Excerpt from Musings on Markets: META Lesson 1: Corporate Governance

“After five decades of research in corporate governance, my sense is that we have lost the forest for the trees, with the composition of boards of directors and rules on proxy voting receiving disproportionate attention, from both legislators and regulators, often at the expense of bigger and more consequential issues. In the aftermath of the Enron and Tyco scandals in the United States, where insider-dominated boards were negligent in their oversight responsibilities, the Sarbanes-Oxley Act was passed in 2002, with improved corporate governance as one of its objectives.

At about the same time, you saw the advent of services that used the disclosures that companies were required to make on governance to estimate corporate governance scores. We were told at the time that the combination of independent boards, increased disclosure, and governance scores would create a revolution in corporate governance, where managers would act to advance shareholder interests.

It is clear that twenty years later that all that Sarbanes Oxley has accomplished is replacing ineffective insider-dominated boards with ineffective independent boards while creating hundreds of pages of disclosure that no one reads and giving rise to scores that are close to useless in judging governance. With the push towards diversity in board composition now taking precedence, this process is hurtling even more into irrelevance, with the only positive being that the ineffective boards of the future will meet all our diversity criteria.”

Read the full post here.