Friday, January 21, 2005

The Glass is Not Broken: Evaluating the State of U.S. Corporate Governance

For the past two years, enormous media attention has been trained on the alleged corporate board and governance failures at Enron, WorldCom, Tyco, Adelphia, Global Crossing, and others. Top executive compensation is routinely criticized as inefficient, excessive, or both.

According to Steven N. Kaplan, a professor at the University of Chicago Graduate School of Business, and Bengt Holmstrom of Massachusetts Institute of Technology, these criticisms and turmoil lose sight of one overarching fact-the U.S. stock market and the U.S. economy have performed remarkably well relative to the rest of the world.

"To read the financial press, you would think that the U.S. corporate governance glass is completely broken," says Kaplan. "We argue that the glass is not broken, but, rather, is more than half full."

In their study, "The State of U.S. Corporate Governance: What's Right and What's Wrong?," Kaplan and Holmstrom analyze the failures and concerns that have served as catalysts for recent legislative and regulatory change. Given the positive performance and those changes, the greater risk in the current environment is overreaction by the political and regulatory systems.

The authors argue that the data on U.S. stock market performance and overall country productivity is not consistent with a deeply flawed U.S. corporate governance system. Rather, the data is consistent with a system that is well above average. The system demonstrated its strength by responding to extreme events in a swift and effective manner, through public outrage, legislative change such as the Sarbanes-Oxley Act of 2002, and regulatory change such as the new governance guidelines from the NYSE and NASDAQ.

The Glass is Not Broken: Evaluating the State of U.S. Corporate Governance

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