Companies with Better Governance Perform Better in Overall Corporate Performance vis-à-vis Companies with Low Governance Standards
29 Jun 2023
- DMD Advocates
In a research paper published in Harvard University’s Quarterly Journal of Economics in February 2003, researchers shared results of a nine-year study (1990-1999) conducted on 1,500 large companies. The study analyzed these companies based on 24 governance-related parameters and ranked them on a governance index (G). The results revealed that companies with higher G scores (Democracy portfolio) consistently outperformed companies with lower G scores (Dictatorship Portfolio) in terms of overall corporate performance.
The research found that the Democracy Portfolio outperformed the Dictatorship Portfolio by 8.5% per year. A $1 investment in a Dictatorship Portfolio would have grown to $3.39 over a period of 9 years which was a 14% annualized return. In contrast, a $1 investment in the Democracy Portfolio increased to $7.07 over the same period yielding a 23% annualized return, a difference of 9%. The Democracy Portfolio also had a better valuation than the Dictatorship Portfolio. This finding was also consistent with vast study conducted elsewhere that has found a positive correlation between corporate governance and company value.
How DMD Advocates can help?
Determining the adequacy of the corporate governance provisions can be a daunting task for any company as these provisions are usually very specific to a business and industry. Governance professionals can assess the current maturity level of a company’s corporate governance framework and recommend a desired state of maturity and an implementation plan to successfully get there.
Reach out to our corporate governance experts, Rashi Dhir & Varun Mowar for assessing adequacy of your company’s corporate governance framework.