All Firms Are Not Alike

21 August 2006 at 8:54 am Peter G. Klein 2 comments

| Peter Klein |

This may come as a shock to regulators, but all firms are not alike. No one-size-fits-all regulatory policy can possibly be effective. Yet, SOX and similar governance codes impose a host of blanket requirements (audit committees, majority of outside directors, etc.) on all companies, large and small, focused and diversified, profitable and unprofitable, and so on. Economically literate regulators must be schooled in industrial-organization models in which the “representative firm” is identical to every other firm.

This new paper by LSE economists Sridhar Arcot and Valentina Giulia Bruno examines heterogeneity among governance choices at UK companies and finds that the best-governed firms are not always those that conform to the “best practices” imposed by regulators.

A [governance] measure which accounts for different choices by companies of corporate governance is significantly associated with performance as against measures based on a tick-box approach, which are not. We find that companies departing from best practice for valid reasons perform exceptionally well and out-perform the fully compliant ones. In contrast, mere compliance with the provisions of the Code does not necessarily result in better performance.

(Via Professor Bainbridge)

Update: Dale Oesterle argues that uniform listing requirements for IPOs are depressing the US IPO market, suggesting that small firms should be allowed to make their IPOS over the Internet, as is allowed in the UK.

Entry filed under: - Klein -, Institutions, Recommended Reading, Strategic Management, Theory of the Firm.

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2 Comments Add your own

1. Vic Fleischer | 21 August 2006 at 10:31 am

Due respect, Peter, but most of the requirements you refer to apply only to public/listed companies. To be sure, there are regulatory costs associated with going public, and some measures perhaps ought to be more tailored. But regulators are well aware of the issue; Congress tends to be the group that paints with an overly broad brush.
2. Peter Klein | 21 August 2006 at 10:56 am

Vic, fair enough. The Arcot and Bruno also looks only at public companies, and I should have specified that I was talking only about listed firms. Even there, however, I’d argue that there is a need for greater flexibility. Clearly the compliance costs are much higher, as a proportion of revenues, for small public companies than for large public companies (helping explain why large firms often favor one-size-fits-all solutions).