Corporate Governance Indices and Construct Validity Discussion by Yishay Yafeh Hebrew University, CEPR, ECGI

Structure of this Discussion Not the usual “summary and then comments” format A bit of “what the paper does” and my immediate reactions to it… Then some more fundamental issues

Summary/Alternative Titles “Is Bernie getting old? Revisiting the CG Indices Literature” (to which he and his co-authors have been major contributors) “The Art (and Science?) of Constructing CG Indices” The CG Indices approach has merit but is associated with major conceptual and empirical issues The paper attempts to address a few of them (not the major ones)

Authors’ Approach to the Construction of Intl. CG Indices Are the concepts used (e.g., “board independence”) available across countries/environments? They do not ask what does it mean to be an “independent director” in China/Turkey? (WVS/culture analogy) Is there variation across firms within a country in a given dimension? Focus here: Do the different variables within a sub-index (e.g., “disclosure”) measure the same thing? Should they?

Looking at CG indices Cronbach’s alpha within a sub-index (e.g., board effectiveness) Claim: should not be “too high” but not “too low” either (substitutes or complements?) PCA aggregation of variables within an index or sub-index Circumvent the indices’ binary nature & equal weights? Check if constructs are correlated with Q (should they be?)

Results (with my quibbles) “Soft” impression that Cronbach’s alpha seems OK for the most part Mechanical reporting of PCA measures for diff countries/indices Is this the best way to show certain sub-indices/components matter? Mechanical reporting of corr with Q Why is disclosure more important in one country and board independence in another? Statistical (no variation) features or economic substance?

More Serious Quibbles What is the point of linking the indices or their components to Q? To show that the index is reasonable? To show that good CG “causes” improved performance (with policy implications)? This requires a totally different empirical standard In what way is the analysis of the link between CG and Q here novel relative to earlier work by Bernie and his co-authors? (and, of course, why Q?)

Fundamental Issues Not sure the CG indices-based lit has really progressed beyond the initial idea GIM: novelty, plus an elegant attempt to separate causality from sample selection and omitted variables Insights from improvements to GIM (e.g., Bebchuk and co-authors)? Bernie’s earlier work: transformation to EMs/concentrated ownership context What next? What insights can be gained from index refinement?

Fundamental Issues (2) Perhaps the next stage is to study whether country-level and company-level CG are substitutes? Does disclosure at the firm level replace weak disclosure rules at the country level? Why do some CG components work in some cases but not in others? Why would disclosure be important and the board is less so, or vice versa? Missing theory? Disclosure matters only when combined with “private enforcement?”

Fundamental Issues (3) Index components are sometimes related, e.g., board structure may affect/determine disclosure This would affect the statistical relation between these index components Mechanical discussion in the paper does not address these (economic) issues

In sum… What is the real objective of this study? Discuss fundamental concepts associated with the CG indices approach (I am all for this!) or offer robustness tests which could be included in any future (or past) paper in this line of research? (less exciting?) Discuss fundamental cross-country differences in CG or just point out the differences without inquiring about the underlying institutional and economic forces driving them?

In sum (2) I would strongly encourage the authors to move from a technical/mechanical level of discussion to a more “fundamental” approach. What is the relation between the CG indices “industry” and basic economic concepts of governance? Can these indices be used for policy? Can these indices can be used to study other/new fundamental questions such as country vs. firm-level governance?

Thank You (and see you in Tokyo next year)