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Institute of International Finance Mumbai, 15 December 2005 Corporate governance: investor perspectives. Agenda. Opinions Performance Action. Investor surveys: McKinsey 2002. Corporate governance at the heart of investment decisions 75% ready to pay premium for high governance standards

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slide1

Institute of International Finance

Mumbai, 15 December 2005

Corporate governance:

investor perspectives

agenda
Agenda
  • Opinions
  • Performance
  • Action
investor surveys mckinsey 2002
Investor surveys: McKinsey 2002
  • 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

Qualitative research, 200 institutional investors

investor surveys investor relations society uk 2005
Investor surveys: Investor Relations Society (UK) 2005
  • To what extent do you incorporate corporate governance issues in your stock selection procedures?

Qualitative research, 100 institutional investors

investor surveys london stock exchange 2005
Investor surveys: London Stock Exchange, 2005
  • Does good corporate governance have a significant impact on improving a company’s valuation?

Opinion survey: 100 institutional investors

investor surveys london stock exchange 20051
Investor surveys: London Stock Exchange, 2005
  • How important is good corporate governance in influencing investment decisions?

Opinion survey: 100 institutional investors

performance analysis independent directors 1999
Performance analysis: independent directors (1999)
  • 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?

Quantitative survey: 1,000 US companies

performance analysis governance rating vs share price
Performance analysis: governance rating vs share price
  • Annualised stock returns, 2001-2003

Governance Metrics International: 1,600 major global companies, 2004

performance analysis deutsche bank 2004
Performance analysis: Deutsche Bank 2004
  • It pays to be good: FTSE 350, top vs bottom 10% scores on corporate governance

Source: Bloomberg, Deutsche Bank Securities Inc. estimates and company information

corporate governance component of equity risk
Corporate governance: component of equity risk
  • 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 scoring mechanism, correlated with financial indicators

investor surveys london stock exchange 20052
Investor surveys: London Stock Exchange, 2005
  • Will corporate governance play a greater role in investment decisions over the next year?

Increasing investor focus on corporate governance: a permanent trend

action linking governance to valuation
Action: linking governance to valuation
  • 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

Break rules rather than do anything against common sense