Governance: not by the numbers

Johnnie Moore

Johnnie Moore

I’m Johnnie Moore, and I help people work better together

There’s a good article at the Knowledge@Wharton website: Corporate Governance by the Numbers: It Doesn’t Work . It reports research which suggests that the formulae offered as “best practice” for good corporate governance simply don’t correlate with good performance in the real world. Here are a few snippets

Warren Buffett is an undesirable board member. He’s too old serves on too many boards and has insider ties to too many of the companies on whose boards he sits.

Sounds ridiculous, doesn’t it? After all, Buffett has a reputation for being one of the most astute and ethical investors of the last 30 years. Plus, the billionaire stock-picker is a bit of a good-governance guru himself, pushing, among other things, for companies to expense employee stock options to show their true cost.

But this is the sort of argument some corporate governance watchdogs make…

Wharton accounting professors David Larcker, Irem Tuna and Scott Richardson say this sort of check-box approach to corporate governance doesn’t work. Companies and their situations are too diverse. “The recipe book is big, and there’s a different recipe for each company,” Richardson notes. Even worse, the professors say, are consultants and ratings services that use formulas – which they typically refuse to reveal – to boil down a company’s corporate governance to a single number or grade.

“Lots of people are coming up with governance scorecards,” Larcker explains. “They’re coming up with best practices and selling this stuff. As far as we can tell, there’s no evidence that those scorecards map into better corporate performance or better behavior by managers.”

I haven’t read the underlying research and it may be that one could question the formulae the professors have used to rate the metrics (of course that sort of reinforces the point doesn’t it?). The article focuses on the correlation between business performance and good governance and of course good governance can’t just be about making more money – yet a lot of the consultants in the area of corporate accountability are claiming that good governance equates with more profit over time.

I will confess (shock!) that their findings fit with my own thoughts about so much of the so-called “best practice” that goes on in the organisational world. I think there’s a desire to reduce our complex, mysterious human behaviour to a set of mechanical formulae as a way to feel safe in an uncertain world. Nothing wrong with wanting to feel safe – but I fear that such an approach is often counter-productive, encouraging us to trust experts instead of paying attention to the subtle evidence of our senses.

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