Pax World believes that strong, transparent corporate governance policies are the foundation for a company’s long-term sustainability. As with our other sustainability criteria, we believe that examining corporate governance practices provides us with crucial insight into the quality of a company’s management.
Pax considers the following core principles of sustainable governance when evaluating a company for investment:
- Loyalty, or acting for the benefit of shareholders rather than simply acceding to the wishes of management
- Accountability for environmental, social and governance performance
- Durability, or appropriate emphasis on long-term performance
- Sustainability, or attention to the interests of stakeholders, as well as financial interests
Many studies support the theory that well-governed companies may make better long- term investments. A 2004 survey of investment studies conducted by Insight Investment reported on the growing body of evidence suggesting a correlation between good corporate governance and positive stock performance and increased long-term shareholder value.1 According to the 2005 study “Beyond the Numbers: Materiality of Corporate Governance” conducted by Deutsche Bank, companies that ranked at the top in terms of their governance characteristics outperformed those with poor governance characteristics by 12.74%, and those with low governance risk outperformed those with higher governance risk by 32.2%.2 A Goldman Sachs JB Were study also published in 2005 indicated that there is “some quantitative evidence of links between company corporate governance ratings and various aspects of company performance [that] merit consideration by investors” including company share price performance, consensus earnings trends and return on equity trends.3 In a follow-up report in 2006, Goldman Sachs JB Were concluded: “We believe…results… show a good relationship between corporate governance ratings and share price performance for FY06…[and] we are impressed by their robustness and consistency.”4
Pax generally avoids investing in companies with significant failures of corporate governance, such as major litigation settlements, Securities and Exchange Commission (SEC) or Department of Justice (DoJ) investigations or accounting restatements, especially if they have not taken steps to address and avoid recurrence of the problems. Pax may also avoid companies with governance structures that are particularly poor or associated with governance failures, particularly in cases where significant failure is judged likely and where there have already been instances of failure. The criteria we examine also includes business ethics.
When evaluating a company for investing, we examine the firm’s governance structures, practices such as executive compensation and protection of shareholders’ rights, and compliance with securities and accounting statutes. In addition, we carefully review each company’s policies and performance on bribery and corruption, protection of intellectual property, and antitrust compliance and performance as governance issues. In industries that are subject to extensive oversight, Pax may evaluate compliance programs and procedures related to political contributions.
Pax World believes that strong corporate governance is important for all companies, and that the management of all sustainability-related factors can easily be viewed as a reflection on governance. Due to particularly complex regulatory environments and business models, Pax particularly views corporate governance as a key issue in the healthcare, financial services, energy and telecommunications sectors.
Past performance does not guarantee future results.
The issues highlighted above are illustrative and do not necessarily reflect the full range of corporate governance issues Pax World may consider in analyzing a particular security for investment.
1Insight Investment, “Investor Responsibility Briefing: Does Good Governance Pay?”, February 2006.
2Deutsche Bank, “Beyond the Numbers: Materiality of Corporate Governance”, November 25, 2005
3Goldman Sachs JB Were, “Corporate Governance and Investing”, August 2005.
4Goldman Sachs JB Were, “Good Corporate Governance = Good Investment Returns”, June 2006