Dan R. Dalton loves to stir up controversy. The former business school dean, who has been studying corporate governance for 25 years, has staked out positions that contradict virtually everything today's corporate reformers hold dear. Board independence, separation of CEO and chairman roles, stock ownership by directors and executives -- none of these good governance tenets can be definitively linked to a company's bottom line, insists Dalton. "I wouldn't deny that I like being a lone wolf," he says.
Dalton made a name for himself as a gadfly in governance circles while dean of Indiana University's Kelley School of Business, a post he has held for the past seven years. But this fall, the 57-year-old PhD in strategic management will be more of an equal among other governance gurus when he becomes director of Indiana's new Institute for Corporate Governance. The institute is the latest in a growing crop of university-based governance centers, director-training programs, and other efforts to help restore investor confidence and prepare corporations for the rigors of life in the era of Sarbanes-Oxley.
In many ways, Dalton is a natural choice to lead Indiana's center. A prolific researcher who has been a professor and administrator at Indiana's Kelley School since 1979, he has authored or co-authored several hundred journal articles on dozens of topics from CEO succession to IPO pricing. And although controversial, his corporate governance studies have garnered respect among fellow academics, even those whose research concludes the opposite -- that there is a correlation between good governance practices and improved financial results.
But his appointment is riling the opponents in the governance world who find Dalton's work misguided. Bob Monks, founder of proxy adviser Institutional Shareholder Services, calls Dalton's brand of research "academic self-indulgence." Others fault Dalton for relying on meta-analysis, which involves drawing conclusions from dozens, even hundreds, of previously published studies by other authors. The criticism: It doesn't include contradictory findings from unpublished studies. Long used in fields such as psychology but rarely in business, meta-studies often produce counterintuitive results. For a debunker of conventional wisdom such as Dalton, that's a powerful draw. But reformers like Monks dismiss his findings as beside the point -- focusing on financial performance when the aim of good governance is to provide a check on managerial power.
Dalton admits his research is limited by its reliance on financial performance data but argues that the measures he uses -- revenues, earnings, and market returns, among others -- are the same gauges adopted by investors to judge companies. And surely one goal of the reform movement, he says, is to improve financial performance through governance changes. "The clear tone [of Sarbanes-Oxley] is that by following these prescriptions, you will have a company that will perform better for shareholders," says Dalton.
A CARDINAL SIN
Dalton's experience isn't just academic. He was a director of First Financial Bancorp (FFBC), and in his first two years the Ohio bank underperformed its peers. But the board paid then-CEO Stanley N. Pontius handsomely, giving him a big increase in cash compensation one year and a salary hike and bigger option grant the next. During that period, the compensation committee included Barry S. Porter, the CFO at Ohio Casualty Corp. (OCAS), where Pontius sat on the compensation committee that determined Porter's pay, a board "interlock" that's considered a cardinal sin of corporate governance. Dalton defends the payout, saying the First Financial board's chair -- and head of the compensation committee -- was an outside director and that the company was in the midst of a costly but crucial reorganization in those years.
Still, Dalton vows that the new corporate governance center won't veer too far from mainstream reforms. "Just because behaving reasonably doesn't have direct rewards doesn't mean we should not behave reasonably," he says. For one thing, Dalton believes in independence, but not in the traditional sense; boards should have their own budgets to hire outside counsel and consultants who'll be beholden to the board, not management. And the center will teach in its executive-education courses and custom programs that the practices and procedures boards follow matter more than board composition and should be determined by directors themselves.
A good start from a naysayer. The challenge for Dalton will be to move beyond his focus on what doesn't matter in the governance arena and become an advocate for what does.
By Jennifer Merritt and Louis Lavelle in New York