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Competition > Corporate Goveranance

A recent article, Does Corporate Governance Matter?, in MIT Sloan Management Review, discusses a recent study done by Holger M. Mueller and Xavier Giroud, two researchers at the Stern School of Business at NYU.  Interestingly, their findings on a fairly substantial sample size (over 10k in a 20 year period), show that competition is strong mitigator against inappropriate governing behavior than in non-competitive industries:

“A negative change in corporate governance [caused by the passage of anti-takeover law], has a negative effect in noncompetitive industries,” explains Mueller.  “But a change in corporate governance has no effect in competitive industries.”

Corporate governance, and Sarbanes in particular, is often a point of discussion.  For most practitioners, and honest ones at that, it is typically not spoken of too highly.  Too much process, too much red tape and too many hurdles put too many barriers and overhead in place for those honestly trying to run their businesses and at the same time adds a lot of inefficient costs too boot.  That is often the argument.

So this study brings up potentially a critical point:  Is competition the great equalizer?  I would premise that many of the people I read who are critical of the increasing governance measures would respond with a resounding YES.  To a degree, I would have to agree and it almost seems logical.  Companies that are in highly competitive environments simply do not have the luxury to manipulate the system or their organizations for inappropriate personal gain.  But how to answer the bigger question, how does one judge how competitive their market is?

I would love to see some of the empirical data used in this study and would be even more interested in seeing data on particular companies that have had exposed issues and been the poster children for the need of corporate governance.  In those cases, would we label those particular companies to be operating in non-competitive industries?

Enron, Tyco, Worldcom and Madoff are some immediate examples that come to mind.  Did they operate in non-competitive industries?

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