Deutsche Bank is set to offer tailor-made corporate governance research on FTSE 350 companies before the end of the first quarter of 2004. Aimed at fund managers, it offers systematic analysis of corporate governance issues at top companies, providing further context for the financial numbers.
Morley Fund Management, which is outspoken on corporate governance in the UK, welcomes Deutsche’s research. Ian Richards, head of governance and public policy at Morley, says: “It’s the first time we’re seeing a systematic look at analyzing trends in governance with trends in performance.”
The research offers fund managers an additional tool in assessing one component of a company’s risk profile that can then be incorporated into stock selection. “It allows you to come up with a risk assessment of an overall portfolio and specific stocks,” says Richards.
At the beginning of last year Deutsche set up its dedicated research team, currently four people based in New York. It includes an equity strategist, an ex-fund manager from Deutsche Asset Management, a consultant auditor and a new graduate.
In July, the team put out a research book entitled Beyond the numbers on US companies. Gavin Grant, director in the corporate governance research group at Deutsche Bank, says: “We wanted to go beyond the numbers and give an assessment of each company’s corporate governance practices and standards.” Deutsche hopes that by using this analysis alongside known financials, fund managers will be able to take a more considered view of a stock.
Beyond the numbers covered the full S&P500. The team assessed 50 factual corporate governance issues for each company to reach overall scores. There are four categories: board independence, shareholder treatment, information disclosure and corporate compensation. Grant says: “It [the research] offers a systematic corporate governance assessment of North America’s most important companies. However, its primary function is to identify some of the sources of corporate governance risk.”
| Assessment of S&P500 |
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| Source: Deutsche Bank |
A governance ranking The companies’ scores are then grouped and the team ascertains whether companies have average, below or above corporate governance practices. The research published in July rated 76 companies as having below average corporate governance and 90 as above average. The team also looks at how companies’ corporate governance principles evolved over the previous two fiscal years to come up with a negative, stable or positive assessment of momentum.
The UK publication will include a formal analysis of the FTSE 350 companies’ governance relative to valuations. This will enable investors to assess whether a company is trading at a premium or discount to its peer group. Says Grant: “If, for example, a company with relatively poorer corporate governance is trading at a premium we know that it can’t be explained by good corporate governance.” So perhaps corporate governance risk has not been priced into the stock price and should be considered by fund managers.
