Strong corporate governance leads to outperformance – research

Added 7th September 2016

Companies with a sound corporate governance culture have significantly outperformed their poorly governed competitors since the beginning of 2009, according to fresh research by Hermes Investment Management.

Strong corporate governance leads to outperformance – research

The finding is the result of research Hermes has done into the question whether ESG investing does actually enhance returns. The study found that high scores on environmental and social factors do not significantly improve performance. But, echoing similar findings from a study conducted earlier this year by NN Investment Partners, it concludes that the ‘G’ in ESG is the most lucrative letter of the acronym.

Companies with good or improving scores on issues such as board independence, remuneration, business ethics and risk management outperform companies with poor or worsening governance by 30 basis points a month on average. This performance gap is largely driven by companies with the lowest-ranking severely underperforming the average.  

Companies within the lowest governance decile underperform the MSCI World more than two thirds of the time (see graph below), suggesting (bad) governance is indeed a powerful performance predictor.


Japan lags behind

Hermes also looked at ESG performance across the different equity markets. It found that European companies score best on environmental and social factors, while US companies have the best corporate governance policies. Perhaps this is a coincidence, but US stocks have outperformed other equity markets over the research period.

Japanese companies are serious laggards when it comes to corporate governance. Japanese companies’ average Governance scores are more than 20% lower than those of their peers in Europe, the US and the Asia Pacific ex-Japan regions. “This is not surprising given the country’s historic business culture, which placed little importance on independent representation at board level, had almost no focus on diversity and a general lack of transparency for shareholders,” the authors note.   

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About Author

Tjibbe Hoekstra

Senior Reporter

Tjibbe joined Expert Investor as a senior reporter in March 2014. Before moving to London he worked as a financial news reporter for various news outlets in Amsterdam, including Reuters and ANP, the main news agency in the Netherlands. He also worked for Fondsnieuws, a website and magazine for finance professionals in the Netherlands. Tjibbe holds a MSc in Public Administration and a post-graduate diploma in Journalism.



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