Assessing corporate governance quality: substance over form

Abstract

After the 2008 global financial crisis and corporate scandals, assessing and improving corporate governance quality (CGQ) is essential. This paper proposes a different approach to evaluate CGQ, to overcome the conceptual and methodological limits of the previous rating systems. It tries to go beyond the objectives of the existing models by suggesting an alternative operating model, (aligned with the new CG guidelines) that provides a concise index for monitoring and decision-making. Using a Fuzzy Expert System (FES), the authors propose a formalized model that: (1) represents all the factors (structural and behavioral) that affect the quality of corporate governance in terms of practical and objective decision-making procedure; (2) is a flexible and useful management tool for supporting the “Board review” and assessing the increase in CGQ associated with particular decisions; (3) supervisors can use to assess CG adequacy by replacing or integrating the experts’ opinions with interviews/questionnaires filled in by directors and managers or through direct observation, as recently suggested by EBA/ESMA. This paper highlights the importance of behavioral features and group dynamics in corporate governance and represents them in an integrated model together with other structural and organizational elements.