Corporate governance as an investment criterion: evidence from UK and European fund managers

It is often claimed that good corporate governance significantly enhances investors’ valuations of a company’s shares, but there has been little research into the perceptions and processes that might lead to such a value differential. In this paper we draw on interviews with UK and European fund mangers to unpack investor perceptions of just what constitutes good corporate governance, how this relates to corporate performance, and how perceptions of corporate governance are built into share price valuation and investment decision-making. We find that perceptions of good governance are associated primarily with management quality and the processes, attitudes and culture of a company and its board, and not with the governance variables most commonly analysed in the academic literature, such as board structure, remuneration structure, and financial disclosure. They are associated especially with a concept of organisational transparency, which is seen as something quite different from disclosure. We also find, contrary to the frequently cited claims, that assessments of governance quality are not in fact built into firm valuations. They do, however, enter the investment decision-making process as unquan tified risk factors, which may prompt investors to avoid a particular share or, if they do invest, to do so conscious of the extra risk they are taking. Our findings suggest that further research on the relationship between corporate governance and performance would be most profitably directed towards the bottom end of the corporate governance spectrum, and towards measures that can be related in some way to transparency. For corporate management, our fi ndings suggests that corporate governance is indeed of great importance if investors are to be satisfied, but that it cannot be ‘fixed’ by attending to a few high profile issues. Today’s investors don’t want to tick boxes or receive presentations. They want to see inside the corporation, and to engage in open dialogue.