Influences on corporate governance
Influences on corporate governance

This free course is available to start right now. Review the full course description and key learning outcomes and create an account and enrol if you want a free statement of participation.

Free course

Influences on corporate governance

2.3 Capital markets

In so far as better corporate governance has the objective of enhancing shareholder control, it should follow that companies with better corporate governance will attract investors and will reduce their cost of capital. A global investor opinion survey carried out by McKinsey & Company (2002) gives some evidence that good governance is linked to investment decisions. The survey found that:

  • investors state that they still put corporate governance on a par with financial indicators when evaluating investment decisions;

  • more than 70 per cent of investors are prepared to pay a premium for companies exhibiting high governance standards, ranging from 14 per cent to more than 30 per cent depending on the region;

  • 60 per cent of investors say they would avoid companies with poor governance.

However, not everyone is convinced by the findings of opinion surveys, because they are just that: opinion surveys rather than hard evidence. Even when empirical work is undertaken, the results are often inconsistent. For example, US companies in the Russell 3000 with poor governance outperformed those with good governance in the period 1999–2003 (Gimbel, 2004). But Gompers et al. (2001) found a relationship between corporate governance and stock returns. Ex post investment strategies that bought firms with the strongest shareholder rights and sold firms with the weakest rights would have earned abnormal returns of 8.5 per cent per year during the 1990s.

According to some, it is a question of which actions add to shareholder value and which do not. Environmental strategies do not impress investors, but environmental accomplishments do. Companies that are consumer-friendly consistently outperformed the market according to a study by Pictet and Cie (Butz, 2003). The Institute of Business Ethics (2003) looked at the relationship between ethical commitment and financial performance. They found that doing the right thing boosts shareholder value. The ethically committed group had an average 18 per cent higher profit as a percentage of turnover. However, the mechanisms by which an ethical commitment or good governance was translated over time into financial results were not evident. Capital markets are placing some value on corporate governance, as evidenced by the appearance of governance-related funds such as Relational Investors (USA) and Hermes Funds (UK), which select companies for inclusion in the fund based on good corporate governance. New funds launched in late 2004–5 include Providence Recovery Partners Fund (USA) and the Corporate Governance Fund (Japan) (UNCTAD, 2005).


Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to university level study, find out more about the types of qualifications we offer, including our entry level Access courses and Certificates.

Not ready for University study then browse over 900 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus