Goals of Corporate Governance :Business Strategy /Financial Advisors

It follows from the observations that one model of corporate governance
does not fit all users; that there are international differences; and that corporate
governance has multiple goals.

These goals include, but are not limited to:
● protecting shareholders’ interests;
● protecting stakeholders’ interests;
● protecting the public’s interest in the banking system; and
● satisfying bank/government regulators.
Because there are different goals, investors, regulators and stakeholders
have different measures of success or failure. Some of the measures may be
tied to laws and regulations that affect the structure of corporate governance.
The Sarbanes-Oxley Act of 2002 (SOX) is the latest example in the
US. SOX was enacted to protect shareholder interests following the Enron,
Tyco and WorldCom debacles. In addition to Federal laws, Self-Regulatory
Organizations, such as the New York Stock Exchange, the American Stock
Exchange and NASDAQ, have rules dealing with the corporate governance
of listed companies

Some of the measures involve the following issues:
1. effectiveness and efficiency of operations;
2. reliability of financial reporting;
3. compliance with laws and regulations;
4. returns on investments; and
5. achieving stakeholders’ goals.

The first three issues appear in the Committee on Sponsoring
Organizations of the Treadway Commission (COSO) report on Internal
Control-Integrated Framework (1992). They also serve as the basis for the
Federal Deposit Insurance Corporation Improvement Act (FDICIA)
enacted in 1991. Section 112 of that Act requires management to report
annually concerning the quality of internal controls. FDICIA also requires
outside audits of the report.9

In general, investors are interested in returns on their investments (No. 4
above), but the degree of interest on returns differs in various countries. For
example, the ‘2006 ISS Global Institutional Investors Study’, of 322 institutional
investors in 18 countries found that in Japan, 80 percent of the 25
institutional investors surveyed cited higher returns on investments as the
major advantage of corporate governance, compared with 7 percent in
China.10 In China, 80 percent of the 30 institutional investors cited improved
risk management as the major advantage. Finally, stakeholders (No. 5 above)
have their interests. For example, employees are concerned about continued
employment, wages, and benefits. Similarly, the communities served by banks
are interested in how banks are serving their credit needs (Community
Reinvestment Act).

WHAT DOES THE ACADEMIC RESEARCH SHOW?
Academic research dealing with corporate governance and shareholders’
interests yields mixed results, depending on the methodology, data,
definitions, time periods used, and what the researcher is trying to prove. A
glimpse at recent research on selected governance topics illustrates this
point. This is not intended to be an extensive review of the literature. It only
provides a brief overview of two selected issues: stock returns and board
composition and structure.

Stock Returns
The first topic is stock returns. Gompers et al. (2003) examined data for
1990–9 and found that firms with strong shareholder rights have 8.5 percent
higher risk adjusted returns than firms with weak shareholder rights.
Cremers and Nair (2005) find that internal and external governance mechanisms
are complements and are associated with long-term abnormal
returns. Aggarwal and Williamson (2006) found that the new corporate
governance regulations were associated with higher stock values; but they
also found that the market was already rewarding firms that had better
governance. Core et al. (2006) did not find that support for the hypothesis
that weak governance causes poor stock returns. Loosely interpreted, these
studies examined whether strong corporate governance affected stock
returns, and the answers are yes and no.