What a Company’s Stewardship Means for Your Investment

By on December 1, 2006

(NewsUSA) – What really distinguishes good corporate governance from bad? Does it really matter to the individual investor what a management team does as long as the stock price goes up and dividends get paid?

While short-term investors might choose to disregard the activities of corporate boardrooms, long-term investors know that sound corporate cultures tend to produce better returns for investors in the long run. Management’s actions can have a profound impact upon your investments, especially if left unchecked.

Analysts at investment research firm Morningstar Inc. assess the management teams and corporate boards of the companies they cover, assigning “Stewardship Grades” based on three critical areas: transparency; shareholder friendliness; and incentives, ownership and stewardship.

Morningstar assigns Stewardship Grades for some 1,550 of the more than 1,850 stocks under the company’s coverage. Roughly 42 percent of those companies received a Stewardship Grade of B, and another 39 percent received a C grade.

The average grade as of September 2006 was a high C.

“Most companies are doing a mediocre job of looking out for individual investors,” said Greggory Warren, a chartered financial analyst and equity analyst for Morningstar. “While it is not too surprising to see excessive executive compensation drag down Stewardship Grades, it is interesting to see some companies continue to hide data and other pertinent information from shareholders.”

The types of issues that might keep firms from receiving higher grades are fairly common things, such as having the chairman and the chief executive officer roles held by the same person. Other issues include: opaque financial disclosures, excessive executive compensation and a lack of clearly defined goals for the pay packages that boards dole out for management teams.

Even though a firm with a poor track record of corporate governance might still turn out to be a decent investment, in the long run, companies that treat all shareholders with respect produce fewer headaches and heartaches for investors, according to Morningstar.

 

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