Jilian Popadak is a PhD student at Wharton. Employing an interesting and innovative research design, she has produced a working paper (link is here) which tests one of the cornerstones of the blue-line argument: namely, that companies that focus management efforts on indicators (the red line) and not on intrinsic value (the blue line) will almost certainly suffer deterioration of the latter. In other words, corporate governance practices can actually destroy value if they focus attention and resources on the wrong things. Here is the abstract from her article:
I show corporate culture is an important channel through which shareholder governance affects firm value. I develop a novel data set to measure aspects of corporate culture and use a regression discontinuity strategy to demonstrate stronger shareholder governance significantly increases results-orientation but decreases customer-orientation, integrity, and collaboration. Consistent with a positive link between governance and value, shareholders initially realize financial gains from the results-oriented corporate culture: increases in sales, profitability, and payout occur. However, by concentrating on tangible benchmarks, managers hurt the intangibles, which is not in the best long-term interest of the firm. Over time, the value of the firm’s intangible assets significantly deteriorates. This longer-term negative link between governance and value appears to act via the governance-induced changes in corporate culture. Estimates suggest firm value declines 1.4% via the corporate culture channel. I use an instrumental variable design and interventions by activist hedge funds to test the external validity of these inferences. Across these complementary research designs, I consistently find strong support for the importance of a corporate culture channel.