Does good governance pay? In theory, it should increase the market valuation of companies by improving their financial performance, reducing the risk that boards will make self-serving decisions, and generally raising investor confidence. Indeed, surveys suggest that institutional investors will pay as much as 28 percent more for the shares of well-governed companies in emerging markets.1 Do such investors practice what they preach? To find out, we looked at 188 companies from six emerging markets—India, Malaysia, Mexico, South Korea, Taiwan, and Turkey—and tested the link between the market valuation and the corporate-governance practices of these companies in 2001.
We rated the performance of each company against some key components of corporate governance (Exhibit 1) and used explicit, objective criteria for every component to ensure consistent ratings. The information on which we based the ratings came from public and proprietary sources as well as annual reports. If, for example, half of the members of the board of a company were truly independent—that is, if they had no business connections to it—the company rated a top mark of 2 on our scorecard. By contrast, companies with fewer independent directors scored either a 1 or a 0.
After we aggregated the...