Corporate Governance: Does it still matter?

For the purpose of this study, corporate governance (hereafter CG) deals with a set of internal and external mechanisms through which corporations are structured, managed, directed and owned. Over the last decade, corporate governance has received growing attention by policy makers, investors and rating agencies, especially in response to corporate scandals such as World Com, Enron, Arthur Andersen, Adelphia Communications, and Parmalat group. Subsequently, several corporate governance reforms were introduced around the world, in order to strengthen shareholders rights, as well as to restore market trust in the governance of public corporations. For example, in 2002 the US enacted the Sarbanes-Oxley (SOX) Act with the aim of improving governance practices inside public corporations by increasing board independence, disclosure, monitoring, and auditing mechanisms. A year later, the New York Stock Exchange (NYSE) and NASDAQ introduced new corporate governance rules by requiring that all listed companies must have a majority of independent directors, on the assumption that increased board independence leads to better management monitoring and better performance. La Porta, Lopez and de-Silanes, Shleifer and Vishny –LLSV- (1997, 1998) provided an empirical foundation for a line of research that emphasized the crucial role in CG of the legal environment and regulatory system, known as the “law matters view” (see also Shleifer 2008). They showed that different legal systems (especially with reference to the Common Law and Civil Law affiliation) exerted enormous influence on shareholders‟ protection, as well as corporate governance practices. Despite subsequent criticism by legal and economics scholars8, their studies provided evidence that Common Law countries better protect investors and minority shareholders (La Porta et al. 1998) and better shareholder protection leads to higher firm performance (La Porta et al. 2002). Given this important link, and the performance goal underlying recent CG reforms, several questions arise: - Does CG really matter?; - How can we measure good corporate governance?; - Do changes in CG matter? The empirical evidence has not uniformly supported a positive relationship between shareholders‟ rights, corporate governance and firm performance. The purpose of this study is to answer the above questions by critically evaluating the most recent literature and thus to shed some light on the linkage between CG and performance.