UK - An index showing the effect of corporate governance on UK companies' stock market returns is to be published for the first time.
The index – which has been developed by Morley Fund Management – will track performance related to companies’ ability to meet a 25-point governance criteria over a five-year period.
It is due to go live within four to six weeks and is modelled on work by academics at the University of Pennsylvania.
Morley said the index would initially target FTSE350 firms.
The US governance index-tracked company performance back to 1990. It showed that an investment strategy in favour of companies with “very good” corporate governance arrangements in the 12-year period produced abnormal returns of 8.5%.
Morley socially responsible investment analyst Luigi Minerva said it was increasingly apparent that any assessment of potential company returns needed to include a focus on corporate governance conditions.
He said that while it was impossible to prevent accounting fraud at companies, investors could monitor corporate governance to ensure it did not go undetected for 10 years – as seen at collapsed food giant Parmalat.
He added: “This is the first index of its kind in the UK and will be peer reviewed – unlike the US where research has been largely academic. If the results confirm what we believe – that corporate governance is essential to risk assessment – the index will be part of an ongoing process.
Corporate governance is going through a strong period of evolution and the more active the approach, the better it is for investors.”
While the US research used “takeover defences” as a key criteria, Morley identified points more relevant to the current UK climate. These include the separation of chairman and chief executive, the makeup of boards, disclosure and the treatment of minority shareholders.
Most respondents in this week's Pensions Buzz do not think businesses should be able suspend AE contributions if in financial distress.
Former BHS owner Dominic Chappell has lost the appeal against his section 72 conviction and sentence for failing to hand over information to The Pensions Regulator (TPR).
This week's top stories include Marsh and McLennan Companies agreeing to buy JLT, and the home secretary calling for AE to be scrapped in a no-deal Brexit scenario.
Lesley Titcomb says the watchdog wants closer interactions with pension funds to spot problems sooner and act before having to use its more stringent powers