We create a broad measure of corporate governance, Gov-Score, based on a new dataset provided by Institutional Shareholder Services. Gov-Score is a composite measure of 51 factors encompassing eight corporate governance categories: audit, board of directors, charter/bylaws, director education, executive and director compensation, ownership, progressive practices, and state of incorporation.
We relate Gov-Score to operating performance, valuation, and shareholder payout for 2,327 firms, and we find that better-governed firms are relatively more profitable, more valuable, and pay out more cash to their shareholders. We examine which of the eight categories underlying Gov-Score are most highly associated with firm performance. We show that good governance, as measured using executive and director compensation, is most highly associated with good performance. In contrast, we show that good governance as measured using charter/bylaws is most highly associated with bad performance.
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