As corporate governance defines the rights and responsibilities of key decision-makers within an organization, it sets the foundation for business performance and should therefore be among the key criteria for investors. In 2015, significant regulatory efforts to establish sound corporate governance principles across industries were driven internationally by the OECD. In the financial sector, for example, the Basel Committee on Banking Supervision issued guidance on corporate governance, which is considered a significant contributing factor to the safety and soundness of the global banking system. In this context, the Chairman of Credit Suisse Group’s Board of Directors, Urs Rohner, confirms that “robust corporate governance is a must in any industry, and for banks in particular.”

Building investment strategies based on good corporate governance
Across industries, corporate governance becomes particularly important under certain conditions. As Mike O’Sullivan, Credit Suisse’s Chief Investment Officer, International Wealth Management, explains: “With profit growth slowing, credit spreads higher and interest rates rising, corporate governance will become an even more important factor for investors”. These are periods when the power of traditional methods of predicting business performance tends to diminish.

In some industries, a focus on corporate governance can reward investors with market outperformance. These include notably telecommunications and financial services. The report concludes that these sectors differentiate themselves in two important ways. First, they understand and actively manage the potential risks of bad governance. Second, the financial, business and reputational consequences of bad governance in these industries can be substantial. Other sectors such as healthcare prioritize good governance but are unable to outperform the market as a result. Also, identifying the most important governance factors such as accounting or management incentive structures can pay off, particularly if investors focus on companies showing significant respective changes.

A final angle of the report moves the focus from investors, regulators and managers to the supply chain. The report finds that good governance leaders tend to demand high standards from their business partners, including both suppliers and customers, and can thus act as multipliers of best practice.

The HOLT governance scorecard
To help investors use corporate governance in a more targeted fashion, the Credit Suisse Research Institute has developed a governance scorecard based on the proprietary HOLT framework. The scorecard assesses and compares 20’000 US and European companies based on 13 governance-relevant criteria, such as the level of transparency of corporate pay and the balance between short and long-term performance measurement.

The Credit Suisse Research Institute report, “How Corporate Governance Matters” is available online in English at: www.credit-suisse.com/research-institute