March 7, 2016

“Good” Governance and Stock Market Performance

Yvan Allaire and François Dauphin | IGOPP

Did the quest, one might dare say the obsession, with implementing “good” governance in public corporations result in better stock market performances for those companies that have adopted the best governance practices?

Numerous studies, mostly American, have tried to show a convincing relationship between governance and performance, usually with disappointing results.

Indeed, it is not surprising that such an undertaking was doomed to fail. The economic and stock market performance of a company over the years is the joint product of macro-economic, cyclical, competitive, industrial and strategic factors; it reflects as well the residual influence of good or bad decisions made over the years. In spite of all the sophisticated statistical tools marshalled to try to isolate and capture the ineffable and fleeting effect of “good” governance (assuming of course that such an effect is indeed
at work), these undertakings have generally been unsuccessful.

And yet, for 14 years, the Globe and Mail’s Report on Business (ROB) has computed and published a governance score for each of the some 230 largest companies listed on the Toronto Stock Exchange. The annual publication of the scores as well as the ranks assigned to every corporation has become a business ritual attended to by corporate leaders and the governance industry.

This overall score, with 100 as a maximum, is the sum of scores on four dimensions of governance:

1.  Board composition (32 points out of 100)

2. Shareholding and compensation (29/100)

3. Shareholder rights (28/100)

4. Disclosure (11/100)

Each of these aspects of governance is defined and captured through a series of variables (37 in total in 2015), each one given a number of points. Generally, these variables do touch upon all the desiderata of impeccable fiduciary governance. Over the years, the scoring system has adapted and evolved in sync with the changing and ever increasing requirements of “good” governance.

Be this as it may, we felt it would be interesting to survey, once more, how the ROB governance scores were related to the stock market performance of the largest Canadian corporations.

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