Institute of International Finance Mumbai, 15 December 2005 Corporate governance: investor...
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Transcript of Institute of International Finance Mumbai, 15 December 2005 Corporate governance: investor...
Institute of International Finance
Mumbai, 15 December 2005
Corporate governance:
investor perspectives
December 2005 3
Corporate governance at the heart of investment decisions
75% ready to pay premium for high governance standards
Premium range:
12–14% North America, Western Europe
20-25% Asia, Latin America
30%+ Eastern Europe, Africa
Companies: better disclosure, more independent boards
Policies: shareholder rights, accounting standards, better disclosure
Investor surveys: McKinsey 2002
Qualitative research, 200 institutional investors
December 2005 4
Investor surveys: Investor Relations Society (UK) 2005
Qualitative research, 100 institutional investors
To what extent do you incorporate corporate governance issues in your stock selection procedures?
4% 2% 18%
35%41%
A great deal
A fair amount
J ust a little
None at all
No opnion
December 2005 5
Does good corporate governance have a significant impact on improving a company’s valuation?
Investor surveys: London Stock Exchange, 2005
Opinion survey: 100 institutional investors
1%
4%
51%
44%
0% 10% 20% 30% 40% 50% 60%
Strongly disagree
Disagree somewhat
Agree somewhat
Strongly agree
% respondents
December 2005 6
How important is good corporate governance in influencing investment decisions?
Investor surveys: London Stock Exchange, 2005
Opinion survey: 100 institutional investors
12%
35%
46%
7%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Not very / not at allimportant
Fairly important
Very important
Extremely important
% respondents
December 2005 7
Board independence: no positive correlation to performance
Professor Sanjai Bhagat: worst performers in 1990s had most outside directors
Outsiders in practice may not resist bad decisions
Independence vs. knowledge and incentives
Read across to SEBI/Irani debate?
Limits of analysis based on discrete CG variables?
Performance analysis: independent directors (1999)
Quantitative survey: 1,000 US companies
December 2005 8
Annualised stock returns, 2001-2003
Performance analysis: governance rating vs share price
Governance Metrics International: 1,600 major global companies, 2004
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
Well aboveaverage
Above average
Average Below average
Well below average
S&P 500
Performance versus sample
Quality of governance
December 2005 9
It pays to be good: FTSE 350, top vs bottom 10% scores on corporate governance
Performance analysis: Deutsche Bank 2004
Source: Bloomberg, Deutsche Bank Securities Inc. estimates and company information
December 2005 10
Deutsche Bank: building corporate governance into research metrics
Corporate governance impacts, analysed retrospectively:
Profitability, RoE
Bottom 20%: 2002 RoE 1.5%
Top 20%: 2002 RoE 15.9%
Share price performance
Volatility
Impact on current valuations harder to define
“Investors currently do not possess the tools necessary to incorporate corporate governance assessments into valuation on a timely basis.”
Corporate governance: component of equity risk
Corporate governance scoring mechanism, correlated with financial indicators
December 2005 11
Will corporate governance play a greater role in investment decisions over the next year?
Investor surveys: London Stock Exchange, 2005
26%
74%
0%
10%
20%
30%
40%
50%
60%
70%
80%
greater same
% r
esp
on
den
ts
Increasing investor focus on corporate governance: a permanent trend
December 2005 12
Size matters: bigger companies have better governance
Growth strategy co-ordinated to governance strategy
Check governance strategy against best known metrics: try rating yourself
Explore, work with analysts’ approaches to corporate governance analysis / measurement
Communicate corporate governance strategy
None of this should get in the way of common sense
Action: linking governance to valuation
Break rules rather than do anything against common sense