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SOx is working: US corporates top governance table for first time

Since the enactment of the Sarbanes-Oxley Act US companies have become the best for corporate governance in the world.

Governance Metrics International (GMI), a corporate governance research and ratings agency, says that since its first report in December 2002 US companies have improved by over 10%, leapfrogging the UK and Canada into first place.

The average rating for a US company has risen from 6.5 to 7.2 in the last two years, and of the 26 corporates awarded a perfect 10 this year by GMI, 20 are American. They include 3M, Coca-Cola, Colgate-Palmolive, GM, Gillette, Johnson Controls, Mattel, Pepsi and Eastman Kodak.

There is also a correlation between corporate governance standards and share price performance. The perfect group of 26 outperformed the S&P 500 index as measured by total returns for each of the last one, three and five year periods by 4.9%, 8.3% and 10% respectively. It is unclear, however, where the causation lies ? whether corporate governance helps a company grow or whether innovative companies simply tend to be more up-to-date on governance rules.

Among the changes brought about by SOx in the US are:

? 95% of companies now have a financial expert on their audit committee, compared to 65% in 2002;

? 73% directly try to hire auditors into the company, compared to 14% in 2002;

? 51% have auditor personnel rotation policies, compared to 8% in 2002; and

? 83% of audit committees now perform self-evaluations compared to 17% in 2002.

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