Corporate Governance: Not Yet Priced In

by Kimberly Gladman, for The Corporate Library Blog, April 22, 2010

Some in the responsible investment community have suggested that the relationship of corporate governance to equity returns is now broadly understood, so that security prices accurately reflect governance risk. Indeed, you’d think that if mainstream investors were ever going to realize that weak boards and bad compensation practices could cost them money, it should have happened in the last year and a half, since the crisis of 2008. However, a study we just commissioned from Quantitative Services Group (QSG), a highly regarded quant shop, suggests that the importance of governance is still an alpha-generating secret. QSG backtested a hypothetical portfolio that used our ratings to screen out companies with high governance risk. They found that our portfolio would have outperformed the Russell 1000 by 275 annualized basis points since 2003—and that  outperformance continued to be strong in  2009, when you’d think the rest of the world would have caught on. (For details, see the report we released today). Broad market understanding of good governance clearly still has a way to go; in the meantime, those of us who are paying attention may have an investment opportunity….(continue reading)

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