The ever-increasing disclosure requirements we impose on public companies are, at best, not read, and at worst, are likely reducing the quality of investor decision-making. More environmental and social (ESG) disclosure has been touted as a popular solution to climate change and social issues. However, the evidence suggests this is highly unlikely, as it is very difficult for shareholders to understand the impact of corporate actions and the viable alternatives. Making matters worse, the very information shareholders require is information that assists a firm’s competitors and therefore is information that, if disclosed, has the effect of reducing the incentives for ESG innovation. Shareholders possess few legal tools capable of constructively engaging with corporate behavior. The empirical evidence about these theoretical points is evaluated, along with an examination of the real-world evidence about the outcomes of shareholder ESG interventions.

Corporate governance reforms are increasingly promoted as a method of materially improving social and environmental (ESG) outcomes. This chapter clears up the conceptual confusion about what counts as an action taken primarily for ESG purposes, then considers the incentives, resources, and market constraints that compel corporate actors to avoid unnecessary expenses or lower-value investments. The empirical evidence suggesting corporations are unlikely to voluntarily pursue ESG includes: (1) the revealed preferences of managers, particularly those that emphasize their ESG commitments; (2) the impact of ESG-friendly governance practices on corporate outcomes; and (3) the actual outcomes generated by giving ESG-friendly constituencies (such as socially responsible investors or employees) more power in corporate governance arrangements.

An introduction to the modern corporate governance project. Using the track record of our efforts to control executive compensation, we see that notwithstanding decades of failure, and considerable evidence that our interventions have been making things worse, modern corporate governance remains fixated on agency cost theory as a normative program of reform. This is a matter of growing concern as corporate governance is gradually adopted as a tool to obtain important environmental and social outcomes. The themes of the book and its methodological approach are summarized. Children’s cartoons are referenced more than you would expect.

Historically, corporate governance arrangements arose out of the interactions of the various constituencies that form around corporations. American corporate law evolved to facilitate the bargaining and innovation that made up this governance market. Pursuant to the modern theory that corporate law is supposed to promote efficiency, rather than market activities, changes to the governance regime imposed a one-size-fits-all set of practices from outside the traditional governance market. The result has been a decline in the number of companies interested in joining America’s public markets, and the adoption, by those companies that do go public, of extreme governance structures designed to resist the influence of the governance industry.

This chapter looks at the rise of the intellectual field that makes up modern corporate governance. It enumerates the most important conclusions that fell out of the ways corporate governance came to be understood: (1) “good governance” is a function of the adoption of certain practices or structures, not the achievement of operational outcomes; (2) governance “best practices” can be identified and applied across heterogenous firms; and (3) the imposition of governance practices from outside the firm is superior to the governance arrangements generated by the various markets in which the corporation and its constituencies participate. Canada is gently mocked.

It is in many parties’ interests to keep the modern corporate governance project afloat, but the evidence shows this project has been unable to improve the things we care about – profits, probity, the environment, or justice. The time has come for us to learn the hard lessons of corporate governance and fix the mess we have made. This chapter includes a non-exhaustive list of possible remedies.

Beyond voting, shareholders can participate in corporate governance through shareholder proposals, proxy contests, and takeovers. The evidence shows little to no benefit to firm performance or corporate governance over the long term following shareholder proposals and proxy contests. Takeovers suffer from similar failings in that there is no evidence they are actually about controlling agency costs or that the target company’s performance improves following acquisition. In fact, takeover defenses appear to be associated with better corporate outcomes.

This chapter looks at the extensive body of empirical research bearing on the major governance best practices recommended for boards of directors: (1) majority (and super-majority) independent directors; (2) independent board committees for things like audit and compensation oversight; (3) board diversity; (4) separating the CEO and board Chair roles; (5) reducing director commitments outside of the company, often referred to as “director busyness” or “overboarding”; and (6) avoiding interlocking directorships. The chapter finds that these best practices do not produce any real-world corporate outcomes that we care about. The possible reasons for these failures are considered.

The rise in executive pay over the last four decades correlates with the rise of corporate governance. This chapter shows that the explosion in executive compensation has mostly been due to the adoption of two “best practices” urged on boards by the modern corporate governance regime: (1) the use of equity incentives to align managers’ interests with those of the shareholders; and (2) the adoption of pay-for-performance schemes. A large body of empirical research suggests neither of these compensation practices produces better corporate performance; the research does show, however, that these pay practices lead to adverse outcomes, including fraud. The chapter concludes by discussing how modern corporate governance’s focus on controlling agency costs has blinded it to the many other roles executive pay must play in a well-run organization.

Does agency cost theory work in the real world? The various hypotheses drawn from agency cost theory are considered in light of the relevant empirical evidence. Agency cost theory appears to be able to explain almost anything, but it predicts nothing.

The modern governance regime claims to be able to “count” corporate governance best practices and calculate the relative governance quality of disparate companies. Companies expend resources to achieve high governance rankings in the various ratings schemes published by proxy advisors, governance bodies, and media outlets. However, empirical evidence shows no correlation between governance scores and firm performance. Both academic and commercial governance ratings schemes measure only noise.

A key component of agency cost theory is that, if left to their own devices, managers will behave in self-interested ways. Natural experiments created by the adoption of constituency statutes, corporate opportunity waivers, tax windfalls, and legal changes to the corporate fiduciary duty show that even when given the freedom to engage in self-interested behavior, managers remain faithful stewards of the firm and remain focused on maximizing profits. Despite agency cost theory’s assumption that managers are self-interested, managers appear to be generally trustworthy. Even if some managers are inclined to behave in strongly self-interested ways, most of them are constrained by competitive markets, which provide little room for slack and diversion. Charlie Brown kicking a football makes an improbable appearance.