Leadership today is complicated as companies face issues beyond what they make or sell, including climate change, income inequality, and diversity and inclusion.

Boards of directors work alongside top management, but they’re also responsible for overseeing the CEO, approving executive compensation and setting strategy.

Yet innovations in corporate governance — practices that dictate how boards lead companies — have a dismal track record.

Ryan Krause, associate professor of strategy in TCU’s Neeley School of Business and the Robert and Edith Schumacher Junior Faculty Fellow in Entrepreneurship and Innovation, wanted to know why.

Ryan Krause co-authored a paper that encourages corporations to see new ideas as legitimate from the start. Photo by Leo Wesson

He argues in the paper “Innovation in the Boardroom,” published last May in the Academy of Management Perspectives, that new ideas in corporate governance must be seen as legitimate from the start. But because innovations are untested, they’re “inherently illegitimate,” which means they often fail.

Krause and co-author Matthew Semadeni, professor of strategy at Arizona State University, found that failure to achieve legitimacy leads to disputes and limited innovation. 

“No one wants to be the first adopter,” Krause said. “Companies often fall back on the rationale of ‘This is how it’s been done’ or ‘This is best practice’ because it gives them legitimacy.”

Krause and Semadeni analyzed three recent corporate governance innovations — majority voting, say-on-pay voting and appointing lead independent directors.

They identified the lead independent director as a successful governance practice. It’s a “compromise solution,” Krause said, which lets a CEO remain as board chair and adds another director to provide oversight.

This arrangement dates to the 1990s, but it didn’t gain favor until after the Enron and WorldCom scandals of the early 2000s and the Sarbanes-Oxley Act, which mandated financial and corporate governance improvements. 

But requiring a director to receive a majority of shareholder votes to be elected and giving shareholders a say on executive compensation haven’t been as successful. 

Nearly 90 percent of Standard & Poor’s 500 companies use majority voting in some form, but most smaller companies do not. Although majority voting has been rapidly adopted, it has mostly occurred on an advisory basis, and it has produced little change.

Many corporate governance practices have focused on executive compensation. To provide shareholders with a greater voice in executive pay, federal legislation now mandates say-on-pay voting for publicly traded companies on an advisory basis. In the past decade, some shareholders have rejected executive pay packages, including at drug company McKesson and financial giant Citigroup. 

“No one wants to be the first adopter. Companies often fall back on the rationale of ‘This is how it’s been done’ or ‘This is best practice’ because it gives them legitimacy.”
Ryan Krause

Krause said the nonbinding votes appear to have little effect even though many corners see say-on-pay voting as crucial. Previous research by Krause and Semadeni showed shareholders care about high CEO pay only at poorly performing companies, which makes it unclear if a no vote means shareholders are angry with the CEO or the board, Semadeni said.

“The big takeaway is to allow for more flexibility to allow these firms to innovate,” Semadeni said. “Most of these measures have failed or not achieved what they wanted to do.”

Flexibility is needed, he and Krause concluded, so companies can experiment with new governance practices without having to permanently adopt them. 

In a new twist, Covid-19 brought a “seismic shift” to companies that perhaps for the first time had to think about their survival, Krause said. Boards must become “more active and accessible.”

Now Krause, who won TCU’s 2019 Deans’ Award for Research and Creativity, is focusing his research on board leadership. “The board chair role is incredibly complex and murky,” he said. “I hope to contribute to understanding how they lead and how to best execute this incredibly weird job.”