Good Governance Has Upside on Stock Price

Twenty-six companies – 20 American, five Canadian, and one Australian – out of 2,588 global companies monitored by GovernanceMetrics International (GMI) received top corporate governance marks.   As a group, these companies outperformed the S&P 500 Index for each of the last one (4.9%), three (8.3%) and five year periods (10.0%), as of August 31, 2004.

Outside of total returns, corporate governance improved across the globe.   On a national level, US companies had the highest overall average rating of 7.23, out of a possible 10.0, followed by Canada (7.19), United Kingdom (7.12) and Australia (6.73). At the other end of the scale, Greek companies had the lowest overall average rating at 2.93 followed by Japan at 3.57. In Europe, companies from Belgium (4.52), Portugal (4.55) and Denmark (4.60) had the lowest overall average ratings.

In large part, the improvement of the governance ratings over the past two years, from 6.5 to 7.2  for US companies came due to the enactment of the Sarbanes-Oxley Act.   Among the more positive changes noted by GMI are:

• 95% of companies now report having a qualified financial expert on their audit committee versus 65% in 2002
• 73% have hiring policies concerning employees or former employees of auditor firms versus 14% in 2002;
• 51% of companies have adopted auditor personnel rotation policies versus 8% in 2002
• 83% of audit committees now perform self-evaluations versus 17% in 2002.

Also during the past two years, GMI said there have been several other improvements in governance.   For example, 90% of companies now have board evaluation policies, compared to only 35% in 2002 and 80% of companies now provide director training versus 14% two years ago.

UScompanies are far from perfect, GMI said, pointing toward notable advances in the UK.   Currently, 95% of rated companies in the UK have separated the Chairman and CEO roles, but only one-third of rated companies in the US have done so.