Risk & Compliance

Governance Champs Outperform the Market

Colgate-Palmolive, PepsiCo, Praxair, and Canadian-based BCE are the highest rated in terms of corporate governance.
Stephen TaubSeptember 10, 2004

Good corporate governance seems to pay. A group of 26 companies that got the highest score from GovernanceMetrics International’s twice yearly corporate governance ratings outperformed the S&P 500 Index.

The good-governance group outperformed the S&P 500 in terms of total returns for each of the last one-year, three-year, and five-year periods by 4.9 percent, 8.3 percent, and 10 percent, respectively, as of August 31.

The findings suggest “a correlation between corporate governance practices and portfolio returns when measured across a number of variables and across a multi-year period,” said Gavin Anderson, GMI’s CEO.

GMI rates 2,588 companies from various countries, applying about 500 metrics. The companies are ranked relative to one another. About one third are deemed to have above-average governance practices, one-third average, and the remaining third below-average.

U.S. companies had the highest overall average rating, followed by Canada, United Kingdom, and Australia. At the other end of the scale, Greek companies had the lowest overall average rating followed by Japan.

“The enactment of Sarbanes-Oxley in 2002 has led to continued improvements in the level of practice and transparency in the United States, but one should not be complacent; governance risks certainly do remain despite changes in the broader corporate governance climate,” says Anderson.

Four companies have ranked at the top of the list of each of GovernanceMetrics’ first three sets of ratings—Colgate-Palmolive, PepsiCo, Praxair, and Canadian-based BCE.

Other U.S,-based companies that topped the September list include 3M, Coca-Cola, General Motors, Gillette, Occidental Petroleum, and Target Corp.