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Gatekeepers: the Professions and Corporate Governance John C. Coffee Jr Oxford University Press, Oxford, 2006
Corporate governance has been very thoroughly studied in the aftermath of the disasters at the beginning of this century, as Coffee admits at the beginning of his book - "academics tend to plough and re-plough the same furrow" (p.1). But, he argues, previous studies have concentrated on directors, shareholders and the relationship between them, to the exclusion of the professions which play a key role that of gatekeeping - in the working of governance. The book deals with the effectiveness of four professions in the USA - auditors, lawyers, securities analysts and ratings agencies - in that role.
Corporate gatekeepers, for Coffee, play two distinct roles. They prevent offending by excluding the offender from the market, for instance giving a qualified audit opinion. And they allow a company into the market by giving the signal that it is trustworthy - a positive audit opinion, a "buy" recommendation from an investment analyst. Gatekeeping should prevent corporate infractions and encourage ethical behaviour on their part: it should also motivate the professions to avoid wrongdoing. If the auditor or corporate lawyer makes a career from conferring reputation, illegal or unethical acts that detract from their reputation will rob them of a major asset. Gatekeepers may make money by overlooking client infractions-but they will have more to lose than their client, and less to gain.
Despite this, Coffee argues that the gatekeeping professions have been the weakest link in the chain of corporate governance. Directors have been disciplined by reforms that began in the 1990s, but the professions do not give adequate protection. There are, he explains, four reasons for this: a decline in legal detenence, more pressure from management, a reduced demand from investors for outside assurance, and the professions' growing eagerness to diversify their income by selling more services.
Coffee's analysis concentrates almost exclusively on the US market, which he typifies as one of dispersed share ownership, compared with the European model of shareholder concentration. Directors' remuneration is a higher multiple of employees' average pay in the USA than anywhere else in the world (53:1, with the UK next highest at 25:1) and a...