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The Corporate Governance Industry

41 Pages Posted: 18 May 2006  

Paul Rose

Ohio State University - Moritz College of Law; Bocconi University - BAFFI Center on International Markets, Money, and Regulation; Tufts University - The Fletcher School of Law and Diplomacy; FundaciĆ³n Instituto de Empresa, S.L. - IE Business School

Abstract

This Article considers the role of the corporate governance industry as a voluntary regulator. The corporate governance industry influences (and in some cases effectively controls) the votes of trillions of dollars of equity, and affects the governance policies and fortunes of thousands of companies through proxy voting recommendations and governance ratings. This Article considers the increasing influence of the corporate governance industry, and argues that potential conflicts of interest within some governance firms cast doubt on the reliability of their proxy advice and governance ratings. Additionally, governance firms may be overstepping their expertise in proxy voting decisions and in governance rating, in part because of their reliance on "good governance metrics" for which there is little evidentiary support. Finally, erroneous governance metrics (and indeed, a reliance on one-size-fits-all governance checklists) promoted by influential governance advisers not only affect important shareholder voting decisions and decisions on whether to invest in or divest from a particular company, but may also have a more general, harmful effect on corporate governance regulation. A number of academics have argued that federal expansion into corporate governance issues has significant negative consequences. Perhaps most importantly, Sarbanes-Oxley mandates specific governance policies rather than setting broad standards, thereby eliminating some vital flexibility in corporate governance. This Article argues that the corporate governance industry may have similarly harmful effects by pressuring companies to adopt a homogenized set of governance rules which may not be suited to the companies' respective requirements.

Keywords: Corporate and Securities Law

JEL Classification: K22

Suggested Citation

Rose, Paul, The Corporate Governance Industry. Journal of Corporation Law, Vol. 32, No. 4, Summer 2007; Ohio State Public Law Working Paper. Available at SSRN: https://ssrn.com/abstract=902900

Paul Rose (Contact Author)

Ohio State University - Moritz College of Law ( email )

55 West 12th Avenue
Columbus, OH 43210
United States

Bocconi University - BAFFI Center on International Markets, Money, and Regulation ( email )

Milano, 20136
Italy

Tufts University - The Fletcher School of Law and Diplomacy ( email )

Medford, MA 02155
United States

FundaciĆ³n Instituto de Empresa, S.L. - IE Business School ( email )

Calle Maria de Molina 12, Bajo
Madrid, Madrid 28006
Spain

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