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Is There a Corporate Governance Stock Price Valuation Impact?

Sorry folks, but you bet there is! There is absolute consensus on the global buy-side (94%) that good corporate governance affects a company’s valuation — in fact, it is seen as delivering a 10% premium. However, the downside of perceived “poor” governance is quite alarming, estimated to be in the neighborhood of a 30% discount. Yes, 30%.

Governance is increasingly on the minds of the global buy-side, with 57% of investors saying it is more important today than ever.

Your buy-side coverage is looking at the same governance issues that the governance analysts are but through a different lens and with very different results. So how do they perceive your governance and what impact is it having on your valuation? Also, we can’t forget that 68% of these portfolio managers have full control, or significant input, on your proxy vote. How does your internal reporting and communication process between IR and governance leaders measure this and communicate your governance value proposition?

Corporate Governance’s Impact on Valuation

  • There is absolute consensus on the global buy-side that good corporate governance affects a company’s valuation.
  • Fully 94% of investors around the world believe good governance impacts valuation.
  • Superb governance is seen as delivering a 10% premium to valuation.
  • But the downside risk of “poor” governance is truly formidable as investors across countries estimate it to be in the neighborhood of a 30% discount.
  • In addition, governance is increasingly on the minds of the global buy-side.
  • Relative to a couple years ago, investors around the world say it is more (57%) as opposed to less (1%) important to take the time to understand a company’s governance policy and/or record.
  • The increased importance of governance is readily apparent across region of domicile (especially in Europe and Asia) and by sector.

There are four top drivers of good governance according to the global buy-side:

  • Commitment to transparency and disclosure
  • Strong/objective board of directors
  • Clear code of ethical conduct
  • Management pay linked to performance

    Governance priorities do not differ materially among investors domiciled in different parts of the world.

“Good communications, transparency, independent directors, separation of CEO and Chairman roles.” United States

“To give information on what their strategy is for the future and not hiding any details.” Malaysia

“The right people on the board, transparency of the financials, timely information.” Switzerland

“Integrity, transparency, engage with shareholders and make accountability real.” Australia

“The policy should ensure that they engage in a variety of good practices, including maintaining an independent audit and compensation committee, having an outside majority on the board, not having too many directors serving on more than four boards, and giving shareholders the right to call special meetings.” Switzerland

“There needs to be a strong board of directors with hands-on committees, succession planning by the board, and clear management team guidelines.” United States

“An effective corporate governance policy means having an independent and balanced board with no conflict of interest with the CEO. The company needs to have good transparency.” United States

“Consistency, responsibility, accountability, transparency and effectiveness that is deployed through the organization.” China

“Long-term vision and, of course, providing correct financial information over time including the positive as well as the negative.” Sweden

“Respected rights of shareholders, integrity, ethical board, transparency.” China

Summary of Completed Interviews

Most of the data reported on in this report is based on 355 in-depth telephone interviews, distributed between 183 North American buy-side investment professionals (163 in the US and 20 in Canada), 111 in Europe (40 in the UK and 71 in Continental Europe) and 61 in the Asia-Pacific region. These interviews were conducted by Rivel’s executive interviewers between October and December 2015.