Opinion: The G in ESG is getting a big shake-up and it s a win for stock investors – MarketWatch
The gurus of corporate governance dealing with things like shareholder voting rights and board elections have convinced many that there s a difference between good and bad corporate governance. Good governance increases democratic shareholder rights, like one-share/one-vote, while bad governance are things that increase despotic managerial power, like a CEO also chairing the board. Good governance reaps better returns for shareholders than bad governance, we are told.
As with the good and bad of consuming red meat, potatoes, and cow s milk, real-world data and professional views evolve. In corporate governance, this next stage has arrived with a new study questioning years of conventional belief on what s good and bad in governance.
Corporate governance data-mining dates back about two decades to pioneering work by finance professors Paul Gompers, Joy Ishi and Andrew Metrick. Using data created by the Investor Responsibility Research Center (IRRC, now part of Institutional Shareholder Services or ISS), they found that investors generally fare way better investing in democratic than despotic companies. Dubbed the G-Index, researchers proliferated numerous variations using similar datasets. Big advisers to large institutional investor advisors such as ISS and MSCI commercialized recommendations based on such data.
Now, a new study by law professors Jens Frankenreiter, Cathy Hwang, Yaron Nili and Eric Talley contends that this bedrock research contains many errors. Coders misinterpreted source material on some basic features, such as whether a company had dual-class shares, a staggered board or supermajority voting. In a multiyear effort, the law professors have built an entirely new dataset they hand-coded from the governance provisions of close to 3,000 public company charters. Comparing their findings with the original IRRC data and its offspring, the law professors report alarming errors in the original coding. Aggregate effects are dramatic, such as erasing most of any return premium to democratic compared to despotic companies.
Hmmm.