A new paper published by the Canadian Coalition for Good Governance (CCGG) reports that research has found a correlation between good corporate governance and shareholder value, but whether there’s a causal connection remains unclear.
The CCGG published the paper by University of Toronto law professor, Anita Anand, which reviews academic literature in this area, and concludes, there is “a strong consensus” in that research that “corporate governance is linked positively to firm value.”
The paper says that the research demonstrates that “governance does matter”. And, that both cross-country and Canada-specific research has shown “a statistically significant and positive relationship between corporate governance measures and firm value.”
In particular, it notes that elements such as board composition, ownership structure and the presence of institutional shareholders “have been found to relate to valuation outcomes”. Additionally, it says “effective compensation, disclosure and shareholder rights practices have also been found to have a positive relationship to firms’ performance, regardless of their ownership structure.”
“Thus, research across a broad spectrum of governance practices suggests the importance of governance to the bottom line,” it says.
However, the paper also notes that “The findings show only a correlation between governance and firm value; the question of causation remains for the most part unanswered.” Indeed, it also notes that it is “impossible to state definitively that corporate governance causes higher performance. Perhaps, for example, firms that perform well are better able to maintain strong governance practices.”
Nevertheless, it concludes, “At the very least, it appears that good corporate governance is more than ‘window dressing’; it can lead to a stronger bottom line and also mitigate exposure to outside risks.”
The CCGG is posting The value of governance paper on its website, and says it also intends to provide it to the directors it meets during its board engagement program.