Institute of International Finance Mumbai, 15 December 2005 Corporate governance: investor perspectives

December Agenda  Opinions  Performance  Action

December  Corporate governance at the heart of investment decisions  75% ready to pay premium for high governance standards  Premium range:  12–14% North America, Western Europe  20-25% Asia, Latin America  30%+ Eastern Europe, Africa  Companies: better disclosure, more independent boards  Policies: shareholder rights, accounting standards, better disclosure Investor surveys: McKinsey 2002 Qualitative research, 200 institutional investors

December Investor surveys: Investor Relations Society (UK) 2005 Qualitative research, 100 institutional investors  To what extent do you incorporate corporate governance issues in your stock selection procedures?

December  Does good corporate governance have a significant impact on improving a company’s valuation? Investor surveys: London Stock Exchange, 2005 Opinion survey: 100 institutional investors

December  How important is good corporate governance in influencing investment decisions? Investor surveys: London Stock Exchange, 2005 Opinion survey: 100 institutional investors

December  Board independence: no positive correlation to performance  Professor Sanjai Bhagat: worst performers in 1990s had most outside directors  Outsiders in practice may not resist bad decisions  Independence vs. knowledge and incentives  Read across to SEBI/Irani debate?  Limits of analysis based on discrete CG variables? Performance analysis: independent directors (1999) Quantitative survey: 1,000 US companies

December  Annualised stock returns, Performance analysis: governance rating vs share price Governance Metrics International: 1,600 major global companies, 2004

December  It pays to be good: FTSE 350, top vs bottom 10% scores on corporate governance Performance analysis: Deutsche Bank 2004 Source: Bloomberg, Deutsche Bank Securities Inc. estimates and company information

December  Deutsche Bank: building corporate governance into research metrics  Corporate governance impacts, analysed retrospectively:  Profitability, RoE  Bottom 20%: 2002 RoE 1.5%  Top 20%: 2002 RoE 15.9%  Share price performance  Volatility  Impact on current valuations harder to define  “Investors currently do not possess the tools necessary to incorporate corporate governance assessments into valuation on a timely basis.” Corporate governance: component of equity risk Corporate governance scoring mechanism, correlated with financial indicators

December  Will corporate governance play a greater role in investment decisions over the next year? Investor surveys: London Stock Exchange, 2005 Increasing investor focus on corporate governance: a permanent trend

December  Size matters: bigger companies have better governance  Growth strategy co-ordinated to governance strategy  Check governance strategy against best known metrics: try rating yourself  Explore, work with analysts’ approaches to corporate governance analysis / measurement  Communicate corporate governance strategy  None of this should get in the way of common sense Action: linking governance to valuation Break rules rather than do anything against common sense