We retrospectively evaluate governance scores. Although ESG (Environmental, Social and Governance) criteria have ceased to attract interest from the majority of investors, governance remains the most relevant factor, regardless of this interest. Alphavalue has tracked changes in governance aspects over 20 years, allowing us to verify whether efforts have been made to correct governance deficiencies and what impacts this has had on valuation.
When analysing the group with the worst governance metrics in 2019, a time when ESG was fashionable and the COVID-19 pandemic had not yet occurred, limited progress in governance and weaker performance in share prices is observed. Stocks with a score below 3.3/10 were selected to narrow the sample to 33 governance zombies, within Alphavalue's coverage of over 500 stocks. This group represents only a small fraction of that coverage.
Starting with their past and current governance ratings, the average score of this group in 2019 was just 2.8/10, while it currently stands at 3.6/10. This advance of 0.8 out of 10 contrasts with the improvement of 0.5 out of 10 recorded across Alphavalue's entire coverage, which reaches an average of 6.8/10. While all companies have improved their governance, those with a poor profile continue to do so.
The positive part is that the boards of directors of these lagging companies have a progressively greater degree of independence. Alphavalue applies its own rules to define the independence of a board member. The proportion of independent directors out of the total board increased from 23% in 2019 to 31% in 2026.
However, there is still work to be done, as the average for our entire coverage stands at 49% in 2026 compared to 40% in 2019. In other words, companies with governance deficiencies are making slow progress in their improvement.
Indeed, these companies pay a high price for this disregard for a fundamental pillar of corporate life. Below is the equally weighted performance of the governance laggards from 2019 (in pink). Interestingly, markets showed no interest in governance deficiencies when post-COVID expectations drove all assets and inflation contributed to accelerating profits.
After the wake-up call from the FED and the subsequent return to operational normalcy, stocks with governance deficiencies recorded an underperformance against the STOXX 600 and substantially so. From 2024, this underperformance becomes significant (second chart).
The reason these companies register underperformance compared to the index likely lies in their combined weak fundamentals. While this may constitute a tautology or circular reasoning, it is worth reiterating. Companies with weak governance do not represent a viable option and do not seem to become cases of spontaneous recovery.