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Keeping Better Company

Jonathan Charkham, Oxford University Press, revised edition 2008, 436 pages, paperback £19.99.

This is the new edition of Jonathan Charkham’s previous volume Keeping Good Company, first published in the 1990s. The book provides the reader with stunning granularity and a thorough insight into the corporate governance practices of five key countries – Germany, Japan, France, the US and the UK. Detailed cross-country reviews of corporate governance systems remain relatively rare so Keeping Better Company fills an important gap in the literature. Indeed, the author’s ability to successfully combine academic knowledge with understanding of the practical realities prevailing in each country deserves special praise.

Economists should be aware though that this book contains little economists’ parlance and there is limited empirical evidence to inform the discussion. The chapter on the UK, for example, spends a great deal of time discussing formal features of the governance of UK quoted companies (eg, board structure and composition, board committees and reporting channels, communication with shareholders) without mention-ing the wealth of empirical evidence accumulated during the last decade. Applied economic studies on the UK’s corporate governance system have looked, for example, at the relevance of having independent non-executive directors sitting on the board, at the relationship between board and committees structure and value creation, and at the importance of splitting the roles of CEO and chairman of the board. More recent studies have even tried to uncover the effectiveness of the UK’s comply-or-explain approach to corporate governance by showing that a principles-based rather than prescriptive approach to governance creates value for shareholders.

There is also now a wealth of literature that, assessing country-level legal regimes and company-level governance practices, concludes that well-governed companies are more likely to create value and produce better returns for shareholders over time. There is also preliminary evidence of certain ‘substitutabilities’ between country rules and company practices, which highlights the risk of over-regulation. These are important findings if one wants to go beyond the letter of the law and convince sceptical minds that governance policies are not necessarily skewed towards risk control rather than growth. Long-term value creation is particularly important for institutional investors such as insurance companies, because their holdings are long term in line with their liabilities.

The last chapter of the book (entitled ‘Unfinished Business’) contains a short, albeit highly topical, section on the governance of banks. Quite rightly, it stresses the importance society should attach to this issue not only because it can prevent the dilapidation of financial resources (the “leaky hosepipe effect”), but also because well-governed banks are more able to influence the quality of governance in borrowing companies. Mr Charkham also highlights the need to set high standards of skills for people aspiring to be a bank director. The recent failure of corporate governance in banks will probably induce further research on this area especially as the ongoing financial turmoil clearly exposes the lack of expertise and absolute blindness to risk in some bank boardrooms – they must certainly be made to “keep better company”.

Finally, while the book’s style of writing is very accessible it can feel slightly staccato at times. Yet I enjoyed immensely reading this revised edition of Keeping Better Company and it will certainly inform my ongoing research on this area.

Mariano Selvaggi

Research Department, Association of British Insurers

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