Perspectives on the Integration of Corporate Governance in Equity Investments: From the Periphery to the Core, from Passive to Active

Historically, non-financial data, including corporate governance, was not considered in mainstream equity valuation methodologies, analysis and investments. However, past as well as recent corporate scandals have led to a rising acknowledgement within the investor community that governance factors may have the potential to affect corporate performance and by extension corporate valuation. And although far from universally accepted, an increasing number of mainstream investors are gradually incorporating corporate governance factors (agency risk) into their equity investment processes. However, different approaches with very different purposes remain among the investor community to corporate governance integration. Two main activities demonstrate, more than any other the integration of corporate governance in equity investments. On the one hand, the increasing incorporation of governance factors alongside financial ones at the onset of an investment process and subsequent stock selection in actively managed portfolios as investors seek valuable sources of risk-related information and/or excess returns: From the Periphery to the Core. Whilst on the other hand, the increasing number of investor engagements with portfolio companies on a wide range corporate governance matters, partially explained by the rise of index tracking investments, as investors seek to fulfill their stewardship responsibilities with the purpose of realizing change through dialogue, confrontation, voting, or a combination of these: From Passive to Active. This short paper aims to provide perspectives on the wide spectrum of different methods applied by investors when seeking to integrate corporate governance in