Time and Size - The Hidden Dimensions of Corporate Governance

Abstract

In the recent literature on corporate governance (CG), the dominant view is that the underlying problem is simple. Managers of Enron in the US or Parmalat in Italy were simply unethical, corrupt or both. They all knew what should have been the right behavior. The rules of CG were good, but the bad guys transgressed them. By cheating, they deliberately betrayed the interest of outside shareholders. The conclusion: more stringent enforcement rules and more vigilance will solve all the problems.This paper offers a different conclusion. First, it will be argued that in the context of modern corporations, the distinction between insiders and outsiders is much more complicated than usually thought. Second, we will show that there is no such thing as “good” CG rules. It is simply not true that adherence to modified CG rules, can guarantee good business. The second message of this paper is that size matters more than good CG. In the globalized world of business, size is the real guarantee of success. Preaching CG to the post-communist economies and promising that their companies can also grow into size at par with GE or IBM is grossly misleading. The third message is that the assumption, according to which stock prices reflect fundamentals and thus in the absence of CG ‘noise’ they must display stability, does not hold water. It is a mistake to promise that good CG will help to attenuate macroeconomic fluctuations: the volatility of asset markets is an intrinsic feature of the capitalist system. Booms and busts, including bubbles, will stay with us in the near future.