Abstract

We study the impact of governance quality as a criterion in the stock selection process of actual portfolio managers. We assess the extent to which portfolio managers’ current holdings are consistent with their governance policy guidelines. We also examine the extent to which governance quality guidelines impact manager performance relative to country specific benchmarks as well as the MSCI World Index. Companies which get a higher grade based on our new index of governance quality outperform the benchmarks, and are low risk, when compared to a basket of randomly selected companies. Key components of the new governance index include factors reflecting board structure and voting, skills and experience, stock ownership and conflicts of interest and compensation. The two criteria which are statistically significant out of the eleven criteria are director independence and metrics used in rewarding compensation. Respondents do take into account the governance variables they consider essential in their investment decisions, and such variables serve to enhance performance.