Corporate Governance in a Liquid Market

My recent series of posts concerning CEO and board compensation, and corporate governance, has led me to a heretofore unrealized question. Is "corporate governance" a viable or relevant concept in our modern financial markets?

Generally, when I have read pieces on corporate governance, going back at least a decade, they typically assume, it seems, some long-term, faceless group of ever-present shareholders. Or, worse, a "stakeholder" group, only some of which are assumed to be shareholders. Thus, the perspective of these writings is usually more political in nature. By that I mean, they deal with corporate policy within the context of our socio-economic and governmental environments in the US.

However, it occurs to me that the existence of deep, liquid financial markets in the US, available at very low prices, changes this perspective radically.

What is the relevance of long-term "corporate governance," and the debates about how to affect it, when any disappointed shareholder can become a non-shareholder in a matter of seconds, for about $9/trade, at retail. For institutional investors, the cost is pennies per share.

Why does there need to be any debate over CEO compensation, board compensation, etc? If you, as an investor, don't like a company's policies, but its performance is superior, do you really care? If a company is a paragon of corporate governance excellence, but can't outperform the S&P500, are you still going to hold its shares?

It seems to me that an overlooked aspect of the corporate governance debate, and the debate over CEO compensation, is that the exit cost for even a small shareholder is de minimus. It's far easier to fix the problem by selling the shares than it is to attempt corporate "reform."

As I have noted elsewhere, it seems to me that some investors have an inability to accept their limits as investors in, rather than as employees or majority owners of a firm. To me, liquidity is a Godsend. If the companies whose stocks I own do not perform up to expectations, selling them is a trivial matter. What could be a better remedy than this?

To follow this logic, if many investors felt similarly, the stock of the company in question would fall. If this would not galvanize a board into action, what would?

As with many aspects of our relatively free-market economy, I suspect that, in the matter of excessive and inappropriate CEO compensation, and other board-originated problems, too, price signals are much more effective than any regulatory or political "solutions."