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Calvert Institute, the Responsible Lending arm of asset management Eaton Vance, this week released an extensive analysis on the real impacts that corporate governance practices are having on financial performance. The sector and connection between the two has until this point been under-researched and likely under-appreciated, particularly on a global scale. In conducting its research, Calvert assessed 8,500 companies in 72 different countries, looking at ten key governance factors.

These factors are as relevant as ever in the current economic environment, spanning accounting and audit risks, to ownership and pay structures, board independence and most importantly, the protection of shareholder rights. In a unique take on the sector, the group decided that it was best to assess each company’s governance practices against the laws and rules under which they operate. Clearly, comparing the corporate governance of a South American company compared to a Swiss one would lead to very different results.

The assessment process was quite straightforward, classifying governance practices as either ‘strong’ or ‘weak’ and assessing each company on a range of around 100 metrics. This was then overlaid with a rules index examining the legislation and regular applying to the core 58 countries using OECD data. The analysis was then compared to a range of fundamental investment factors including return on assets (ROA), return on invested capital (ROIC) and various valuation metrics.

Through the analysis, countries were broken down into sub-groups based on the comparative weakness and strength of their rules and systems, the big names as follows:

• Weak practices, strong rules – Brazil, China, Hong Kong, India and Japan. In this group, according to Calvert, “the governance basics of board independence and shareholder rights are material to corporate performance, in addition to the gateway factors of accounting risk and ownership structure”.
• Strong practices, strong rules – Australia, Netherlands, Germany, UK and the US: in this group “the advanced governance quality factors of board effectiveness and pay/performance alignment are material, in addition to the gateway factor of accounting risk.”
• Strong practices, weak rules – Canada, France, Singapore, Sweden and Switzerland. In this group “all three compensation factors are material to corporate performance, in addition to the gateway issues of accounting risk and ownership structure”.
• Weak practices, weak rules – Mexico, South Korea, Taiwan, Thailand and the UAE. In this group, “the basic issue of pay figures is material to corporate performance, in addition to the gateway factor of ownership structure”.

The authors, Hellen Mbugua and Daniel Rourke, noted that Calvert has “long considered corporate governance assessments an integral part of company research because they can be an indicator of how well a company identifies material environmental and social factors and manages associated risks and opportunities.” With the key conclusion being that the “the impact the factors had on corporate performance differed depending on the relative strength of governance practices and rules in its country of domicile.”