Governance by the Numbers Flunks Wharton Test

Wharton accounting professors David Larcker, Irem Tuna and Scott Richardson say a check-box approach to corporate governance doesn't work. Companies and their situations are too diverse. Even worse, the professors say, are consultants and ratings services that use formulas - which they typically refuse to reveal - to boil down a company's corporate governance to a single number or grade.

"Lots of people are coming up with governance scorecards," Larcker explains. "As far as we can tell, there's no evidence that those scorecards map into better corporate performance or better behavior by managers."

Larcker, Tuna and Richardson tried to create a magic formula of their own. Rut no matter, how they sliced and diced governance data (consisting of more than 30 individual measures) on more than 2,100 public companies, they couldn't find one. The three professors have released their findings in a working paper titled, "Does Corporate Governance Really Matter?" (www.knowledge.wharton@upenn.edu) The title is intentionally provocative. They do think corporate governance matters, but after puzzling over reams of company numbers, they are not confident that anyone can measure whether one firm's governance is better than another's at least, not by using typical metrics. Not only are typical governance indicators based on shaky empirical foundations, they even can yield perverse results. Consider computer-maker Dell. Its stock has returned 32 percent over the last two years, compared with 22 percent for the Dow Jones Total Stock Market Index. It's considered one of the success stories of the '90s tech boom. But some corporate-governance raters have criticized it, claiming insiders dominate its board. The list of top performing firms that have been dinged in these sorts of ratings includes Wal-Mart and Southwest Airlines.