Pros and Cons of Good Governance: Despite the costs, there are notable advantages.

Author:Raymond, Doug

Are best practices in corporate governance worth it? Why should boards struggle to implement policies and procedures that may be uncomfortable, expensive and inefficient?

Pundits often suggest that strong governance can boost stockholder returns and studies periodically seek to support to this idea with pronouncements such as "companies with strong governance outperform those with weak governance by 7.4% per annum," states a report titled Internal Governance Characteristics, Time-Varying Agency Costs and Stock Prices.)

The SEC, stock exchanges and many institutional investors also appear to have bought into good governance as a pathway to stronger shareholder returns. But some have sharply criticized such analyses, and at least for the moment, there doesn't seem to be strong empirical support for the claim that good governance produces increased shareholder returns. Despite the lack of quantifiable benefits, there are some notable advantages of good governance, including promoting efficient and effective responses to corporate misfortune.

The current governance regime includes state and federal laws and regulations, the various requirements of the stock exchanges, and recommendations and policies of institutional investors and their advisors. These prescriptions are extensive, intrusive and expensive.

To start, the median annual compensation of a director at a Fortune 500 company is now more than $250,000. Governance imposes other financial costs, including the expense of engaging outside experts and consultants, and non-financial costs such as the time and other resources spent in the name of "good governance." At many companies, management now spends days to prepare for board meetings, time that might have been devoted to operations or sales growth.

Beyond these, there can be other costs. Some have criticized that too much board interference impedes the entrepreneurial spirit that has animated many successful corporations. After all, many directors believe that their role requires skepticism in assessing management's plans and avoiding risks wherever possible. This skepticism and risk aversion can delay, thwart or dilute the implementation of management's grand vision.

In recent years, similar concerns have motivated founders, particularly in the technology sector, to use two classes of common stock when taking their companies public, allowing them to retain control over their boards.

So, if good governance produces inconclusive market...

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