Linking Corporate Governance and Performance

The Australian Treasury released a paper (March 2009) that purports to demonstrate a linkage between corporate governance and performance — whether it be operating results or share price.

For those interested in this topic, the ‘review of related literature’ cites a wealth of international studies that support the thesis: that there is a positive correlation between meeting defined principles of governance and results.

But I remain a skeptic of the studies. I would love to believe, but am having a tough time. 

The authors use information disclosed in public filings as the basis for determining whether companies’ governance practices meet the requirements of the corporate principles. But, consider this:

1. How many companies disclose their governance failures? I have never seen one report that their board is dysfunctional, dominated by the CEO, not addressing critical issues, or lacking reliable information. But I have seen a survey of board members that reported that most boards were concerned about their lack of experience in risk management and the poor quality of the risk information they received.

2. Enron: on paper, a model for corporate governance. Need I say more?

3. How many companies objectively assess their governance practices, so they know that there are deficiencies?

4. As an auditor (CAE) for many years, I have worked at companies with governance issues that the board and executive team didn’t understand were problems:

a. Where the CEO deliberately fostered a climate of cut-throat completion among the executive team. Everybody competed for favors and nobody shared information.

b. Where the code of conduct was signed by employees all over the world, many of whom didn’t understand English.

c. Where board members had little influence on the meeting agendas.

d. Where a board member was suspected of trying to oust the CEO and take over.

e. In one situation, I asked members of the audit committee why they were asking so many detailed questions of management. I got an honest answer: they didn’t trust the management team to perform.

5. Governance is broader, including how companies understand stakeholder needs, the establishment of strategies, oversight of management, and more. I am not persuaded that the study has used the most critical governance activities.

So what do you think? Are you a skeptical, yet hopeful believer?

 

Posted on May 13, 2011 by Norman Marks

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