In search of a model.

• Author: Levy, Leslie
• Position: Corporate governance

I have been told that the task of predicting episodes of corporate governance is just too hard. I don't understand why.

Suppose it were, say, the early days of the Reagan administration. And suppose at that time you knew when the next major period of corporate governance activity would occur. What would you have done with that knowledge?

As far as I know, there is no model, and especially no statistical model, for predicting periods of corporate governance.

I have been told that the task of predicting episodes of corporate governance is just too hard. I don't understand why. It strikes me that various institutions, including the government, attempt to make predictions that, on the face of it, look much more intricate.

We can intuitively be pretty sure of some of the factors that help to create an appropriate climate for corporate governance - for example, GNP, overall U.S. competitiveness, the unemployment rate, the kinds of jobs available as compared to those previously held by individuals, the availability of investment capital, corporate profitability, prevailing dividend rates, the strength of unions, and many other macroeconomic factors.

Furthermore, various factors at the board level would be expected to be pertinent. For example, if directors receive little or no useful information or if board discussion (in the sense mandated by Delaware and other courts) does not take place, directors are surely asking for trouble. Or, if CEO salaries, board composition, the nature of corporate investments, or other factors appear inconsistent with other conditions that turn out to be strongly associated with periods of corporate governance, surely governance activity becomes more likely. Similarly, corporate governance activity would presumably increase under a Secretary of Labor who considers corporate monitoring a fiduciary obligation, or an SEC that expands the opportunities for the owners of widely disseminated stock to plan joint strategy.

Of course, the fact that at least some of the preceding factors have been important in past periods of corporate governance activity does not imply their importance in the future. Who knows whether the next round of corporate governance will involve entirely new factors.

Still, it would be extremely interesting to know, for example, the relative importance in the past of factors external to the board or the corporation as opposed to internal, and especially formal, structural ones.

Alternatively, it would...