How can you measure good governance?

06 December 2021

Question by Michael

How can you measure good governance?


Answered by Boring Money

Hi Michael,

This is a very good question and one that everyone in the ethical/ESG investment sphere is trying to answer as it is still very much a grey area and currently there is no single accepted way of measuring good governance. There was some good news at COP 26 in Glasgow this year, with one of the most significant developments in accounting and reporting in decades, the International Financial Reporting Standards (IFRS) Foundation formally announced the establishment of the International Sustainability Standards Board (ISSB)

However, there are certainly some accepted exercises and metrics that can be used to infer how a company is performing in the governance arena – both on a qualitative and quantitative basis including:

Board effectiveness - This can be judged by assessing issues like roles, competencies, board meeting productivity, communication, and recruitment.

Compliance sanctions - If a specific entity, or indeed a wider structure, has a history of facing sanctions from regulators in various jurisdictions and so is on a mission to instil good governance practices, then tracking any dealings with those regulators will help to see the impact of any moves taken.

Staff turnover and talent attraction – Quantitative measures such as staff turnover, the length of time to fill vacancies and the number of applications for open positions can help to measure the impact of good governance.
Fluctuations in share price and investor/stakeholder interest - Tracking share price and investor interest, can be a way to measure the impact of good governance.

Operational costs - Measuring both operational efficiency and the cost of operations and tracking trends in those metrics can help to measure the impact of good governance

Risk management and mitigation - By keeping a close eye on the risk taken by the company – both in terms of the investments and the market choices it makes and in terms of operational practices – one can infer the impact of good governance.

These are not easy metrics to measure for individuals which is why most investment managers have stewardship teams who hold the businesses they invest in, to account. Investment managers want companies to generate sustainable value over the long term for their clients, so the stewardship team look at a range of issues including strategy and financial performance, corporate governance (including executive pay, diversity of the board and management, succession planning, culture and stakeholder engagement), productivity and capital management, audit and accounting, and environmental and social issues, including climate change.

When choosing an investment, it is important to find out how the investment manager screens certain industries/sectors, so you are choosing an investment that meets your beliefs.

I hope this helps,
Kind regards,
Helena

Answered by

Boring Money