@Risk

Most corporations are investing inappropriately in corporate governance because they don’t take into account the financial and legal systems of the country in which they operate, according to new research from Lehigh University.

Anne Anderson, associate and a chaired professor in finance, and Parveen Gupta, professor and department chain in accounting at Lehigh College of Business and Economics studied 1,732 firms representing 22 countries. Their research, published in the January issue of The Journal of Contemporary Accounting and Economics , is the most comprehensive of its kind to-date and explores how a country’s financial structure and legal system impacts an organization’s governance behavior and financial performance.

Interestingly, the study results challenge the traditional thinking that says: if you implement good governance, you will increase the value of your company. Instead, Anderson and Gupta found that an increase in performance occurs only when you match the level of corporate governance with the financial and legal systems of the company where you do business. In a nutshell:

• High levels of corporate governance do not need to be implemented in every jurisdiction, and a “one-size-fits-all” approach simply doesn’t work for companies attempting to align their governance structure to enhance their firm’s performance.

This study also suggests that some of the world’s corporations may have gone too far in aggressively implementing governance restrictions to better protect their shareholders, customers and employees in reaction to the Enron, WorldCom and other such scandals.

“When a significant problem arises, most companies begin imposing additional governance mechanisms without thinking,” said Anderson in a press release. “It’s a knee-jerk reaction. They believe they need to be visible and quickly show their commitment to change to contain the damage. The problem is, they enact the wrong measures, and that makes for a very costly mistake.”

Therefore, companies need to do a better job of studying their options before implementing governance simply for the sake of “implementing governance.”

“If you are a country where capital allocation takes place primarily through the banks, it’s important to know that when banks loan money, they typically put a member of the bank on the board of that company,” said Gupta. “Because the banks become an insider and have access to all the information, there is not a need for additional control mechanisms – these measures can be duplicative and redundant in this case. However, in a common law, market-based system, there is no dominant financier, so you do need these external systems to protect the assets.”

So, how should you implement corporate governance in this post-Enron era?

“Our advice: Be judicious and aware of your environment. Be careful and consider where you operate,” Anderson said.