Aswath Damodaran 52
Is there a payoff to better corporate governance?
! In the most comprehensive study of the effect of corporate governance on
value, a governance index was created for each of 1500 firms based upon 24
distinct corporate governance provisions.
- Buying stocks that had the strongest investor protections while simultaneously
selling shares with the weakest protections generated an annual excess return of
8. 5 %.
- Every one point increase in the index towards fewer investor protections decreased
market value by 8. 9 % in 1999
- Firms that scored high in investor protections also had higher profits, higher sales
growth and made fewer acquisitions.
! The link between the composition of the board of directors and firm value is
weak. Smaller boards do tend to be more effective.
! On a purely anecdotal basis, a common theme at problem companies is an
ineffective board that fails to ask tough questions of an imperial CEO,
The bottom line is this. Changing the way boards of directors are chosen cannot
change the way companies are governed. You need informed and active
stockholders and a responsive management ot make corporate governance work.
When it does, stockholders are better off.
