Does governance culture exist and can it be mandated?

The purpose of this paper is to investigate the orientation of a firm's governance choices along a continuum of shareholder voice to managerial power and tests whether the governance orientation of a firm can survive regulation.

Using a sample of 873 firms, a set of three index measures is constructed reflecting the orientation of a firm's governing rules, the orientation of the board of directors and the overall orientation of both types of governance structures. The resulting measures are compared pre‐ and post‐SOX.

While specific, individual governance components, such as independence, can be regulated, the overall orientation of a firm's governance mechanisms, as manifested by its aggregate choice of governance structures, appears to be constant overtime suggesting that it is difficult to regulate the governance orientation of a firm.

The findings may be limited due to sample bias. There is both survivor bias and listing bias in the sample. To be included in the sample, firms needed to be publicly listed from 1998 through 2006 and needed to be listed on a major S&P index for each of those years.

The paper highlights ways in which companies circumvent the intention of regulations such as SOX. The paper therefore has implications for regulators and shareholders.

While the index method has been used before it has not been used to compare the impact of regulation on governance orientation. That makes this paper of value to regulators when considering the cost and benefit of regulations.