The Role of Self-Regulation in Corporate Governance

This paper assesses the effectiveness of self-regulation to promote investor interests. The Netherlands provides an excellent opportunity to gather such evidence for two reasons. First, characteristics of the Dutch corporate governance structure have made it the recent focus of attention by the European Union, the International Monetary Fund and countries (e.g., Korea) when deliberating issues of corporate governance. Second, during the period 1996-1998, a private sector initiative was undertaken to promote change in the balance of power between management and investors. Not surprisingly, the United States Securities and Exchange Commission has closely followed the Dutch "experiment" in self-regulation. We begin by identifying corporate governance characteristics that are linked to firm value. We then compare corporate governance characteristics and the relation between firm value and these characteristics before and after the private sector initiative. We find that the recommendations of the private sector initiative had no substantive effect on corporate governance characteristics or their relationship with firm value. Using event study techniques we document the market's skepticism about the successful evolution of corporate governance practices in the Netherlands through self-regulation. The one exception to this general conclusion is the market for new listings. Overall, our results confirm the importance of shareholder voting rights, and who controls these rights, when considering the design of a successful self-regulation process.