead with questions, not answers.Leading from good to great does not mean coming up with the answers and motivating everyone to follow your messianic vision. It means having the humility to grasp the fact that you do not yet understand enough to have the answers, and then to ask questions that will lead to the best possible insights.Engage in dialogue and debate, not coercion.All good-to-great companies have a penchant for intense debates, discussions and healthy conflict. Dialogue is not used as a sham process to let people “have their say” so they can buy into a predetermined decision; rather, it is used to engage people in the search for the best answers.Conduct autopsies, without blame.Good-to-great leaders must take an honest look at decisions his or her company makes, rather than simply assigning blame for the outcomes of those decisions. These “autopsies” go a long way toward establishing understanding and learning, creating a climate where the truth is heard.Build red flag mechanisms that turn information into information that cannot be ignored.Good-to-great companies have no better access to information than any other company; they simply give their people and customers ample opportunities to provide unfiltered information and insight that can act as an early warning for potentially deeper problems. Chapter 5 : The Hedgehog ConceptIt talks about the triumph of understanding over bravado -- requires a deep understanding of three intersecting circles translated into a simple, crystalline concept -- the hedgehog concept.and it’s the basis for much of the book. This concept involves reflecting on three important questions that all businesses should ask:1. What are you deeply passionate about?2. What drives your economic engine? and3. What you can be best in the world at ?At what you can be best in the world. This standard goes far beyond core competence — just because you possess a core competence doesn’t necessarily mean you are the best in the world at that competence. Conversely, what you can be best in the world at might not even be something in which you are currently engaged. The Hedgehog Concept is not a goal or strategy to be the best at something; it is an understanding of what you can be the best at and, almost equally important, what you cannot be the best at.What drives your economic engine? To get insight into the drivers of your economic engine, search for the one denominator (profit per x, for example, or cash flow per x) that has the single greatest impact. If you could pick one and only one ratio to systematically increase over time to make a greater impact, what would that ratio be? This denominator can be subtle, sometimes even unobvious. The key is to use the denominator to gain understanding and insight into your economic model.What you are deeply passionate about. Good-to-great companies did not pick a course of action, then encourage their people to become passionate about their direction. Rather, those companies decided to do only those things that they could get passionate about. They recognized that passion cannot be manufactured, nor can it be the end result of a motivation effort. You can only discover what ignites your passion and the passions of those around you.These three questions are placed within overlapping circles. The area where the three overlap is the area where a corporation should aim to reach, to ensure the most output and the greatest efficiency..A hedgehog concept is not a goal to be the best, a strategy to be the best, an intention to be the best, a plan to be the best. It is an understanding of what you can be the best at.If you could pick one and only one ratio - profix per x (or in the social sector, cash flow per x) - to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine?The core of the book emphasizes what Collins refers to as a 'hedgehog' strategy that is necessary to achieve greatness. Collins says great companies are like hedgehogs in that they stick to what they know and can do well. Collins says when a fox attacks a hedgehog the hedgehog curls into a prickly ball and the attacking fox must leave it alone. Then, the fox runs around and tries another point of attack and never learns. The hedgehogs only need to do one thing that works well and consistently. In short, after much research and writing, Collins finds the key to business success is functioning within the intersection of three circles. The first circle represents an endeavor atwhich your company has the potential to be the best in the world. The second circle represents what your company can feel passionate about. The third circle represents a measure of profitability that can drive your economic success. You must choose to do something that's profitable and know how to focus upon that profitability.To find the circles, Collins makes the excellent point that you must begin with the right people. Collins emphasizes that the people must come before you decide exactly how your company will achieve success. We learn that in great companies there is often heated debate about what's best for the company. The culture of great companies is open in the sense that the truth will be heard. That's very different from debating for the sake of protecting private turf and self-aggrandizement.Chapter 6 : Cultural DisciplineThis chapter deals with the importance of discipline. It talks about building a culture full of self-disciplined people who take disciplined action, fanatically consistent with the three circles, the hedgehog concept. freedom and responsibility within a framework -- build a consistent system with clear constraints, but give people freedom and responsibility within the framework of that system. It advises to hire self-disciplined people who don't need to be managed, and to manage the system, not the people.Discipline means fanatical adherence to the Hedgehog Concept and the willingness to shun opportunities that fall outside the three circles. The findings here might surprise some people. First of all, the management teams of the best companies are not strict disciplinarians. Discipline is stressed, but it comes from hiring employees who are already disciplined and ready to motivate themselves to achieve. Bureaucratic culture arises to compensate for incompetence and lack of discipline, which arise from having the wrong people on the bug in the first placeHaving a disciplined culture is the opposite of having a controlled one. There is no need for hierarchy, bureaucracy, or excessive control. Sustained great results depend upon building a culture full of self-disciplined people who take disciplined action fanatically consistent with the three circles of the Hedgehog Concept. This is in contrast to the typical ways in which many companies (particularly start-ups) conduct themselves when responding to growth and success. As these companies grow, they tend to sacrifice the creativity, energy and vision that made them successful in favor of hierarchical, bureaucratic structures and strictures — thus killing the entrepreneurial spirit as they create order. Exciting companies thus transform themselves into ordinary companies, and mediocrity begins to grow in earnest. Indeed, bureaucratic cultures arise to compensate for incompetence and lack of discipline, which arise from having the wrong people on the bus in the first place. Most companies build their bureaucratic rules to man-age a small percentage of the wrong people, which in turn drives away the right people. This self-perpetuating problem can be avoided by creating a culture of discipline.Action StepsTo create a culture of discipline, you must:Build a culture around the idea of freedom and responsibility, within a framework.Good-to-great companies built a consistent system with clear constraints, but they also gave people freedom and responsibility within the framework of that system. They hired self-disciplined people who didn’t need to be managed, and then managed the system, not the people. They also had the discipline of thought, to confront the brutal facts of reality and still maintain faith that they were on the track to greatness. Finally, they took disciplined actions that kept them on that track.。

CEO Connectedness

THE JOURNAL OF FINANCE•VOL.LXX,NO.3•JUNE2015CEO Connectedness and Corporate Fraud VIKRAMADITYA KHANNA,E.HAN KIM,and YAO LU∗ABSTRACTWeﬁnd that connections CEOs develop with top executives and directors throughtheir appointment decisions increase the risk of corporate fraud.Appointment-basedCEO connectedness in executive suites and boardrooms increases the likelihoodof committing fraud and decreases the likelihood of detection.Additionally,it de-creases the expected costs of fraud by helping conceal fraudulent activity,makingCEO dismissal less likely upon discovery,and lowering the coordination costs ofcarrying out illegal activity.Connections based on network ties through past employ-ment,education,or social organization memberships have insigniﬁcant effects onfraud.Appointment-based CEO connectedness warrants attention from regulators,investors,and corporate governance specialists.A LLEGATIONS OF CORPORATE and securities fraud have dominated headlines over the last decade.Corporate wrongdoing damages investor conﬁdence,decreases shareholder value,causes misallocation of capital,and increasesﬁnancial mar-ket instability,leading a number of scholars to examine factors affecting the likelihood of fraud and its detection.1Largely absent from these inquiries, however,is an analysis of the role played by the CEO’s connections with other ∗Khanna is at the University of Michigan Law School;Kim is at the University of Michigan Ross School of Business;and Lu is at Tsinghua University School of Economics and Management.We are grateful for helpful comments and suggestions by Campbell Harvey(the Editor),the Associate Editor,an anonymous referee,Cindy Alexander,Jennifer Arlen,John Coates,Simon Johnson, Jeffrey Smith,David Wilkins,and participants at business and/or law school seminars/roundtables at Boston University,Central University of Finance and Economics,Harvard University,Indian School of Business,Renmin University,Shanghai University of Finance and Economics,University of Miami,University of Michigan,University of Southern California,and Yale University,as well as participants at the2013American Finance Association Meetings,the2013American Law and Economics Association Annual Meeting,the7th Conference on Empirical Legal Studies,and the 2014NASDAQ OMX Conference on Capital Markets.We are indebted to Jonathan Karpoff and Gerald Martin for generously sharing their Federal Securities Regulation(FSR)database.We also thank Joseph Rewoldt,Satoko Kikuta,Guodong Chen,Paul A.Sandy,Alex Pierson,Melan A.Patel, Rudresh Singh,Tamar Groswald Ozery,Shinwoo Kang,and Robert Powell for excellent research assistance.This project received generousﬁnancial support from Mitsui Life Financial Research Center at the University of Michigan.Yao Lu acknowledges support from Project71202020of the National Natural Science Foundation of China.1See Karpoff and Lott(1993),Beatty,Bunsis,and Hand(1998),Bhagat,Bizjak,and Coles (1998),Karpoff,Lee,and Vendrzyk(1999),Bar-Gill and Bebchuk(2002),Karpoff,Lee,and Martin (2008a,2008b),Gande and Lewis(2009),Murphy,Shrieves,and Tibbs(2009),and Karpoff,Lee,and Martin(2014).Yu(2013)surveys this literature,highlighting the enormous welfare loss stemming from corporate fraud.DOI:10.1111/joﬁ.1224312031204The Journal of Finance Rleaders within theﬁrm.2CEOs have substantial“soft”inﬂuence in addition to explicit legal authority to direct corporate behavior,3of which wrongdoing is but one potential outcome.This soft inﬂuence is likely to be strengthened by the CEO’s internal connections.CEO connections with other top executives and directors could increase or decrease the incidence of corporate fraud.As with other corporate activities, corporate wrongdoing often requires coordination between,or acquiescence by, top executives and/or board members.Such coordination and acquiescence can take the form of direct involvement in criminal activities,or a reluctance to “blow the whistle.”A CEO’s close connections may facilitate wrongdoing by providing the necessary support.However,CEO connections may also help deter fraud.The CEO’s familiarity with other top executives may enable him to detect early signs of fraudulent activity.Further,when a CEO is not aware that a certain activity is illegal,a common problem in some areas of white collar crime,closer interpersonal relationships could make it easier for other executives and board members to help the CEO avoid wrongdoing.Thus,CEO connectedness can cut both ways.Which effect prevails is an empirical question. We consider CEO connectedness to top executives and directors through two sources:appointment decisions and prior network ties.Our results indicate that appointment-based connectedness warrants attention.In particular,it is signiﬁcantly associated with not only greater likelihood of fraud,but also lower expected costs of engaging in fraud:it decreases the likelihood of fraud detection,lengthens the time from fraud commission to detection,reduces the likelihood of forced CEO turnover upon discovery of fraud,and lowers the coordination costs needed to carry out illegal activity.Appointment-based CEO connectedness is measured by the fraction of top corporate leaders—top executives and directors—appointed during the current CEO’s tenure.Such connections increase what social psychologists refer to as“social inﬂuence,”which relies on norms of reciprocity,liking,and social consensus to shape group decision-making processes(Cialdini(1984)).Social inﬂuence facilitates the acquiescence or coordination required to engage in fraud and keep it from view.When more top executives are appointed during a CEO’s tenure,the CEO’s social inﬂuence increases because CEOs are heav-ily involved in recruiting,nominating,and appointing top executives.Those 2A notable exception is Chidambaran,Kedia,and Prabhala(2012),who study how CEO-board network ties are related to the likelihood of fraud.3The importance of CEO inﬂuence onﬁrm behavior and performance is well documented.Gra-ham,Harvey,and Puri(2013)show that CEO behavioral traits,such as optimism,risk-aversion, and time preference are related to corporateﬁnancial policies and managerial compensation; Bertrand and Schoar(2003)ﬁnd that CEO characteristics matter for a wide range ofﬁrm poli-cies;Bennedsen,Perez-Gonzalez,and Wolfenzon(2006)document that CEO deaths are strongly negatively correlated withﬁrm proﬁtability and growth;Cronqvist,Makhija,and Yonker(2012) show that differences in corporateﬁnancial leverage can be traced to CEOs’personal leverage;and Jenter and Lewellen(2014)ﬁnd that CEOs’age approaching retirement has an important impact on the likelihood of theirﬁrms being taken over and the takeover premiums their shareholders receive.Also see Allen,Kraakman,and Subramanian(2012)for discussion of CEOs’legal authority to contractually bind theﬁrm for ordinary transactions.CEO Connectedness and Corporate Fraud1205 executives are more likely to share similar beliefs and visions with,and may be more beholden to,the CEO who hired or promoted them to their current position than executives appointed during a previous CEO’s tenure(Landier et al.(2013),Kim and Lu(2014)).CEOs also tend to be involved in appointing board members either directly or indirectly through consultation with the nom-inating committee.Consequently,directors recruited during a CEO’s tenure may be similarly beholden to the CEO(Morse,Nanda,and Seru(2011),Coles, Daniel,and Naveen(2014)).In other words,appointment-based CEO connect-edness with corporate leaders may weaken the checks and balances required for prevention of corporate wrongdoing and detection.Inadequate checks and balances in the executive suite and boardroom breed fraud,make detection difﬁcult,and reduce the expected costs of wrongdoing.In contrast to appointment-based connectedness,CEO connectedness based on sharing prior education,employment,or social network ties with top execu-tives or directors has insigniﬁcant effects on both fraud and the expected costs of wrongdoing.The insigniﬁcant effects may be attributed to a weaker sense of loyalty.When one is appointed to a top executive position or is recommended to the board by a CEO,she may feel a sense of loyalty to the CEO.Such loyalty is likely to be weaker or absent when the connection is through network ties. One may even argue that sharing similar education or work experiences can breed a sense of competition within theﬁrm that may notﬁt as comfortably with loyalty.Our sample covers17,797ﬁrm-year observations for2,736uniqueﬁrms dur-ing the1996through2006period.We identify309cases of fraud,with873ﬁrm-year observations,in which the CEO is a named respondent and data are available to construct appointment-based CEO connectedness variables. Our primary source of fraud data is the Federal Securities Regulation(FSR) database(Karpoff et al.(2014)),generously provided by Karpoff and Martin. FSR provides the most comprehensive and accurate data onﬁnancial mis-statements.We add other types of fraud by supplementing FSR with fraud allegations contained in the Securities and Exchange Commission’s(SEC’s) Litigation Releases and in the Stanford Securities Class Action Clearinghouse (SSCAC).Inherent in any fraud sample is a partial observability problem:we observe detected fraud,not the population of fraudulent activity.Since observed fraud depends on two distinct but latent processes—the commission of fraud and the detection of fraud—we follow Wang,Winton,and Yu(2010)and Wang(2013) and employ a bivariate probit model.CEO connectedness with top executives is measured by the fraction of top-four non-CEO executives appointed during the current CEO’s tenure,the fraction of executives appointed(FTA);CEO con-nectedness with directors is measured by the fraction of directors appointed during a CEO’s tenure,the fraction of directors appointed(FDA).These frac-tions at a particular point in time depend on how long the CEO has been in the ofﬁce.Thus,our analyses control for CEO tenure throughout the paper.Both measures of CEO connectedness are positively related to the likeli-hood of wrongdoing and negatively related to the likelihood of detection given1206The Journal of Finance Rwrongdoing.Theseﬁndings are robust to two-stage instrumental variable(IV) regression estimates.As instruments we use deaths of non-CEO top execu-tives or of non-CEO directors,which increase FTA or FDA but are unlikely to be related to fraud—none of the deaths can be attributed to suicide.We also use the yearly industry average turnover ratio of top-four non-CEO executives and non-CEO directors,excluding theﬁrm in calculating the average,as an instrument for FTA and FDA.Our estimates indicate that aﬁrm with all top-four non-CEO executives appointed during the CEO’s tenure(FTA=1)has a20%higher incidence of fraud and a12%lower likelihood of detection given fraud than aﬁrm with none of the top-four executives appointed during the CEO’s tenure(FTA=0). Aﬁrm with all directors appointed during the CEO’s tenure(FDA=1)has a 19%higher incidence of fraud and a14%lower likelihood of detection than a ﬁrm with no directors appointed during the CEO’s tenure(FDA=0).An important factor in the choice of whether to commit fraud is the ex-pected punishment(Becker(1968)),which depends on the likelihood of de-tection.Greater connectedness may help CEOs conceal fraud by inﬂuencing others to fabricate or obfuscate internal records,making it harder to detect or prove wrongdoing in court(Arlen and Carney(1992),Khanna(2003)),or by pressuring individuals not to reveal instances of wrongdoing out of loyalty to the CEO who appointed them.Bivariate probit model estimates show that FTA and FDA are negatively related to detection given fraud.Further,FTA is positively related to fraud detection duration,the period from the beginning of fraudulent activity to its detection date,and negatively related to the Cox-hazard ratio of fraud detection.Our estimates imply that fraudulent activity by aﬁrm with FTA=1will take288days longer to be detected than fraud by a ﬁrm with FTA=0.Appointment-based CEO connectedness therefore appears to help conceal fraud and delay detection.Another channel through which CEO connectedness affects the expected costs of fraud is by lowering the probability of CEO dismissal upon discovery of wrongdoing.Detected fraud with CEO involvement does not automatically lead to CEO dismissal.CEOs more connected to their top lieutenants and board members may have greater support to retain their jobs.Weﬁnd that greater CEO connectedness is associated with lower forced CEO turnover-fraud sensitivity.Our estimates indicate that the probability of forced CEO turnover following a fraudulent activity by aﬁrm with FTA=1is8.27%lower than that by aﬁrm with FTA=0.The turnover probability is13.69%lower for aﬁrm with FDA=1than for aﬁrm with FDA=0.In addition,coordinating illegal activity may be less costly when CEOs are more closely connected with other corporate leaders.With lower coordination costs,more people are likely to be involved in a case of fraud and to be charged when the fraud is detected.Weﬁnd that,indeed,the number of people charged with fraud is signiﬁcantly positively related to both FTA and FDA.The aboveﬁndings are robust to alternative measures of FTA and FDA. In particular,the results are robust to tenure-and compensation-weighted fractions of top executives and directors appointed during a CEO’s tenure,asCEO Connectedness and Corporate Fraud1207 well as abnormal fractions of top executives and directors appointed during a CEO’s tenure,the residuals of regressions relating FTA and FDA to CEO tenure,and other factors directly correlated to them.Prior literature on corporate fraud examines the impact of board structure, general business conditions,corporate lobbying,market-and regulatory-based institutions,and executive compensation.4We contribute to this literature by identifying an important factor magnifying the risk of corporate fraud,namely, appointment-based CEO connectedness.Our study also helps distinguish how different sources of CEO connectedness—appointment decisions vis-`a-vis prior network ties—affect fraud.Before presenting our analyses,a caveat is in order.Ourﬁndings do not necessarily imply that appointment-based CEO connectedness is bad overall. It has potential beneﬁts.For example,closely knit top executives may ex-pedite decision-making,resulting in better anticipation of,and reactions to, internal and external challenges.They may also implement decisions more ef-ﬁciently via effective communication and coordination.Furthermore,greater FTA and FDA mean that there are more newly appointed top executives and directors;the new blood may help revitalize the top executive team and the board,enhancing the CEO’s productivity(Edmans,Goldstein,and Zhu(2013)). Unfortunately,these efﬁciency-related beneﬁts of appointment-based CEO con-nectedness are not illuminated here because our inquiry is about the dark side of CEO connectedness—its association with fraud.The paper is organized as follows.Section I contains the empirical design, data description,and summary statistics.We estimate how appointment-based CEO connectedness is related to the incidence of fraud and the likelihood of its detection in Section II as well as estimating two-stage IV regressions.Section III explores channels through which connectedness inﬂuences the expected costs of wrongdoing.Section IV reestimates the same set of regressions with prior network-tie based CEO connectedness.Section V provides a battery of additional robustness tests.Section VI concludes.I.Empirical Design,Data,and Summary StatisticsA.Empirical MethodologyTo address the partial observability issue when estimating the relation be-tween CEO connectedness and fraud,we follow Wang,Winton,and Yu(2010) and Wang(2013)and employ a bivariate probit model.For eachﬁrm i,we denote by Fraud it*and Detect it*the latent variables determiningﬁrm i’s4See Beasley(1996),Agrawal and Chadha(2005),and Chidambaran,Kedia,and Prabhala (2012)for board structure;Povel,Singh,and Winton(2007),Wang,Winton,and Yu(2010),and Wang and Winton(2012)for general business conditions;Yu and Yu(2011)for corporate lobbying; Dyck,Morse,and Zingales(2010)for market-and regulatory-based institutions;and Burns and Kedia(2006),Peng and R¨o ell(2008),Hertzberg(2005),and Efendi,Srivastava,and Swanson(2007) for executive compensation.1208The Journal of Finance Rlikelihood of committing a fraud in year t and the possibility of detecting it as follows:Fraud∗it=X F,itδ+μit(1a)Detect∗it=X D,itη+v it,(1b) where X F,it is a vector of variables explainingﬁrm i’s likelihood of committing a fraud in year t,and X D,it contains variables explaining theﬁrm’s likelihood of being detected.The variablesμit andνit are zero-mean disturbances with a bi-variate normal distribution.The correlation betweenμit andνit isρ.We deﬁne Fraud it=1if Fraud it*>0,and Fraud it=0otherwise;similarly Detect it=1if Detect it*>0,and Detect it=0otherwise.We do not directly observe the realiza-tions of Fraud it and Detect it;instead,we observe Observe it=Fraud it Detect it, where Observe it=1ifﬁrm i has committed a fraud and has been detected,and Observe it=0ifﬁrm i has not committed a fraud or has committed a fraud but has not been detected.LetФdenote the bivariate standard normal cumulative distribution function. The empirical model for Observe it isP(Obser v e it=1)=P(Fraud it Detect it=1)=φ(X F,itδ,X D,itη,ρ)(2a) P(Obser v e it=0)=P(Fraud it Detect it=0)=1−φ(X F,itδ,X D,itη,ρ).(2b) Thus,the log-likelihood function for the model isL(δ,η,ρ)=log(P(Obser v e it=1))+log(P(Obser v e it=0)).(3)This model can be estimated using maximum likelihood.Robust standard errors are clustered at the industry level using48Fama-French(1997)industry groupings to account for possible correlations amongﬁrms in the same industry.B.V ariablesB.1.FraudOur fraud sample covers the1996to2006period.We begin in1996because RiskMetrics board data begin in that year,which is also theﬁrst year after the passage of the Private Securities Litigation Reform Act of1995,designed to reduce frivolous private securities fraud class actions.We search for cases of fraud through2009but include frauds occurring no later than2006to allow sufﬁcient time for detection.In our sample,the average duration from the beginning of fraudulent activity to the detection date is1,081days.Our primary source of fraud data is the FSR database described in Karpoff et al.(2014),who carefully study SEC and Department of Justice publications and compile an exhaustive list of federal enforcement actions under Section 13(b).Where there are multiple enforcement actions for a single alleged SectionCEO Connectedness and Corporate Fraud1209 13(b)violation,Karpoff et al.(2014)group these actions together so that only one case is identiﬁed.For each case,FSR provides detailed information.Over our1996to2006sample period,there are171cases of fraud in FSR that are not dismissed and involveﬁrms covered by RiskMetrics or ExecuComp that have sufﬁcient data to construct appointment-based CEO connectedness measures. We supplement FSR with alleged cases of fraud from the SEC’s online Liti-gation Releases(/litigation.shtml),which go beyond Section 13(b)violations.The SEC data contain information on civil lawsuits and ad-ministrative proceedings brought for allegedﬁnancial misreporting,insider trading,violations of the Foreign Corruption Practice Act,violations of the Sarbanes-Oxley Act,and other alleged violations of federal securities laws and their accompanying regulations.We obtain41additional unique cases of fraud from the SEC.These cases are not present in FSR,but correspond to fraudu-lent activity between1996and2006that is settled and involvesﬁrms with the necessary data to construct appointment-based CEO connectedness measures. Shareholders may also bring private civil suits,independent of the SEC,for infractions beyond those covered in FSR.We therefore supplement the FSR and SEC cases with data from SSCAC(/index.html), which provides information on private securities fraud class actions.This database provides a collection of likely discovered cases of fraud,including virtually all alleged frauds with more than a de minimis effect on stock price that could generate private litigation.5Such private suits may include frivolous suits,where private litigants use the costs of the legal system to extract a monetary settlement(Alexander(1991),Grundfest(1995),Choi(2007),Choi, Nelson,and Pritchard(2009),Dyck,Morse,and Zingales(2010)).To cull false detections,we follow Dyck,Morse,and Zingales(2010)and exclude cases sub-sequently dismissed by a court or settled for less than$3million.6Unlike Dyck, Morse,and Zingales(2010),however,we do not exclude backdating cases or cases in which defendants claim they are settling to avoid negative publicity if the settlement amount exceeds$3million.This procedure yields165additional unique cases of fraud.Cases from FSR and the SEC’s website also exclude cases dismissed by the courts but include cases settled for amounts less than$3million.SEC en-forcement actions are less likely to be frivolous or mistaken than private suits because the people making enforcement decisions do not directly receive the monetary remedies.Thus,a small settlement amount in an SEC case does not imply a frivolous suit.The SEC sometimes pursues a case involving small damages because it raises important legal or enforcement questions or the 5Filing a securities class action lawsuit is now a largely automatic process whereby lawﬁrms ﬁle a suit whenever there is a negative stock price movement above a certain de minimis level (Choi,Nelson,and Pritchard(2009)).6The threshold of$3million originates from previous studies(Grundfest(1995),Choi(2007), and Choi,Nelson,and Pritchard(2009)),which suggest a settlement amount as an indicator to separate frivolous suits from meritorious ones.Theyﬁnd that suits settling below a$1.5–$2.5 million threshold are on average more likely to be frivolous.1210The Journal of Finance RSEC demands a substantial change inﬁnancial reporting and/or improvement in corporate governance in lieu of a large settlement.We further exclude six cases solely involving IPO underwriter allocation, mutual fund timing and late trading,or analysts.CEO connectedness is un-likely to play a role in these cases.Our total fraud sample thus consists of309 cases of alleged fraud in which the CEO is a named respondent and62cases in which the CEO is unnamed.B.2.Appointment-Based CEO ConnectednessAppointment-based CEO connectedness is measured as the fraction of top-four non-CEO executives appointed,FTA it,and the fraction of directors appointed,FDA it,during the tenure ofﬁrm i’s CEO as of year t.7We follow ExecuComp and rank executives by the sum of salaries and bonuses.In calcu-lating FDA,we exclude the CEO from both the numerator and the denominator if he is on the board.We determine if the executive or director is appointed dur-ing the current CEO’s tenure by comparing the appointment year with the year the current CEO took ofﬁce.8We assume the year a non-CEO executiveﬁrst appears on the list of top-four non-CEO executives is the year in which she secured the position.The appointment date of each board member is obtained from RiskMetrics.Although RiskMetrics data are available from1996,infor-mation on directors’appointment dates is available only from1998.Therefore, the sample period for FDA analyses starts in1998instead of1996.We also regress FTA and FDA on CEO tenure and other factors mechan-ically correlated to them and use the residuals as abnormal fractions of top executives or directors appointed during the CEO’s tenure,AFTA and AFDA. The estimation results using the abnormal measures,reported in the Internet Appendix,are robust.9B.3.Control V ariablesEstimating a bivariate probit model requires two sets of control variables, one each for the fraud commission and fraud detection equations.In the base-line model,all variables in the detection equation are included in the commis-sion equation,because the expected cost of committing fraud depends on the7We dropﬁrm-year observations when ExecuComp reports less thanﬁve top executives(includ-ing the CEO)to reduce noise in FTA it.Kim and Lu(2011)illustrate the importance of keeping constant the number of executives when constructing executive variables.Cross-checking against proxy statements shows that missing executives in ExecuComp are due to omission:ﬁrm-year observations with less thanﬁve top executives in ExecuComp showﬁve or more top executives in proxy statements.8When the appointment year of the current CEO and an executive or a director is the same, then as in Morse,Nanda,and Seru(2011),we do not include the executive or director in calculating FTA or FDA because we cannot determine who is appointedﬁrst.9The Internet Appendix may be found in the online version of this article on the Journal of Finance website.CEO Connectedness and Corporate Fraud1211 probability of detection.However,it is possible that individuals engaging in wrongdoing may not fully appreciate all the factors inﬂuencing fraud detec-tion.As an alternative speciﬁcation,we allow some variables in the detection equation to be omitted from the commission equation.The estimation results, reported in the Internet Appendix,are robust.B.3.1.Detection V ariablesMonitoring:Internal and external monitoring may play an important role in detecting fraud.We includeﬁve control variables related to internal monitoring by the board.First,we include the percentage of nonindependent directors on the board,%NonIndepDirectors.The monitoring role played by independent directors has been widely documented.For example,Weisbach(1988)ﬁnds that CEO turnover following poor performance is positively related to the fraction of outside directors.Second,we include the log of the number of directors on the board,Ln(BoardSize).Prior research indicates that larger boards tend to be less effective monitors(Lipton and Lorsch(1992),Jensen(1993),Yermack (1996),and Eisenberg,Sundren,and Wells(1998)).Next,we include the log of the number of board meetings in a given year,Ln(BoardMeetings),which may indicate the strength of board oversight and monitoring(Vafeas(1999)).We also include the percentage of nonindependent directors on the audit committee, %NonIndepDirectors Audit,and the log of the number of directors on the audit committee,Ln(AuditComSize),as audit committees are charged with the oversight ofﬁnancial reporting,internal controls,and external audits and hence play an important role in fraud detection(Deli and Gillan(2000)).To capture the strength of external monitoring,we use institutional owner-ship concentration,IOC,and analyst coverage,Ln(Analyst).Previous studies document the important role institutional investors play in shaping corporate governance(e.g.,Hartzell and Starks(2003),Cremers and Nair(2005),Del Guercio,Seery,and Woidtke(2008),Edmans(2009),and Kim and Lu(2011)). We follow Hartzell and Starks(2003)and estimate IOC by the percentage shareholdings of the topﬁve institutional investors.Analyst coverage is widely considered an important form of external monitoring as it reduces informa-tion asymmetry(e.g.,Hong,Lim,and Stein(2000),Brav and Lehavy(2003), Chang,Dasgupta,and Hilary(2006),Das,Guo,and Zhang(2006),and Kelly and Ljungqvist(2012)).The variable Ln(Analyst)is the log of one plus the number of analysts following aﬁrm in a given year.Litigation Risk:The securities litigation literature(e.g.,Jones and Weingram (1996),Johnson,Nelson,and Pritchard(2007))suggests thatﬁrm performance and stock return volatility are related to aﬁrm’s litigation risk.Firm perfor-mance is proxied by Tobin’s Q and Ebitda/TA,where Tobin’s Q is measured as the ratio of the market value of common equity plus the book value of to-tal liabilities to the book value of total assets,and Ebitda/TA is measured as earnings before interest,taxes,depreciation,and amortization divided by the book value of total assets.Stock return volatility,StockV olatility,is measured as the standard deviation of daily stock returns over a given year.In addition,。

会计舞弊财务舞弊外文文献翻译

会计舞弊财务舞弊外文文献翻译(含：英文原文及中文译文)文献出处：Badawi I M. Global corporate accounting frauds and action for reforms[J]. Review of Business, 2005, :26(:2).英文原文Global Corporate Accounting Frauds and Action for ReformsIbrahim BadawiSt. John’s UniversityAbstractThe recent wave of corporate fraudulent financial reporting has prompted global actions for reforms in corporate governance and financial reporting, by governments and accounting and auditing standard-setting bodies in the U.S. and internationally, including the European Commission; the International Federation of Accountants; the Organization for Economic Cooperation and Development; and others, in order to restore investor confidence in financial reporting, the accounting profession and global financial markets.IntroductionDuring the recent series of corporate fraudulent financial reporting incidents in the U.S., similar corporate scandals were disclosed in several other countries. Almost all cases of foreign corporate accounting frauds were committed by entities that conduct their businesses in more than onecountry, and most of these entities are also listed on U.S. stock exchanges. Following the legislative and regulatory reforms of corporate America, resulting from the SarbanesOxley Act of 2002, reforms were also initiated worldwide. The primary purpose of this paper is twofold: (1) to identify the prominent American and foreign companies involved in fraudulent financial reporting and the nature of accounting irregularities they committed; and (2) to highlight the global reaction for corporate reforms which are aimed at restoring investor confidence in financial reporting, the public accounting profession and global capital markets.Cases of Global Corporate Accounting FraudsThe list of corporate financial accounting scandals in the U.S. is extensive, and each one was the result of one or more creative accounting irregularities. Exhibit 1 identifies a sample of U.S. companies that committed such fraud and the nature of their fraudulent financial reporting activities.Who Commits Financial Fraud and HowThere are three groups of business people who commit financial statement frauds. They range from senior management (CEO and CFO); mid- and lower-level management; and organizational criminals [6,16]. CEOs and CFOs commit accounting frauds to conceal true business performance, to preserve personal status and control and to maintain personal income and wealth. Mid- and lower-level employees falsifyfinancial statements related to their area of responsibility (subsidiary, division or other unit) to conceal poor performance and/or to earn performance-based bonuses. Organizational criminals falsify financial statements to obtain loans or to inflate a stock they plan to sell in a “pump-and-dump” scheme. Methods o f financial statement schemes range from fictitious or fabricated revenues; altering the times at which revenues are recognized; improper asset valuations and reporting; concealing liabilities and expenses; and improper financial statement disclosures.Global Regulatory Action for Corporate and Accounting ReformsIn response to corporate and accounting scandals, the effects of which are still being felt throughout the U.S. economy, and in order to protect public interest and to restore investor confidence in the capital market, U.S. lawmakers, in a compromise by the House and Senate, passed the Sarbanes-Oxley Act of 2002. President Bush signed this Act into law (Public Law 107-204) on July 30, 2002. The Act resulted in major changes to compliance practices of large U.S. and non-U.S. companies whose securities are listed or traded on U.S. stock exchanges, requiring executives, boards of directors and external auditors to undertake measures to implement greater accountability, responsibility and transparency of financial reporting. The statutes of the Act, and the new SEC initiatives that followed [1,4,8,12,15], are considered the mostsignificant legislation and regulations affecting the corporate community and the accounting profession since 1933. Other U.S. regulatory bodies such as NYSE, NASDAQ and the State Societies of CPAs have also passed new regulations which place additional burdens on publicly traded companies and their external auditors.The Sarbanes-Oxley Act (SOA) is expressly applicable to any non-U.S. company registered on U.S. exchanges under either the Securities Act of 1933 or the Security Exchange Act of 1934, regardless of country of incorporation or corporate domicile. Furthermore, external auditors of such registrants, regardless of their nationality or place of business, are subject to the oversight of the Public Company Accounting Oversight Board (PCAOB) and to the statutory requirements of the SOA.The United States’ SOA has reverberated around the globe through the corporate and accounting reforms addressed by the International Federation of Accountants (IFAC); the Organization for Economic Cooperation and Development (OECD); the European Commission (UC); and authoritative bodies within individual European countries.International Federation of Accountants (IFAC)The IFAC is a private governance organization whose members are the national professional associations of accountants. It formally describes itself as the global representative of the accounting profession, with the objective of serving the public interest, strengthening theworldwide accountancy profession and contributing to the development of strong international economies by establishing and promoting adherence to high quality standards [9]. The Federation represents accountancy groups worldwide and has served as a reminder that restoring public confidence in financial reporting and the accounting profession should be considered a global mission. It is also considered a key player in the global auditing arena which, among other things, constructs international standards on auditing and has laid down an international ethical code for professional accountants [14]. The IFAC has recently secured a degree of support for its endeavors from some of the world’s most influential interna tional organizations in economic and financial spheres, including global Financial Stability Forum (FSF), the International Organization of Securities Commissions (IOSCO), the World Bank and, most significantly, the EC. In October 2002, IFAC commissioned a Task Force on Rebuilding Public Confidence in Financial Reporting to use a global perspective to consider how to restore the credibility of financial reporting and corporate disclosure. Its report, “Rebuilding Public Confidence in Financial Reporting: An International Perspective,” includes recommendations for strengthening corporate governance, and raising the regulating standards of issuers. Among its conclusions and recommendations related to audit committees are:1. All public interest entities should have an independent auditcommittee or similar body.2. The audit committee should regularly report to the board and should address concerns about financial information, internal controls or the audit.3. The audit committee must meet regularly and have sufficient time to perform its role effectively.4. Audit committees should have core responsibilities, including monitoring and reviewing the integrity of financial reporting, financial controls, the internal audit function, as well as for recommending, working with and monitoring the external auditors.5. Audit committee members should be financially literate and a majority should have “substantial financial experience.” They should receive further training as necessary on their responsibilities and on the company.6. Audit committees should have regular private “executive sessions” with the outside auditors and the head of the internal audit department. These executive sessions should not include members of management. There should be similar meetings with the chief financial officer and other key financial executives, but without other members of management.7. Audit committee members should be independent of management.8. There should be a principles-based approach to definingindependence on an international level. Companies should disclose committee members’ credentials, remuneration and shareholdings.9. Reinforcing the role of the audit committee should improve the relationship between the auditor and the company. The audit committee should recommend the hiring and firing of auditors and approve their fees, as well as review the audit plan. 10. The IFAC Code of Ethics should be the foundation for individual national independence rules. It should be relied on in making decisions on whether auditors should provide non-audit services. Non-audit services performed by the auditor should be approved by the audit committee.11. All fees, for audit and non-audit services, should be disclosed to shareholders.12. Key audit team members, including the engagement and independent review partners, should serve no longer than seven years on the audit.13. Two years should pass before a key audit team member can takea position at the company as a director or any other important management positionOrganization for Economic Cooperation and Development (OECD) The Organization for Economic Cooperation and Development (OECD) is a quasi-think tank made up of 30 member countries, includingthe United States and United Kingdom, and it has working relationships with more than 70 other countries. In 2004, the OECD unveiled the updated revision of its “Principles of Corporate Governance” that had originally been adopted by its member governments (including the U.S. and UK) in 1999. Although they are nonbinding, the principles provide a reference for national legislation and regulation, as well as guidance for stock exchanges, investors, corporations and other parties [11,13]. The principles have long become an international benchmark for policy makers, investors, corporations and other stakeholders worldwide. They have advanced the corporate governance agenda and provided specific guidance for legislative and regulatory initiatives in both the OECD and non-OECD countries.The 2004 updated version of “Principles of Corporate Governance” includes recommendations on accounting and auditing standards, the independence of board members and the need for boards to act in the interest of the company and the shareholders. The updated version also sets more demanding standards in a number of areas that impact corporate executive compensation and finance, such as:1. Granting investors the right to nominate company directors, as well as a more forceful role in electing them.2. Providing shareholders with a voice in the compensation policy for board members and executives, and giving these stockholders theability to submit questions to auditors.3. Mandating that institutional investors disclose their overall voting policies and how they manage material conflicts of interest that may affect the way the investors exercise key ownership functions, such as voting4. Identifying the need for effective protection of creditor rights and an efficient system for dealing with corporate insolvency.5. Directing rating agencies, brokers and other providers of information that could influence investor decisions to disclose conflicts of interest, and how those conflicts are being managed.6. Mandating board members to be more rigorous in disclosing related party transactions, and protecting soca lled “whistle blowers” by providing the employees with confidential access to a board-level contact.U.S.-EU Cooperation for Corporate Reforms Initially, the European Union resented applicability of U.S. Sarbanes-Oxley Act reforms to European companies and accounting firms operating in the U.S. However, after a series of negotiations, the U.S. and EU authorities have agreed to cooperate and decided to develop a compatible set of regulations. The regulatory bodies on both continents have undertaken a two-way cooperative approach based on effective equivalence of regulation and oversight authorities. Furthermore, member states of the European Union have proposed a code of conduct on the independent auditors whichincludes a five-year auditor rotation requirement. Furthermore, the national governments of the individual European countries have proposed reforms of their corporate laws. For example, in July 2002, the British government released a white paper proposing changes to the Company Law, which included harsher penalties for misleading auditors; redefining the roles of the directors; and creating standards for boards in accounting supervision and other disclosure issues. The British government is also reviewing the roles of non-executive directors and is considering the regulation of audit committees.中文译文全球企业会计欺诈与改革行动易卜拉欣·巴达维圣约翰大学摘要最近一波企业欺诈性财务报告激发了全球公司治理和财务报告改革，政府和会计和审计机构在美国和国际上的标准制定机构，包括欧盟委员会，国际会计师联合会;经济合作与发展组织;以恢复投资者对财务报告，会计行业和全球金融市场的信心。

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