S&P says investors place a premium on strong corporate governance
September 30, 2009
Standard & Poor's has said that better governed companies are rewarded with higher market valuations, are less leveraged, have greater capacity to service their debts and pay dividends, and enjoy more stable profit margins compared to their peers.
The ratings agency said preliminary evidence from a four-year study of nearly 300 companies listed on the National Stock Exchange of India found evidence of a positive and significant relationship between corporate governance practices and company performance.
"While there is an ongoing debate on the appropriate management and control structures which bring about greater transparency in the functioning of a company, these findings demonstrate that good corporate governance enhances a company's access to capital, contributes towards its financial performance, and encourages sustainability," said Dr Sunil Sinha, head & senior economist, CRISIL.
The research, which was carried out between 2005 and 2008, evaluated companies against 127 parameters covering various facets of corporate governance, including shareholder capital, shareholder rights, financial and operational information, board and management information and remuneration, corruption, leadership and business ethics.
"Better governed firms not only command a higher market valuation, they are less leveraged, have higher interest coverage ratios, provide a higher return on net worth and capital employed, and their profit margins are also relatively more stable," Sinha added.
The study also found price-earnings ratio (P/E) and yield—the return earned by the shareholders by way of dividend—are also relatively higher for better governed firms.
To examine the relationship between corporate governance and company performance, Standard & Poor's used corporate governance scores from the S&P ESG India Index as a proxy for firm level governance quality.
"Companies have a clear financial incentive to improve their corporate governance standards— as well as publicising the measures they take—to improve their market valuations and maximise shareholder value, as investors appear to be using the information available to them to differentiate between companies," said Alka Banerjee, vice president, S&P's Index Services. - Yogesh Sapkale [email protected]