Paradigm Flaw in the Boardroom

This article was written a decade ago and very little has changed

This paper addresses the fact that in today’s evolving corporate governance process that actual performance may well be retarded by the rapid proliferation of intrusive regulatory requirements, zealous enforcement initiatives and the cottage industries that have grown up around them. Rather than address the “emperor’s clothes” phenomenon, such heightened regulatory attention to corporate governance has driven many further away from substantive improvements, largely because management and corporate directors have often responded by becoming more risk averse[1].

The emphasis on quarterly earnings at the expense of long-term growth has garnered significant attention in the last two decades. A new scholarship has arisen which has focussed on the interests of the owners of the corporation which include, depending on one’s point of view, shareholders and other stakeholders. Long term value is readily distinguished from short term returns often generated by managers who are incentivized by the time horizon of their compensation arrangements. In his retrospective on the first decade of what he terms the “global corporate governance revolution”, Stephen Davis recounts the wise comment once made by Harvard University President Larry Summers, that “in the history of the world, no one has ever washed a rented car”. As with corporations themselves, far too much of people’s savings are managed as if rented, rather than owned. Davis observes that, “things go deeply amiss when owner passivity is so chronic”.

See the full paper in: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2583613