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Does Corporate Governance Matter?

For those of us who toil in the corporate governance vineyard, it would be nice to think that what we do contibutes to economic growth. Yet, evidence for a postive link between corporate governance and productivity is sketchy at best. Here’s a new paper on Canadian firms that presents mixed results:

We investigate the impact of board’s quality as defined by a Score published in a Canadian National Newspaper on the performance of the firm. Based on the current literature, we ranked the boards of 219 Canadian firms in terms of four board characteristics: composition of the board, compensation of board members, shareholder rights, and disclosure. Then, we defined firm performance by using traditional accounting-based measures such as ROI, ROE, EPS, and Market-to-book ratio and value creation-based measures such as EVA(R) and MVA. To test the effects of board’s quality on firm performance, we adopted different models of univariate and multivariate statistical analysis.

Our results show no significant relationships between corporate governance and performance when using traditional performance measures, such as ROI, ROE, EPS and Market-to-book. However, they reveal significant links between board’s quality and performance when the latter is captured by value performance measures, such as market value added and economic value added.

And then there’s this paper from Michael Bradley and colleagues, which reports that:

This study examines the empirical relations between the governance structure of public corporations in the United States and the rating and pricing of their debt securities. We study an unbalanced panel of 775 unique U.S. firms from 2001 through 2007 and identify several statistically significant relations between corporate governance factors and credit ratings, bond spreads and firm values. We find that credit ratings are negatively related to the presence of antitakeover measures for firms with speculative grade ratings and positively related to the presence of antitakeover measures for firms with investment grade ratings. Moreover, we find that spreads are positively related to the presence of antitakeover measures, and this relation is significantly stronger for firms with less than investment grade credit ratings. Our findings also suggest that more stable boards, defined as having attributes relating to board tenure, director liability indemnification and classified board structures are related to higher credit ratings and lower bond spreads. We conjecture that boards with greater stability may be better positioned to take into consideration the longer term interests of the firm as a whole, thus benefiting the firm’s creditors.