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Rice University research finds executive board members are driven by incentives

In a recent study, a Rice Business professor found that board members actually need incentives — both short- and long-term — to act in stakeholders' best interests. Getty Images

If you're a stockholder, you may envision your investment helmed by a benevolent, all-knowing board of directors, sitting around a long finely-grained wooden table, drinking coffee, their heads buried in PowerPoint charts as they labor to plot the best course for the company. Too often, however, you can't take for granted that a company's board will steer it wisely.

Companies choose directors because they offer rich and varied experience in the business world. Many who serve on boards, moreover, are CEOs of other corporations, or have headed big companies in the past. As of October 2018, for example, six of the 11 directors on Walmart's board and eight of 13 on AT&T's board hold CEO or CFO positions in other firms. So it's easy to assume that board members will act in the best interests of stockholders.

But in a recent study, Rice Business professor Shiva Sivaramakrishnan found that board members actually need incentives — both short- and long-term — to act in stakeholders' best interests.

Corporations usually compensate board members with stock options, grants, equity stakes, meeting fees, and cash retainers. How important is such compensation, and what sort of incentives do board members need to perform in the very best interests of a company? Sivaramakrishnan joined co-author George Drymiotes to trace how compensation impacts various aspects of board performance.

Recent literature in corporate governance has already stressed the need to give boards of directors explicit incentives in order to safeguard shareholder welfare. Some observers have even proposed requiring outside board members to hold substantial equity interests. The National Association of Corporate Directors, for example, recommended that boards pay their directors solely with cash or stock, with equity representing a substantial portion of the total, up to 100 percent.

To the extent that directors hold stock in a company, their actions are likely influenced by a variety of long-and short-term incentives. And while the literature has focused mainly on the useful long-term impact of equity awards, the consequences of short-term incentives haven't been as clear. Moreover, according to surveys, most directors view advising as their primary role. But this role also has received little attention.

To scrutinize these issues, the scholars used a simple model, which assumes the board of directors perform three roles: contracting, monitoring and consulting. The board contracts with management to provide productive input that improves a firm's performance. By monitoring management, the board improves the quality of the information conveyed to managers. By serving in a consulting role, the board makes managers more productive, which, in turn, means higher expected firm output.

This model allowed the scholars to better understand the relationship between the board of directors and the company's managers, as well as with shareholders. The former was particularly important to take into account, because conflict between a board and managers is typically unobservable and can be costly.

The results were surprising. Without short-term incentives, the researchers found, boards did not effectively fulfill their multiple roles. Long-term inducements could make a difference, they found, but only in some aspects of board performance.

While board members were better advisors when given long-term motivations, short-term incentives were better motivators for performing well in their other corporate governance roles, according to the research, which tied specific aspects of board compensation to particular board functions.

Restricted equity awards provided the necessary long-term incentives to improve the efficacy of the board's advisory role, the scholars found, but only the short-term incentives, awarding an unrestricted share or a bonus based on short-term performance, motivated conscientious monitoring.

The scholars also examined managerial misconduct. Board monitoring, they concluded, lowered the cost of preventing such wrongdoing — but only if the board had strong short-term incentives in place.

Even at the highest rungs of the corporate ladder, in other words, short-term self-interest is the greatest motivator. Maybe it's not surprising. In the corporate world, acting for one's own benefit is a given — so stockholders need to look more closely at those at the very top. Like everyone else, board directors need occasional brass rings within easy reach to do their best.

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This story originally ran on Rice Business Wisdom.

Shiva Sivaramakrishnan is the Henry Gardiner Symonds Professor in Accounting at the Jesse H. Jones Graduate School of Business at Rice University.

What's the latest in tech research in Houston? Here are three revolutionary research projects happening right under our noses. Getty Images

Tons of research happens daily at various Houston institutions — from life-saving medical developments to high tech innovations that will affect the greater business community.

In this Houston research roundup, three research projects from three Houston organizations are set to revolutionize their respective industries.

University of Houston researcher explores potential disruption in blockchain

blockchain

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A huge technology question mark within business has been blockchain — how it'll affect the sharing of information and industry as a whole. But, one University of Houston professor and his Texas A&M University colleagues are looking into that potential disruption in a recent paper.

"It's an emerging technology. It's evolving," says Weidong "Larry" Shi, associate professor of computer science at UH, in a UH news release.

Funded by the Borders, Trade, and Immigration Institute, the research has developed into the paper, which was published in the International Journal of Production Research.

A key focus of the research is how blockchain will affect cargo entering the United States, and identifies six pain points within adapting blockchain for cargo management: traceability, dispute resolution, cargo integrity and security, supply chain digitalization, compliance, and trust and stakeholder management, according to the release.

"The wide adoption of blockchain technology in the global SC (supply chain) market is still in its infancy," the article reads. "Industry experts project that on average, it may take about six years for the widespread adoption of blockchain."

Blockchain has the potential to prevent fraud within the global supply chain, among other things.

"The data can't be changed. Everyone (along the supply chain) has a copy. You can add information, but you can't change it," Shi says in the release.

The U.S. Army taps Rice University for network research

Photo by Jeff Fitlow/Rice University

Rice University and the U.S. Army have joined forces for a five-year, $30 million research agreement to modernize the Army — specifically for developing next-generation wireless networks and radio frequency (RF) electronics.

"[The Army Research Laboratory] and Rice will match the right people and capabilities to meet specific challenges, and the cooperative agreement is structured to allow the Army to partner widely across our campus," says Yousif Shamoo, Rice's vice president of research and lead on the ARL partnership, in a recent news release. "One exciting aspect of this partnership is the broader societal benefits. The technologies we're starting with are needed for Army modernization and they could also benefit millions of Americans in communities that still lack high-speed internet."

Without going into too much detail, the two entities are working to advance the Army's existing infrastructure to create networks that can sense attacks and protect themselves by adaption or stealth. The technology has the potential to affect the Army as well as civilians, says Heidi Maupin, the lead ARL contact for the Rice partnership.

"We want to deliver the capability of quickly deploying secure, robust Army communications networks wherever and whenever they're needed," Maupin says in the release. "The technology needed for that will benefit the world by transforming the economics of rural broadband, reducing response times to natural disasters, opening new opportunities for online education and more."

Research out of Baylor College of Medicine advancing information known about vision

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For humans, seeing is pretty simple — just open your eyes. But the process our eyes go through extremely complex, and scientists have had a hard time recreating the process — until now.

Researchers at Baylor College of Medicine in Houston and the University of Tübingen in Germany have developed a novel computational approach that accelerates the brain's ability to identify optimal stimuli. The complete study by the scientists was published in the journal Nature Neuroscience.

"We want to understand how vision works," says senior author Dr. Andreas Tolias, professor and Brown Foundation Endowed Chair of Neuroscience at Baylor. "We approached this study by developing an artificial neural network that predicts the neural activity produced when an animal looks at images. If we can build such an avatar of the visual system, we can perform essentially unlimited experiments on it. Then we can go back and test in real brains with a method we named 'inception loops."

To track neurons and how they work, the researchers tracked brain activity scanning thousands of images.

"Experimenting with these networks revealed some aspects of vision we didn't expect," says Tolias, founder and director of the Center for Neuroscience and Artificial Intelligence at Baylor, in a release. "For instance, we found that the optimal stimulus for some neurons in the early stages of processing in the neocortex were checkerboards, or sharp corners as opposed to simple edges which is what we would have expected according to the current dogma in the field."

The research is ongoing and will only continue to help dissect how the brain sees and interprets visual elements.