Does corporate governance improve company performance?

10 Nov 2023 | Data is not evidence

Corporate governance…can genuinely add value for business.

I was delighted to see a company’s study reach this conclusion. Corporate governance is my main research topic; I’m a Fellow of the European Corporate Governance Institute, and at the time I was Academic Director of the LBS Centre for Corporate Governance. The study’s subtitle was ‘A proven link between effective corporate governance and value creation’ (my emphasis) and the contents page suggests that they found ‘the holy grail’. A summary of the study boasted that ‘there has never been conclusive proof…until now.’

And the results indeed seemed conclusive: ‘Companies with the strongest governance practices achieve total shareholder returns of 8.5x the initial investment.’ By buying companies with good governance, you’d not just double your money — you’d more than octuple it (if that’s even a word).

But all the company did was find a correlation between corporate governance and performance — which is far from causation. There are two rival theories. The first is reverse causality. Perhaps poorly-performing companies have to focus on fire-fighting; only once a company has a rosy future outlook can it turn its attention to longer-term issues such as governance. The second is omitted variables. Something entirely different, such as having a great CEO, could improve both governance and performance, rather than the former causing the latter.

What was striking is that the link between corporate governance and performance had already been shown by many studies published in the top scientific journals. But the company’s study measured corporate governance by its own Corporate Governance Index. So, to tout their own index, they pretended that this question had never been explored before, and claimed ‘conclusive proof’  when they didn’t even have evidence. They had data, but data is not evidence when it’s consistent with rival theories.

Inside the Ivory Tower

Inside the Ivory Tower

In May Contain Lies, I highlight the value of academic research. While it's far from perfect, it can be more reliable than practitioner studies for a number of reasons: Its goal is scientific inquiry, rather than advocacy of a pre-existing position or releasing findings to improve a company's image. It's conducted by those with expertise in conducting scientific research. Papers published in top scientific journals are peer-reviewed, which helpsimprove their accuracy. However, authors, journalists, and practitioners will sometimes cite research as if it bears the hallmark ...
Does only 2% of VC funding go to female founders?

Does only 2% of VC funding go to female founders?

A widely quoted statistic is that only 2% of VC funding goes to female founders. For example, this Forbes article highlights that "only 2% of all VC funding goes to women-led startups" and asks "Why is only 2% of VC funding going to female founders"? If true, this statistic is substantial underrepresentation and needs to be urgently addressed. However, it's problematic for several reasons. 1. The Statistic Ignores Diverse Teams The 2% statistic actually refers to companies founded solely by women. It ignores diverse companies founded by both men and women. This is strange, because ...
An unhealthy obsession with organisational health

An unhealthy obsession with organisational health

Two leading asset management firms drew my attention to the McKinsey Organizational Health Index as a potential tool to evaluate a company. A book, "Beyond Performance 2.0: A Proven Approach to Leading Large-Scale Change", written by two McKinsey partners, claimed that companies with high scores on this Index trounced their unhealthy peers along a range of performance measures. For example, their shareholder returns were three times as high. But as I wrote in an earlier post, rather than being more impressed by big numbers, we should be more sceptical. If it were really possible to ...