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Alex Todd’s Comment on: The uncertain relationship between governance and performance by Stephen M. Bainbridge

Alex Todd’s Comment on:  The uncertain relationship between governance and performance by Stephen M. Bainbridge

Stephen, I agree, but its worse than complicated; the governance/performance dynamic is complex.

The fundamental problem with corporate governance is that everyone does not agree on what the board is expected to accomplish and on whose behalf. The debate has become polarized to the point where it is starting to sound like religion, especially when we start to use terms like “good” and “bad” corporate governance practices. Whose God are we following when we judge a “good” or “bad” corporate governance practice? See my poll: “Are corporate governance ratings more like religion than science?” at http://polls.linkedin.com/poll-results/89315/ymjga

Most studies to date have been flawed, because they start with the hypothesis that “good” corporate governance associated with “good” business results. What constitutes “good” in each use of the term? The reality is that there are more or less appropriate corporate governance practices for different kinds of organizations, and there appears to be a connection between the strategic priorities of a company and its corporate governance style. I wrote about this in my article “Corporate Governance Best Practices: One size does not fit all”, most recently published by The Singapore Accountant (see http://trustenablement.com/local/One_Size_Does_Not_Fit_All-ICPA_Singapore.pdf).

I have since validated the styles using corporate governance date for more than 7,000 companies worldwide (5,000 in the United States) and found the small sample portfolio of those that strongly exhibiting one of the styles produced a 14% total stock return over the past 4 years (that’s significantly above even the best performing Russell index). I am now planning to validating these results with a large pension fund. The corporate governance practices that comprise the “style” of the high-performing portfolio are both “good” and “bad”.

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