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27 February 2008
Finacial Times: Good governance pays better than bad
Source: www.ft.com
By Kate Burgess
Published: February 27 2008 04:13 | Last updated: February 27 2008 04:13
Well-governed companies outperform poorly-governed companies and are less volatile, according to research by one of the UK’s leading shareholder groups.
Companies complying with codes of best-practice on issues such as remuneration and board composition not only achieve better operating performance, according to the Association of British Insurers, but share price returns are better too.
The ABI set out to see if good governance drives performance and how it affects company values using data gathered over four years.
The research showed share price returns from well-governed companies were 18 per cent higher than companies with a record of breaching standards of best practice and were 9 per cent less volatile.
Companies that breached guidelines on pre-emption rights, which protect shareholders from dilutive share issues and capital raisings, suffered the worst hit to profits and market value. The ABI said these companies “see an annual fall of 3 percentage points in industry-adjusted profitability and a 0.2 point decrease in the market value of assets”.
The balance between independent non-executives and executives also drives performance. The ABI found that more non-executive directors on boards improved performance but very big boards where non-execs “drown out” executives can hurt performance.
The research was based on how many times FTSE 100 companies were awarded a “red top” or “amber top” by the ABI between 2003 and 2007. Red tops are the ABI’s most serious signal of governance breaches.
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