Good governance gives 18% better returns over 5 years – report

ABI report shows clear link between corporate governance and returns.

Companies with the best corporate governance records have produced returns 18% higher over a sixty-month sample period than those with the poorest governance, according to a report by the UK Association of British Insurers.
The study of 654 UK FTSE All-Share companies from 2003 to 2007 using governance data from the ABI’s Institutional Voting and Information Service (IVIS), also revealed that breaches of governance best practice (known as a red top warning in the ABI’s guidance) reduces a company’s industry-adjusted return on assets by an average of 1 % per annum.
The ABI said the research showed that shareholders investing in a poorly governed company suffered from lower returns. It said that £100 invested in a company with no corporate governance problems leads to an average return of £120 but if invested in the worst governed companies the return would have been just £102. The ABI report is one of the most detailed to date regarding a clear link between good corporate governance issues and financial value.Other key findings of the report were that the worst offending companies, which breached guidelines in every year examined, underperformed the average industry-adjusted return on assets by 3-5 % a year. The ABI found that there was a time lag of two to three years between any breach and the impact on performance. The report said that the volatility of share returns for well-governed companies is 9% lower than for poorly governed companies. It found that the balance of the board was a crucial factor in better governance, noting that an increase in non-executive directors (NEDs) generally improved performance, although it said that too great a number was linked to a fall in company profitability. Peter Montagnon, director of investment affairs at the ABI said: “Our growing database has enabled us to look at the impact of corporate governance over a period of time. Our members’ interest in governance has always been driven by their desire to generate value for policyholders over time. The results confirm our belief that good governance produces better returns with less volatility – something that long term savers need.”