Although it is widely accepted that governance rules play a major role in the smooth running of businesses and contribute to market equilibrium, how can we measure businesses’ degree of responsibility in this area? And how can we evaluate the effect of poor governance practices or the effectiveness of new arrangements’ This is what Boris Nikolov and Norman Schürhoff from HEC Lausanne, along with their co-author Erwan Morellec (EPFL), set out to examine in their latest research.
Whenever a business fails or a financial crisis occurs, the finger is pointed at governance rules and new arrangements are put in place. However, in order to introduce measures that can resolve governance issues effectively, there needs to be an initial assessment of the impact of behaviours that are detrimental to the value of the business and stakeholder groups.
By examining two common governance issues - one where a majority shareholder influences a business’s decision-making at the expense of the minority shareholders, and one where it acts at the expense of creditors - the three researchers were able not only to demonstrate a cause-and-effect relationship but above all, put a figure on the loss of value suffered by the business, depending on the behaviour of the dominant shareholder.