New risks, new rules: financial community shows governance is the new differentiator in investment decisions

Nearly 90 per cent (89 per cent) of financial services decision-makers considered effective governance to be a critical driver of investment performance. Corporate governance emerged as the most important matter on which asset managers should enagage the companies in which they invest, with strong support also for engagement on remuneration, corporate actions and environmental and social issues.

The overwhelming majority (85 per cent) of the sample of 293 decision-makers said that asset managers should engage with the companies in which they invest client funds both before investments are made and at regular intervals subsequently. Respondents agreed that poor governance was the biggest challenge faced by companies after tax regulations.

Aberdeen Asset Management head of corporate governance, Paul Lee said: “The research makes clear that governance has to be a fundamental part of what investors do day-in, day-out . It’s about asset managers understanding what they own and not being shy of having conversations with the companies they invest in. Those conversations need to happen regularly and be a frank and honest two-way dialogue.

“Getting governance right is not easy. It involves research and thoughtful understanding. A lot of time spent meeting people and listening – not just talking. Doing these things, and therefore getting governance right, is easier if you take a long-term approach. A company is much more likely to talk to you if they don’t think you’ll sell their bonds or shares at the sight of one set of poor quarterly figures. We need to do more as an industry to invest for the long term ourselves and encourage the companies we own to do the same.”

Several impediments to long term investment emerged from the research with 70 per cent of respondents citing a short-term environment where performance is regularly measured against peers as a barrier to a long termview. Nearly half (48 per cent) believed regulations also forced short-term thinking and acting, while the vast majority believed that there were sufficient investment models and performance metrics available to support long term investing. Indeed, one factor identified as promoting short-termism was the proliferation of models and metrics.

At a country level, over half (57 per cent) felt governance regimes/competencies were a better measure of risk and opportunity than the traditional emerging/developed market categories. The research confirmed that in evaluating investment opportunity, asset managers are expected to take a lead in assessing country risk.

As part of the research, Mark Colman, Head of Fiduciary Management Office, Santander Asset Management, said: “Asset managers should certainly include governance in their analysis. Increasingly, it is essential that no matter how good a company is in a particular country, there are times when you’ve got to say ‘do I really want to put my money there?’ because there could be issues well beyond the influence of that particular company that should make you shy away from investing.”

One test of good governance was reported as the ability to survive and adapt in times of market stress. As part of the research, Michael McCauley, Senior Officer, Investment Programs and Governance, Florida State Board of Administration USA, said: “Governance is a very significant and material factor within investment analysis. I always like to think of it as something that is on par with a lot of the other fundamental factors that can drive performance and value. When you look at the company’s overall governance profile and you measure it across different underlying dimensions, broadly speaking, it has been shown empirically that governance is a risk mitigant.”

The research, conducted by Gabriel Research & Management Ltd., and commissioned by Aberdeen Asset Management, surveyed a total of 293 decision-makers around the globe, including institutional investors, trustees, managers and consultants across the financial services industry, corporate and not-for-profit sectors.

This research will be published alongside Aberdeen Asset Management’s Annual Investment Conference, 2015, taking place on Tuesday 24th November.