GMI Governance and Performance Studies

September 2006 - In this study we wanted to explore a new line of inquiry and test the linkage between corporate governance and profitability. To that end GMI undertook an analysis of the relationship between corporate governance, Return on Equity (ROE), Return on Assets (ROA) and Return on Capital (ROC) with the assistance of Sung Je Byun of Columbia University. The results were striking. Over the one, three and five year periods ending June 30, 2006, companies rated in the top ten percent of GMI's global database achieved a higher ROE, ROA and ROC than the average for all companies rated by GMI. Further, companies rated in the bottom ten percent of GMI's global database achieved a lower ROE, ROA and ROC than the average for all companies rated by GMI over the same time frame. These results suggest to us that there is a link between corporate governance and a company's ability to invest its capital efficiently.

August 2006 - We asked our colleagues Hollis Ashbaugh-Skaife from the University of Wisconsin, Madison and Ryan LaFond from the Massachusetts Institute of Technology (MIT) to examine the link between GMI Ratings and cost of capital. Their results support the general hypothesis that firms with better governance present less agency risk to shareholders, resulting in a lower cost of equity capital. This is consistent with other research examining the link between corporate governance and bond yields, which found that governance mechanisms can help reduce agency risk as well as information risk by inducing firms to disclose information in a timely manner, resulting in higher bond ratings and lower bond yields. This helps explain why credit and debt analysts are also starting to look at governance issues in their own risk models.

May 2005 - A new study has just been completed by researchers at the University of Maastricht and the Auckland Institute of Technology (AIT) in New Zealand which examined GMI's ratings on Japanese companies and their correlation to performance. The principal authors were Bart Frijns of AIT and Rob Bauer of the University of Maastricht. Rob Bauer is also research director at ABP, Europe's largest pension fund. The study is still preliminary in that the authors are seeking comments, but it will be submitted soon for publication in an academic journal. Their key finding is that firms with good governance as determined by their GMI scores, significantly outperform firms with poor governance and have a risk adjusted out-performance of up to 15.12% annually. They also found that firms with higher governance have significantly higher firm value as measured by Tobin's Q.

March 2004 - GMI released the results of a study examining the link between its recently updated ratings for 2,100 companies worldwide and firm performance. The results were comparable to those of the previous study, with the exception of total returns for the most recent year. This was attributed to exceptionally strong stock price performance worldwide over the last twelve months. Still, the correlation between governance and performance was found to hold over a 3, 5 and 10-year period. GMI also found a connection between total returns and specific areas of analysis, including board accountability and financial disclosure / internal controls.

January 2004 - Mutual funds that invest in companies with higher corporate governance standards have been rewarded with superior returns, according to a report conducted by Lipper, the mutual fund performance experts, and GMI. In addition, buying into this kind of quality has rewarded long-term holders with lower risk over time, according to the study. The two research firms compared the portfolios of 725 large-capitalization funds against GMI's corporate governance ratings. For all three large-cap styles (core, value and growth), the funds with the largest holdings of poorly governed firms had lower total return ratings and poorer risk ratings than those that placed their bets with better governed stocks over a three and five-year holding period. This out-performance did not hold over the one-year time frame, but this was not surprising given the tech-stock rally and the fact that as a group, tech stocks tend to have lower-than-average governance profiles.

September 2003 - GMI released the results of a study examining the link between its corporate governance ratings for 1,600 companies worldwide and firm performance. GMI examined a broad array of governance attributes at rated companies, including board accountability. The GMI research study found a substantive link between investor-friendly governance practices and total shareholder returns as measured over a number of multi-year periods.

Please contact us if you would like to see copies of any of the GMI Governance and Performance Studies. They are available free-of-charge.

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