Greenbaum on Corporate Governance

Stuart Greenbaum recently gave a very interesting and important speech at the Financial Intermediation Research Society Meetings in Shanghai China. Fortunately for those of who did not go to China to attend the conference, the keynote address is available through SSRN. The abstract does not do the speech justice, so I will provide some "visual bites" via some "look-ins":

*"Ben Hermalin and Michael Weisbach (2003) quote Adam Smith on agency problems arising from separation of finance and management....Berle and Means (1933) essay these same issues in the context of public corporations with diffuse ownership....Nevertheless, the current flowering of the corporate governance issue, accompanied by a tsunami-like surge of research...offers something new."

* "It was recently noted by Gillan (2006) that searching "“corporate governance"” on SSRN yielded 3500 items....being impelled to reinterpret virtually all of Finance."

*"Finance may well become the business school'’s quintessential normative discipline. Teaching business ethics, always something of an embarrassment, may simply come to be teaching Finance well!"

* "The corporate governance issue divides itself conveniently into two complementary components of substance and implementation. The former asks the question of corporate purpose. Arguments in the corporation'’s alleged objective function are the domain of inquiry. Shareholders versus stakeholders is the vernacular phrasing."

"Tirole concedes three pedestrian reasons for the narrower construal of corporate purpose [that is why we should focus on shareholders] These include paucity of appropriable resources, parsimony (workability) and avoidance of foot-dragging and deadlocks in decision making (again, workability). There is no doctrinal defense of share- or debtholders'’ property rights. Tirole'’s concessions to shareholders'’ exclusivity as claimants to both cash flow and control rights are unabashedly and exclusively practical."

However,

*"Whatever your personal predilection---and mine veers toward the traditional, narrower view on Tirolean grounds--- it would be wrong to ignore the tectonic drift in public sentiment toward a greener, more European view of corporate purpose."

* "...the explosion of interest in corporate governance is too easily misinterpreted as a theme, even a nuance, in Finance. Nomenclature aside, corporate governance is a watershed, comparable to the reinvention of the field beginning in the late 1950'’s by Modigliani, Miller, Scholes, Merton, Jensen, Fama, et al."

*"The corporate governance movement breathed life into Behavioral Finance that sought explanations for anomalies of the frictionless, efficient markets so integral to the earlier recasting of Finance. But whereas Behavioral Finance deployed a set of unrelated psychological constructs as explanations for previously puzzling financial occurrences, corporate governance offered a cohesive story originating at the epicenter, the inner sanctum of corporate affairs"

Greenbaum then goes on to discuss the role of intermediaries:

*"...banks have been complicit in the more heralded corporate scandals...In any case, this failure of banks to perform expected monitoring was widespread. Standard explanations fell into the "“my brother thinks he'’s a chicken”" category. That is, the fees paid to the intermediaries were too seductively large to be jeopardized....This is the same reason Arthur Andersen and Enron'’s lawyers were said to have looked the other way."

* He concludes: "The financial intermediaries, along with boards, external auditors, lawyers, the stock exchange and governmental regulators, are the guardians society depends upon to protect corporate integrity. The intermediaries'’ role is to monitor, but they are just as subject to subversion as those they are charged with monitoring."

Well said and a great speech. Definitely I^3 (which is I think the first time I have ever given a speech an I^3 rating.)

Highly recommended!

Cite: Greenbaum, Stuart I., "Corporate Governance and the Reinvention of Finance" (June 20, 2006). Available at SSRN: http://ssrn.com/abstract=908613