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RI Academic Digest, June 2011: Investor protections improve corporate governance and returns.
Review of Bebchuk, L. A. and Weisbach, M. S.. (2010) “The State of Corporate Governance Research.” The Review of Financial Studies, 23 (3): 939-961.
RI’s regular digest of research published by the PRI Academic Network, June 2011.
Summary
Interest in corporate governance has grown in recent years due to such factors as the role of poor governance in the financial crisis and the increasing interest in corporate reporting on ESG issues. A recent issue of The Review of Financial Studies brings together seven recent studies on corporate governance, on subjects ranging from shareholder activities to board oversight and executive compensation. In general, the findings support the view of responsible investors that strong investor protections lead to improved corporate governance, which, in turn, can improve investment returns.
• Seven academic articles published in a 2010 issue of The Review of Financial Studies address the issue of corporate governance;
• The academic articles address shareholder activities, board independence, executive compensation, and politics; and
• In most cases, strong investor protections lead to improved corporate governance.
Main Review
Interest in corporate governance has grown in recent years, as authors Bebchuck and Weisbach point out in their overview of seven academic articles published in a 2010 issue of The Review of Financial Studies. The reasons for such increased interest are many; as the authors observe, the role of poor corporate governance in the financial crisis is one such reason. Another reason not overtly specified in the report is the growing insistence by responsible investors and others on reporting of environmental, social and governance (ESG) factors by companies. Not only is corporate governance one of the pillars of ESG; as Anthony Miller, the Economic Affairs Officer for the Investment and Enterprise Division of the United Nations Conference on Trade and Development (UNCTAD), recently stated, “Without good governance mechanisms, there is no responsible investment.” In their overview, the authors identify seven recent studies of corporate governance that represent “state of the art research”. The studies address a range of corporate governance issues, from shareholder activities to board oversight and executive compensation. A final study focuses on the role of politics in corporate governance.
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