Governance & Inclusion

The self-interests of shareholders and executives are never fully aligned. This becomes evident from the simple fact that the owner wants to pay her management just as much as necessary while the management, in contrast, would like to earn as much as possible. For this reason, many legal requirements and regulations have been introduced. They serve to balance the interests of different stakeholders in the company. This is generally referred to as corporate governance.

Some companies are more diligent in applying governance rules than others which means that they meet higher standards in aligning executives' and owners' interests. Especially in emerging markets, good corporate governance is very important (International Finance Corporation research). The developed markets have already learned to appreciate good corporate governance, so that simple methods for identifying good governance no longer achieve a significant outperformance that was possible in the past (New York Times).

This does not mean that good governance is associated with a poorer performance: While good governance stocks nowadays trade at higher prices, they have similar returns as other stocks. However, their management reliability is safer for the investor.

Investment Theme: Governance & Inclusion

April 13, 2023. Investment Themes research is updated annually. ()

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