The “G-Index”? Something only for academics?

– The “G-Index” is mainly relied upon by academics as data points of governance.
– Apparently many of the data points in the G-Index might be erroneous. But that shouldn’t matter to those in the governance world who never relied upon the G-Index in the first place.

I felt embarrassed when I first saw the sensationalist headline from a University of Virginia article about “Why Everything We Thought We Knew About Corporate Governance Is Wrong.” I think of myself as a governance expert – I co-authored a 1500-page legal treatise on the subject – and I had never heard of the “G-Index.”

This ValueEdge blog made me feel better. Here’s an excerpt:

The UVA headline assumes that “everything we know about corporate governance” is based on an often-cited 2003 data set from Paul Gompers, Joy Ishii and Andrew Metrick called the “Governance Index” or “G-index.” On the contrary, while many institutional shareholders were encouraged by the link that paper made between “good governance” and shareholder value, we are not aware of anyone in the governance world (as opposed to the academic world) who took it seriously enough to, for example, base an index or investment strategy on it.

Indeed, the success of commercial products from proxy advisors and firms like GMI Ratings (co-founded by the partners of this firm) are not based on the G-index but on more nuanced and more predictive data points. For example, the CEO pay-performance link. This data set, like the one before it, relies too much on what can be counted instead of what counts.

Anyway, a new academic study entitled “Cleaning Corporate Governance” pretty much debunks the G-Index – so I can go back to writing practical pieces based on the real-world.