MSCI study sees global benefits in strong corporate governance

Institutional investors have often criticized corporate boards, but some directors themselves have concerns about the boards on which they serve. Last February, Harvard Business Review reported that in a survey of 772 directors of global companies, McKinsey found only 22% who thought their boards fully understood how their companies created value for shareholders; only 16% said directors had a solid understanding of their own industries.

Many investors actively engage with boards, pushing for more independence from management and more leverage for shareholders. That process can be costly, however, and limited by the number of boards with which any investor can practically engage. Is there an easier way to ensure that companies in investor portfolios are well governed?

MSCI ESG Research recently published a case study using the corporate governance data we have compiled since December 2009. Our starting point was the MSCI World Index, comprising more than 1,600 stocks in 23 developed market countries. We scored each stock for financial and governance quality to produce the Governance-Quality Index, a subset of the parent World Index. Its constituent stocks have varied over time; at the end of October 2015, they numbered 299.

For the study period from December 2009 to June 2015, this subset of stocks returned an average of 12.5% per year, versus 10.6% for the World Index—an 18% improvement. During that period, the companies in the Governance-Quality Index raised far fewer governance concerns, as this graph shows.
 

Percentage of global companies with governance concerns

Based on our study, we believe this approach might serve as a useful tool to complement active engagement campaigns with corporate boards, while having the potential to raise corporate management standards throughout global markets, thus producing benefits for all shareholders.