Biggest Corporate Failures, the Underlying Agency Problem, and the Corporate Governance Measures

Based on our study of the biggest corporate failures in history from Barings Bank to General Motors we contend that despite the seemingly varied reasons suggested by the media the underlying cause of corporate failures in majority of the cases was agency problem. The academic literature addresses this problem under the umbrella of corporate governance. Most studies in this literature measure corporate governance by the G-index developed by Gompers, Ishii, and Metrick (2003). We show that the G-index and/or the entrenchment index of Bebchuk, Cohen, and Ferrell (2009) would have misclassified majority of the firms that we study as well-governed firms. However, we also show that majority of the firms that ultimately failed showed deterioration in their corporate governance measure over time as they approached their ultimate demise. We therefore suggest that future studies rely not only on the level of Gindex or entrenchment index as a measure of corporate governance but the change in these indices over time.