Abstract
Despite increased recognition of the importance of sound corporate governance practices in emerging markets, previous researchers reported inconclusive evidence on the association between corporate governance and financial performance. Authors that predominantly focused on board-related variables might, however, have failed to reflect the complex nature of corporate governance. The financial performance measures employed in the majority of previous studies also ignored the potential risk-reducing benefits that sound corporate governance could hold for emerging market firms. The purpose of this article was thus to investigate the relationship between a comprehensive measure of corporate governance and the risk-adjusted performance of selected South African companies. A unique corporate governance database was compiled by conducting content analysis on the considered companies’ annual reports over the period 2002 to 2010. Aspects related to nine corporate governance categories were taken into account. In addition to the accounting and market-based performance measures that were employed in previous studies, South African companies’ risk-adjusted performance was also taken into account. The capital asset pricing model and the Fama-French three-factor model were employed to estimate risk-adjusted abnormal returns for four corporate governance-sorted portfolios. Both estimations revealed that the portfolio comprising of companies with the highest corporate governance scores managed to significantly outperform the market.
Highlights
The German philosopher Arthur Schopenhauer stated that “there are three steps in the revelation of any truth: Firstly, it is ridiculed; secondly, it is resisted and thirdly, it is considered self-evident”
Based on the reported results, both null hypotheses were rejected. The results indicated both positive and negative relationships between financial performance and corporate governance
In contrast to previous emerging market researchers who predominantly focused on board-related variables, comprehensive corporate governance score (CGS) reflecting both disclosure and acceptability criteria were compiled for this study
Summary
The German philosopher Arthur Schopenhauer (in Viviers, Bosch, Smit & Buijs, 2009) stated that “there are three steps in the revelation of any truth: Firstly, it is ridiculed; secondly, it is resisted and thirdly, it is considered self-evident” This statement is apt in light of the increasing number of responsible investors who actively integrate environmental, social and corporate governance (ESG) considerations into their investment analyses and ownership practices. Many global and local investors regard ESG management to be narrowly concerned with corporate governance They tend to place more focus on corporate governance than environmental and social considerations (Van der Ahee & Schulschenk, 2013). While some corporate governance aspects (e.g. board composition) are relatively easy to measure, environmental and social aspects might be more difficult to appraise
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