Having publicly-held corporations be responsive to shareholder and community concerns is one of the reasons for wanting good corporate governance.
Another is avoiding loss of financial value. Enron's market capitalization reached nearly $60 billion; when it collapsed and everything was lost, much of the blame was aimed at the formerly high-flying energy-trader's governance.
The Sarbanes-Oxley legislation and passel of new SEC rules that followed tries to improve corporate governance. But were more and stricter rules and requirements the best way to do that? Won't the government be outmatched by the high-paid lawyers and accountants on most big-company payrolls?
Isn't there another question that might be more important? It's a question some people don't like to ask and many don't want to know the answer to, "Does good corporate governance make a positive difference when it comes to financial performance?" 
Opponents of increased regulatory oversight argue it's always a bad bargain; there may be some benefits, but they aren't justified by the costs. Proponents take the opposite tack saying markets don't penalize good behavior; good corporate governance and good financial performance go hand-in-hand.
Which side is right? Has anybody tried to answer this question with some serious thought and analysis?
Another post mentioned the California Public Employees Retirement System, widely known by its acronym, CalPERS. When it comes to financial behemoths, there's no one bigger.
They're the nation's largest public pension fund with over $245 billion invested in the stocks and bonds of over 2700 companies. When they speak, people pay attention, particularly if they are one of your biggest stockholders.
About 20 years ago, CalPERS began asking whether there's a connection between poor financial performance and bad corporate governance.
Below-average financial performance isn't hard to detect or measure. CalPERS compares an investment's performance with popular indexes (S&P 500, for example) as the first step of their process.
Deciding whether a company uses good or bad governance is more complicated. Companies govern themselves in many different ways. There's no one universal set of practices that everyone agrees is better than others.
After much trial and error, CalPERS focuses on some of the following for identifying whether a company is "poorly governed":
- Roles of Board Chair and CEO are combined
- Relatives serving on Board of Directors
- Size of Board (Number of Directors)
- Relative proportion of Insider/Outside Directors
- Actual or Potential Conflicts of Interest
- Insider members on Board's Nominating or Compensation Committees
- Procedures for Amending Bylaws or Voting on Shareholder nominees or initiatives
- Material restatement of financial results
- Compensation plans insufficiently linked to performance
CalPERS annually publishes a "Focus List" of companies in its investment portfolio that have performed poorly and have poor governance. The 2007 list has 11 companies on it, a few of which are well-known.
- Dollar Tree Stores. Underperformed S&P 500 by 21% and refused to remove super-majority voting requirements that control stockh0lder initiatives.
- Eli Lilly & Company. Underperformed S&P 500 by 52% and refused to grant stockholders the right to call special meetings.
- International Paper Corporation. Underperformed peers by 35% and refused to remove super-majority voting requirements. (Fortune magazine named International Paper as one of "America's Most Admired Companies.")
- Sara Lee (Jimmy Dean Sausage and Kiwi Shoe Polish among many others). Underperformed peers by 36% and refused to implement measures to make Board less isolated and more accountable.
CalPERS does more than just publicize the names of the companies they identify as poor financial performers and badly governed. They meet with board members, executive officers and, in many cases, ask for specific actions they believe will improve the company's governance.
After all this "dust" settles, was it worthwhile? Where companies agreed to improve their governance, did their financial performance also improve? Are valuable benefits gained from good governance?
Several studies have looked at what's called the "CalPERS effect." Most of them show positive results in terms of stock-price performance during the year after CalPERS initiates its focus on improving a company's governance. Poor financial performers perk up after making changes in their governance. More than anything, the governance initiatives seem to stop rapidly eroding financial value.
Some inconsistencies in the results show up, however. The "poorest" performers tend to improve the most, which skews the average somewhat. Likewise, the positive effects of improved governance seem to fade over time; five-year performance improvements are less than one-year improvements.
Some of this might be explained by CalPERS not having consistent standards or enforcing them uniformly over time. CalPERS' management is subjected to political pressures that might cause it to act unevenly at times.
In sum, there is market-derived, hard evidence that shows good corporate governance gets financially rewarded. Investors and markets look for and support efforts that make companies more transparent and accessible.
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