UK - The link between corporate governance and investment performance depends on active ownership, and companies with active shareholders will tend to outperform.

This is the conclusion of a study by Hermes , the UK asset manager owned by the British Telecom pension scheme.

Reviewing the current research, Hermes said the most convincing evidence for a causal link between corporate governance and company performance was provided by focus list studies.

Focus lists attempt to publicise the failings of companies listed in the hope that this will induce their management to take remedial action. The best-known focus list is operated by California Public Employees Retirement Scheme (CalPERS).

Research into the effects of focus lists suggests that a key driver of corporate performance is investor pressure and oversight.

Colin Melvin , director of corporate governance at Hermes said “Most convincing are the focus list studies, which suggest a link between active ownership and improved performance of companies that have the potential to improve. Significantly, this also suggests that corporate governance structure itself is less important than the extent to which ownership oversight is exercised.

“It is not the absolute 'quality' of governance that is important in terms of compliance with codes but rather the process of active ownership
and oversight of management.”

He said that Hermes’ own active ownership funds, the Hermes Focus Funds, use their part-ownership of poorly-performing companies to encourage improvements that will increase the value of their investments.