Monday, 19 May 2008

Corporate governance and productivity

A friend pointed me in the direction of this paper that BERR issued back in February. The chapter that caught my attention was the one on governance, and there's plenty of stuff in there about the role good governance plays in reducing costs. Notably a lot depends on good old-fashioned regulation:

The interaction of frameworks and regulatory requirements can also help reduce the cost of equity capital. Hail & Leuz (2005) and Leuz (2006) attempt to understand and analyse the complexity of the influences of legal institutions, securities regulation and the level of integration of a nation’s capital markets. Emphasising the inherent caveats, they find some empirical support for the claim that firms from countries with more extensive disclosure requirements, stronger securities regulation and stricter enforcement mechanisms (as enabled by a high quality legal infrastructure) have significantly lower cost of equity capital than those that do not rate as highly on these parameters.

And look at the table on page 20 to see how well Japan does on this score. I'm sure many people would be surprised to see them top the table for lowest cost of capital.

It does rather suggest that whatever economic benefits stem from good governance, they are better achieved with the credible threat of enforcement. I'm not sure that a country like the UK meets that requirement. Here the enforcement role often falls into the hands of fund managers who a) may not be convinced that governance adds value and/or b) may not have a sufficiently long timescale to tackle governance issues that might take time to play out and/or c) may be too conflicted to play the role effectively.

On that cheery thought I am (probably) logging off for a day or so as my rock and roll lifestyle requires my appearance at a pensions conference in Sutton Coldfield. However if I have internet access and have something to post I will.

1 comment:

Destiny said...

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