how corporate governance issues can affect your career moves.
by rick telberg
on careers
should you be concerned about corporate governance issues if you’re only an employee? or if you work for a private company or independent accounting firm? you bet! when you join a company, you’re making one of the biggest investments of your life. not only do you want to be sure the company is going to return the favor by investing in you, but you also want to look for the same red flags that any savvy outside might look for. but where to start?one place is to ask whether there is a correlation between good governance and company/market performance?
fortunately, some of the legwork has already been done for us. the open compliance and ethics group, a not-for-profit organization supported largely by business interests, including the aicpa, identified and reviewed more than 60 major empirical research studies on the effects of corporate governance on corporate and market-return performance to find a connection.
according to oceg, the results, considered as a whole, consistently and positively support the view that corporate governance is strongly related to corporate financial and market returns.
to be sure, none of the research proves that good governance automatically leads to good returns, but it does draw the correlation that bad returns usually coincide with bad governance. that’s “reverse causality” according to the experts, still, oceg says the empirical evidence almost universally supports the correlation between good governance and higher financial results and market valuations.
nevertheless, oceg is willing to assert the following: (1) there is a universally strong correlation between good corporate governance performance and financial and market performance, and (2) this correlation exists across all jurisdictions and economies around the globe.
the effect of good governance in market return terms was far more pronounced in asian and emerging economies, where institutional investors were willing to pay a premium of up to 40 percent more in firms exhibiting good governance compared with those in the lowest corporate governance categories. in developed countries, the effect was lower – institutional investors were willing to pay premiums of about 10 percent to 15 percent higher in firms exhibiting good corporate governance.
oceg says the disparity in the “willingness to pay” is explained by the fact that in developed markets, institutional investors’ average level of expectation for conduct is much higher than in less controlled markets, so the expected benefit from exemplary governance versus the standard is lower.
there are minimum expectations built into corporate governance. so, while not meeting market expectations for corporate governance will often result in a serious valuation downgrade, oceg notes that exceeding expectations won’t necessarily lead to a valuation upgrade.
while the existing research can show a correlation between good governance and performance, oceg notes that demonstrating a causal relationship isn’t possible because of the research limitations. there’s no way to study companies that don’t have corporate governance of some kind in place and then introduce corporate governance so effects on performance afterwards can be measured.
an interesting note by oceg: “the most widely quoted studies on the link between corporate governance and stock market response could be considered the least empirical.” oceg cites a series of opinion studies conducted by mckinsey & co. from 1996 through 2004 on the question of whether institutional investors would pay a premium for good governance.
the paper raises another interesting point: “although there was no evidence that the investors actually acted on their opinions as they said they would, the results of these studies (and other mckinsey studies like them) were (i) very consistent over time and (ii) demonstrated a perception among market participants that companies which are demonstrably well structured and managed to look after the interests of investors will (i) attract market premiums and (ii) benefit from a lower cost of capital.”
while the point that well-governed companies benefit from lower cost of capital and attract market premiums is interesting, the argument seems much weaker when couched by the phrase, “although there was no evidence that the investors actually acted on their opinions as they said they would.”
you, on the other hand, can act on your opinions of the company. maybe accountants and finance executives at some firms and companies should be getting something akin to “combat pay.” are you one of them?
[first published by the aicpa]