As shareholders take on a more active role in demanding ethical business practices, a growing number of institutional investors say they’re as concerned with the business decisions made by corporate boards as companies’ financial performance.
A recent study of more than 200 institutional investors managing $3.25 trillion in assets revealed three-quarters felt that investing with companies whose boards practiced "good corporate governance" was as important in making investment decisions as a company’s financial performance. McKinsey & Co, an international management-consulting firm with offices in New York City, conducted the survey.
Eighty percent of those surveyed said they would pay more for the shares of a well-governed company than for those of a poorly governed company with similar financial performance. The study defined well-governed companies as those in which a majority of board members are external directors who aren’t tied to management, but who have significant company stockholdings. Conducting formal evaluations of directors and being forthright with investors were also defined as essential elements of companies with good governing policies.
In some cases, investors said they would pay more for the stock of a well-governed company, demonstrating the idea that corporate governance will deliver higher shareholder return. In the United Kingdom and the United States, investors reported they would pay 18 percent more, while in Venezuela and Indonesia, investors said they would pay up to 27 percent more.
This report suggested that the fluctuating size of the premium that institutional investors are willing to pay, "reflects the extent to which they believe there is room for improvement." Since accounting standards and disclosure are higher in Europe and the United States, "the relative importance of corporate governance is lower."
Several other board-member responsibilities were highly valued by investors. On a five-point scale rating importance, U.S. and European investors gave maintaining legal and ethical practices an overall score of 4.0, communicating with shareholders a value of 3.0, and communicating with other stakeholders such as customers, vendors, and the community a 3.1. In all cases, these responsibilities received even higher marks in Latin American and Asia, reflecting the ongoing push for more responsible business practices in these regions.
The conclusion of the study, according to McKinsey & Co. Director Paul Coombes is that, "high governance standards will prove essential to attracting and retaining investors in globalized capital markets, where failure to reform is likely to hinder those companies with global ambition."