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Institute of International Finance Mumbai, 15 December 2005 Corporate governance: investor perspectives

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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Institute of International Finance Mumbai, 15 December 2005 Corporate governance: investor perspectives

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  1. Institute of International Finance Mumbai, 15 December 2005 Corporate governance: investor perspectives

  2. Agenda • Opinions • Performance • Action

  3. 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

  4. 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

  5. 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

  6. Investor surveys: London Stock Exchange, 2005 • How important is good corporate governance in influencing investment decisions? Opinion survey: 100 institutional investors

  7. 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

  8. Performance analysis: governance rating vs share price • Annualised stock returns, 2001-2003 Governance Metrics International: 1,600 major global companies, 2004

  9. 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

  10. 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

  11. 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

  12. 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

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