Is Corporate Governance Dead?

John Richardson writes that corporate governance is dead.

One indicator of this is the recent spate of mergers in the proxy adviser world. ISS goes through its seemingly endless series of mergers and acquisitions. MSCI, now stuck with a minimally profitable enterprise is no doubt wondering how to offload this doddering venture. Governance Metrics merged with the Corporate Library. Recent reports have announced the acquisition of Proxy Governance by Glass Lewis. Each of these events speaks to the unspoken fact that there is little money to be made in the proxy advisory world. CalPERS is refocusing its governance work in a way that suggests that its adventures over the last two decades is winding down.

More importantly, the arcane discussions about executive pay, director responsibility and risk are proving to be ever more irrelevant in a world concerned about the influence of the corporate enterprise on society and the environment. Corporate Governance as a tool for addressing these problems has lost its edge. While these discussions remain important to the initiated, its backward-looking approach and its failure to influence the ills of global corporate conduct speaks to its ultimate irrelevance. (Corporate Governance is Dead | Global Investment Watch, 12/28/2010)

Sure, many of us are frustrated by what appears to be a “failure to influence the ills of global corporate conduct” but corporate governance doesn’t necessarily take a “backward-looking approach.” While issue oriented advocates push one item at a time, those focused on corporate governance take a more systematic approach, focusing on rules and accountability. Just as you can govern a state through initiatives, you can govern corporations through advisory proposals. Richardson appears ready to throw in the towel even before the most significant reform, proxy access, has even been implemented.

Hopefully, we can move from one-dimensional reforms, like “independent” directors, that can easily be co-opted. For example, “independence,” as defined by Nasdaq and the NYSE, does little to increase the likelihood that directors will exercise independent judgment. On the other hand, directors who are dependent on nomination by shareowners will at least provide better balance on boards and such directors can be expected to take a broader approach to corporate responsibility than simply doing whatever is necessary to ensure a self-perpetuating board.

With regard to there being little money to be made in proxy advisory services, this appears to be a case where the low hanging fruit has been picked.

How can one make sense of the association between governance and returns during the 1990’s and its subsequent disappearance? We find that this pattern is due to markets’ learning over time to appreciate the difference in expected future profitability between firms that have good and bad governance (in terms of their levels of anti-takeover protection). (Pricing Corporate Governance, by Lucian Bebchuk, Harvard Law School, 11/30/2010)

If any firm can move beyond box-ticking approach to corporate governance, the combined brains of The Corporate Library, Governance Metrics and now Audit Integrity should be able to do so. Attempting to Reconcile their approaches will, I’m sure, lead to new synergies. CalPERS and others have a long track record making excess returns by investing in corporate governance focused funds. It The Corporate Library can market the methodology to weight indexed funds to reduce risk, that will stir more demand for corporate governance analysis.

Key, may be applying a model developed by Mark Latham. Instead of selling services to individual and institutional investors, it may be more effective to have services paid by the corporations being evaluated but selected by all of the firm’s shareowners.

As for CalPERS “winding down” their corporate governance activities, that opinion seems hard to reconcile with their recent campaign to spread majority vote requirements to an additional 50 companies.

To date, 20 of the 58 companies that CalPERS identified on the issue have implemented or have publicly committed to adopting the majority vote standard.  CalPERS plans to file shareowner proposals for majority vote at Annaly Capital Management, Apple Inc., BB&T Corp., and V.F. Corporation. CalPERS will continue engaging the remaining 34 companies and file shareowner proposals when necessary. (press release, 12/22/2010)

Of course, CalPERS isn’t the only actor in corporate governance. The Council of Institutional Investors wrote to 54 companies regarding 95 directors who failed to receive majority support from shareowners in 2010 board elections. The United Brotherhood of Carpenters and Joiners of America is filing majority vote proposals at 75 to 85 S&P 500 companies. Florida SBA and CalSTRS are also pursuing majority vote requirements at additional firms. And that’s just one of many issues.

On the horizon is a gradual awakening of individual investors to the importance of corporate governance. Organizations like,, & the US Proxy Exchange (USPX), which focus on getting them involved are just getting started. If individuals embrace the importance of corporate governance in both their equities and in how their institutions vote, half the battle will be won. Corporate governance is far from dead.

Richardson knows all this. I’m sure he isn’t giving up after 15 years focused on corporate governance. I’ll be watching his future posts to see just where he is going with his provocative assertion. At least he got us thinking over the holidays.

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