In February, I wrote a blog about the UK approach to corporate governance, which started with the Cadbury code. I argued that we need to review the UK approach as it is not enough evidence based. A few years ago, I organised a conference on corporate governance at Cardiff Business School. One of the participants, one of the authors of an important review of UK corporate governance which was commissioned by the UK government, expressed utter surprise at the fact that there was indeed research being conducted on corporate governance. It seems weird that policy makers and executives have so little awareness and knowledge of corporate governance research, which by its very nature is highly practice oriented and often also has important policy implications.
Why would this be the case? Imagine that your general practitioner (GP) refuses to keep up with recent developments in medical research. What would be your reaction? You would very likely lose confidence in your GP and try to find a doctor with up-to-date knowledge. So why aren't executives interested in corporate governance research? The answer to this question is not obvious. First, executives are frequently prejudiced about business and management research (and not just corporate governance research), believing that it is too remote from what they do on a daily basis, too theoretical and fails to deliver clear prescriptions about what to do in practice. Both sides are probably to blame. While there is research out there that is highly theoretical and sometimes has predictions that cannot be tested, a lot of research is of an empirical nature using primary data (e.g. from interviews and questionnaire surveys) or secondary data (e.g. from companies' annual reports). Clearly, such research will provide insights into corporate governance practice. In turn, a lot of academics may still have a rather blasé attitude in the sense that they believe that it is beneath them (and a waste of their time) to engage directly with (potential) users of their research. Nevertheless, attitudes are changing in academe whether this is voluntary or not. For example, the latest government exercise of rating UK universities in terms of the quality of their research, the Research Excellence Framework, gives marks for impact, defined as the 'reach' and 'significance' of research. Second, as anything else that is driven by government policy or at least government pressure, vested interests are likely to be an important driving force pushing regulation in a particular direction or, even worse, preventing it altogether. The sub-prime mortgage crisis is a good illustration of how powerful pressure groups can mold and/or prevent regulation that is against their self-interest. Third, there is clear path dependence. If one goes down a particular path (e.g. emphasising the role of non-executive directors in corporate governance), it is difficult to make radical changes to that approach later on.
However, I believe that it is also important to rethink the approach to teaching corporate governance within business schools. Too often, that approach is too simplistic and grounded in existing regulation rather than evidence. For example, some of the earlier textbooks on corporate governance, after a very cursory review of corporate governance theory (to be frank there isn't much), embark on an extensive review (typically devout of any criticism) of existing corporate governance regulation and codes of best practice. This is then followed by chapters discussing how to achieve the key recommendations of the codes (e.g. board independence). As I have written in a previous blog, there is very little evidence that board independence creates firm value. There is also now emerging evidence suggesting that, while board independence may be good for more mature firms, it may cause more harm than good for younger, high-growth firms.
I believe that when teaching corporate governance it is important to keep an open mind approach, which would include a critical review of existing regulation. It is also crucial to convey to students that to date there is still a lot we do not know about corporate governance. Finally, we need to get back to basics. What are the aim and the objectives of corporate governance? Looking up the definition of corporate governance on Wikipedia [accessed on 22 March 2014] is a hair raising experience:
Why would this be the case? Imagine that your general practitioner (GP) refuses to keep up with recent developments in medical research. What would be your reaction? You would very likely lose confidence in your GP and try to find a doctor with up-to-date knowledge. So why aren't executives interested in corporate governance research? The answer to this question is not obvious. First, executives are frequently prejudiced about business and management research (and not just corporate governance research), believing that it is too remote from what they do on a daily basis, too theoretical and fails to deliver clear prescriptions about what to do in practice. Both sides are probably to blame. While there is research out there that is highly theoretical and sometimes has predictions that cannot be tested, a lot of research is of an empirical nature using primary data (e.g. from interviews and questionnaire surveys) or secondary data (e.g. from companies' annual reports). Clearly, such research will provide insights into corporate governance practice. In turn, a lot of academics may still have a rather blasé attitude in the sense that they believe that it is beneath them (and a waste of their time) to engage directly with (potential) users of their research. Nevertheless, attitudes are changing in academe whether this is voluntary or not. For example, the latest government exercise of rating UK universities in terms of the quality of their research, the Research Excellence Framework, gives marks for impact, defined as the 'reach' and 'significance' of research. Second, as anything else that is driven by government policy or at least government pressure, vested interests are likely to be an important driving force pushing regulation in a particular direction or, even worse, preventing it altogether. The sub-prime mortgage crisis is a good illustration of how powerful pressure groups can mold and/or prevent regulation that is against their self-interest. Third, there is clear path dependence. If one goes down a particular path (e.g. emphasising the role of non-executive directors in corporate governance), it is difficult to make radical changes to that approach later on.
However, I believe that it is also important to rethink the approach to teaching corporate governance within business schools. Too often, that approach is too simplistic and grounded in existing regulation rather than evidence. For example, some of the earlier textbooks on corporate governance, after a very cursory review of corporate governance theory (to be frank there isn't much), embark on an extensive review (typically devout of any criticism) of existing corporate governance regulation and codes of best practice. This is then followed by chapters discussing how to achieve the key recommendations of the codes (e.g. board independence). As I have written in a previous blog, there is very little evidence that board independence creates firm value. There is also now emerging evidence suggesting that, while board independence may be good for more mature firms, it may cause more harm than good for younger, high-growth firms.
I believe that when teaching corporate governance it is important to keep an open mind approach, which would include a critical review of existing regulation. It is also crucial to convey to students that to date there is still a lot we do not know about corporate governance. Finally, we need to get back to basics. What are the aim and the objectives of corporate governance? Looking up the definition of corporate governance on Wikipedia [accessed on 22 March 2014] is a hair raising experience:
Corporate governance refers to the system by which corporations are directed and controlled. The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and procedures for making decisions in corporate affairs. Governance provides the structure through which corporations set and pursue their objectives, while reflecting the context of the social, regulatory and market environment. Governance is a mechanism for monitoring the actions, policies and decisions of corporations. Governance involves the alignment of interests among the stakeholders.
Corporate governance is much more far reaching. I believe it is wrong to limit corporate governance to a set of rights, rules, procedures and mechanisms. We are actually experiencing some of these far reaching consequences at this very moment in time. The 2007/8 bank failures are now redefining the social contract in the UK, in particular the distribution of the country's wealth across social classes. This is reflected in recent as well as ongoing cuts to social benefits and employee rights. Yes, corporate governance is also about rights, rules, procedures and mechanisms. However more importantly, I believe it is about the prevention or mitigation of conflicts of interests. Such conflicts of interests may exist between:
This is the approach I adopt in my textbook on International Corporate Governance. Hence, the inclusion of chapters on Corporate Governance, Types of Financial Systems and Economic Growth, and Employee Rights and Voice across Corporate Governance Systems, as well as the discussion of important concepts such as capture of gatekeepers (e.g. regulators and auditors) by firms.
A suggested outline for a module on corporate governance can be found here.
Legal disclaimer: This blog reflects my personal opinion and not necessarily that of my employer. Any links to external websites are provided for information only and I am neither responsible nor do I endorse any of the information provided by these websites.
- the providers of finance and the managers;
- the shareholders and the stakeholders;
- different types of shareholders (mainly the large controlling shareholder and the minority shareholders).
This is the approach I adopt in my textbook on International Corporate Governance. Hence, the inclusion of chapters on Corporate Governance, Types of Financial Systems and Economic Growth, and Employee Rights and Voice across Corporate Governance Systems, as well as the discussion of important concepts such as capture of gatekeepers (e.g. regulators and auditors) by firms.
A suggested outline for a module on corporate governance can be found here.
Legal disclaimer: This blog reflects my personal opinion and not necessarily that of my employer. Any links to external websites are provided for information only and I am neither responsible nor do I endorse any of the information provided by these websites.
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