Good governance is a key investment differentiator

According to a study pursued by Aberdeen Asset Management among institutional investors, governance is an integral and critical factors when selecting and analysing investments. Still “it is more an art than a science”.

In a recent study among nearly 300 global financial decision-makers, 89 percent considered effective governance to be a critical driver of investment performance. Moreover, the respondents rated poor governance as one of the biggest challenges companies face, second only after tax regulations.

In order to profit from good governance, investors need to invest for the long term. Still, 70 percent of respondents say that short-term performance measurements hinders investors to focus on the long term. “A company is much more likely to talk to you if they don’t think you’ll sell their bonds or shares at the sight of one set of poor quarterly figures,” says Paul Lee, Aberdeen’s head of corporate governance. Good governance is, according to Lee, compatible with long-term investing.

Research from Arabesque Asset Management shows, that governance as well as other sustainability factors increase financial performance as it, for example, decreases the costs of capital and drives innovation. One aspect that has such an effect is active ownership, says Andreas Feiner, founding partner of Arabesque, in an guest article on altii. “I believe that the future lies in the growth of active ownership by multiple stakeholders over the coming years. This would include investors and consumers seeking to influence corporate behaviour to benefit financially,” he says.

Still, integrating governance factors into investment processes remains difficult. “Good governance involves a qualitative, rather than mechanical, evaluation of corporate practices and of the people carrying them forward. It evaluates complex issues as broad as the quality of management to effective risk management. It is more of an art than a science. While improvements in technology, communication and management information have aided the governance process, they are only useful when quality people utilise this information effectively,” says Martin Gilbert, Chief Executive of Aberdeen Asset Management, on Regarding governance, the study shows that investors are most concerned with corporate governance standards, board diversity, structure and succession planning as well as corporate actions and takeovers.