PENNumbra publishes responses to The Elusive Quest for Global Governance Standards
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This issue contains responses to The Elusive Quest for Global Governance Standards by Lucian A. Bebchuk & Assaf Hamdani.
In The Elusive Quest for Global Governance Standards, Professors Lucian Bebchuk and Assaf Hamdani argue that the currently available metrics for assessing the governance of public companies around the world suffer from a basic shortcoming. The impact of many key governance arrangements, they argue, depends considerably on companies’ ownership structure: measures that protect outside investors in a company without a controlling shareholder are often irrelevant or even harmful when it comes to investor protection in companies with a controlling shareholder, and vice versa. Consequently, governance metrics that purport to apply to companies regardless of ownership structure are bound to miss the mark with respect to one or both types of firms. In particular, Bebchuk and Hamdani attempt to show that the influential metrics used extensively by scholars and shareholder advisers to assess governance arrangements around the world—the Corporate Governance Quotient (CGQ), the Anti-Director Rights Index, and the Anti-Self-Dealing Index—are inadequate for this purpose. They suggest that going forward, the quest for global governance standards should be replaced by an effort to develop and implement separate methodologies for assessing governance in companies with and without a controlling shareholder. The professors identify the key features that these separate methodologies should include and discuss how to apply such methodologies in either country-level or firm-level comparisons.
In American Corporate Governance Indices as Seen from a European Perspective, Professor Klaus Hopt provides his insights from a continental European perspective in response to Bebchuk and Hamdani. Overall, Hopt believes the article is a “great contribution that may . . . open up a new legal and politics-of-law discourse” on the measures of corporate governance. Despite its promise, however, Hopt offers several differences in the economies of the United States and continental Europe that warrant closer consideration in Bebchuk and Hamdani’s duel set of metrics. These unique features of the European system—such as the increased number of companies with controlling shareholders or the larger institutional presence of labor on company boards—lead Hopt to question several aspects of Bebchuk and Hamdani’s analysis and recommendations. More generally, he wonders if shareholder structures are “the only or even the major criterion for differentiation” between the various corporate governance metrics when compared to the “securities-regulation regime and the financial system of the relevant country.” Finally, Hopt cautions the reader to remember that however these metrics evolve, they are but one tool of many for “basing comparative, investment, and even policies decisions” in the world of corporate governance.
Professor Vikramaditya Khanna offers his thoughts on Bebchuk and Hamdani’s article in Corporate Governance Ratings: One Score, Two Scores, or More? Khanna begins by offering a succinct summary of the Bebchuk and Hamdani’s recommendations and capturing the governance practices that the authors suggest matter most to companies with (CS) and without (NCS) controlling shareholders. Next, he considers whether these differences are supported in the extant scholarship. He considers anecdotal and emprical data from established and emerging markets and concludes that Bebchuk and Hamdani’s distinctions find “considerable support” in the literature. Notwithstanding this support, Khanna turns to consider whether the CS-NCS distinction is the optimal one to organize the professors’ governance rankings. Although he notes several other potential considerations, he ultimately offers a solution that would retain the simplicity and usefulness of Bebchuk and Hamdani’s CS-NCS distinction while providing insight into other salient country- or firm-specific distinctions through subsidiary rankings. Lastly, Khanna offers suggestions for next steps for implementing the recommendations of The Elusive Quest for Global Governance Standards.