The Monday, July 2nd issue of the Wall Street Journal had an article entitled "Finding the Best Measure of 'Corporate Citizenship'". Basically, the article highlighted that governance trackers use a variety of metrics to offer insights into the goodness/badness of a firm's governance and that these varying measures are leading to confusion. These metrics ultimately are believed to help investors pick stock winners and losers.
The article highlighted several interesting things, some of which I've spoken about before in this blog:
- There is no dearth of metrics that supposedly help one identify stock outperformance. More proof of the metrics zeitgeist which has grabbed the attention of many continues unabated. These maybe interesting (assuming they are properly constructed), but keep in mind that there is a peril in trying to boil performance down into a single measure because company performance is driven by a complex set of drivers. I would argue that resource allocation and the associated 'bets' a company makes are more vital drivers of company performance than governance, but I also would not go so far as to say that it's the one measure to look at.
- In this case, there are 2 firms that track corporate governanance, e.g., Governance Metrics International and Audit Integrity have very different lists of criteria that determine good governanance. So while a metric is interesting, it's only useful if you believe the metric is fundamentally sound in its construction. Many organizations fall into the metrics trap where measuring something and developing a metric is deemed an accomplishment even if the metric in question may not be useful.
- There is an abundant lack (oxymoron?) of skepticism from organizations who are customers of 'metrics-providers'. So in this case, the firms are named Governance Metrics and Audit Integrity and to nobody's surprise, they feel corporate governance yields better investment returns. Of course they do!!! This is how they make money - by selling research tied to corporate governance. If they came out and said corporate governance doesn't have an implication on returns, they don't have a business. So given this conflic of interest, why do organization's quote and feel these metrics are objective. Consultants, software companies and advisory firms can almost always make data look a certain way. I'm not picking on these firms but am making a general commentary. This is the same as a software company holding a seminar called "How software transforms IT" or something similar. You can't blindly trust these folks because there is an inherent conflict.
When it comes to metrics - use them but be careful. And always be skeptical of the source.
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