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A growing body of academic research is pointing to a connection between better corporate boards and financial results, giving advocates new evidence to bolster their argument that corporate governance matters.

The Canadian Coalition for Good Governance is releasing a report Wednesday that synthesizes academic work from different countries to assess whether there is evidence that better governance practices correlated to improved profitability and shareholder returns.

The summary, completed by University of Toronto law professor Anita Anand, shows researchers have found differing amounts of correlation between various governance practices and companies' results, but the broad landscape suggests there is a clear link.

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Prof. Anand said research has found connections between board composition, ownership structure and the presence of institutional investors and "valuation outcomes" for a company. Effective disclosure, compensation and shareholders rights practices have also been found to have a positive relationship to performance.

"There is strong correlation between shareholder protection mechanisms – or what people would call good governance – and firm value," Prof. Anand said in an interview.

The CCGG, Canada's leading association of large institutional investors, asked Prof. Anand to review research (on an unpaid basis to avoid accusations of bias) and report on the research landscape.

Executive director Stephen Erlichman says the CCGG conducts 45 or 50 meetings a year with board chairmen of Canadian companies, and is still asked about the merits of the cause it espouses.

"In those meetings it's still clear, even in 2013, that there are still some skeptical directors about the value of governance," Mr. Erlichman says. "We wanted something we could hand out to say, 'Here it is.' I do believe there's a clear relationship between good governance and better performance and less risk."

In Canada, some academic research has used The Globe and Mail's Board Games database, which annually assesses governance practices at major companies.

A 2005 review by researchers at Simon Fraser University, for example, found effective compensation, disclosure and shareholder rights issues correlate with better firm performance, but board independence had no positive impact. A 2010 review by Yves and Richard Bozec found strong evidence that the weighted average cost of capital decreases as governance scores increase, while another 2009 study found the Board Games scores did not correspond with firm value between 2002 and 2005.

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One of the world's most cited governance studies was done by Harvard University law professor Lucien Bebchuk and his colleagues, who concluded companies that scored higher on various governance indexes had a higher return on assets, net profit margin and sales growth than poorly scoring firms in the same industry.

Despite the evidence, however, it is also clear there remains a final frontier that academic research has yet to cross – proving that governance practices caused the better results. Prof. Anand says research finds connections between the factors, but does not definitively prove one causes the other.

Research may never be able to isolate a governance factor and prove causation, given the extremely complex factors that determine the success of a corporation, including senior management skill, product demand, industry competitiveness, and broader societal economic factors.

Mr. Erlichman says that gap in the research does not undermine the value of good governance practices. He believes it is common sense to assume better practices leads to less risk and more diligent oversight, and strict evidence is not necessary.

"Ultimately we may not have mathematical proof of causation, but better governance has to reduce the risk of bad things happening, like litigation risk," he says.

(Janet McFarland is a Globe and Mail Business Reporter.)

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About the Author
Real Estate Reporter

Janet McFarland is the real estate reporter for The Globe and Mail’s Report on Business, with a focus on residential real estate trends. She joined Report on Business in 1995, and has specialized in reporting on corporate governance, executive compensation, pension policy, business law, securities regulation and enforcement of white-collar crime. More

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