A Better Choice, Clearly
 

Board Accountability Index

Governance-enhanced S&P 500 Index

Investing in companies with good governance can improve shareholder returns, as many have suspected for years.

This is no longer just a matter of intuition. It’s a fact.

A study by Harvard Law School professor Lucian Bebchuk and his colleagues identified a statistically significant and strong correlation, over a long period of time, between stock performance and the degree to which boards are accountable to their shareholders.

Based on this research, Professor Bebchuk and Dr. Cohen, in collaboration with Glass, Lewis & Co., have developed a governance-enhanced S&P 500 index, the Board Accountability Index (BAI). The BAI consists of all companies in the S&P 500. It uses a modified market-cap weighting algorithm that adjusts a company’s weight based on the presence or absence of five critical corporate governance features identified in the study of Bebchuk, Cohen, and Ferrell.

Key Governance Factors

Compared with the S&P 500, the BAI underweights or overweights companies based on the presence or absence of the following:

  • Staggered Boards
  • Limits on shareholder bylaw amendments
  • Poison pills
  • Golden parachutes
  • Supermajority requirements for mergers

Standard and Poor’s has agreed to serve as the BAI’s calculation agent and will make daily weightings and closing prices available on its platforms.

In extensive back-testing over the 14-year period from January 1, 1991 to December 31 2004, the BAI, while tracking closely the performance of the S&P 500, also:

  • Outperformed the S&P 500 in 12 of the last 14 calendar years;
  • Outperformed the S&P 500 by an average of 55 basis points per year;
  • Provided since 1991, an additional cumulative return of 30.9% (beyond that produced by the S&P500); and
  • Outperformed the S&P 500 in a majority of the one-month, 3-month, 6-month, and 12-month periods.

By controlling for elements other than the presence or absence of board accountability, the BAI offers institutions the opportunity to enhance returns by investing in good governance while tracking closely the S&P 500.