Research Management

A Good Corporate Governance Pays Off

, by Andrea Costa and Ezio Renda
The 771 companies that have improved their top management structure perform better and risk less when investing abroad, according to the SDA Bocconi Corporate Governance Lab

Italian companies that have adopted more advanced models of governance have held up better during the pandemic, and have been able to assess more correctly the risks arising from internationalization, investing more in safer countries.

This is found in the 2022 Report by the Corporate Governance Lab of SDA Bocconi, signed by the research center's director Alessandro Minichilli, together with Daniela Montemerlo, Valentino D'Angelo and Chiara Pia D'Ambrosio and produced with the contribution of PwC TLS, as scientific technical partner, Banca Generali and NUO. The report considers the two-year period 2018-2020 and analyzes all 5,398 Italian companies with a turnover exceeding 50 million euros, monitoring their governance and ownership structure.

Each year, the Corporate Governance Index (CGI) is calculated by CGLab for each company, taking into account five parameters: existence of a BoD, individual leadership (i.e. presence of a single executive leader), presence of external directors, separation of the offices of chairman and CEO and diversity of the BoD by gender balance, age and geographical origin.

All metrics have evolved in the right direction: diversity has increased in 229 companies, the board has been introduced and opened to outside directors in 79 and 182 cases, respectively. The positions of chairman and CEO have been split in 377 companies, and 251 adopted an individual leadership. The overall CGI increased for 771 firms, 14% of the total.

A first important result that emerged in the report is that, although over the period considered Italian companies on average lost 8.4% of their turnover, companies in which the CGI improved lost 2.3 points less than those in which it worsened. In the latter group, in 2020, a loss is more frequent (+7.1 percentage points compared to +5.2 p.p. for companies with a stable index and +4.4 p.p. for companies with an improving index).

An improvement in the index is also associated with a greater likelihood of distributing dividends. In fact, each additional index point leads to an increase of up to 14.9% in the probability of paying dividends. In addition, each additional index point is accompanied by a 7.4% decrease in the need for government support measures.

Other important results, and a first for these topics, are to be found in the part of the report devoted to the risk associated with the internationalization of companies. For each of the three risk categories (political, climatic and credit), an analysis of the correlation between risk exposure and CGI was conducted. The result is very clear: companies with better governance have a better ability to assess risks, reducing their exposure to highly uncertain environments. For example, companies with a higher GCI have a 2.22% chance of being present in countries with low political risk but only a 0.86% chance of being present in countries with high political risk, while the opposite is true for those with a lower GCI: they have a 1.27% chance of investing in countries with lower risk, against a nearly doubled probability (2.44%) of being in more problematic countries.

This is true, albeit to varying degrees, for all three risk categories. As Alessandro Minichilli, director of the Corporate Governance Lab at SDA Bocconi, explains, "Our results demonstrate the importance of good governance in being able to evaluate strategic decisions in relation to risks. When faced with low risk, good governance is reassuring. But if the risk is high, governance mitigates. And this role becomes particularly relevant in a moment of extraordinary uncertainty such as the one we are experiencing now, in which, alongside customary risks, we are witnessing an escalation of health-related and geopolitical risks in completely new forms compared with the past."

"The results of the Corporate Governance Lab definitely confirm – despite the crisis period – the direct correlation between corporate governance and financial results. This concept has become ever clearer when looking at companies in this area and that has prompted us to develop an entire consulting module tailored on our entrepreneur clients. Our aim now is to integrate the results and best practices that emerge from the Observatory into our model of open banking. This is in order to provide our clients with accurate, customized solutions for managing their business assets in a market scenario made increasingly complex by geopolitical, inflationary and recovery-related uncertainties," states Andrea Ragaini, Deputy General Manager of Banca Generali.

"The trends observed and described in the report show how entrepreneurs are beginning to look at governance issues in a new way, now considering the best advice as a key to navigating complexity and as an integral part of the strategic agenda of the company on which they intervene," says Fabrizio Acerbis, Chairman of PwC TLS.

"Good governance is the compass for navigating the right course. In the face of an increasingly complex and unpredictable global context, entrepreneurial families and their companies will thrive only if they are willing to welcome a plurality of skills and stimuli, with a solid leadership at the helm" concludes Tommaso Paoli, CEO of NUO SpA.