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Good governance increases returns by 18%

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  • Good governance increases returns by 18%

UK - Companies with the best corporate governance procedures delivered returns 18% higher than firms with poor governance over five years, the Association of British Insurers (ABI) revealed.

The ABI's 'Governance and Performance in Britain' showed a breach of governance best practice - based on data from the ABI's Institutional Voting Information Service (IVIS) - resulted in an annual1% fall on a company's industry-adjusted return on assets.

This equates to an actual fall of 8.6% in returns each year, while the worst offending companies, those who breach the guidelines every year, underperform the average industry-adjusted ROA by 3-5% a year.

In addition, the report showed over a five-year period the shares of well-governed companies delivered a monthly industry-adjusted return which is 37 basis points higher than other firms.

This research, which examined 654 UK FTSE All-Share companies between 2003-07, highlighted a breach of pre-emption rights - where existing shareholders are offered shares at a new share launch to stop their holdings being diluted - resulted in an annual fall of 3% on ROA.

The ABI claims its research confirms good governance procedures lead to stronger operating performance, particularly as the volatility of share returns is 9% lower for companies with good corporate governance procedures.

It pointed out companies committing the most serious governance breaches are "less profitable and generate less value over time for shareholders than other companies".

However, the report noted although good governance improves profitability and value creation, "these are long-run relationships that take several years to crystallize" and warned too much focus on short-term links between organisational governance and performance "may be misguided".

The research is the first time the ABI has used the data from IVIS - which relies on a series of colour codes to indicate the extent to which particular governance provisions cause concern - but confirmed its intention to conduct further analysis in an attempt to make governance "more focused on value and less driven by compliance and box ticking".

Peter Montagnon, director of investment at the ABI, said: "Our growing [IVIS] database has enabled us to look at the impact of corporate governance over a period of time. The results confirm our belief tat good governance produces better returns with less volatility - something that long term savers need."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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