Corporate Governance : over-rated?

Do independent directors really make a positve difference? Does improved governance result in better corporate performance? The answers may be ambivalent at best. Following excerpts from The Economist (Schumpeter) are perhaps the most unflattering assessment so far:

"New research by David Erkens, Mingyi Hung and Pedro Matos, of the University of Southern California, powerfully reinforces the sceptics’ case. The authors conducted a comprehensive study of the performance in 2007-08 of 296 financial institutions with assets of more than $10 billion. They found that none of the tenets of good corporate governance stood up to close examination. Directors who were well informed about finance performed no better than know-nothings. Companies that separated CEOs and chairmen did no better. Far from helping companies to weather the crisis, powerful institutional shareholders and independent directors did worse in terms of shareholder value. Indeed, the proportion of independent directors on the boards was inversely related to companies’ stock returns.


Why was this? The authors argue that in the run-up to the crisis powerful institutional owners pushed firms to take more risks to boost shareholder returns. This suggests, they argue, that outside shareholders may be inherently more risk-hungry than managers who have their livelihoods tied up with their companies. They also argue that independent directors were much more likely to press firms into raising more equity capital even when the company’s share price was tanking. One possible reason for this is that independent board members are worried that their value in the market for directorships will plummet if they have overseen companies that have filed for bankruptcy or debated restructuring. "

What is there to comment?