“After five decades of research in corporate governance, my sense is that we have lost the forest for the trees,” writes Aswath Damodaran in his latest blog post on the disassociation of ESG regulation from market pricing and business value. This cycle, he argues, began with the Enron and Tyco scandals in the United States, where insider-dominated boards were negligent in their oversight responsibilities. The resultant Sarbanes-Oxley Act, and subsequent UK regulation, named corporate governance as one of its objectives.
That was 2002. “Twenty years later 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,” Damodaran continues. Most users of financial statements (including investors and business valuers) would have a hard time explaining how a 2022 annual report is any more helpful than the 2002 version.
“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,” Damodaran continues. “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. 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.”
“I believe that for a true shift in corporate governance to happen, we have to reframe the meaning of good corporate governance, shifting away from a board-centered, check-box driven view,” Damodaran argues. This view only clouds the independence and reliability of financial data essential to the practise of business valuation. Instead, Damodaran envisions financial regulation that is centered on giving shareholders the power to change company management, if they choose to. “In fact, good corporate governance is like a good democracy, where shareholders (voters) get the power to change management (governments), when they believe that their interests are not being served,” he says.
Damodaran’s blog has over 23 million page views, ranking him as one of the most successful blog authors on the planet.
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