Peer Group Governance

Corporate America is increasingly shaping our everyday lives. But Corporate America is not
merely an abstract concept. It is the aggregate of thousands of corporations, each operating independently and guided by its own set of policies. From political donations to diversity, corporations—and the governance policies that drive them—wield the power to transform society. But how do corporations adopt their policies? A rich literature has highlighted several channels through which governance practices disseminate across corporate America. This Article is the first to identify an important and previously overlooked channel: peer corporations.

Over the last fifteen years, corporations have increasingly identified other corporations as their
peers. These designations were mostly spurred in response to investors’ concerns regarding executive compensation and to benchmark executive pay against a group of peers. But as this article demonstrates, peer groups do more than that—they help corporations identify policies and practices to emulate in a variety of areas, ranging from governance to diversity to environmental protection. This Article terms this tendency as “peer group governance.”

Despite the growing use of peer groups and the impact it has on corporate actions, scholars
have not explored how corporations select their peers and use them over time. This Article sheds new light on the use of peer groups among public corporations. In doing so, the Article makes three key contributions to the literature. First, using a first of its kind, hand-collected dataset of all peer group designations amongst the S&P 1500 companies from 2005 to 2021, it offers the first detailed empirical account of both the growing use, attributes, and composition of peer groups. Second, using data on the governance attributes of each corporation in the S&P 1500, and interviews with directors and general counsels of public corporation, the Article identifies peer groups as an important channel for the transfer of corporate governance policies and practices. Third, the article delineates the wide ranging implications of peer group governance on SEC disclosure rules, investor policies and shareholder advocacy efforts.