Leadership Spotlight

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Given such striking differences, should investors seek out these "democratic" firms? Metrick says no. "When people ask me, 'When should we start the mutual fund,' I tell them, '1990,'" he says. "If you had started in 1990, you'd have done really well. But today, people pay a lot more attention to corporate governance, and the things that we look at are most likely priced in the market."

Instead, the study's long-term value, Metrick argues, is in helping firms organize to increase value, profits, and sales. "Nothing is supposed to predict the stock market, but we find that these things did predict the stock market, suggesting that the market underestimated or underappreciated the importance of these organizational differences," Metrick says. "This is where the work has to be going forward – to understand better what the things are that companies can do – how can they change the way they organize themselves to lead to better performance. We think that there are a lot of things that go into creating a pervasive corporate culture. Corporate culture matters," Metrick says.

He points to Enron and Tyco as recent examples of what happens when corporate culture collapses. "You can't have this going on if people are all on the same page and thinking they need to serve shareholders," he says. Going forward, Metrick applied for and received a grant from the National Science Foundation to expand his corporate governance research and answer the many questions the study's conclusions raise.

Interestingly, Metrick and his co-authors happened across their findings somewhat by accident. After completing a separate study on institutional investors, Metrick and Gompers became interested in the growing impact of institutional shareholder activism on corporate governance. In searching for data to investigate this relationship, they discovered a rich and untapped source – The Investor Responsibility Research Center – with detailed information on shareholder rights. They saw that most variation in shareholder rights came about in the 1980s, thanks to the anti-takeover strategies many firms adopted and the laws passed by many states giving firms further takeover protection.

The end result was a wide range of governance structures among U.S. firms, making it possible to study the differences between firms that operated as democracies and those that operated as dictatorships. The team ran a long-term experiment similar to a medical experiment, "just to see what happened," says Metrick. "Now you can say, 'OK, what happened in the 1990s?' It's very similar to saying 'OK, some people started eating a lot of vegetables, and some didn't. Was there any difference in their life expectancy?' There was no reason to know at the beginning which one of these strategies was going to be right."

"But we found this monstrous relationship. And nothing we could do would make it go away," he says. "We didn't really think it was real when we first saw it. But no matter what we did, it was there, and then it was there in a lot of other contexts like stock performance and stock valuation, and capital expenditures. It was pretty exciting." But just like most long-run medical studies, Metrick says, "It is difficult to prove causality. What we have instead is a very strong and economically important correlation. If this were the medical study, the results would still be enough to get me to eat my vegetables."

Metrick's other research has examined a broad range of issues, from a study on the Internet's effect on stock trading to another that used the television game show "Jeopardy!" to investigate the choices people make during times of uncertainty. He's most excited, though, about a book he's begun on venture capital valuations – work that came about during classroom discussions with Wharton students. In trying to teach corporate finance, he learned that standard valuation tools are often lacking, designed largely for manufacturing companies trying to decide, for instance, when to build a factory or replace a large piece of equipment. "There are some big differences between corporate finance for manufacturing companies and corporate finance for innovative technological companies," Metrick says. "And when you are considering making a venture capital investment, standard valuation tools that have been developed for traditional industries are only marginally useful." Metrick hopes his book, based almost entirely on his lecture notes, will fill some of these gaps.