Corporate governance quality affects market value

S K Lo

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A recent survey on corporate governance practice in Hong Kong listed companies shows that investors reward companies with good corporate governance practices. The results of the Corporate Governance Scorecard project conducted by CityU and sponsored by the Hong Kong Institute of Directors (HKIOD), shows a statistically significant, positive correlation between a company’s market value and the quality of its corporate governance.

 

The project, which aims to encourage the adoption of best practice in governance by evaluating current practices and identifying key areas of improvement, is conducted by a research team comprising four professors, one graduate student and four undergraduate students, under the leadership of Chair Professor Stephen Cheung, Department of Economics and Finance (EF).

 

“This is the first-ever comprehensive study on the corporate governance practices of Hong Kong listed companies, which attempts to provide input for Hong Kong companies, policy makers, and the public to identify a path towards improved corporate governance practices,” Professor Cheung said. The project evaluated the corporate governance practice of 168 major constituent stocks of four leading indexes of the Hong Kong market: the Hang Seng Index, the Hang Seng Hong Kong Composite Index, the Hang Seng China-affiliated corporation Index, and the Hang Seng China Enterprise Index. The companies’ corporate governance practices were assessed in five areas: rights of shareholders; equitable treatment of (minority) shareholders; role of stakeholders in corporate governance; disclosure and transparency; and the board's responsibilities.

 

The average score for all companies was 48.32 (full marks: 100) which, according to the research team, is satisfactory. But the notable difference in the scores for the best performing company (76.34) and the worst (32.86) means there is room for improvement. The companies generally performed well in the areas of “equitable treatment of (minority) shareholders” and “disclosure and transparency” and but less satisfactorily in the areas of “rights of shareholders” and “board responsibilities,” Professor Cheung said.

 

Mr Herbert Hui, JP, Chairman of the HKIOD, emphasized that there is a growing global demand for companies to maintain high quality corporate governance practices. In the wake of the recent crises in some locally listed companies, investors are taking a more serious attitude towards good corporate governance practice. “It is important that directors of listed companies take the initiative to promote and encourage good corporate governance practice,” he said.

 

Joining Professor Cheung and Mr Hui in announcing the survey results on 10 September were Ms Carlye Tsui Wai-ling, Chief Executive Officer, HKIOD; and research team members Dr Aristotelis Stouraitis, Assistant Professor, and Ms Lynda Zhou, EF graduate student.

 

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