Poor corporate governance prompts 30bp underperformance

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Companies with poor corporate governance underperform well governed businesses by 30bps a month, according to new analysis released today.

However, IT firms buck the trend, according to the report by Hermes Investment Management, ESG Investing: It still makes you feel good, it still makes you money.

The report, which examined companies across geographies and sectors between 2009 and 2016, also found social and environmental considerations did not improve performance in a statistically significant way, but they did not impair performance either.

Socially responsible investing is often perceived to come at a cost to financial returns.

Head of global equities at Hermes Investment Management Geir Lode says the “governance premium” is well entrenched, with research conducted by the firm two years ago showing the same 30bps difference between well governed and poorly governed companies.

“Our latest study demonstrates that the premium holds true across different geographies and sectors – albeit with a few caveats – proving the almost universal power of effective corporate governance,” Lode says, referring to tech firms outperforming even if their governance is poor.

“The IT sector can be dominated by start-up companies which rapidly grow from micro-to-mega-cap businesses, often driven by a strong dominant founder.

“From a governance perspective, these companies can look weak – dictatorships are not the ideal corporate governance structure – but the returns achieved can be exceptional. Once these companies mature they tend to implement better standards of governance.”

The research found North America scored highest on corporate governance, but lagged when it came to environmental and social scores.

Japan’s ESG scores lagged the three other major regions analysed – Asia Pacific ex Japan, Europe and North America. 

Lode says: “2016 really was the year that responsible investing came of age. From Mark Carney, Governor of the Bank of England, highlighting the risk that climate change poses to financial stability through to the increased adoption of ESG market indices, it seems that the investment world has accepted that factors beyond traditional financial metrics can be material.”