Entrepreneurship and Innovation: The Hidden Costs of Corporate Governance in Europe

Abstract

This paper discusses new corporate governance trends in the aftermath of the financial crisis. We consider the rationale used by policymakers for introducing stricter rules and codes of best practice, such as the Stewardship Code (which targets institutional investors in the United Kingdom), as well as recent initiatives to encourage board diversity. There is a division of opinion regarding whether listed firms should be subject to new, more stringent, regulations. The competing views are assessed critically. In this regard, we find hidden costs of corporate governance in Europe which can be classified into three groups: (1) increasing entry level expenses for firms with high growth potential, (2) the deception of investors and (3) short-termism by managers. This paper concludes that more economic evidence is required before new corporate governance reforms are introduced and suggests that policymakers should preferably focus on the existing minimum standards of corporate behaviour supported by open norms.

Keywords: corporate governance, takeovers, shareholder rights, executive compensation, board diversity, enforcement, innovation, entrepreneurship

JEL Classification: G18, G34, G38, K22, L26