Firms seen doing better if obey governance rules

Companies with best corporate governance practices yield higher returns for shareholders than their poorly governed peers such as troubled mortgage lender Northern Rock, new research showed on Wednesday.

A hundred pounds invested in a "blue-topped" firm - which complies with the Combined Code on Corporate Governance and whose procedures, director pay and other features satisfy shareholders - grows over five years to 120 pounds, and only to 102 pounds if invested in a worst-governed "red-topped" company, said the Association of British Insurers (ABI).

"Good governance produces better returns with less volatility - something long-term savers need," director of investment affairs at the insurance industry trade body, Peter Montagnon, said in a statement.

ABI member companies hold shares in a fifth of the country's stock market on behalf of millions of pensioners and savers.

ABI uses a colour system to define how well a company is governed, with red showing the strongest concern about an issue, followed by amber. A green top indicates an issue that has been resolved while best-governed firms receive a blue top.

ABI amber-topped Northern Rock, which in September fell victim to the global credit crunch, for over-generous bonuses and salary hikes for four years running, with the latest amber top - for its governance in 2006 - given in April last year.

"Remuneration is a good indicator...of deeper issues," Montagnon told journalists during a presentation of the study.

He added that what mattered was how decisions about pay were taken and whether pay rises were properly explained.

ABI also found that the right balance between non-executive directors on a board and their executive counterparts is crucial to achieving greater profitability.

The researchers examined 654 FTSE All-Share companies from 2003 to 2007.