Raising the Bar on Corporate Governance: A Study of Eight Stock Exchange Indices
Study Finds Corporate Governance Indices Could Have Positive Benefits in Emerging Markets
A new report from IFC and the World Bank finds that Corporate Governance Indices (CGI) can raise a country’s overall corporate governance standards and can offer companies possible financial and investment benefits from corporate governance improvements.
Many countries are making reforms to corporate governance a priority as a way to improve business performance and help companies attract investment and become sustainable. As a result, stock exchanges in these countries are looking for ways to promote better corporate governance practices in companies.
The study also shows that CGIs present companies with an opportunity to differentiate themselves in the market and, ultimately, offer companies an incentive to adopt better governance practices.
The following are six key findings of the study:
Corporate governance indices can be an effective market solution in addressing legal and regulatory gaps, and in enhancing corporate behavior and company’s visibility.
Evidence suggests that indices based on binding listing rules allow greater access to capital than those based on corporate governance codes or other scoring mechanisms.
Investors recognize the importance of corporate governance in their investment decisions, and the difficulty in gathering related information, especially in emerging markets. If set up correctly, CGIs can address that information gap.
Given the qualitative nature of CGIs, investors need to properly understand the building blocks and methodology an index is based on, as information and expectation asymmetry may pose unforeseen risks.
In most CGIs, key challenges for investors remain: access to index information and rating methodology is limited, and company evaluations are rarely made public.
Virtually all CGIs have had strong constituent growth. However, most are struggling to beat the benchmark index. This often reflects the overlap of constituent companies and a lack of depth in the capital markets.
As the process for vetting and evaluating companies for inclusion in the indices continues to evolve, access to underlying methodologies, disclosure of the ratings and self-assessments of individual companies, and of overall monitoring processes and procedures can still be enhanced.