UNIVERSITY PARK, Pa. -- The most effective corporate governance occurs when a mix of complementary mechanisms that include CEO incentive alignment and both internal and external monitoring mechanisms are present, according to a new study from Penn State Smeal College of Business faculty member Vilmos Misangyi and his colleague from the Singapore Management University.

Corporate governance refers to the collection of activities meant to help ensure that executives make the best decisions for shareholder profitability. While much past research has attempted to evaluate the effectiveness of each governance mechanism individually, Misangyi’s study of the S&P 1500 firms instead takes a holistic view of how these activities work in concert to achieve profitability.

The two primary categories of governance mechanisms include incentive alignment and monitoring. Alignment mechanisms incentivize executives to act in the best interest of shareholders through, for example, CEO stock ownership and compensation contingent upon firm performance. Monitoring can occur from both internal and external sources, such as boards of directors and shareholders owning large blocks of equity, respectively.

Have you noticed the rising tide of news stories about corporate governance in recent months? While some have highlighted the fraudulent behaviours of some boards and directors, most of the articles have focussed on efforts to improve the quality of governance around the world. 

Much of the current discussion is focussed on regulation and diversity. Some regulators, including those in Singapore, believe that good regulatory frameworks are key to investor confidence. Many others, including Hong Kong's Exchange HKEx and noted academic Dr Richard Leblanc, are promoting diversity as a means of improving the quality of governance. I applaud these moves, but question whether regulation and diversity are the variables that will reliably deliver the main goal of good governance: better company performance. Regulation, for example, is a compliance tool not a growth tool. While they provide important safeguards for shareholders and stakeholders, they don't help companies to grow.

My conclusion, having reading hundreds of research reports and peer-reviewed articles, is that behavioural factors, social context and an active involvement in strategic decision-making are far more important than regulatory, structural or composition factors. As such, this is where our efforts to improve governance performance should lie. Ultimately though, the bottom line remains the same. Shareholders—whether professional investors or small business owners—need to know that the board is fulfilling its mandate to maximise company performance. If regulation or diversity helps achieve that, then well and good. If not, then let's move our attention to other factors—quickly—for the good of our economy and society.