Good Governance Really Matters: New Evidence

“Firms in which long-term investors own a greater stake improve managerial behavior and corporate governance…… Overall, long-term investors increase shareholder value by both increasing profitability and decreasing risk.”

“DO LONG-TERM INVESTORS IMPROVE CORPORATE DECISION-MAKING?”HARFORD, KECSKES, AND MANSI, JULY 2016

“Representation on U.S. public pension fund boards by state officials or those appointed by them….is strongly and negatively related to the performance of private equity investments made by the fund.”

“POLITICAL REPRESENTATION AND GOVERNANCE:EVIDENCE FROM THE INVESTMENT DECISIONS OF PUBLIC PENSION FUNDS”ANDONOV, HOCHBERG, AND RAUH, SEPTEMBER 2016

“U.S. public pension funds with a higher level of underfunding per participant, as well as funds with more politicians and elected plan participants serving on the board, take more risk and use higher liability discount rates. This increased risk-taking is negatively related to their performance.”

 “PENSION FUND ASSET ALLOCATION AND LIABILITY DISCOUNT RATES”ANDONOV, BAUER, AND CREMERS, SEPTEMBER 2016

It is tempting to simply summarize the findings of the three new studies cited aboveⁱ and conclude that they indicate that good organizational governance really matters. Academics call this inductive reasoning. Instead, this Letter starts with a deductive reasoning question: why should good governance matter?

A one-page handout created by strategic management professor David Beatty at the Rotman School of Management, and used as course material in the Rotman-ICPM Board Effectiveness Program (BEP) for pension organizations, answers the question succinctlyⁱⁱ: In addition to hiring the CEO, the jobs of a BOARD are based on 3 lines of sight: