Do Heterogeneous Firms Select Their Right “Size” of Corporate Governance Arrangements?

One-size-does-not-fit-all in corporate law and governance. But do firms really choose their right “size” of governance as conventional wisdom holds? That one-size-does-not-fit-all is frequently raised to object mandatory corporate reforms, ISS voting recommendations, and other sorts of intervention which presumably interfere with firms’ tailoring governance arrangements to their specific needs. This Article argues that not only that firms do not always choose their right size, but firms that need governance the most are frequently less likely to self-constraint (Resisting Firms).The “one-size-does-not-fit-all” argument entails an inherent tension. Its logic suggests that firms whose managers are subject to weak market discipline will voluntarily come up with mechanisms to curtail managerial opportunism. But market discipline is required also to incentivize managers to tie their own hands. Furthermore, if differences among firms are not observable by outsiders, due to adverse selection, IPO pricing might not provide sufficient incentives either. Evidence from studies spanning a wide range of contexts suggests that firms frequently do not choose their right size. Independent directors seem to add more value to firms that were required to add them by law, rather than to firms that voluntarily chose to appoint them; firms’ inclination to cross-list on US exchanges is negatively correlated with controlling shareholders’ private benefits and with positive market response to cross-listing; Nevada’s lax fiduciary duties attract some firms that could benefit from more controls rather than less, and managers disproportionally contest shareholder proposals in firms with entrenched governance, and in firms that investors believed could benefit most from proxy access arrangements. The Article details implications for data interpretation and policy, and for mandatory rules, SEC policies in awarding no-action letters, proxy advisory firms and hedge fund activists. First, evidence from voluntary adoption of governance terms might underestimate their value to shareholders. Second, policy makers should weigh the costs of inefficient self-selection against the costs of applying one-size policies. Third, SEC no-action letters’ policies should be minded of inefficient self-selection. Fourth, proxy advisory firms and hedge fund activists are shown to serve an overlooked role of pressuring Resisting Firms to adopt value-enhancing corporate governance changes.