Interesting article in The Economist (Corporate Constitutions, 10/28/2010) on the recent revolution in corporate governance.
in 2009 less than 12% of incoming CEOs were also made chairmen, compared with 48% in 2002. CEOs are held accountable for their performance—and turfed out if they fail to perform, with the average length of tenure dropping from 8.1 years in 2000 to 6.3 years today. Companies have turned to a new class of professional directors, and would-be directors sign up for bespoke courses at business schools because Sarbanes-Oxley makes them personally liable for the accounts that they sign.
While Nell Minow and other corporate governance activist point to the recent financial crisis as evidence more reforms are needed in this direction, The Economist cites research by David Erkens, Mingyi Hung and Pedro Matos, of the University of Southern California (Corporate Governance in the 2007-2008 Financial Crisis: Evidence from Financial Institutions Worldwide), which found “the proportion of independent directors on the boards was inversely related to companies’ stock returns.” Institutional owners pushed firms to take more risks and independent directors appear to be more subject to their pressure.
However, the same authors also point out that the evidence from Asia suggests that greater external monitoring has produced better performance. The Economist concludes,
Good corporate governance on its own cannot make up for a toxic corporate culture. Reformers should continue to experiment with systems of checks and balances. But they would also profit from spending less time drawing up ideal constitutions and more time thinking about intangible things such as firms’ values and traditions.
In my opinion, this provides further evidence for the value of the UK’s newly introduced Stewardship Code… something the US would do well to study and modify for our own use.