Introduction

The question of whether there is a link between corporate governance and performance is significant for a fund manager such as Hermes which undertakes corporate governance activities on behalf of three of the UK's five largest pension funds. Such funds are the classic long-term investors who will be shareholders for decades and, as they represent thousands of individuals who depend on them for their long-term financial well-being, have a strong interest in the sustainable, wealth-creating capacity of the companies in which they invest.

The corporate governance activities carried out by Hermes, on behalf of its clients, are based on the fundamental belief that companies with governance structures that allow shareholders to hold their management to account, and those that have active, interested and involved shareholders, will ultimately perform better and be worth more than those where either of these factors is missing. At the very least, we are convinced that sensible corporate governance activities may prevent the destruction of value. In our view, the key to the long-term success of a business is a constructive dialogue between companies and investors, commonly described as active ownership. Management and boards which have a dialogue with and are accountable to their owners will tend to operate more effectively in the long-term interests of the business and its investors.

Given this fundamental belief, the evidence for a link between corporate governance and performance is of great importance to Hermes and its clients.