Research reveals roll-on effects of poor mgmt behaviour on investments

New research from global investment manager, Acadian Asset Management, has uncovered a connection between the behaviour of senior management and investment performance.

The research found that companies with subpar corporate behaviour and a negative workplace culture perpetuated by senior and executive management had consistently underperformed when compared with their Australian and global peers.

According to Acadian, events that reveal company mismanagement and corporate misbehaviour have the power to affect company valuations, with “secret affairs, sexual harassment and systemic abuses of power” just some of the scandals seen in 2024.

The research also revealed that several other incidents – such as misuse of company resources for personal interest, bullying and harassment, failed whistleblowing procedures, undisclosed investments and systemic breaches of professional conduct – imposed severe financial consequences on Australian listed companies last year, including loss of momentum, project delays, earnings and revenue downgrades, share price volatility and weak investor sentiment.

Matt Picone, Portfolio Manager at Acadian Australia, said that many of these instances resulted in directors resigning and regulatory repercussions, highlighting the importance of ensuring “checks and balances” are working to align management behaviour with shareholders’ interests’.

“When making investment decisions, it’s important to consider corporate behaviour and culture. These measures go deeper than the glossy statements and usual governance metrics quoted in annual reports,” he said.

“This underperformance wasn’t necessarily because of public scandals, and it is difficult to predict such events, however, there can be red flags that may point to corporate executives not acting in shareholders’ interests and this may lead to negative behaviour.

“Not only did companies that scored poorly at the start of the year become more involved in negative events that played out in the media, but they also significantly under-performed from a share price perspective.”

Despite the average governance of corporate management among Australian companies appears to rate higher than other regional and global indices, according to the MSCI Governance Pillar Scores, Piccone warned investors against falling into a “false sense of security”.

“Australian investors could be forgiven for thinking that they don’t need to worry too much about the quality of management, however, the behaviour of CEOs and senior executives both in the office and outside, although more challenging to observe, is a critical component in measuring a company’s overall management quality,” he said.