Much discussion of corporate governance in the last few years has centered on reforms advocated by ISS and CII and indices of good corporate governance practice created and maintained by such groups. A new study by Roberta Romano, Sanjai Baghat, and Brian J. Bolton, however, concludes that there is “no consistent relation between governance indices and measures of corporate performance.” The authors continue,

[T]here is no one “best” measure of corporate governance: the most effective governance institution appears to depend on context, and on firms’ specific circumstances. It would therefore be difficult for an index, or any one variable, to capture critical nuances for making informed decisions. As a consequence, we conclude that governance indices are highly imperfect instruments for determining how to vote corporate proxies, let alone for portfolio investment decisions, and that investors and policymakers should exercise caution in attempting to draw inferences regarding a firm’s quality or future stock market performance from its ranking on any particular corporate governance measure. Most important, the implication of our analysis is that corporate governance is an area where a regulatory regime of ample flexible variation across firms that eschews governance mandates is particularly desirable, because there is considerable variation in the relation between the indices and measures of corporate performance.

The paper is entitled The Promise and Peril of Corporate Governance Indices and the full text is available on SSRN.

I started writing this as a comment to Josh’s last post, but it got so long I figured I’d make a post out of it.  Thanks for the inspiraiton, Josh.

I really hope Radiohead releases the data on its little experiment!  My prediction: They will receive an average price of $2 and a median price of $0. 

And I think Radiohead has a better chance of succeeding than that coffeeshop Josh wrote about (which is somewhere near here, right?  I should really go grab some free coffee).  Their fans are rabid, and they feel an emotional connection to the band unlike I imagine anyone has to a coffeeshop.  There are people out there who believe that Radiohead changed their lives.  Incidentally, these people are also anti-capitalists.  And yet they will find themselves throwing money at the band, completely unnecessarily, simply because, well, it’s a whole new zeitgeist, man. 

For the rest of us–the more rational Radiohead fans (it’s hard to deny the quality of this band.  It’s hard to believe that the same public that loves Britney could also love something as good as Radiohead, but there it is)–views will be split.  Some will feel an obligation to compensate the band for their work, although they will find it hard to explain exactly why they feel obligated if the band itself is not obligating them.  Others will think it’s cool, and it’s an awesome slap in the face to the paleolithic record labels, and will contribute to the cause.  And most will know that they would probably have just burned the CD from a friend anyway, and entering credit card information is such a pain, and, well, why should I pay if they don’t make me?  And these people will pay nothing.  A large subset of them will claim to have paid $5.

So what does the band get?  For starters, some good press (although they hardly need that).  They also get to satisfy their moral desire to bring down the (putatively) evil record labels (to say nothing of DRM!) and to demonstrate their disdain for capitalism and consumer culture.  Consider it a form of charity. 

Or competitive advantage.  I can assure you that in a post-record-label/post-DRM world, where revenue comes from live performances and t-shirts, Radiohead will be in a considerably better position than the 4 million bands trying to make it on MySpace.

Here’s what else they get:  An excellent mailing and e-mail list.  To buy (or receive gratis) the album from the website one must enter name, email (and no cheating, since download codes are sent via email), address, cell phone number (but not home number.  Anyone see mass text messaging in Radiohead’s future?), etc.  For Radiohead, this is a valuable list, I imagine.  It may also be valuable to any number of direct marketers and online advertising companies. 

Mostly, though, I think Radiohead is leaving money on the table.  And I also think that the band will not release the data, and we won’t know the extent to which this experiment fails.

I, for one, have already pre-ordered my copy.  And of course I paid $5.

UPDATE:  Steve Levitt wants to crunch the data.  Note also the colorful quote from Thom Yorke (Radiohead’s front man) about the music industry’s “decaying business model.”

I’ve previously discussed the voluntary pricing strategy taken by restaurants and cafes in a handful of states to offer food and drink for free and allow customers to decide whether and how much they would pay.   I was rather skeptical about the profitability of this strategy in the retail setting.  But it looks like we may soon have another datapoint from another industry as the WSJ reports that Radiohead will sell its new album (”In Rainbows”) only as a digital download from its website and allowing fans to choose how much they will pay.  From the WSJ article:

By letting consumers dictate what they will pay for a digital copy of the album, the band will test theories of online pricing that have been the subject of much speculation in recent years — most notably, the notion that fans will pay a fair price for downloads if given the freedom to do so on their own terms.

Speaking of experiments in online behavior and “voluntary pricing,” Stan Liebowitz has posted a paper to SSRN critiquing the empirical claims in the highly publicized JPE Oberholzer-Gee and Strumpf paper on file-sharing which found little, if any, impact of file sharing on music sales.  Unfortunately for the economics profession, one aspect of the critique is that the authors of the JPE study have not been willing to share data with Liebowitz so that their findings can be replicated. 

Frankly, I thought the movie, The Corporation, was unabashedly abysmal.  It was a childish caricature, exhibiting no understanding by the filmmakers (or most of the interviewees) of the law, economics, or nature of corporations–to say nothing of capitalism.  The movie is unsophisticated, anti-capitalist tripe.  See Seth Weinberger’s review of the movie from the journal Political Communication for the longer version of this analysis. 

That said, the filmmakers have just provided me–and now you–with one of the most remarkable three minutes of video footage I’ve ever seen:  The Milton Friedman Choir. 

Milton Friedman on corporations says,
Corporations have no social duty
Except to those who own their stock.

Hat tip:  Henry Manne.

At his new and excellent blog Hodak Value, frequent TOTM commentor Marc Hodak offers the following in response to a post at the Daily Kos implying that Wal-Mart’s treatment of its workers should give rise to a level of concern similar to that of the Rwandan genocide:

My standard for concern about an organization is somewhat different. If an organization has people beating down the doors to get in, it’s probably not a problem how they’re treating their workers. If an institution has people risking their lives to flee, that’s probably an institution that needs some outside monitoring.

Hodak’s blog is up and running and has lots of great stuff. Check it out.

But back to Wal-Mart for a minute. Hodak’s post got me thinking about some of much milder Wal-Mart rhetoric that has started to fly around since the campaign has started to heat up. The most recent example is presidential hopeful Hillary Clinton’s answer to the “Wal-Mart Question” in the recent debate where she describes Wal-Mart as “a mixed blessing.” Here’s the whole thing:

Well because when Wal-Mart started, it brought goods into rural areas, like rural Arkansas where I was happy to live for 18 years. And it gave people a chance to stretch their dollar further. But as they grew much bigger, though, they have raised serious questions about the responsibility of corporations and how they need to be a leader when it comes to providing health care and having safe working conditions and not discriminating on the basis of sex or race or any other category. Brian, this is all part, though, of how this Administration and corporate America today don’t see middle class and working Americans. They are invisible. They don’t understand that if you’re a family that can’t get health care, you’re really hurting. But to the corporate elite and to the Administration and the White House, you’re invisible.

Clinton starts with the sensible and obvious proposition that Wal-Mart does do at least some good. But notice how the benefits are trivialized: A handful of rural consumers get goods that could not have otherwise and folks can have a “chance to stretch the dollar further.” But the downside is not so trivial, Clinton tells us, because it is “serious problem” that is part of a plot between the Administration and Corporate America to leave middle American behind. Of course it is!!! By the way, Wal-Mart causes crime too.

Luckily, the market provides ample data to test these assertions and distinguish the hand-waving proclamations from the truth.  But who needs evidence when one can rely on the the tried and true causal relationship between firm size and evil: “as they grew much bigger, though, they have raised serious questions about the responsibility of corporations and how they need to be a leader when it comes to providing health care and having safe working conditions and not discriminating on the basis of sex or race or any other category.”

You see, Wal-Mart was all good in its nascent stages when it was not so big  — Guilt-free low prices for families for low and moderate income families!  But those, you see, were the good ol’ days before it grew.  You know, the days when Clinton sat on Wal-Mart’s board, a.k.a. the days when an attack on Wal-Mart and free trade weren’t in the compulsory portion of the campaigning program.  I don’t mean to just pick on Clinton.  Obama has taken the bait to engage in a little Wal-Mart bashing as well at least once.

Here’s a quote from Hillary Clinton from a 1996 interview on C-Span just after endorsing the proposition that ” the unfettered free market has been the most radically disruptive force in American life in the last generation,” where she discusses the good ol’ days of Wal-Mart:

One of the things that Sam Walton believed in was profit sharing. I mean, part of the reason that I appreciated his business philosophy is that the workers at Wal-Mart were able to share in the profits, and the executives, when I was on the board, were very careful to keep their perks down — the kind of offices they had, the way that they lived and the way that they treated their fellow associates at every level in the business. I thought that was a good example.

But then Wal-Mart grew, became evil, and became a serious problem. Never mind the giant consumer benefits that flow from Wal-Mart’s competitive pricing. For example, low generic drug prices. Or how about Hausman and Leibtag’s estimate of consumer benefits from big box retailers that amounts to approximately 20.2% of the average food expenditures. For consumers in the bottom income quintile, this amounts to a welfare increase of approximately 6.5% (and 1.5% averaged across all consumers).  We should all be so lucky to have mixed blessings like this.

But I should be fair to Clinton’s case against Wal-Mart.  Here goes.   Clinton points to three things: (1) health care; (2) working conditions; and (3) discrimination. Oddly, she seems to believe that there is some lcausal link between Wal-Mart’s growth and this trio. I’m fairly certain there is no evidence of that but would love to see it if it is out there. As far as (2) and (3) go, I don’t think any Wal-Mart supporters have argued that Wal-Mart should be immune from labor or discrimination laws. But the public policy debate seems to focus on whether Wal-Mart has some special obligation on these issues because of its size. As Hodak points out, the fact that there appears to be a significant demand for jobs at Wal-Mart is certainly relevant to this analysis, e.g. 15,000 applicants for 400 jobs at the new Chicago Wal-Mart.

So, how about that evidence about Wal-Mart any health care? Jason Furman (NYU, and former economic adviser to John Kerry) offers a thorough review of the available evidence on health care and concludes that “Wal-Mart’s health benefits are similar to or better than benefits at comparable employers.”

Being election season and all, I know I am barking up the wrong tree for wanting more than soundbite treatment of these issues from politicans, e.g. Clinton’s plea that Brian Williams and America see the Wal-Mart issue has part of a conspiracy by the “Administration and corporate America” to ignore and exploit middle class and working Americans. A welfare increase of 6.5% for the lowest income quintile is enormous. How many government programs create that kind of welfare benefit? Can you name one? If there are serious arguments to be launched against Wal-Mart, and surely some of these politicians are serious (right?), they must embrace the reality that Wal-Mart has produced enormous benefits for Americans as a whole and especially lower and middle-lower class Americans.

Furman addresses this issue head on:

Well-intentioned Wal-Mart critics are sincerely interested in an America where workers are better off. They understandably want higher wages and higher benefits for everyone. Wal-Mart’s low prices help to increase real wages for the 120 million Americans employed in other sectors of the economy. And the company itself does not appear to pay lower wages or benefits than similar companies, or to cause substantially lower wages in the retail sector. Although there may be a dispute about the magnitude of the cost savings for consumers, no one disputes that they are large. In contrast, the effect on workers is relatively smaller and far from obviously negative.

There is relatively little scope to pressure Wal-Mart – and almost no scope to pressure other smaller and less visible companies – into paying higher compensation. Even if the campaign resulted in, say, some expansion of health benefits to placate one of Wal-Mart’s most visible public relations problems, the result could well be lower wages. At worst, to the degree the anti-Wal-Mart campaign slows or halts the spread of Wal-Mart to new areas, it will lead to higher prices that disproportionately harm lower-income families.

In the process, some of the campaign’s rhetoric risks undermining public support for making work pay, and in particular for publicly provided health benefits for less-skilled and less experienced workers who earn lower wages. A much better strategy would be to recognize that Wal-Mart is a progressive success story. By acting in the interests of its shareholders, Wal-Mart has innovated and expanded competition, resulting in huge benefits for the American middle class and even proportionately larger benefits for moderate-income Americans.

Obama’s lead economic adviser is Austan Goolsbee — which gives me hope that this is some sort of election rhetoric from Obama that he doesn’t really mean because he gets basic economics.  Maybe Clinton should hire Jason Furman?

Today’s WSJ had an article titled “Wal-Mart Apologizes to Groups That Were Focus of Surveillance,” which noted that Wal-Mart apologized for responding to large institutional shareholders as “threats.”  Obviously Wal-Mart realized a bit too late that it was absurd, from an investor relations standpoint (and a corporate governance standpoint), to refer to the owners of the corporation as “threats.”

That said, I am not shocked by the reference to large (activist) shareholders as “threats,” and I partially blame corporate lawyers for that perspective.  My view is that, too often, outside counsel forgets that, actually, the corporation is the client, not the CEO/GC who hired outside counsel.  My impression is that often outside counsel tries to “protect” executive officers and the board from large shareholders, as opposed to trying to agitate *for* the shareholders.  Of course, we all know why.  Who hires and fires outside counsel (outside accountants, investment banks, etc.)?  They know where their bread is buttered.  The savvy lawyer/accountant/banker is going to try to keep the person who hired her happy.

Perhaps, then, the solution is to have shareholder ratification of outside counsel….  (Just a random thought that came to me as I typed - no prior thought given.)  Kudos to Wal-Mart for at least recognizing their shareholder relations gaffe.

The government subpoenas Google’s records, and also Yahoo!’s and Microsoft’s. MSFT and YHOO cave: Their stocks are down a little over and a little under 2%, respectively. Google resists. Its stock drops almost 9%. And yet a headline for an article by MSNBC’s chief economics correspondent–with the relevant stock prices immediately alongside–notes, “Google stand could be good for business.” Maybe he’s talking about Microsoft’s business?

The article quotes Dan Solove who has thoughts about the matter here, here and here. Solove and others view Google’s resistance as primarily a matter of principle, but I bet Google is quick to claim that it is (or at least “will be eventually. Really. We promise”) good for the bottom line. And perhaps here principle and profit coincide: That principle in this case seems to require resisting government interference in markets is a good indication that this might be true. But what if the two remain divergent?

Think about how Google’s actions square with one or more of these claims, Tyler Cowen’s attempted distillation of Milton Friedman’s thoughts on Corporate Social Responsibility:

1. Profit maximization is the best rule available, even though it fails society in particular instances (in that case, isn’t there some slightly more convoluted rule that can cover at least some of these situations and modify the outcomes? If only “very simple” rules are allowed, why?)

2. Businesses have no responsibility to behave in an act utilitarian fashion. Rules are rules, and we should follow them, come what may.

3. Following the doctrine of fiduciary responsibility — in this case to shareholders — is the greatest social good in these situations. It outweighs potential act utilitarian considerations pointing in other directions.

4. Force and fraud aside, profit maximization always coincides with the social good, at least in the absence of bad government interventions.

5. It is a public choice argument. The claim is a noble lie, for otherwise business will be regulated by government in a counterproductive manner.

6. So much anti-corporate nonsense has been written, so we need to shock people with an extreme claim in the opposite direction.

Defenders of Google’s actions on principle will point to the caveat in #4 and will deny especially #2 and #3.

I would like to rest my defense of profit maximization on #4, but as a descriptive matter, I think the exception is in serious danger of subsuming the rule. I suppose that leaves me with #3, which looks to me like a slightly weaker version of #4. (And Steve Bainbridge has mounted a compelling justification of #1 and #2).

Either way, I’ve said it before and I’ll say it again: Google does not have a duty here to saddle its shareholders with the cost of saving the world from itself. Although if I knew its leaders believed in any of the claims above, I’d give them the benefit of the doubt.