Poor corporate governance hurts performance, study concludes

A hypothetical mutual fund screened to exclude companies identified as having poor corporate governance practices significantly outperformed its benchmark, according to a study conducted by Northfield Information Services for Portland, Maine-based The Corporate Library.

The Governance Alpha Fund (GAF) was created in 2003 and has beaten the Russell 1000 index by 279 annualized basis points over the past five years.

"The Corporate Library's ratings-based screens were used to exclude any companies identified as having poor corporate governance and high governance risk at the time of rebalacing, effectively creating an enhanced index portfolio," the study states.

"A $100 investment in GAF at inception of the fund would have returned $171.14 over the next five years versus $149.92 if the money had been similarly invested in the Russell 1000 benchmark."

The GAF fund excluded companies with an excessive focus on management interests (e.g., composition of the board and key committees), runaway agency costs (e.g., CEO compensation that is poorly aligned with shareholder interests), management and/or board entrenchment (e.g., overly-powerful takeover defences), board-level accounting weaknesses and subordinated public shareholder interests (e.g., dominant or controlling shareholder concerns).

To request a copy of the report, please contact Drew Buckley at dbuckley (at) thecorporatelibrary.com.