OM believes corporate governance risk factors, particularly accounting risk and dilution risk can be meaningful drivers of negative excess returns in portfolios.
OM’s Governance Concerns Index (GCI) is based on a scoring model using seven governance based factors: accounting risk; board quality risk; related party risk; dilution risk; executive pay structure risk; executive pay materiality risk & board independence risk. These scores are produced by OM analysts across the ASX 300 Index. The rankings are based on OM’s knowledge of the entities, experience of engagement with senior management and directors, public disclosures and disclosure, corporate and capital raising practice over time.
The dataset is split between the ASX 100 and ASX Small Ords (as each set has different weights applied to each factor). The aim is to identify which entities have features that expose investors to downside risk.
The ASX 100 measures performance by comparing the bottom quartile (weakest governed) companies vs the remaining top three quartiles. The accounting risk factor in the ASX 100 Index is a strong predictor of underperformance, with 3.5% pa underperformance since 2012 (underperformance over the past five years is 2.4% pa).
The ASX Small Ords is measured by comparing an equally weighted portfolio of the bottom 15% of companies (weakest governed) vs the ASX Small Ords Accum Index. The ASX Small Ords data set was launched in Jan 2015 and to date shows the weakest companies for corporate governance underperforming by 10.3%pa since inception (7.5 year track record). This portfolio has underperformed the benchmark in 80% of quarters since inception.