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Governance and performance research show it pays to be good

Wednesday, November 13, 2013
Opalesque Industry Update - PIRC, Europe’s largest independent governance research specialists and Inalytics, who measure investment skill, have announced a new collaborative service to allow pension funds to assess their portfolios for both governance risk and investment skill.

The service has grown from Inalytics Research Paper 08 which demonstrated that firms who practise good governance have outperformed the market over the past two years.

The research paper reveals the marked impact of governance on performance. Of the 423 portfolios analysed, firms ranked as high risk by PIRC underperformed the index by an average of 4.1% over a 23 month period. The beneficial effect of good governance is much more potent; firms ranked as ‘low-risk’ by PIRC outperformed the index by 13.1% on average.

The research revealed that the relationship between governance and performance is felt particularly acutely for smaller companies. Small low-risk firms outperform the index by 15%, medium risk by 8.5% and high risk firms underperformed by 0.4%.

The new service is provided by Inalytics, enhancing its existing service of benchmarking manager skill by incorporating PIRC’s Corporate Governance Ratings for every quoted company in the UK, the USA and Europe.

The new service gives Pension Funds two powerful tools to examine their portfolios to see whether they own companies that are high risk, while knowing if their Managers have the investment ability to meet their performance targets.

Rick Di Mascio, CEO of Inalytics, said: “We believe that PIRC’s governance ratings will be a significant value enhancing addition to our manager skill analysis. Our clients can now correlate governance risk with manager skill assessments in their equity portfolios. This research will help pension funds understand the tangible effect that governance is having on their investments.”

Alan MacDougall, PIRC’s Managing Director, said: “We are delighted to be working with Rick and his team to combine our strengths, and have long been admirers of the work Inalytics undertakes. We believe this service is absolutely unique, and marks a significant step in bringing an objective assessment of governance risk into mainstream portfolio analysis and construction.”

PIRC’s Corporate Governance Ratings offer an independent view of where governance risks may be embedded within a company or portfolio. The Ratings provide an assessment of the presence or absence of particular governance structures and policies which have a material impact upon the company’s performance. The Ratings draw on approximately 100 data points, covering four main areas: audit and reporting; the board; executive pay; and shareholders and capital.

Inalytics has featured on Opalesque before. You can read that piece here.

Press release

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