… is the only thing that matters. Providing any investment proposition with an ESG shine has become a ridiculous scramble, with qualitative data being tortured into a modelling of sorts with no connection to financials.

11 years ago, AlphaValue started accumulating data of its own on governance on the simplest possible observation: without a proper governance, environmental and human resources issues will be discussed at length but never sorted. Progress if it happens is determined by “good” governance.Good is defined by perspective. The AlphaValue perspective is that of a minority shareholder in a secondary market.  A majority shareholder will not agree with us. Nor will a debt-holder whose perspective is time-limited to getting his money back.

Protecting minority shareholders is a demanding perspective. We compute that less than 40% of the 6,600 board members that AlphaValue screens are not up to the task because they are simply not independent, a most prosaic requirement to defend minority shareholders.

Good is defined by perspective. The AlphaValue perspective is that of a minority shareholder in a secondary market.  A majority shareholder will not agree with us. Nor will a debt-holder whose perspective is time-limited to getting his money back.

Protecting minority shareholders is a demanding perspective. We compute that less than 40% of the 6,600 board members that AlphaValue screens are not up to the task because they are simply not independent, a most prosaic requirement to defend minority shareholders.

Ask corporates what they think which is de facto what happens when they fill up data bases and the proportion of independent board members shoots up to 60%. Of course…

As repeatedly mentioned, good governance goes beyond the independence of board members by, amongst other basic requirements, having diversified boards, a fair proportion of women, avoiding large boards and sticking to fair by-laws. Few companies will survive that acid test. Those that do may do well but those that do not pass the test may do well too.

One has to be modest and recognise that good governance is more an insurance policy than a guaranteed way to raise ROCEs. If there is any correlation to be found it is that financially-strong firms tend to be strong as well on governance. Which is the egg and which is the chicken is best left to university researchers.

One can see the logic of long-term quality earnings driven by good governance as well as demanding governance not being an issue when the business spits out cash flows effortlessly (yes that still happens).

We selected 32 stocks that meet a set of useful criteria from the point of view of minority shareholders: large cap with no control, tight board, 30% being women, 50% of board members being independent. A five-year performance would back that filtering but there is a caveat: good governance tends to be British.

On the right side of the Channel, this will not be a surprise. On the continent, more than a fund manager will wonder whether his remit extends to a universe of stocks trading in GBP. Which raises an excellent question about where fiduciary responsibility begins.

Buy good governance, buy Brit

To get the list or learn more about AlphaValue’s governance metrics and research : click here