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December 01, 2000
Surveys Reveal Investors Will Pay for Good Governance
by Mark Thomsen
Global surveys published in The McKinsey Quarterly indicate institutional investors are willing pay
a premium for well-governed companies.
SocialFunds.com --
McKinsey & Co., a respected global consulting firm, conducted three surveys over the last year and
a half on how shareholders weigh the importance of corporate governance. The surveys were carried
out with the cooperation of Institutional Investor's regional institutes, Korea's Yonsei
University, and the World Bank. While the results are not definitive, inferences can be made about
how good corporate governance is valued.
 The authors defined a well-governed
company as "one that has a majority of outside directors with no management ties on its board,
undertakes formal evaluations of directors, and is responsive to requests from investors for
information on governance issues."
The three surveys studied attitudes toward investing in
Asia, the U.S. and Europe, and Latin America, respectively. Of the 200 total respondents, 84 gave
their opinion about investing in Asia, 42 about the U.S. and Europe, and 90 about Latin America.
In assessing companies for investment, McKinsey Quarterly said three-quarters of the
investors overall indicated that "board practices were at least as important as financial
performance."
"For Latin America, almost half of the respondents consider board practices
to be more important than financial performance. Over 80 percent of investors say that they would
pay more for the shares of a well-governed company than for those of a poorly governed one with a
comparable financial performance."
The survey showed that the value of good corporate
governance varied according to country. Good corporate governance in United Kingdom and U.S.
companies brought the lowest premium, at 18 percent. For investments in Southeast Asian and Latin
American companies, however, the premium rises to between 23 and 28 percent.
Regarding
these results, McKinsey Quarterly writes "the size of the premium the institutional investors say
they are willing to pay for good board governance reflects the extent to which they believe that
there is room for improvement in the quality of the financial reporting in a particular country."
This would seem to say that Asia and Latin America could lower their cost of capital by increasing
the scope and quality of their financial reporting.
The authors offered theories to
explain the dissimilar responses for different regions. "Lower premiums for well-governed United
Kingdom and U.S. companies suggest...that the investment community feels that they have already
addressed many fundamental governance issues. Improvement in these areas can come only by
fine-tuning current practices and by identifying innovative ways to raise governance standards
further."
The Continental Europe premiums "suggest that, besides improved corporate
governance at the board level, there is a need for more effective disclosure to shareholders of
information on governance practices and financial issues."
Asia and Latin America's higher
premiums "reflect the need for more fundamental disclosure of information and for stronger
shareholder rights." The survey concerning Latin America was able to distinguish that local
investors felt better reporting was the chief issue, while foreign investors perceived shareholder
rights as the principal concern. The authors noted that when foreign investors are limited to
holding nonvoting shares, they cannot influence company decisions. Under such circumstances, better
reporting is of little value.
The results of McKinsey's surveys support the idea that
shareholders increasingly believe good governance has a positive influence on the bottom line. One
might conjecture that in the future, competition for capital may become one of the factors that
spur companies to improve their governance structures.
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SRI World Group, Inc. All Rights Reserved.
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