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Investor confidence takes a tumble over corporate governance, volatility

Investor confidence is evaporating on fears of low returns and increased market volatility. But a new survey also found corporate governance issues weighing on the minds of retail investors. AAP/Paul Miller

An overwhelming proportion of investors want the introduction of a rating system to identify poorly governed companies, according to a new survey.

And over 80% of those polled said they would stay away from companies if they were rated poorly.

The survey, conducted by Global Proxy Solicitation (GPS) and the Melbourne Institute of Applied Economic and Social Research at the University of Melbourne, asked 1000 retail investors about the impact of corporate governance on company performance.

The survey also found there was a sustained fall in shareholder confidence. The GPS-Melbourne Institute Leading Index of Shareholder Confidence fell 4.9% since November to hit 102.4, the fourth consecutive fall since May.

The Index is down 16.1% since the same time a year ago.

Guay Lim, deputy director of the Melbourne Institute, put the fall down to a perception of low returns and increased volatility.

“We now have a significant shift in shareholder confidence to levels materially lower than 12 months ago while at the same time, there are no signs of near-term change in shareholder sentiment,” Professor Lim said.

“Market activity and confidence have been out of sync since August, probably reflecting the influence of short-term factors over fundamental factors. But the recent fall in the market index has re-aligned them – market activity and confidence are back in sync, but at lower levels,” she said.

But the survey, which came in the wake of a number of corporate governance scandals, found there were growing investor concerns over executive remuneration, disclosure, and corporate behaviour.

Thomas Clarke, director of the Centre for Corporate Governance at the University of Technology, Sydney, said a clear correlation between investor confidence and investor perceptions of corporate governance was emerging.

“The obsessive focus on short-term results, dividend payments, and share buy backs is a distraction from investing in industries that will provide long term returns.”

“While investment institutions are becoming more alert to the significance of environmental, social and governance commitments, they too have often become trapped into a laser-like focus on short-term rewards,” Professor Clarke said.

“A direct consequence of this culture is the frequent lapses in corporate governance in Australia, where executive incentives encourage self-interested behaviour that undermines the trust of investors in equity markets.”

But Michael Quilter, a senior lecturer in corporate governance at Macquarie University, said changes were coming.

“The introduction of the ASX Corporate Governance Principles and Recommendations was the start of more focus on measurement of satisfactory governance,” he said.

“Over recent years the Corporations Act has started to reflected the importance of shareholder input into governance practices, for example the rules giving shareholders the ability to act where remuneration is an issue.”

“Recently ASIC has focused on selective disclosure issues which prevent investors gaining equal access to information and undermine fairness.”

“An awareness of ASIC’s busy investigative schedule is every reason to think shareholders would be worried, and further, what do these worried shareholders make of the Senate inquiry into ASIC,” he said.

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