Wednesday, 29 February 2012

Shifts in corporate governance

It's a time when some of the long unchallenged fundamentals of many investors' approaches to corporate governance are finally being re-explored. For instance I've blogged a lot in the past about my growing scepticism about the value of performance-related pay for directors. I'm at the point where I'm pretty much convinced that it is ineffective, if not actively damaging, and therefore that shareholders waste an enormous amount of time trying to design and re-design incentive schemes.

One of the books I have on the go currently adds a new element - performance pay intended to incentivise more 'good' behaviour can drive out ethical behaviour. According to this book (an easy intro to behavioural ethics) goal-setting generally is dangerous territory, and reward systems intended to incentivise good behaviour can achieve the opposite. Incentive schemes focus attention on what is being rewarded to the exclusion of other factors, crowd out intrinsic motivation and so on. I don't really need any more convincing on this, but useful nonetheless.

However reading through the book, I was interested to discover that other axiomatic 'good thing' in corporate governance - transparency/disclosure - is also something of a double-edged sword. Go to any corporate governance event and sooner or later someone will say something like "sunlight is the best disinfectant". I certainly wouldn't argue against transparency, but we ought to be aware of some of the evidence in this area. For example, there is some experimental evidence that, for example, an approach to conflict of interests based principally on disclosure may make the conflicted party feel more able to act in their own interests.

Thinking about disclosure more broadly, it's interesting that John Kay has joined the ranks of those who believe that quarterly reporting might be problematic. More information may not only not be an effective policy response, it might be a positively bad thing. This is important when you consider that the stock response to many issues in responsible investment in the past has been to demand disclosure of more information.

Finally, John Kay's interim report out today also indicates that the ground is shifting in terms of the unexplored ideas that sit behind shareholder rights. As he says, whilst few are willing to explicitly challenge the idea of treating different types of shareholder/investor (ie short- and long-term) differently, a growing number do implicitly (see paras 3.14 and 3.15). This is potentially important stuff, and a further sign that 1990s vintage corporate governance is on the way out.

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