“For years, investors have had a good reason to ignore good governance. Academic research found no clear causal link with financial performance. New research, however, threatens to change that. Paul Gompers of Harvard Business School and two colleagues looked at 1,500 firms in the 1990s and found those that were most responsive to shareholders would have enjoyed returns 8.5% a year higher than those run as management dictatorships. When regulators seek to impose good governance, they may do more harm than they prevent. Some folk, such as William Allen [former judge on the Delaware Chancery Court]… already fret that the current changes go too far, staunching the appetite for risk and innovation. Many of the proposed new requirements insist on measures that most boards ought to have met, one way or another, of their own volition. Will the new rules improve governance? They will make good governance easier, but only if both boards and investors are determined that they should do so. Ultimately, the best way to prevent the occasional…bamboozling [of] directors is to have directors who are willing to stake their reputations on their job. And no rules can guarantee that.” [MeansBusiness Annotation]
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