Interesting Information on Corporate Governance

I think the most interesting datum here is that General Motors made the "highest rated" list, ranking right after General Electric. Meanwhile, GM hybrids (and I presume its bonds) are rated one level above junk.

So I don't know if this survey on "Corporate Governance" should inspire confidence in a company. It's certainly interesting, when compared to other measures of a company's "strength."

"Michael E Craney" wrote snip

Well, nothing's perfect, but it testifies to a strong correlation between good business execution and ethical business management (a correlation which does not suprise me).

It also suggests a good investment strategy with above average returns and below average risk. Could we hope for a governance ETF someday?

Mike

I think it's hard to make these conclusions based on 5 years of data. Do they have data going back further?

-Will

I'd be more interested in the bad-governance ETF on the rationale that when bad governance has been identified, the company is probably in the pits, and facing shareholder pressure to clean house. Turnarounds are where I see the opportunity for additional returns, not solid companies that keep being solid. Like, Tyco and Cendant were excellent investments at the time that their governance would have earned an F, and the headlines were spilling all the ugly details.

There's a study of excellent vs. unexcellent companies, based on the criteria in the book "In Search of Excellence." The excellent companies ended up being lousy investments, as it turned out. Similar kind of thing, once you're excellent all you can do is fail to meet the inflated expecations.

I wonder whether this governance study's data worked looking forward - meaning, were these companies that outperformed the S&P selected as "A" grade five years ago, or now, in hindsight?

And of course the standards are somewhat arbitrary and so may not relate at all to investment returns. Berkshire Hathaway does poorly in these things because of its lack of disnterested board members (among other things) but hey, the long-term shareholders aren't complaining and prefer it that way.

-Tad

Governance ratings are fairly new, so likely not, and assuming that the conmpanies were so managed prior to the ratings would be a bad mistake. For instance, there were some governance issues (although it was mostly due to a bad acquisition) when Jill Barad took Mattel down the rabbit hole in 1998, IIRC.

An ETF like this would ideally buy and sell annually according to was added and removed from the list, I would hope.

Mike

Well, maybe. It's counterintutitve, but the companies who have returned the highest returns over the last 25-40 years are all your old solid consumer staples companies who have been solid for a half century or more.

See, that comes a little too close to "timing the market" for my tastes. Besides, how would you know if, after the hit on governance issues, if the company will rebound, bankrupt, or liquidate?

Yea, that's what Jeremy Siegle calls "The Growth Trap." If a company is hot and exciting and in a fast growth field, all that is already factored into the price, and your chance for good returns are higher.

Coudn't say. I looked at the website, and they're not altruistic. They wanted money for their data.

Yup.

Mike

An excerpt from a March 28 New Yorker article by James Surowiecki (page

"Local stardom [in the hometowns of currently successful CEOs] is destructive because it exacerbates one of the biggest problems that modern American CEOs face: hubris. A recent study by the finance professors Ulrike Malmendier and Geoffrey Tate, for instance, shows that companies run by 'superstar' CEOs--those who've won major awards from the business press--underperform their competitors and the market as a whole in the years after they win their awards, while the CEOs themselves begin spending more time on things that don't help shareholders (such as writing books or making country-music records). A study of a hundred recent corporate crises suggests that bosses who are charismatic autocrats are 'a major source of organizational decline.' Too much publicity and self-congratulation, in other words, can be bad for business."

"Tad Borek" wrote