Corporate governance and corporate performance: UK FTSE 350 companies

In the wake of the recent financial crisis, attention has once again turned to corporate governance, with policy reviews of UK corporate governance being undertaken by the FRC and the Walker Review. One key question may relate to the purpose of corporate governance – is it about the control of risks, the improvement of performance, or both? If this could be clarified, criteria could be developed to measure the success of corporate governance procedures or codes. This research investigates whether companies with particular corporate governance characteristics outperform other companies and have lower levels of risk. The governance characteristics investigated in the report are: board independence; board size; directors’ ownership of equity; and extent of ownership by large block holders. The effects of these characteristics were measured over two three year periods between 1999 and 2004. Three measures of performance were used: one stock market measure (market to book ratio); and two accounting based measures (return on assets and ratio of sales to total assets). Risk was measured in three ways: total risk; systematic risk; and a measure of sudden share price falls. The findings reveal no clear systematic relationship between governance factors and improved performance, and no strong evidence that governance reduces either total or systematic risk. This project was funded by the Scottish Accountancy Trust for Education and Research (SATER). The Research Committee of The Institute of Chartered Accountants of Scotland (ICAS) as also been happy to support this project. The Committee recognises that the views expressed do not necessarily represent those of ICAS itself, but hopes that the project will add to the knowledge about the interaction between corporate governance factors, company performance and risk.