During the past two years, the share prices of companies with high governance risk ratings performed poorly, whereas companies with good governance and low risk ratings performed well, according to asset management industry consultancy and research group Inalytics.
Inalytics said it analysed a comprehensive set of governance risk ratings from UK-based research and advisory consultancy PIRC to assess the link between governance and share price performance.
The most surprising finding was the disparity between large and small companies, Inalytics said, with smaller companies showing a very strong dependence on good governance, while for large companies it doesn’t hold at all.
“This is ironic as most of the focus is on large household names, whereas smaller companies tend to go unnoticed. Clearly a case of ‘no news is good news’,” Inalytics said in its research paper Does It Pay To Own Companies That Do The Right Thing?
The UK-focused research rated 423 companies in the FTSE All-Share Index, accounting for 96 per cent of the market, with companies classified as low, medium or high risk.
Low-risk companies returned 11.2 per cent over the two-year period, medium-risk companies 8.4 per cent and high-risk companies 4.3 per cent. When weighted to account for the high number of smaller companies, the return difference between low- and high-risk companies narrowed to 4.7 per cent, Inalytics stated.
For small companies alone, low-risk firms returned around 20 per cent and high-risk companies lost around 10 per cent. However, for large companies, only medium-risk groups made money, gaining just over half a per cent, high-risk companies were fractionally into the negative and low-risk companies performed the worst, losing almost two per cent.
