Corporate Governance, the Economist, and a Criticism without a Purpose

by J Robert Brown Jr. for The Race to the Bottom, November 9th, 2010.

We don’t have much of an opportunity to comment on the approach taken by The Economist on corporate governance.  When we do, however, it is usually to disagree.  This week’s edition provides an opportunity.

Schumpeter, Corporate Constitutions takes issue with corporate governance reform.  It relies on a number of questionable assertions to buttress the argument.

First, the piece notes that directors now take courses at business schools “because Sarbanes-Oxley makes them personally liable for the accounts that they sign.”  The part about the classes may be true and directors certainly obtained elevated responsibilities as a result of SOX.  But impose liabilities on the accounts they sign?  Not in the Act.  SOX did require that the CEO and CFO certify financial statements.  But this expanded liability for officers who signed the forms, not directors.   Moreover, under the antifraud provisions, the person signing the false filing can generally be viewed as a primary violator.  Still, the requirement did not emanate from SOX.

But the thrust of the article was a challenge to those using the financial crisis to argue for stronger corporate governance.  As the piece noted:

  • Corporate reformers immediately seized on the crisis as yet more proof of their arguments. Banks had always been badly managed, they argued. And banking CEOs were past masters at bamboozling shareholders and directors. Nell Minow, one of the most industrious of the reformers, flatly declared that “the recent volatility” proved that the “need for better corporate governance has never been clearer or more pressing.”

The response?  That some companies with “weak” governance performed well and some with “good” corporate governance had not. (continue reading… )


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