Creating Value Through Corporate Governance
8 Pages Posted: 18 Mar 2003
Abstract
Value and governance are such familiar words that we do not often enough reflect on their meanings in a specific situation. This paper will suggest:
Value is in the eye of the beholder.
The appearance of governance may be preferable to the real thing.
In order better to understand value, we will work with a simple question - is it appropriate for a global investor to purchase common shares in Volkswagen? There are many kinds of shareholder, each with distinctive interests that are not always compatible with the interests of the other investors. A global investor is typically the trustee of a pension plan with the simple obligation to collateralise the pension promise by maximising the long-term value of trust assets. The beneficiaries of pension funds are not rich people. Fluctuations in market values are no longer primarily a question as to whether rich people are a bit richer or poorer, they are a question as to whether pensions will be paid to the roughly half of the population of the OECD world who have interests in employee benefit plans. This makes investment a matter of social and political concern. At the end of our trip through the mythology and prospects for adding value to corporate enterprises through effective governance, we come to a very simple conclusion. I bastardise a celebrated principal of physics to conclude that both in science and in business a watched particle behaves differently than one that is not watched. "An observed board behaves differently" and is more likely to generate value for corporate owners.
Keywords: Value, Global Investor, Common Shares, Accountability, CEO Compensation, Audit
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