How corporate governance factors can influence financial performance


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Problem Identification

Assessment of corporate governance factors is an integral part of company research as a potential indicator of how well a company identifies material environmental and social factors and manages associated risks and opportunities. However, incorporating governance information into investment decision-making poses challenges. There is an abundance of publicly available data but there is little clarity on which measures may be linked to performance, or the impact the rules and practices of different countries may have on those links. The latter is especially relevant as responsible investing becomes an increasingly global phenomenon.

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Research

Calvert examined how 10 governance factors, ranging from accounting risk to shareholder rights, materially affected financial performance of more than 8,500 companies in 72 countries. Each country was assigned to one of four clusters: Strong practices/strong rules; strong practices/weak rules; weak practices/strong rules; weak practices/weak rules. To assign a country to its proper cluster, each country was evaluated along two proprietary indexes for measuring governance, a practice index and a rules index.

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Findings

The country-level cluster classifications outlined in the research serve as the foundation to further investigate the relationship between corporate governance and financial performance. Calvert found that the impact the governance factors had on corporate performance differed depending on the relative strength of governance practices and rules in its country of domicile. The research offers guidance for investors in assessing the impact of governance factors in the four country clusters.

Contributors


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Hellen Mbugua

VP, Senior ESG Research Analyst, Calvert

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Jade Huang

VP, Portfolio Manager, Calvert

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George Serafeim

Professor of Business Administration, Harvard

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Daniel Rourke

VP, Senior ESG Research Analyst, Calvert

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Tanguy Dauphin

ESG Quantitative Analyst, Calvert

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Christina Rehnberg

Senior ESG Associate, KKS Consulting, London