UK: Relationship between good governance and company performance

The ABI has published a report titled "Governance and performance in corporate Britain" in which, to quote directly from the report, it seeks to answer the following questions:

"...does good governance lead to stronger operating performance, and does it lead to higher share price returns? Our findings suggest the answer is yes. We use the ABI’s Institutional Voting Information Service (IVIS) to assess the quality of company governance over a four-year period. It is the first time we have used the data in this way. We set this against data on company performance and shareholder returns generated by Thomson Financial. The studied companies are in the FTSE All-Share Index".

The authors conclude (to quote directly from the report):

(a) Over a five-year period, the shares of well-governed companies deliver an extra return of 37 basis points a month industry-adjusted.

(b) The volatility of share-price returns is also lower for portfolios of well-governed companies. In addition, well-governed companies deliver higher returns when you adjust for risk.

(c) The overall balance of the board is important. More Non-Executive Directors (NEDs) on a board improves performance, but too great an increase in the percentage of NEDs on a board is associated with a decrease in profitability. The key is balance. This suggests that the Combined Code model of balanced boards, or of at least two independent NEDs at sub-FTSE 350 companies, is preferable to the US model that appears to favour boards with a vast majority of NEDs.