Corporate Finance

Introduction 
 33

weak or zero. For example, the proportion of independent directors on a company’s board has no significant
effect on performance. Likewise, other attributes like institutional shareholding or a firm’s committee structure
are not correlated with performance. This weak correlation between governance attributes and performance
is probably because the differences in practices between firms (in the sample) are negligible. But we would
expect the correlation to be much higher in a country where investor protection rights are weak, expropriation
by insiders the maximum and so on. A study of correlation between performance and corporate governance
in Russia suggests that a one-standard-deviation improvement in governance ranking^13 leads to eight-fold
increase in firm value and a worst-to-best improvement in ranking leads to 600 fold increase in firm value.^14
Studies have shown that companies in which management has a stake tend to perform better than those in
which they don’t.^15 Another study conducted by McKinsey in conjunction with Institutional Investor found
that many large private money managers are willing to pay a higher stock price for companies with good,
independent boards.^16 McKinsey surveyed 50 money managers representing about $850 billion in assets and
found they were willing to pay a premium of 11 percent on average for good governance. Another survey by
McKinsey (results of which are shown in Exhibit 1.4) of institutional investors from around the world suggests
that investors are willing to pay a premium of up to 28 percent for good governance.^17

Exhibit 1.4 The value of good governance around the world

(Premium, in percent)

Asia Europe/US Latin America

Indonesia 27 Italy 22 Venezuela 28
Thailand 26 France 20 Colombia 27
Malaysia 25 Germany 20 Brazil 23
South Korea 24 Spain 19 Mexico 22
Japan 20 Switzerland 18 Argentina 21
Taiwan 20 UK 18 Chile 21
US 18

Ranking of Investors’ Priorities (in percent)

First priority Second priority

Latin America Foreign investors Latin America Foreign investors

investors in Latin America investors in Latin America

Shareholder rights 36 71 28 22
Disclosure 56 48 39 36
Board of directors 42 12 26 57

(^13) The ranking takes into account factors like transparency, asset stripping, limit on foreign ownership, dilution through
share issuance to construct an index and rank companies.
(^14) Black, Bernard (2000). ‘Does Corporate Governance Matter? A Crude Test using Russian Data’, Working Paper No.
209, Stanford Law School. Another study in the US finds that a group of attributes are correlated with firm performance:
Gompers, Paul A, Joy Ishii, and Andrew Metrick (2001). ‘Corporate Governance and Equity Prices’, Unpublished Working
Paper, Harvard University.
(^15) Branch, B (1973). ‘Corporate Objectives and Market Performance’, Financial Management, Summer, pp. 24–29.
(^16) Hawkins, J A (1997). ‘Why Investors Push for Strong Corporate Boards’, McKinsey Quarterly, No. 3.
(^17) Coombes, Paul and Mark Watson (2000). ‘Three Surveys on Corporate Governance’, McKinsey Quarterly, No. 4.