Description
This study analyses an emerging form of economic calculation in financial markets,
namely, the integration of corporate governance into investment analyses undertaken by
sell-side financial analysts. It examines how the expertise of these analysts in corporate
governance integration is constructed, with particular attention to the calculative ideas
and calculative devices through which it is achieved. Corporate governance integration is
shaped by certain ‘calculative ideas’. These relate to ideas about the potential link between
corporate governance and financial performance and the ideal of incorporating governance
criteria into the investment process. This paper suggests that these calculative ideas have
constituted the discursive conditions under which analysts sought to build their expertise
in a new domain. The paper also shows that at a time when the quality of traditional sellside
research was scrutinised, the investment professional association and constituents of
the investing public, through their arguments and discourses, constructed analysts as the
‘specialists’ having the imperative and credibility to perform corporate governance integration.
Furthermore, as the paper demonstrates, analysts have sought to ‘theorize’ calculative
ideas. They have normatively deployed certain ‘calculative devices’ to make corporate governance
integration operational. Corporate governance integration is conducted in ways
that make it receptive to the claims of a particular form of expertise, that of analysts. This
paper suggests that it is through the assemblage formed over time between the ideas and
aspirations on the one hand, and the tools and devices on the other, that the expertise of
analysts in corporate governance integration has gradually been formed.
The construction of calculative expertise: The integration
of corporate governance into investment analyses by sell-side
?nancial analysts
q
Zhiyuan (Simon) Tan
?
Department of Management, King’s College London, Franklin-Wilkins Building, 150 Stamford Street, London SE1 9NH, United Kingdom
a b s t r a c t
This study analyses an emerging form of economic calculation in ?nancial markets,
namely, the integration of corporate governance into investment analyses undertaken by
sell-side ?nancial analysts. It examines how the expertise of these analysts in corporate
governance integration is constructed, with particular attention to the calculative ideas
and calculative devices through which it is achieved. Corporate governance integration is
shaped by certain ‘calculative ideas’. These relate to ideas about the potential link between
corporate governance and ?nancial performance and the ideal of incorporating governance
criteria into the investment process. This paper suggests that these calculative ideas have
constituted the discursive conditions under which analysts sought to build their expertise
in a new domain. The paper also shows that at a time when the quality of traditional sell-
side research was scrutinised, the investment professional association and constituents of
the investing public, through their arguments and discourses, constructed analysts as the
‘specialists’ having the imperative and credibility to perform corporate governance integra-
tion. Furthermore, as the paper demonstrates, analysts have sought to ‘theorize’ calculative
ideas. They have normatively deployed certain ‘calculative devices’ to make corporate gov-
ernance integration operational. Corporate governance integration is conducted in ways
that make it receptive to the claims of a particular form of expertise, that of analysts. This
paper suggests that it is through the assemblage formed over time between the ideas and
aspirations on the one hand, and the tools and devices on the other, that the expertise of
analysts in corporate governance integration has gradually been formed.
Ó 2014 Elsevier Ltd. All rights reserved.
Introduction
A number of high pro?le corporate governance failures
occurred in the early 2000s, such as Enron, WorldCom, and
Parmalat. This shook the global business landscape. Since
then, corporate governance has been perceived as ‘an area
of risk’ that may have material impacts on ?nancial perfor-
mance and shareholder value (Dallas & Patel, 2004;
Solomon, 2010). Integrating corporate governance into
the investment process has become an ideal to be sought
within the investing public (The UN Global Compact,
2004, 2005, 2009; The UNEP FI, 2004). Whilst progresshttp://dx.doi.org/10.1016/j.aos.2014.05.003
0361-3682/Ó 2014 Elsevier Ltd. All rights reserved.
q
This paper is based on my doctoral thesis that I completed at the
London School of Economics (LSE). The ?nancial support from the
Department of Accounting at the LSE is acknowledged. I am very grateful
to Peter Miller for his academic support throughout this study. Earlier
versions of the paper have been presented at the Accounting, Organisations
and Society Seminar at the LSE, The 2011 British Accounting and Finance
Association Annual Conference, The 34th European Accounting Association
Annual Congress, and The 2012 Interdisciplinary Perspectives on Accounting
Conference. I am grateful to the editor, David Cooper, and the two
anonymous reviewers, who have helped to improve the paper consider-
ably. I also wish to thank Richard Laughlin, Colin Clubb, Alex Preda, Jill
Atkins, and Hanna Silvola for having read earlier versions of the
manuscript and provided extremely useful comments.
?
Tel.: +44 (0)2078483626.
E-mail address: [email protected]
Accounting, Organizations and Society 39 (2014) 362–384
Contents lists available at ScienceDirect
Accounting, Organizations and Society
j our nal homepage: www. el sevi er. com/ l ocat e/ aos
has been made, a common understanding of how to incor-
porate governance criteria into the investment process is
yet to be developed (The UN Global Compact, 2004: 1).
Corporate governance integration is thus an immature
?eld of practice which may leave room for expertise to
develop (cf. Power, 1997a). This study analyses the integra-
tion of corporate governance into investment analyses
conducted by sell-side ?nancial analysts. Speci?cally, the
paper focuses on examining how the expertise of these
analysts in performing corporate governance integration
is constructed, with particular attention to the calculative
ideas and calculative devices through which it is achieved.
Sell-side ?nancial analysts (analysts thereafter) work in
the equity research divisions of brokerage ?rms. They are
commonly perceived as experts in investment analysis
and stock valuation. Research on governance and other
extra-?nancial issues, however, has been driven mostly
by specialist teams rather than individual analysts (EAI,
2008). In the early 2000s, major brokerage houses, such
as Deutsche Bank, Citigroup, Goldman Sachs, JP Morgan,
Merrill Lynch, and UBS, established dedicated teams to
investigate corporate governance and other extra-?nancial
issues. Analysts employed in these specialist teams are
sometimes called corporate governance analysts, socially
responsible investment (SRI) analysts, or environmental,
social, and governance (ESG) analysts. These analysts may
not offer investment recommendations directly to inves-
tors. Nevertheless, they have taken the initiative to explore
ways in which issues such as corporate governance may be
integrated into investment analyses, and have devoted con-
siderable effort into seeking to demonstrate the importance
of corporate governance in determining shareholder value.
This paper examines how the expertise of analysts in
this particular form of economic calculation has been
formed out of a set of calculative ideas and a related set
of calculative devices. The ‘calculative ideas’ at stake here
include ideas and discourses related to the potential link
between corporate governance and ?nancial performance,
which have been articulated in academic research, public
policy making, and institutional investment. They also
include the ideal and aspiration of bringing corporate gov-
ernance into the investment process that surfaced in the
institutional investment community in the early 2000s.
These ideas, discourses, and aspirations have constituted
the discursive conditions of possibility for analysts to build
their expertise in a new domain. Meanwhile, at a time
when the quality of traditional sell-side research was scru-
tinised, i.e. in the early 2000s, the investment professional
association and constituents of the investing public,
through their arguments and discourses, constructed ana-
lysts as the ‘specialists’ having the imperative and credibil-
ity to perform corporate governance integration.
As specialists, analysts have sought to develop their own
interpretation of the link between corporate governance
and ?nancial metrics. They have developed and deployed
certain ‘calculative devices’, such as portfolio, event, and
regression analyses, and the associated graphs, to make this
link newly visible, measurable, and calculable. More impor-
tantly, analysts have attempted to combine the assessment
of the governance of a company with its broader invest-
ment thesis. They have normatively developed certain
principles and mechanisms (e.g. the ‘governance–valua-
tion–pro?tability’ analyses and graphs) to ful?ll the objec-
tive of incorporating governance criteria into investment
analyses. It is through the assemblage formed over time
between the ideas and aspirations on the one hand, and
the tools and devices on the other, that the expertise of ana-
lysts in corporate governance integration has gradually
been formed. Fig. 1 summarises these key insights.
This study seeks to contribute to the literature along
three dimensions. First, this paper ?lls a gap in the litera-
ture that has failed to address how analysts develop exper-
tise concerning a new domain in their investment advice.
Prior research has considered mainly the expertise of tradi-
tional sell-side investment research (Beunza & Garud,
2007; Fogarty & Rogers, 2005). The issue of how analysts
build expertise to operate in a new domain has not been
systematically examined. This paper addresses this limita-
tion by investigating how the expertise of analysts in
corporate governance integration is formed, particularly
at a time when the quality of their traditional work has
been questioned. This paper also shows that analysts do
not appear to aim to achieve enclosure over their expertise
in this new ?eld of practice. These important empirical
insights add to those already contained in the literature
on professional expertise in economic sociology and the
sociology of accounting (Gendron, Cooper, & Townley,
2007; Power, 1992, 1997a; Preda, 2002, 2007).
Second, this paper adds to the ‘governmentality’ litera-
ture by making the role of experts and expertise more
explicit. Accounting scholars whose research is informed
by the ‘governmentality’ literature argue that economic
calculation is constituted along two dimensions, the
‘programmatic’ and the ‘technological’ (Mennicken,
Miller, & Samiolo, 2008; Miller, 2008b; Power, 1997b). This
study builds on these arguments by examining the ideas
articulating and the devices operationalising corporate
governance integration. The paper has taken one step fur-
ther and attended speci?cally to one of the consequences
of the assemblage formed over time between calculative
ideas and calculative devices, that is, the constitution of
calculative expertise. This particular approach to analysing
corporate governance integration and the expertise
developed sheds new light on our conceptualisation of
the constructive nature of calculative expertise.
Third, aligned with the ‘governmentality’ literature, this
paper attends to the role of expertise as ‘relays’, i.e. inter-
preting calculative ideas and creating calculative devices,
in the forming of particular modes of economic calculation
(Miller & Rose, 1990). This literature, however, fails to
address properly how expertise stabilises linkages
between programmes and speci?c technologies (Gendron
et al., 2007: 103). To address this limitation, this paper
articulates more fully the ‘relay’ aspect at issue here by
viewing experts as ‘theorizing agents’, a notion that is
drawn from neo-institutional analyses (Sahlin-Andersson
& Engwall, 2002; Strang & Meyer, 1993). Analysts, the
‘theorizing agents’ under investigation, are viewed to link
up the ideas and the devices of a particular form of
economic calculation. The ‘theorization’ by analysts, as
the paper also demonstrates, is part and parcel of the
process of constructing their calculative expertise.
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 363
The rest of the paper is structured as follows. Sec-
tion ‘Economic calculation, expertise, and theorization’
outlines the relevant literature and theoretical lenses that
inform this study. Section ‘Data and methods’ introduces
the various textual documents that provide the empirical
material and discusses how these documents were
collected and analysed. Section ‘Sell-side ?nancial ana-
lysts: status, expertise, scepticism, and regulatory reform’
provides a background discussion of sell-side ?nancial ana-
lysts, highlighting their status in ?nancial markets, their
expertise in securities valuation, scepticism over their
work, and the regulatory reforms directed at them. The
analysis of the construction of the expertise of analysts in
corporate governance integration is then performed in
three steps. Section ‘Corporate governance integration:
ideas, discourses, and aspirations’ traces the calculative
ideas that constituted the discursive conditions under
which analysts have sought to develop their expertise in
corporate governance integration. Section ‘Exploring cor-
porate governance integration by analysts: pressure and
credibility’ examines the ways in which the analyst profes-
sional association and constituents of the investing public
discursively constructed analysts as experts in this new
domain. Section ‘Theorizing and operationalising corporate
governance integration’ demonstrates how analysts, with
the deployment of calculative devices, sought to theorize
calculative ideas and ful?l the objective of integrating gov-
ernance criteria into investment analyses. The ?nal section
provides some concluding discussion and re?ects upon the
contributions of the paper.
Economic calculation, expertise, and theorization
To explore how the expertise of analysts in corporate
governance integration is constituted, this paper draws
upon and aims to contribute to three relatively distinct
yet overlapping sets of literature: ?rstly, the literature that
has addressed ideas and devices of economic calculation;
secondly, the literature on the development of professional
expertise in economic sociology and the sociology of
accounting; and thirdly, the literature on neo-institutional-
ism, in so far as this has addressed the ‘carrying’ and ‘the-
orization’ of ideas. Each of these is considered below.
Economic calculation: ideas and devices
Economic calculationhas beenanobject of enquiryinthe
sociological analysis of the economy since the late 1970s
(Mennickenet al., 2008; Miller, 1994). Scholars fromvarious
disciplines, including those in accounting, have demon-
strated that the operation of particular ways of calculating
is implicated within speci?c social and cultural settings
(Burchell, Clubb, Hopwood, Hughes, & Nahapiet, 1980;
Hacking, 1975; Hopwood, 1983). Some have focused specif-
ically on the interrelation amongst economic calculation,
economic policy, and economic discourse (Burchell, Clubb,
& Hopwood, 1985; Miller & Rose, 1990; Thompson, 1986).
Economic sociologists turned their attention to the
impact of calculative practices in the late 1990s (Callon,
1998). Following the science and technology studies (STS)
tradition, economic calculation is considered as ‘‘distrib-
uted amongst human actors and material devices’’, where
‘material devices’ include tools, equipment, technical
devices, and algorithms (Callon & Muniesa, 2005: 1245).
Although conjoint analyses of human actors and material
devices are performed,
1
‘the material reality of calculation’
Fig. 1. Summary of Key Insights.
1
Beunza and Stark (2004), for instance, examine the links between
traders and instruments, such as trading robots, telephones, and pricing
tools, in a trading room at a Wall Street investment bank.
364 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
has been given most attention (Callon, 1998: 5). This strong
focus on the ‘technological infrastructures’ of economic cal-
culation has been labelled a ‘technological turn’ in economic
sociology (Mennicken et al., 2008). Recently, the notion of
‘market devices’ has been coined as a way of referring to
the material instruments and models that represent and
intervene in the construction of markets (Muniesa, Millo, &
Callon, 2007).
The role of inscriptions is important here (Latour, 1987;
Latour & Woolgar, 1986; cf. Hacking, 1992). Latour (1987)
views inscription as a material textual translation of any
setting that is to be acted upon. Similarly, Robson (1992:
689) regards inscriptions as ‘‘the various techniques of
‘marking’ an object or event that is to be known – writing,
recording, drawing, [and] tabulating’’ (cf. Chua, 1995;
Ezzamel, Lilley, & Willmott, 2004; Preston, 2006; Qu &
Cooper, 2011; Quattrone, 2009). Inscriptions translate a
setting into graphs, diagrams, photographs, equations,
models, and written reports, inscriptions. They render the
realm visible, measurable, comparable, and calculable.
Inscribing may be seen to create ‘knowledge’ about a
domain. ‘Knowledge’ in this formulation is ‘‘an outcome
of the practical procedures of inscription [and] of the tech-
nologies for inscribing the world’’ (Robson, 1992: 689).
Whilst the importance of inscriptions has been empha-
sised, the ‘technological turn’ in economic sociology has
downplayed the role of programmes, ideas, and rationales
that shape particular ways of calculating (Mennicken et al.,
2008; Miller, 2008a,b). These elements, however, are
stressed particularly by accounting scholars whose work
is informed by the ‘governmentality’ literature (Miller &
Rose, 1990, 2008; Rose & Miller, 2010). Accounting, a par-
ticular form of economic calculation, is viewed as being
constituted along two dimensions, the ‘programmatic’
and the ‘technological’ (Mennicken et al., 2008; Miller,
1991, 2008b; Power, 1997b). The ‘programmatic’ dimen-
sion, as Power (1997b: 6) explains, relates to ‘‘the ideas
and concepts which shape the mission of the practice
and which [. . .] attach the practice to [. . .] broader policy
objectives’’. The ‘technological’ refers to ‘‘the more or less
concrete tasks and routines which make up the world of
practitioners’’ (ibid.). These two dimensions often go
hand-in-hand with each being the condition of operation
for the other (Miller, 2008b: 25).
In light of this governmentality literature inspired con-
ceptualisation, this paper addresses both the ideas and the
devices populating the domain of economic calculation
under investigation. Put somewhat schematically, ‘calcula-
tive ideas’ correspond to what governmentality scholars
have termed the ‘programmatic’ realm. It is those dis-
courses and ideals that shape, articulate, and give signi?-
cance to the corporate governance integration performed
by analysts. ‘Calculative devices’, meanwhile, can be
viewed as the material tools and mechanisms that seek
to make corporate governance integration operational.
Professional expertise
Economic calculation relies in large part on the legiti-
mated expertise of certain professionals. In the economic
sociology and sociology of accounting literatures, issues
on how expertise is constituted, the nature of expert
knowledge, and how experts make claims to expertise in
new domains have been explored. It is commonly found
that expertise is constructed conjointly by experts them-
selves and its users and audiences.
Preda (2007), for instance, reports that technical ana-
lysts adopted certain persuasion strategies to distribute
their expert knowledge and persuade the users, i.e. brokers
and investors, to adopt it. Reciprocally, the users were pre-
con?gured in the body of expert knowledge they
employed. Power (1992) reports that accountants and
other professionals used certain ‘credentializing strategies’
to assert their authority of expertise in brand valuation in
Britain. These strategies, it is considered, were necessary to
establish networks of support for the particular practices.
Power (1997a) also analyses the representational strate-
gies by which accountants attempted to develop claims
to expertise in environmental audit. As Power (1997a:
124) suggests, ‘‘even the [. . .] most procedural elaboration
of practical guidance [. . .] is part of a wider normative dis-
course which constructs and presents the ?eld in ways
which make it receptive to the claims of a certain form of
expertise rather than another’’.
Similarly, Gendron et al. (2007) analyse how govern-
ment auditors in Alberta in Canada promoted its claim to
expertise in measuring government performance, and
how targeted audiences, government and public servants,
responded to it. They take one step further, however, by
demonstrating that the promotion of auditor expertise
was linked to the endorsement of the performance mea-
surement project under the broader agenda of New Public
Management (ibid., 125). This indicates, more generally,
that discourses and rationales articulated in wider econ-
omy and society may form the discursive conditions of
possibility for particular expertise to develop, whilst
experts are crucial players in operationalising broader
aspirations.
This way of conceptualising the development of
expertise is consistent with that in the ‘governmentality’
literature. Expertise is referred to in this literature as a
‘‘complex amalgam of professionals, truth claims and tech-
nical procedures’’ (Miller & Rose, 1990: 8). The governmen-
tality literature, as Miller and Rose (2008: 12) proffer,
attends to the way in which ‘‘expertise had been formed,
the historical emergence of the problems which seemed
to call for professional ‘know-how’, the new domains and
enclosures that began to form around such issues, and
the ways in which that expertise itself made it possible
to conduct conduct in new ways’’. Given this historical
focus, the rise of expertise is seen to be linked to transfor-
mations in both rationalities and technologies of
government (Rose & Miller, 2010: 285).
Accordingly, when analysing economic calculation, the
development of calculative expertise may be seen to be
linked to transformations in calculative ideas and calcula-
tive devices. Experts may realise claims to expertise as
rationales, discourses, ideals, tools, and mechanisms have
been assembled. This paper considers ideas related to the
link between corporate governance and ?nancial perfor-
mance and the ideal of integrating governance criteria into
the investment process as forming the discursive
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 365
conditions of possibility for analysts to develop their
expertise in corporate governance integration. It also anal-
yses the arguments and discourses used by the investment
professional association and constituents of the investing
public that construct analysts as having the imperative
and credibility to operate in that domain. Meanwhile, the
calculative devices deployed by analysts are seen in this
study to make corporate governance integration receptive
to their particular expertise.
Experts as carriers and theorists
Expertise is considered in the ‘governmentality’ litera-
ture to play the role as ‘relay’. As Rose and Miller (2010:
285–286) explain, experts ally themselves with political
authorities and translate political concerns into expert lan-
guages. Experts also seek to form alliances with individual
persons and organisations, translate their problems into a
language claiming the power of truth, and offer to teach
them the techniques needed to ful?l their aspirations.
Accordingly, for economic calculation, expertise may be
argued also to play the role as ‘relay’. It is experts who
elaborate upon calculative ideas and who deploy devices
to make calculation operational. Experts may be seen to
provide a link between calculative ideas and calculative
devices. However, the governmentality literature is said
to pay insuf?cient attention to the role of expertise in
stabilising linkages between programmes and speci?c
technologies (Gendron et al., 2007: 103). To better under-
stand how expertise links up calculative ideas and calcula-
tive devices, neo-institutional analyses of the ‘carrying’ and
‘theorization’ of ideas help articulate more fully the ‘relay’
aspect at issue here.
Neo-institutionalists concern the diffusion of institu-
tional elements (Scott, 2008). Early studies tended to exam-
ine the mechanical movement of elements from one place
to another (ibid., 133). As informed by constructionism in
STS (Latour, 1987), some institutionalists have advanced
that institutional ideas are modi?ed by ‘carriers’ in trans-
mission (Czarniawska & Joerges, 1996; Sahlin-Andersson
& Engwall, 2002; Scott, 2003, 2008). Carriers contribute to
the framing, packaging, and circulating of ideas. They in?u-
ence signi?cantly the nature of the elements transmitted
(Scott, 2003: 879). The form, focus, and content of the origi-
nal elements are subject to transformation in the ‘carrying’
process. The notion of ‘carrying’ is relevant here, as it
reminds us that analysts may constantly unpack, interpret,
and construct calculative ideas when processing them.
Carriers often ‘theorize’ ideas (Ezzamel, Robson, &
Stapleton, 2012; Greenwood, Suddaby, & Hinings, 2002;
Sahlin-Andersson & Engwall, 2002; Scott, 2008; Strang &
Meyer, 1993). Theorization involves the ‘‘development
and speci?cation of abstract categories and the formula-
tion of patterned relationships such as chains of cause
and effect’’ (Strang & Meyer, 1993: 492). It may lead to
the formulation of either simple concepts and typologies,
or highly abstract, complex, and rich models (ibid., 493).
Carriers, such as management consultants and other pro-
fessionals, may be seen as ‘theorists’ or ‘theorizing agents’
(Greenwood & Hinings, 2006; Sahlin-Andersson & Engwall,
2002; Strang & Meyer, 1993). With the deployment of a
particular language, theorists interpret and normatively
develop the issue under investigation. They may also seek
to convert abstract ideas into concrete apparatuses that
can be seen and touched (Czarniawska & Joerges, 1996;
Czarniawska & Sevon, 2005).
In light of these insights from neo-institutional
analyses, this paper examines the ‘theorization’ by analysts
of ideas related to the potential link between corporate
governance and ?nancial performance. It investigates
how analysts combine the governance assessment of a
company with its broader investment thesis. This process
is to be conceptualised also as ‘theorization’ where ana-
lysts normatively develop certain mechanisms to make
corporate governance integration operational. Further-
more, theorization is to be viewed as part and parcel of
the process whereby the expertise of analysts in corporate
governance integration is developed.
Before turning to a discussion of sell-side ?nancial
analysts, Section ‘Data and methods’ introduces the various
textual documents that this study draws upon as empirical
material and discusses how these documents were
analysed.
Data and methods
Textual documents are used intensively to provide key
empirical data in research in the social sciences (Bryman,
2008). As Laughlin (2004) proffers, empirical research in
accounting, no matter if it is positivist, interpretive, or crit-
ical, draws on textual documents to provide important
empirical insights. This paper deploys a diverse set of tex-
tual documents as empirical material.
Based on the ‘governmentality’ literature, it is through
the deployment and elaboration of a particular language
or vocabulary that ideas and aspirations take shape in
‘‘government reports, White Papers, Green Papers, papers
from business, trade unions, ?nanciers, political parties,
charities and academics’’ (Miller & Rose, 1990: 4). Sec-
tion ‘Corporate governance integration: ideas, discourses,
and aspirations’ examines the calculative ideas that consti-
tuted the discursive conditions of possibility for analysts to
develop their expertise in corporate governance integra-
tion. To trace discourses about the link between corporate
governance and ?nancial performance in academic
research and public policy making, academic publications
and of?cial documents issued by regulatory bodies were
referred to. To trace ideas and aspirations surrounding cor-
porate governance integration, reports of asset manage-
ment ?rms and networks formed between them, The UN
Global Compact, and industry research organisations, and
the ?nancial press were analysed. Similarly, for
Section ‘Exploring corporate governance integration by
analysts: pressure and credibility’, reports of the Chartered
Financial Analyst Institute and other ?nancial market par-
ticipants were analysed to examine how analysts were
constructed discursively as having the imperative and
credibility in performing corporate governance integration.
This paper also draws on analyst reports as empirical
material. This is consistent with some sociological studies
that attend speci?cally to the work products of analysts
366 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
(Beunza & Garud, 2007; Fogarty & Rogers, 2005). These
studies indicate that one may look indirectly into the work
products generated by analysts in order to infer what they
do. Section ‘Theorizing and operationalising corporate
governance integration’ examines how analysts ful?l the
objective of integrating governance criteria into invest-
ment analyses. It refers mainly to analyst reports that
address the link between governance and ?nancial metrics
and that document corporate governance integration.
These reports were obtained from the Investext Plus
database accessed through the British Library until early
2009.
2
Five reports written by analysts based in the US
and Britain before 2009 are considered relevant. The number
of relevant reports is relatively small given the infancy of
corporate governance integration at that time. These reports
were written by analysts based mainly in specialist corpo-
rate governance, ESG, or SRI teams at brokerage ?rms when
they were published.
For data analysis, ‘constant comparative method’ (Flick,
2009; cf. Glaser, 1969) was adopted to compare issues
articulated in one document with those in the others. Text
passages derived from the documents were grouped and
coded in relation to certain themes. The development of
these themes was informed theoretically by notions such
as ‘calculative ideas’, ‘calculative devices’, and ‘theoriza-
tion’ discussed previously. The material from documents
that are not analyst reports was analysed in relation to
the interpretations of the link between governance and
?nancial performance by academics, policy makers, and
asset owners and managers; the desires attached to corpo-
rate governance integration; and the views regarding the
role of analysts in this domain. Analyst reports were also
compared to identify the vocabularies, mechanisms, and
tools developed by analysts in theorizing the link between
corporate governance and ?nancial metrics and in oper-
atonalising corporate governance integration. Material, in
the forms of selective quotes, tables, and graphs, is taken
from the documents to illustrate the themes developed
from the data analysis, focusing on demonstrating the
construction of the expertise of analysts in corporate gov-
ernance integration through calculative ideas and calcula-
tive devices. The selection of material from the documents
was on the basis of those chosen providing signi?cant
empirical ampli?cation of theoretical points of relevance.
Whilst this is intentionally selective, similar themes are
apparent in the other documents, but they are not as clear
as the ones referred to in this paper.
Sell-side ?nancial analysts: status, expertise, scepticism,
and regulatory reform
Sell-side ?nancial analysts are key players in capital
markets. Traditionally, they are employed in the equity
research divisions of brokerage ?rms. They specialise by
industries and study companies in a speci?c sector. In prin-
ciple, analysts attend to the strategy and fundamentals of
corporations, evaluate the investment potential of compa-
nies, and offer investment recommendations. Analysts
document the results of their research mostly in equity
research reports that are utilised normally by institutional
and retail investors. According to the ‘All-American’ ana-
lyst rankings compiled by Institutional Investor magazine
in 2003, the arguments articulated in analyst reports were
seen by investors to be more helpful than the brief num-
bers represented in the form of investment recommenda-
tions and price targets (Beunza & Garud, 2007).
Sell-side analysts are accorded with important roles in
?nancial markets. They are viewed as ‘critics’, assessing if
a company conforms to their model of how ?rms in a given
industry should be structured (Zuckerman, 1999). Analysts
are depicted as ‘gatekeepers’, monitoring companies and
scrutinising opportunistic corporate behaviour (Coffee,
2006). Analysts may be considered to act like ‘status
groups’ who are granted with the legitimacy to make
claims in the market place (Preda, 2005). All these roles
appear to re?ect the unique position that analysts capture
in ?nancial markets. As Fogarty and Rogers (2005: 338)
put, analysts ‘‘span the boundary between those that need
capital and those that have it’’ and ‘‘provide the former
with access to resources [. . .] and the latter with some
degree of con?dence about their decision’’. Accordingly,
analysts are in?uential and their research reports are often
given great consequence by market participants (Beunza &
Garud, 2007; Fogarty & Rogers, 2005).
Whilst the securities analyst occupation is not a classic
profession, movement towards professionalisation has
been made
3
(Fogarty & Rogers, 2005). The ?rst analyst
professional association, the New York Society of Security
Analysts, was established in 1937. In 1948, the National Fed-
eration of Financial Analyst Societies was formed, function-
ing as a national network of local American societies. The
1990s saw the worldwide expansion of analyst associations
and internal differentiation (Preda, 2005). A more signi?cant
step towards professionalisation of analysts was the creation
of the credential, the ‘Chartered Financial Analyst’ (the
‘CFA’), by the end of the 1950s
4
(Coffee, 2006: 248).
However, what ‘‘furnished the intellectual construct that
energized the rise of securities analysis as a profession’’
was the publication of the book Security Analysis by Graham
and Dodd in 1934 (Coffee, 2006: 254). This book, for the ?rst
time ever, codi?ed the basic techniques and methodology of
fundamental valuation analysis.
Analysts are supposed to perform an expert analysis of
corporate information. There appears to be a mechanism
whereby analyst can generate insight into future corporate
fortune based on the information assembled. Such a mech-
anismis saidto dependontheir graspof theory of microeco-
nomic behaviour and their skill to assess the implications of
accounting information (Fogarty &Rogers, 2005: 338). Also,
analysts are seen to develop ‘calculative frames’. These are
‘‘interpretive devices’’, including ‘‘categories, metrics and
analogies, that yield the necessary estimates which go into
2
The British Library terminated subscription to Investext Plus in early
2009.
3
Coffee (2006) provides an in-depth discussion of the history of the
securities analyst occupation.
4
A CFA credential is not required for a securities analyst, although it
seems to become the norm, at least for the younger generation (Coffee,
2006: 248).
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 367
the valuation of a company’’ (Beunza & Garud, 2007: 26 &
35). They commonly take the forms of texts, tables, ?gures,
and numbers in analyst reports, and Excel spreadsheet ?les.
Accordingly, what analysts generate may be seen as ‘infor-
mation knowledge’, involving interpretation, calculation,
and explanation
5
(Knorr Cetina, 2010: 172).
The assumed objective, independent, and technical nat-
ure of the work of analysts, however, has been questioned.
As Fogarty and Rogers (2005: 349) claim, there is ‘‘a loose
coupling between the espoused technology of ?nancial
analysis and the actual output’’ generated. Bruce (2002:
201) even suggests that the advice from analysts is ‘‘a com-
plex mix of wishful thinking and self-serving hype’’. This
hints towards the con?icts of interest existing in the
relationship between analysts and other ?nancial market
participants. These include investment bankers working
for the same brokerage ?rms as analysts, institutional inves-
tors and fund managers who are clients of sell-side analysts,
and the ?nancial media that publicise analyst performance,
amongst others (Coffee, 2006; Hayward & Boeker, 1998;
Imam, Barker, &Clubb, 2008; Swedberg, 2005). The con?icts
of interest between analysts and their investment banking
counterpart
6
appear to be the most prevalent and are seen
to have contributed to the downfall of Enron and WorldCom
in the early 2000s (Coffee, 2006; Healy & Palepu, 2003).
Indeed, in the late 1990s and early 2000s, the stock
market crash and the corporate failures drove down
investor con?dence with the integrity of capital markets.
The way in which sell-side research was traditionally per-
formed, particularly the issue of con?icts of interest, was
viewed to contribute to this loss of investor con?dence at
that time (Donaldson, 2003; Nazarethi, 2003). Accordingly,
regulatory reforms were proposed to transform the way in
which sell-side research was organised and conducted. In
the US, the Global Analyst Research Settlement (SEC, 2003)
proposed structural reforms of brokerage ?rms, aiming
particularly to mitigate the in?uence of investment bank-
ing on equity research.
7
Similarly, in Britain, new regula-
tions were enacted to address analyst con?icts of interest,
an issue being seen to have undermined investor con?dence
with the integrity of the UK ?nancial markets (FSA, 2004).
Since the enactment of these regulations, analysts have been
forced to work within a more regulated environment.
These regulatory reforms caused new problems. The
question who would subsidise sell-side research has been
raised, given that it was henceforth required to be sepa-
rated from investment banking (Coffee, 2006: 267). Also,
since the enactment of the Global Settlement, the size of
sell-side research departments and the number of compa-
nies covered by analysts have been reduced (Davis, 2004).
This indicates that supply of sell-side research has been
squeezed. Demand for it, however, has not weakened
(Coffee, 2006). Instead, ‘‘more relevant, more original and
better-targeted’’, and ‘‘innovative’’ sell-side research was,
and is still highly sought after by asset owners and manag-
ers (EAI, 2004; Hunt & Williams, 2003). This request for
improving sell-side research coincided with the initial
articulation within the investing public of the ideal of
incorporating corporate governance and other extra-?nan-
cial issues into the investment process in the early 2000s
(The UN Global Compact, 2004). What underlies this
agenda is the idea that corporate governance and ?nancial
performance are potentially linked. It is to this issue that
the paper now turns.
Corporate governance integration: ideas, discourses,
and aspirations
During the past three decades, ideas and discourses
related to the potential link between corporate governance
and ?nancial performance have been articulated in three
arenas: academic research, public policy making, and insti-
tutional investment. Such a link appears to be based on
agency theory, which has served as a ‘meta-programme’
where corporate governance and ?nancial performance
have become connected. Also, from the early 2000s, the
ideal of incorporating corporate governance and other
extra-?nancial issues into the investment process started
to emerge within the institutional investment community.
All these ideas, discourses, and aspirations have endowed
the corporate governance integration undertaken by ana-
lysts with broader signi?cance. They have also constituted
the discursive conditions of possibility for analysts to build
their expertise in this new domain.
Academic research
The ?rst academic study of the link between corporate
governance and ?nancial performance can be traced back
to the 1950s when Vance (1955) related board structure
to ?rm performance. It was not until the 1980s that aca-
demic studies of this link started to gain momentum.
Dalton, Daily, Ellstrand, and Johnson (1998) systematically
reviewed 54 empirical studies of board composition and 31
of board leadership structure and their relationships with
?nancial performance. A majority of them were published
in the 1980s and 1990s and in academic journals from var-
ious disciplines. As Dalton et al. (1998: 269 & 270)
commented:
‘‘There is a distinguished tradition of conceptualization
and research arguing that boards of directors’ composi-
tion and leadership structure [. . .] can in?uence a vari-
ety of organisational outcomes. This attention
continues to be apparent in the academic literature.’’
Agency theory, formulated by Jensen and Meckling
(1976), informed a majority of the studies reviewed by
Dalton et al. (1998). This theory advocates the ‘shareholder
value’ model of the ?rm (Dobbin & Jung, 2010). It suggests
that outside directors, small focused boards, and indepen-
dent chairmen could help to monitor executive behaviour,
improve corporate performance, and promote shareholder
interests in the long-term. Empirical studies informed by
5
Knorr Cetina (2010: 172) speaks of the notion ‘information as
knowledge’. She suggests that ‘‘information may be treated as uninter-
preted data’’, but information knowledge as ‘‘involving interpretation,
calculation, accounts, and explanation’’.
6
There exists evidence that ‘‘analysts at underwriting ?rms appear to
in?ate their estimate of ?rm clients, and higher investment banking fees
correlate with more positive predictions’’ (Coffee, 2006: 251).
7
For details, seehttp://www.sec.gov/news/speech/factsheet.htm.
368 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
agency theory have reported that outside director repre-
sentation and separating the chairman and the CEO are
correlated positively with ?rm performance (Baysinger &
Butler, 1985; Ezzamel & Watson, 1993). However, some
research has found no association between these variables
(Chaganti, Mahajan, & Sharma, 1985; Daily & Dalton,
1992). Some other studies have claimed that inside direc-
tors and joint leadership structure may be associated with
better ?rm performance
8
(Donaldson & Davis, 1991; Kesner,
1987). As Dalton et al. (1998: 269–270) remarked:
‘‘[. . .] guidance from the academic literature as to the
superiority of speci?c board composition con?gurations
or board leadership structures is unclear, especially
with respect to ?rm performance.’’
Since the turn of this century, the problematisation by
academics of the link between corporate governance and
?nancial performance has continued. Abdullah and Page
(2009) reviewed over 40 empirical studies of this link that
were published mostly in the late 1990s and early 2000s.
These studies analysed the relationships between board
structure, board size, board independence, ownership
structure, and managerial ownership, and ?nancial perfor-
mance. The corporate scandals breaking out in the early
2000s and the regulatory reforms followed seemed to have
motivated academics to further examine the link between
corporate governance and ?nancial performance (ibid.).
Some research ?ndings have even challenged regulatory
ideas and appeared to cast doubt on what agency theory
suggests. As Cole, Daniel, and Naveen (2008: 352) argued:
‘‘In the context of the recent scandals at Enron, World-
Com, and Qwest, as the role of boards in the governance
of corporations comes under increased scrutiny, and as
Congress, TIAA-CREF, CALPERS, the NYSE, Nasdaq, and
others weigh in on governance, our [. . .] evidence casts
doubt on the idea that smaller boards with fewer insid-
ers are necessarily value-enhancing.’’
Academics have also explored the impact of shareholder
activism on ?rm performance. It is assumed that strong
monitoring of corporate behaviour by activist shareholders
can contribute positively to ?nancial performance, which is
aligned with the dictate of agency theory (Becht, Franks,
Mayer, &Rossi, 2008; Goranova &Ryan, 2014). Results from
empirical studies, however, have been contradictory
(Karpoff, 2001). Nesbitt (1994), for instance, found that
shareholder activism has a positive impact on the ?nancial
performance of companies targeted by the California Public
Employees’ Retirement System. In contrast, Faccio and
Lasfer (2000) reported that pension funds in Britain do not
add value to the companies where they hold large stakes.
Since the early 2000s, the availability of commercial
corporate governance ratings has expanded the scope of
academic research into the link between corporate gover-
nance and ?nancial performance. Academics have explored
the relationship between the overall quality of the
governance procedures of a ?rm, captured by a single gov-
ernance metric, and ?nancial performance (Brown &
Caylor, 2004; Daines, Gow, & Larcker, 2010). Similar to
prior studies, this more recent research has generated
inconclusive ?ndings. Nevertheless, the agenda for explor-
ing the relationship between corporate governance and
?nancial performance has been consolidated further
within the academic community. The idea that corporate
governance and ?nancial performance are potentially
linked has been articulated within academia once again.
Public policy making
Ideas related to the potential link between corporate
governance and ?nancial performance have appeared in
the public policy making arena approximately since the
1980s. Albeit implicitly, prescriptions from agency theory,
such as outside directors, small focused boards, indepen-
dent chairmen, and promotion of shareholder interests,
appeared to have informed policy making in corporate
governance.
In the US, governance reforms in the early 1980s initi-
ated by the Securities and Exchange Commission and the
American Law Institute (1982) were informed by the per-
ception that corporate governance and ?nancial perfor-
mance are potentially linked. As Baysinger and Butler
(1985: 103) revealed:
‘‘[T]he reform movement is based on the idea that
shareholder welfare is enhanced by boards of directors
which are capable of monitoring management, render-
ing independent judgments on managerial performance
[. . .] ?rms with more independent boards should per-
form better; changes in board composition toward the
reformers’ prescriptions should improve performance.’’
Since the late 1980s and early 1990s, corporate gover-
nance has become a salient issue in the UK, US, and global
business community. This was triggered by the outbreak of
some corporate scandals, such as Bank of Credit and Com-
merce International and Maxwell, and the Asian ?nancial
crisis. Corporate governance then started being subject to
on-going regulatory intervention. Starting with the
Cadbury Report (1992), a number of governance codes
and principles have been developed in Britain, the US,
and transnationally. These regulations appeared to be
formulated in light of the belief that corporate governance
and ?nancial performance are potentially linked. For
instance, when setting out the responsibilities of the board,
the Organisation for Economic Co-operation and Develop-
ment (OECD) stated in its Principles of Corporate Governance
(OECD, 1999: V):
‘‘Together with guiding corporate strategy, the board is
chie?y responsible for monitoring managerial perfor-
mance and achieving an adequate return for sharehold-
ers, while preventing con?icts of interest and balancing
competing demands on the corporation.’’
An assumption underlying this statement is that a
responsible corporate board can monitor managerial
actions effectively, which may in turn bring about
enhanced investment return to shareholders.
8
This line of research is consistent with stewardship theory (Donaldson
& Davis, 1991).
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 369
Similarly, it was considered that the Hampel
Report(1998) , published in Britain, was aligned with the
belief that active institutional shareholders may contribute
positively towards ?nancial performance. As Solomon and
Solomon (2004: 131) indicated:
‘‘It is clearly an implicit assumption of the Hampel
Committee and other proponents of shareholder activ-
ism that institutional investors’ intervention in investee
companies produces higher ?nancial returns.’’
Despite the increased scrutiny of governance processes,
the scandals continued. The outbreak of the corporate fail-
ures in the early 2000s, such as Enron, WorldCom, Global
Crossing, and Parmalat, further increased the salience of
the issue of corporate governance. These corporate failures
were considered to be caused, at least partially, by the mis-
application of some aspects of agency theory by corpora-
tions (Dobbin & Jung, 2010). It was said that corporate
boards only gained symbolic independence, with more
outsiders and smaller sizes, and became more responsive,
but they did not discipline management because they
remained under the thumb of the chief executive of?cer
(ibid.).
In response to the outbreak of the scandals in the early
2000s, a new wave of governance reforms took place. The
idea that corporate governance and ?nancial performance
are potentially linked continued to underlie policy docu-
ments issued at that time. As stated in the Higgs Report
(2003):
‘‘Good corporate governance [. . .] is an integral part of
ensuring successful corporate performance, but of
course only a part. [. . .] successful entrepreneurs and
strong managers, held properly to account and sup-
ported by effective boards, drive wealth creation.’’
Similarly, the OECD called for a survey to assess the
Principles of Corporate Governance issued in 1999 before
revising this regulation. When reporting the assessment
results, the OECD stated that it reviewed a body of ‘‘empir-
ical work showing the importance of corporate governance
in determining company performance and economic
growth’’ (OECD, 2004: 4). This indicates that the idea that
corporate governance and ?nancial performance are
potentially linked was acknowledged publicly by the
OECD, even if it might not have explicitly informed the for-
mulation of the updated Principles. The dictate of agency
theory continued to shape governance reforms, although
some regulatory proposals were seen to still fail to address
the failures in the implementation of this theory by com-
panies
9
(Dobbin & Jung, 2010).
Institutional investment
Agency theory is said to have a more thorough effect on
the corporate world than any other theory from academia
(Dobbin & Jung, 2010: 36; cf. Guillen, 1994). This theory
succeeded because it was promoted directly by institu-
tional investors and fund managers (Dobbin & Jung,
2010: 35). For instance, institutional investors have pro-
moted speci?cally the notion of board monitoring under
agency theory (ibid., 45). Correspondingly, they have
shared the belief that corporate governance and ?nancial
performance are potentially linked.
Such link has been articulated by institutional investors
in conjunction with their activism towards corporations
that emerged in the mid-1980s and ?ourished in the
1990s.
10
Shareholder activism, as Smith (1996: 227)
explained, aims ‘‘to bring about changes in the organisa-
tional control structure of ?rms [that is] not perceived to
be pursuing shareholder-wealth-maximising goals’’. The for-
mation of the Council of Institutional Investors (CII) in the
US in 1985 marked the beginning of shareholder activism
by institutional investors (Gillan & Starks, 1998). The Coun-
cil was formed on the part of large public pension funds to
lobby for shareholder rights and hold investee companies
accountable.
One primary assumption underlying shareholder activ-
ism is considered to be the promotion of sound governance
practices as a means to improve ?nancial performance and
shareholder value (Eisenhofer & Levin, 2005). This means,
active shareholders believe that corporate governance
and ?nancial performance are positively linked. As Dale
Hanson (1993), former chief executive of the California
Public Employees’ Retirement System (CalPERS), a pioneer
of shareholder activism, stated:
‘‘CalPERS has no motives other than to improve corpo-
rate performance so that investment value is increased
[. . .]. We seek a return to corporations being account-
able to their shareholders. If accountability exists, we
are con?dent that corporate performance will follow.’’
Alastair Ross Goobey, former chief executive of Hermes
Pensions Management in Britain, further elucidated that
shareholder activism may potentially lead to enhanced
investment return:
‘‘We see corporate governance [. . .] as part of our ?du-
ciary duty to our clients in identifying the business risks
[. . .] to enhance our investment process accordingly
[. . .] Hermes believes that an active shareholder
involvement can help release the higher intrinsic value
of the company.’’ (Quoted in Sparkes, 2002)
Institutional investors became more concerned about
corporate governance after the outbreak of the corporate
scandals in the early 2000s (Tricker, 2009; Young, 2003).
They have perceived more strongly the link between cor-
porate governance and ?nancial performance. According
to a survey conducted by McKinsey & Company (2002),
investors believed that corporate governance can make a
9
For instance, Dobbin and Jung (2010) argue that the Sarbanes–Oxley
Act has failed to lead to true ‘board independence’.
10
Before the mid-1980s, individual activists and religious groups in
America challenged corporations on social or moral issues (Hendry,
Sanderson, Barker, & Roberts, 2007). Shareholder activism by institutional
investors, particularly by public pension funds, emerged ?rst in America in
the mid-1980s. From the early 2000s, especially in Britain, ‘new share-
holder activism’ by mainstream institutional investors (e.g. wholesale and
retail asset management funds, pension funds, and the investment arms of
life assurance companies) started to surface (ibid.). This paper refers to
activism that is exerted by mainstream institutional investors.
370 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
difference to the bottom line of a ?rm. It was reported that
the majority of investors surveyed would be prepared to
pay 12% more for the shares of a well-governed UK com-
pany and 14% more for the shares of a well-governed US
company, compared to the shares of companies with sim-
ilar ?nancial performance but poorer governance. As
Mallin (2004: 74) commented on the survey results:
‘‘It is [. . .] the investor’s [. . .] belief that corporate gover-
nance is important and that belief leads to the willing-
ness to pay a premium for good corporate governance.’’
Almost in parallel, i.e. since the early 2000s, a group of
institutional investors have come to view corporate gover-
nance, which is part and parcel of the notion of ‘ESG’ or
‘extra-?nancial issues’, as potentially having material
impacts on ?rm performance and shareholder return over
the long-term
11
(EAI, 2004). For instance, in its Global Prin-
ciples of Accountable Corporate Governance, the CalPERS
(2009: 17) stated that it
‘‘[. . .] believes that environmental, social, and corporate
governance issues can affect the performance of invest-
ment portfolios (to varying degrees across companies,
sectors, regions, and asset classes through time.)’’
Other constituents of the investment community have
echoed institutional investors regarding the potential link
between governance and other extra-?nancial issues and
long-term ?nancial performance. For instance, fund man-
agement ?rms, insurance companies, and investment
banks taking part in the Financial Sector Initiative Who
Cares Wins overseen by The United Nations Global Com-
pact claimed:
‘‘[. . . We] are convinced that in a more globalised, inter-
connected and competitive world the way that environ-
mental, social and corporate governance issues are
managed is part of companies’ overall management
quality needed to compete successfully. Companies that
perform better with regard to these issues can increase
shareholder value [. . .].’’ (The UN Global Compact,
2004: i)
This emerging thinking about the link between corpo-
rate governance and long-term ?nancial performance is
consistent with the spirit of agency theory. Under agency
theory, executive interests are supposed to align with the
long-term interests of shareholders (Dobbin & Jung,
2010). However, agency theory seemed to have been
misapplied in the business world. For instance, boards
compensated executives for increasing share price in the
short-term. This has led to the widespread view that
executive interests were aligned more with those of fund
managers who focused on increasing portfolio value in
the short-term than with long-term shareholder interests
(ibid.). The emerging idea that corporate governance and
long-term ?nancial performance are linked seems to
constitute an important step towards correcting some per-
ceived mistakes in the application of agency theory in the
corporate world.
Institutional investors and fund managers not only have
articulated the idea that corporate governance and ?nan-
cial performance are potentially linked. Compared to aca-
demics and policy makers, they have also taken one step
further and explicitly called for the integration of corporate
governance and other extra-?nancial issues into asset
management, securities brokerage services, and buy-side
and sell-side research functions. As Kay Carberry, director
of the Trade Union Congress Superannuation Society in
Britain, stated:
‘‘There is a growing recognition amongst pension funds
and fund managers that the management of extra ?nan-
cial or intangible issues by companies is essential for
their long-term performance [. . .]. Without comprehen-
sive analysis of these issues, investors will continue to
base investment decisions on a partial view.’’ (Quoted
in EAI, 2005)
The incorporation of governance criteria into the invest-
ment process has even been considered capable of helping
to achieve some broader aspirations and objectives in
economy and society. It was suggested:
‘‘[. . .] a better consideration of environmental, social
and governance factors will ultimately contribute to
stronger and more resilient investment markets, as well
as contribute to the sustainable development of socie-
ties.’’ (The UN Global Compact, 2004: i)
Accordingly, integrating ESG criteria into the invest-
ment process has become an ideal to be sought and an
agenda to be pursued within the institutional investment
community. Instead of treating environmental, social, and
governance issues as undifferentiated, a report issued by
the European Centre for Corporate Engagement (2007: 2)
suggested that corporate governance forms ‘‘a separate
category’’. As the report explained:
‘‘[. . .] corporate governance should not be bundled
together with other ESG factors. [. . .] corporate gover-
nance has a much more direct effect than any of the
other factors on the company’s bottom line and perfor-
mance; in particular, its ability to promote effective
managerial decision making and to prevent opportunis-
tic behaviour that decreases ?rms’ value.’’ (ibid., 9)
The distinctiveness of governance issues has also been
highlighted in a report issued by The United Nations
Global Compact (2009: 24):
‘‘[There is a] need to differentiate between E, S and G in
assessing progress in investment research [. . .].’’
In short, corporate governance integration is part and
parcel of the overall agenda for incorporating extra-?nan-
cial issues, or ESG criteria, into the investment process.
Given the special nature of governance issues perceived
by ?nancial market participants, corporate governance
integration has become a stand-alone calculative practice
11
This was triggered largely by the adoption of the idea of ‘socially
responsible investment’ (SRI) in the institutional investment community in
the US and UK (Sparkes, 2002). SRI used to be a fringe activity of some unit
trusts and mutual funds. Since the late 1990s, it has become an important
consideration by mainstream institutional investors. The terms ‘ESG’ and
‘extra ?nancial issues’ are adopted mostly by members of the institutional
investment community to capture factors that may have material impact
on ?rm performance and shareholder value in the long-run.
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 371
that has attracted special attention. As the next section
demonstrates, analysts have not only been put under pres-
sure to engage in corporate governance integration, but
also seen to be the specialists in doing so.
Exploring corporate governance integration by analysts:
pressure and credibility
The initial articulation within the investing public of the
aspiration of incorporating governance and other extra-
?nancial issues into the investment process in the early
2000s coincided with the need to transform sell-side
research at that time. Sell-side research that considers
ESG issues became to be viewed as more relevant, innova-
tive, and valuable (EAI, 2004; Hunt & Williams, 2003).
Some asset owners and managers created informal net-
works to collectively encourage analysts to integrate gov-
ernance and other extra-?nancial issues into investment
analyses.
12
As Thamotheram (2005), former Chair of the
Steering Committee of the Enhanced Analytics Initiative
(EAI), one notable industry-led network formed in 2004,
commented on sell-side research on extra-?nancial issues:
‘‘Good analysts much prefer doing interesting and intel-
lectually challenging work than the repetitive, mecha-
nistic commentary on last quarters ?gures. [. . .] at a
time when the analyst business model is being squeezed
by regulatory attention [. . .] EAI represents a clear state-
ment by a growing pool of international clients who are
clear about what they are happy to pay for!’’
Similarly, as mentioned in a report issued jointly by the
World Business Council for Sustainable Development
(WBCSD) and The United Nations Environment Programme
Finance Initiative (UNEP FI), Colin Monks, the then Head of
European Equity Research at HSBC, stressed the impor-
tance of sell-side research on ESG criteria:
‘‘It is becoming clear that sustainable development will
be one of the major drivers of industrial change over the
next ?fty years and that there is a growing demand
from both companies and institutional investors to
understand its ?nancial impacts. It follows therefore
that the successful brokers will be those that anticipate
this demand, respond to it with robust ?nancially
relevant research and thereby differentiate themselves
in an increasingly crowded marketplace.’’ (WBCSD and
The UNEP FI, 2004: 3)
The increased demand from the investing public for
more relevant and innovative sell-side research came at a
timely occasion when the analyst business model was sub-
ject to regulatory scrutiny and reform viewed to be neces-
sary. Performing research on ESG criteria, where corporate
governance is an important element, and incorporating
them into investment analyses, could become a step
forward for the transformation of sell-side research.
Undertaking ESG research may offer a new opportunity
for brokerage ?rms to re-conceptualise the way in which
sell-side research could and should be conducted. Whilst
traditional sell-side research was in doubt, analysts were
viewed to have the imperative to engage in a new domain,
namely, corporate governance integration.
Without addressing directly the problem associated
with sell-side research, other ?nancial market participants
have also considered integrating ESG issues into invest-
ment analyses to be an imperative for analysts. As the
twenty ?nancial institutions (including mostly asset man-
agement ?rms, insurance companies, and investment
banks) have jointly expressed in the reports issued by
The United Nations Global Compact:
‘‘Analysts should improve their understanding of the
link between ESG performance and value creation and
more actively communicate with companies on these
issues.’’ (The UN Global Compact, 2004: 33)
and
‘‘[. . .] developing and integrating environmental, social
and governance (‘‘ESG’’) issues in investment is inevita-
bly becoming an obligation for mainstream analysts
and decisions makers.’’ (The UN Global Compact,
2005: iii)
The Chartered Financial Analyst (CFA) Institute, a global
association of investment professionals, has suggested the
need to integrate ESG criteria into investment analyses:
‘‘[. . .] ?nancial professionals worldwide have a duty to
act in the best interests of their clients and ultimate
bene?ciaries. There is an increasing recognition of the
need to include the analysis of ESG factors in order to
more completely ful?ll this duty [. . .].’’ (CFA Institute,
2008: 3)
It appears that analysts have been put under pressure to
integrate corporate governance into investment analyses.
Their work in this area has indeed been perceived to be sig-
ni?cant for the investment community as a whole. As the
report issued jointly by the WBCSD and The UNEP FI
(2004: 3) has articulated:
‘‘Analysts’ views on environmental, social and gover-
nance issues are critical to sustainability. [. . .] Securities
analysts produce forecasts, valuations and opinions on
the securities they track. This research is in?uential
throughout the investment world, with investors, asset
managers and rating agencies among the clients relying
on this information. The extent to which analysts incor-
porate [ESG] issues into their assessments in?uences
whether markets reward or penalise companies’ perfor-
mance in these areas.’’
More importantly, analysts havebeenseentopossess the
expertise in performing the task of corporate governance
integration and been granted with the credibility to do so.
When the proposal for incorporating ESG criteria into
investment analyses was set out initially, a consistent
understanding of how to do it was not seen to have been
developed (The UN Global Compact, 2004: 1). How gover-
nanceissues couldandshouldbe integratedintoinvestment
analyses was yet to be explored. Amongst actors in the
12
The other evidence that the work of analysts is client driven is provided
by Imam et al. (2008). They ?nd that the recent popularity of discounted
cash ?ow models used by analysts re?ects the preferences of fund
managers and institutional investors.
372 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
investment chain, including fund managers, brokers, and
buy-side and sell-side analysts, sell-side analysts have been
viewed as ‘‘the specialists best placed to show how ESG
issues impact company and investment value’’ and to play
a ‘‘leading role’’ in exploring corporate governance integra-
tion (ibid., 37). Analysts were also believed to have the
capacity:
‘‘[. . .] to take an active role in testing and re?ning the
investment rationale for ESG integration in research
and investment decisions [. . . and to] further develop
the necessary investment know-how, models and tools
in a creative and thoughtful way [to] better deal with
qualitative information and uncertain impacts related
to ESG issues’’ (ibid., ii, 10 & 28)
Fund management ?rms and the asset management
departments of investment banks that constituted the
Asset Management Working Group under The United
Nations Environment Programme Finance Initiative also
considered:
‘‘[. . . analysts to be able] to identify speci?c [corporate
governance and other extra-?nancial] criteria likely to
be material for company competitiveness and reputa-
tion [. . . and] to the extent possible to quantify their
potential impact on stock price.’’ (The UNEP FI, 2004: 4)
The CFA Institute played a crucial part in attempting to
equip its members with the knowledge and tools to deal
with ESG issues. To provide investors and securities
analysts with a way to assess the governance policies of
companies and the associated risks, the CFA Institute Cen-
tre for Financial Market Integrity published The Corporate
Governance of Listed Companies: A Manual for Investors. As
indicated in the Manual:
‘‘It is our hope that all Investors – be they existing
Shareowners, potential Investors, or analysts – can use
this information as part of their analyses and valua-
tions, in light of their particular investment perspec-
tives, objectives, and risk-tolerance levels, to evaluate
a Company.’’ (CFA Institute, 2005: 1)
At some brokerage ?rms, analysts deal with governance
issues primarily on an individual and piecemeal basis
within the sector teams to which they belong (EAI, 2005).
However, in the early 2000s, major brokerage houses such
as Deutsche Bank, Citigroup, Goldman Sachs, JP Morgan,
Merrill Lynch, and UBS, amongst others, established dedi-
cated research teams within their equity research divisions
to focus attention on governance and other extra-?nancial
issues.
13
Analysts working in these specialist teams took the
initiative to explore systematically the integration of ESG
criteria into investment analyses and seek to demonstrate
the importance of extra-?nancial issues in determining
shareholder value. As the CFA Institute has acknowledged:
‘‘[. . .] a number of investment banks already employ
dedicated ‘‘ESG teams’’ who are charged with
evaluating relevant issues and incorporating them into
the larger equity analysis processes.’’ (CFA Institute,
2008: 3)
To summarise, analysts have been put under pressure
to integrate governance and other extra-?nancial issues
into investment analyses and perceived to be able to
develop the know-how to accomplish this task. The issues
of how analysts interpret ideas related to the potential link
between corporate governance and ?nancial performance
and what devices they have deployed to render corporate
governance integration operational will be addressed in
the next section. That section also reveals how these activ-
ities performed by analysts may further contribute to the
development of their expertise in corporate governance
integration.
Theorizing and operationalising corporate governance
integration
Analysts working within specialist ESG or SRI teams at
brokerage ?rms have advanced an agenda for exploring
ways in which corporate governance may be integrated
into investment analyses. In this process, ideas related to
the potential link between corporate governance and
?nancial performance are ‘theorized’ by analysts, particu-
larly with the aid of certain material tools and devices
(Greenwood & Hinings, 2006; Sahlin-Andersson &
Engwall, 2002; Strang & Meyer, 1993). Furthermore, ana-
lysts have attempted to combine the assessment of the
governance of a company with its broader investment the-
sis. This is also a theorization process where analysts
develop normative mechanisms and models to ful?l the
objective of incorporating governance issues into the
investment process.
The agenda of analysts for exploring corporate governance
integration
Consistent with the perception that a consistent
approach to incorporating governance into the investment
process has not been formulated (The UN Global Compact,
2004: 1), analysts have considered their work in this
domain to be exploratory. Analysts may be seen to build
their expertise in an emerging, but immature ?eld of prac-
tice. They have proffered an agenda for exploring ways in
which governance issues may be integrated into invest-
ment analyses:
‘‘[. . .] we identify some of the potential implications of
corporate governance to the investment process. [. . .]
We identify the facts and behavioural differences
impacting a company’s governance standards and
explore ways to integrate theminto the investment pro-
cess in a systematic way.’’ (Grandmont, Grant, & Silva,
2004: 6)
Meanwhile, the work performed by analysts appears to
be shaped strongly by ideas related to the potential link
between corporate governance and ?nancial performance
13
The specialist teams in some brokerage ?rms, including Citigroup, JP
Morgan, Deutsche Bank, and Merrill Lynch, were discontinued in the end of
2008. Commentators attributed these incidents to the ?nancial crisis that
was sparked in 2007 (Wheelan, 2008). The ?nancial crisis forced brokerage
?rms to reduce cost by cutting headcounts, including cutting staff
employed in the specialist teams.
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 373
that have been articulated in academic research, public
policy making, and institutional investment. As revealed
from an analyst report:
‘‘[. . . We] believe that the quality of corporate gover-
nance can affect the volatility of the price of risk, at
the level of market, sector, and company, and therefore,
can affect the performance of investment portfolios.’’
(Hudson & Morgan-Knott, 2008: 3)
Other analysts also shared similar interpretations of the
potential link between corporate governance and ?nancial
metrics. Agency theory, advocating the ‘shareholder value’
model of the ?rm, appears to underlie some of these inter-
pretations, even though this theory is not acknowledged
explicitly by analysts. For instance, as indicated by
Grandmont et al. (2004: 14):
‘‘We hypothesize that corporate governance standards
affect the way a company is run and, consequently, its
pro?tability. It is logical to predict that companies and
boards that are focused on maximizing shareholder
value tend to be better run and have better returns.’’
Furthermore, as consistent with the views of some com-
mentators (Dallas & Patel, 2004), analysts have framed cor-
porate governance as a risk factor in the investment
process. For instance:
‘‘[. . . C]orporate governance is potentially a signi?cant
source of risk at the level of country, sector, and com-
pany.’’ (Hudson & Morgan-Knott, 2008: 17)
and
‘‘It is now increasingly accepted that corporate gover-
nance and extra-?nancial risk metrics encompassing
environmental and social factors are components of a
company’s equity risk premium [. . .] Incorporating
these risk metrics into the investment decision-making
process is a necessary – and ultimately – pro?table step
for portfolio managers.’’ (Grant, 2005: 1)
Ideas related to the potential link between corporate
governance and ?nancial metrics and the belief that corpo-
rate governance is a risk factor, it may be argued, rational-
ise the corporate governance integration conducted by
analysts. However, the potential link between governance
and ?nancial performance has not been accepted by ana-
lysts at face value. Instead, some analysts have expressed
their mis-trust in the link. Hudson and Morgan-Knott
(2008: 4 & 15), for instance, stated that they
‘‘[. . .] do not believe the governance rating would neces-
sarily explain potential performance in isolation [. . .] it
is unlikely to be very easy to make a direct association
between governance and share price performance.’’
Consequently, to pursue the agenda for exploring cor-
porate governance integration, ?rst of all, some analysts
draw upon some tools and devices to seek to further theo-
rize the relationships between corporate governance and
?nancial metrics, even though they have been studied by
others, such as academics. With these relationships being
examined by analysts themselves, they explore ways in
which governance criteria may be considered in relation
to ?nancial information in the investment process. This
approach to exploring corporate governance integration
has been set out explicitly by some analysts:
‘‘We quantify and measure corporate governance stan-
dards and explore the relationships between corporate
governance and risk (e.g. volatility) and their implications
for pro?tability, stock price performance and equity valua-
tion. With these links we can start to evaluate companies
and equity portfolios by comparing their inherent corpo-
rate governance risks.’’ (Grandmont et al., 2004: 6)
Quanti?cation of corporate governance
Before examining the link between corporate gover-
nance and ?nancial metrics, analysts attempt to get gover-
nance issues measured and quanti?ed. Some analysts
make use of the quanti?cation provided by corporate
governance rating ?rms, such as the GovernanceMetrics
International (GMI). Others develop their own measure-
ment of the governance procedures of companies.
To quantify governance issues, some analysts focused on
corporate governance factors that ‘‘represent international
best practices as well as being indicators of equity risk’’
(Grant, 2005: 5). These analysts identi?ed a total of 50 cor-
porate governance factors and treated them as 50 data
points. Each data point was weighed depending on whether
it was consideredbyanalysts as a ‘primary’, ‘secondary’, ‘ter-
tiary’, or ‘information’ issue of corporate governance best
practice (see Tables 1 and 2). For example, according to
Table 1, ‘Independent Chairman’ is treated as a ‘primary’
issue. A ‘primary’ issue, based on Table 2, is referred to as
‘‘a deliberate stance to disadvantage minority investors or
a factor identi?ed as price/valuation sensitive’’ and given
‘3x weight’ in the generation of a governance score.
For each company examined, an overall assessment
score was sought to be generated. This score was presented
on an ‘absolute scale’, ranging from0% to 100%.
14
For exam-
ple, Burberry was givena score of 38%, whilst BHP BillitonPlc of
82%(Grant, Grandmont, &Silva, 2004: 17 &31). This indicates
that the governance system of BHP Billiton Plc appears to be
superior to that of Burberry by 44%. Additionally, the change
inthe qualityof the governance procedures of companies over
time has been considered by analysts. Such change is mea-
sured by the ‘momentum score’. It was generated, as
highlighted in analyst reports, through ‘‘compare[ing] each
company’s underlying current governance data to its own
available historical data’’ (Grandmont et al., 2004: 9).
In short, quanti?cation of corporate governance is an
essential step towards the theorization of the link between
governance criteria and ?nancial metrics and the com-
bined assessment of corporate governance and ?nancial
performance conducted by analysts. Through the mecha-
nism of quanti?cation, qualitative information about
corporate governance is transformed into quantitative
information, differences between the governance proce-
dures of different companies are transformed into
14
Analysts did not describe in their reports how they actually derived the
absolute scores based on the 50 data points and the weights. This does not
affect the current empirical analysis. Here, it is the mechanism adopted by
analysts of quantifying governance criteria that is of interest.
374 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
magnitudes, and a common metric, namely, the corporate
governance score, is generated.
Theorizing the link between corporate governance and
?nancial metrics
Due to their mis-trust in the link between governance
and ?nancial performance, some analysts have set out to
investigate this link and seek to develop their own ‘theori-
zation’ of the link (Greenwood & Hinings, 2006; Sahlin-
Andersson & Engwall, 2002; Strang & Meyer, 1993). This
theorization is characterised by the deployment by ana-
lysts of certain material tools and devices, which may be
viewed as inscriptions (Latour, 1987). These ‘calculative
devices’ render the link between corporate governance
and ?nancial metrics newly visible, measurable, and calcu-
lable. They also help to construct knowledge about the link
(cf. Robson, 1992).
First, ‘portfolio analyses’ have been performed by ana-
lysts. These analyses are considered to be the use of:
‘‘[. . .] ?nancial metrics to compare best from worst per-
formers for a given set of [. . .] corporate governance cri-
teria against existing stock portfolios. The comparison
helped [to] evaluate the ?nancial impact of chosen cri-
teria.’’ (The UNEP FI, 2004: 7)
Some analysts constructed two equally weighted portfo-
lios fromthe US S&P500 index based only on corporate gov-
ernance criteria (Grandmont et al., 2004; Grant, 2005; Grant
et al., 2004). The ?rst portfolio consists of stocks of compa-
nies with above average
15
absolute governance scores and
positive momentum scores
16
between 07/02/2001 and 30/
06/2003. The second portfolio comprises stocks of companies
with belowaverage absolute scores and negative momentum
scores for the same period. These analysts plotted the price
performances of the two portfolios over the two-year period
in a graph (see Graph 1). This graph reveals that the ?rst port-
folio (darker trajectory) has a higher average market price
than the second portfolio (lighter trajectory). Given this
observation, these analysts claimed:
‘‘[C]ompanies with above average assessment & posi-
tive momentum outperformed those with below aver-
age assessment & negative momentum [. . .]
investments in companies with the highest quality of
governance structures and behavior have signi?cantly
Table 1
Figure 13 from Grant et al. (2004: 38) Source: PIRC, Deutsche Bank estimates and company data.
Director independence Information disclosure
Chairman Information Directors state compliance with Combined Code Primary
CEO Secondary Individual directors attendance is disclosed Secondary
Independent Chairman Primary Compensation /policy changes fully explained Secondary
Number of board members Tertiary Fully independent audit com w/at least 3 memb Primary
Number of independent directors Primary Total non-audit fees as% of total fee Secondary
CEO other directorships/positions Secondary Number of audit committee meetings last FY Tertiary
No director attends more than 4 board meetings Secondary Audit Com has right to engage outside advisors Tertiary
Directors attend more than 4 boards Secondary Audit Com includes at least 1 ?nancial expert Secondary
Number of board meetings in last FY Secondary Political contributions (GBP) Information
Number of directors with 9+ years tenure Tertiary Process for board appraisal is disclosed Secondary
There is a named senior independent director Tertiary Process for succession planning is disclosed Secondary
% independence: Audit, Nom., Remun. Comt. Primary Transparent recruiting system for new directors Secondary
Shareholder treatment Corporate compensation
Each ordinary share has equal voting rights Primary CEO appointment year Information
Other share type Tertiary CEO’s last FY salary Information
Authorised/Issued shares Secondary CEO’s last FY bonus Information
All directors face election every year Primary CEO’s other emoluments Information
There is no controlling shareholder Secondary CEO’s share option gains Information
No persons have right to designate directors Secondary CEO’s LTIP gains Information
All new LTIPs/ESOs are put to vote Tertiary CEO’s pension gains Information
All voting conducted equitably and by poll Tertiary CEO total compensation Information
Issued shares under option Primary All components of salary are fully disclosed Secondary
Directors required to build up sig. equity stake Secondary Comp. liability on termination of contract stated Tertiary
Directors interests Primary All directors with 1+ year of service own stock Secondary
No director has a contract in excess of 1 year Secondary Maximum potential awards are disclosed Tertiary
Modi?ed from: Grant et al. (2004: 38).
Table 2
A table modi?ed from Grant et al. (2004: 37)
Primary issues 3 Â weight A deliberate stance to disadvantage minority investors or a factor identi?ed as price/valuation sensitive
Secondary issues 2 Â weight A failure to follow international best practice standards
Tertiary issues 1 Â weight A failure to follow pro-active corporate governance policies
Information issues No weight Of relevance to institutional investors but not scored
Modi?ed from: Grant et al. (2004: 37).
15
This ‘average’ is the average governance absolute score computed by
analysts for companies in the US S&P500 index.
16
A positive momentum score means that a ?rm improves its governance
standard over time. A negative momentum score signals that the gover-
nance standard of a company deteriorates.
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 375
outperformed those with the weakest governance’’
(Grandmont et al., 2004: 10).
By constructing two portfolios based only on gover-
nance criteria, tracking their price performances, and
revealing the price performance differential through a
graph, knowledge about the link between corporate gover-
nance and share price has been constructed. Thanks to the
portfolio analysis, which involves the use of both ?nancial
and governance information, and the graph, the way in
which the link between corporate governance and share
price may be looked at has been transformed. This link is
now rendered newly visible, material, and tangible.
Portfolios constructed based on corporate governance
criteria have also been deployed in ‘event analyses’.
Analysts, such as Grant (2005: 16), investigated whether
companies from the UK FTSE350 index announcing posi-
tive governance reforms around the annual general meet-
ing (AGM) date would outperform companies disclosing
deteriorating governance standards. Grant built two
equally weighted portfolios for companies ‘‘with the most
identi?able momentum – top and bottom 5% of [the UK
FTSE350] index’’.
17
The price performances of these two
portfolios were plotted in a graph (see Graph 2). According
to this analysis, Grant (ibid., 17) argued that the portfolio
of companies disclosing deteriorating governance standards
(lighter trajectory) underperformed the portfolio of compa-
nies announcing positive governance reforms (darker trajec-
tory) over the 90-day analysis period around the AGM date.
This event analysis constructs further knowledge about
the link between corporate governance and ?nancial met-
rics. That is, change in the governance of companies may
have an impact on share price. This knowledge is con-
structed through the building of two portfolios based only
on governance criteria, the tracking of their price perfor-
mances over time, and the visualisation of the price perfor-
mance differential in a graph. Once again, with the
deployment of certain inscriptions by analysts, the poten-
tial link between corporate governance and ?nancial met-
rics has been rendered into a newly visible and material
form.
Similar to academics, analysts have adopted regression
analyses to investigate statistically the relationships
between the governance standards of companies presum-
ably captured by governance scores and ?nancial metrics
such as share price, valuation, and accounting performance
(Hudson & Morgan-Knott, 2008: 15). Some analysts argued
that ‘‘corporate governance standards affect the way a
company is run and, consequently, its pro?tability’’
(Grandmont et al., 2004: 14). They examined the relation-
ship between corporate governance and pro?tability for
companies within the UK FTSE350 index. Three measures
of pro?tability were considered: ‘Return on Equity’ (ROE),
‘Return on Assets’ (ROA), and ‘Earnings Before Interests,
Tax, Depreciation and Amortisation Margin’ (EBITDA Mar-
gin). The quality of the governance procedures of compa-
nies was measured by the absolute governance scores
that these analysts have developed. To investigate the
association between corporate governance and ?rm pro?t-
ability in a statistical manner, regressions were run, with
pro?tability being the dependent variable and corporate
governance being the independent variable. The regression
model appears to be
18
:
Profitability ¼ a þb Corporate Governance þe
Graph 1. Figure 6 from Grant et al. (2004: 10).
17
This means that one portfolio comprises stocks of companies whose
momentum scores are higher than those received by 95% of the companies
in the UK FTSE350, and the other includes stocks of companies whose
momentum scores are lower than those received by 95% of the companies
in the same index.
18
Compared to academics, analysts deploy a relatively simple model.
Without comparing the technical pro?ciency of the two approaches,
academics at least seek to control for non-governance effects, i.e. they
appear to challenge the effect of governance on performance more strongly
than analysts. It is beyond the scope of this paper to compare the work of
analysts in this area with that of academics in detail.
376 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
These analysts found that the governance scores
received by companies are positively correlated to all three
measures of pro?tability. For instance, for the relationship
between corporate governance and ROE, the regression
result is ROE = 0.2518Corporate Governance + 0.1128,
where the coef?cient for the independent variable is posi-
tive (Grandmont et al., 2004: 14). The relationships
between each pro?tability measure and corporate gover-
nance were also represented in graphs. As revealed from
the graph depicting the result from the regression between
ROE and corporate governance (see Graph 3, the regression
line is upward sloping. This con?rms that ROE and corpo-
rate governance tend to be positively correlated. With
the use of regression analyses, the link between corporate
governance and ?rm pro?tability is established statisti-
cally. This link has also been visualised with the regression
lines being plotted in graphs. Another new visibility of the
link between corporate governance and ?nancial metrics
has been created. This link has once again been trans-
formed into a material and tangible form.
Nevertheless, the link between corporate governance
and ?nancial metrics cannot always be established as
expected. For instance, although corporate governance
and the price earnings ratio have been perceived to be
positively correlated, one analyst noted:
‘‘[. . .] within the UK life insurance sector there appears
to be a decreasing relationship between the governance
rating and price earnings ratios (P/E), although there is
no statistically signi?cant data to back up this conclu-
sion.’’
19
(Walker, 2008: 1)
Accordingly, the results from the investigation into the
link between corporate governance and ?nancial metrics
have been viewed by analysts to be sector-speci?c. The
results are also seen by analysts to depend on the level of
analysis, namely, individual ?rm level, industry level, or
market level. The examination conducted by some analysts
of the relationship between corporate governance and
stock valuation for companies within the US S&P500 index
clearly demonstrates this. Here, three measures of valua-
tion were considered: Price to Earnings (P/E), Price to Book
Value (P/BV), and Price to Cash Flow (P/CF). The relation-
ships between each of these measures and the governance
scores developed by analysts were studied. It was noted:
‘‘[. . .] while for the Food & Staples Retailing sector the
relationship shows that companies with higher gover-
nance standards trade at higher valuation multiples,
the same cannot be said for the Capital Goods sector.’’
(Grandmont et al., 2004: 22)
When further re?ecting upon their results, Grandmont
et al. (2004: 23) remarked:
‘‘[. . .] there is no US market-wide correlation between
corporate governance and equity valuations.’’
In summary, analysts have sought to theorize the link
between corporate governance and ?nancial metrics. In
this theorization process, the calculative devices deployed
by analysts render this link newly visible, measurable, and
calculable. Knowledge about this link is produced. ‘Knowl-
edge’ in this formulation is an outcome ‘‘of the technolo-
gies for inscribing’’ the link (Robson, 1992: 689). Analysts
have gradually been building their expertise in discovering
this link. The deployment of portfolio, event, and regres-
sion analyses and the graphs has allowed analysts to
Graph 2. Figure 23 from Grant (2005: 17).
19
Walker (2008) examined only seven UK life insurance companies.
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 377
perform systematic investigations into the link between
corporate governance and ?nancial metrics, and to develop
their own interpretations of this issue. What analysts have
produced may also be viewed as ‘information knowledge’
about the link as it involves some degrees of ‘‘interpreta-
tion, calculation, accounts, and explanation’’ (Knorr
Cetina, 2010: 172).
Not all perceived relationships between corporate gov-
ernance and ?nancial metrics can be ascertained. However,
the associations between these two categories that have
been con?rmed by analysts appear to reinforce the idea
that governance criteria need to be incorporated into the
investment process. They also rationalise the corporate
governance integration conducted by analysts. Some ana-
lysts have even considered the weak correlation between
corporate governance and market valuation of some com-
panies as being induced by the inability of investors to
incorporate governance assessments into valuation models
on a timely basis due to lack of effective tools (Grandmont
et al., 2004: 24). It is for this particular reason that these
analysts have claimed to develop certain frameworks to
help portfolio managers and investors ‘‘incorporate gover-
nance systematically throughout stock selection’’ (Hudson
& Morgan-Knott, 2008: 1).
Combining corporate governance with ?nancial metrics
The development of frameworks by analysts to help
investors ‘‘incorporate governance systematically through-
out stock selection’’ is also a ‘theorization’ process. In this
process, certain principles and mechanisms are norma-
tively developed by analysts to seek to bring corporate
governance into the investment process. Speci?cally, ana-
lysts have sought to combine the assessment of the gover-
nance of companies with the assessment of their
investment thesis driven by pro?tability, equity valuation,
and stock price performance mainly on a case-by-case
basis. The overarching principle is to seek an alignment
between the governance assessment of a ?rm and its
broader investment thesis.
Such an alignment occurs, according to analysts, when a
company whose governance rating is above sector average
achieves above sector average pro?t, market valuation, and
stock price performance, or vice versa. When the ?nancial
performance of a company and its governance pro?le are
not aligned with each other, as analysts suggested, further
investigation is needed to determine whether the company
is worthy of being chosen for investment. This principle of
‘alignment’ is informed largely by the positive link
between corporate governance and ?nancial metrics that
has been discovered by analysts. This principle is adopted
irrespective of how the governance assessment is per-
formed. Hudson and Morgan-Knott (2008: 23), who uti-
lised the governance ratings of the GMI, stated:
‘‘[. . . We] look for an alignment between the overall
governance rating according to GMI, and the broader
thesis driven by fundamentals, valuation, and/or share
price performance, as appropriate.’’
Hudson and Morgan-Knott (2008) have provided some
illustrations of the combined analysis of corporate gover-
nance and ?nancial metrics by focusing on companies in
the UK beverage sector. As they noted, Britvic was given
high scores by the GMI. From a ?nancial perspective,
DeRise, an equity research analyst who values the stocks
of Britvic, suggested that ‘‘Britvic is cheap and defensive’’
(Hudson & Morgan-Knott, 2008: 23). Accordingly, Hudson
and Morgan-Knott (2008) considered the governance
assessment for Britvic as aligning well with its broader
investment thesis. They viewed the low governance risk
of Britvic to be in line with the ‘buy’ recommendation pro-
vided by DeRise. As Hudson and Morgan-Knott (ibid.)
commented:
‘‘Britvic is not only ‘‘cheap and defensive’’, but also
brings the additional comfort of a strong governance
pro?le.’’
Graph 3. Figure 16 from Grant et al. (2004: 14).
378 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
Nevertheless, inconsistencies between governance
assessment and broader investment thesis appear. Whilst
Carlsberg was given very low scores by the GMI, DeRise still
recommended investors to buy its shares. DeRise provided
a justi?cation for the ‘buy’ recommendation that Hudson
and Morgan-Knott (2008: 5) endorsed and re-produced
in their own report:
‘‘Though Carlsberg has a low governance rating, we con-
tinue to recommend the stock as Buy. [. . .] we believe
Carlsberg’s growth story from S&N cost synergies and
ongoing restructuring of the ‘‘old’’ Carlsberg business
is compelling and not factored into the current share
price.’’
A similar approach is adopted by other analysts in their
attempt to integrate corporate governance into investment
analyses, but with some additional tools and devices
deployed. For instance, Grant et al. (2004) have sought to
demonstrate the mechanisms through which corporate
governance information could be used in conjunction with
?nancial information in the selection of stocks for invest-
ment. As these analysts explained:
‘‘Our objective is to incorporate the corporate gover-
nance risk factor into the investment decision making
process [. . .] we add corporate governance information
as a further layer to traditional fundamental analysis
in order to select stocks for inclusion (or exclusion)
from portfolios. [. . .] This analysis allows us to identify
companies whose governance-valuation-pro?tability
measures are [. . .] inappropriately priced by the mar-
kets, allowing us to generate long and short stock
ideas.’’ (Grant et al., 2004: 57)
The ‘governance-valuation-pro?tability’ analyses devel-
oped by these analysts may be seen as the theorized mech-
anisms through which governance criteria may be brought
into investment analyses. They involve combined assess-
ment of corporate governance and ?rm pro?tability, or
corporate governance and equity valuation. These analyses
are performed with the deployment by analysts of speci?c
inscription devices, namely, the ‘governance-to-pro?tabil-
ity’ and ‘governance-to-valuation’ graphs. In this way, the
ideal of corporate governance integration is materialised
and transformed into concrete and tangible apparatuses
(Czarniawska & Joerges, 1996; Czarniawska & Sevon,
2005). Also, the ‘governance-valuation-pro?tability’ analy-
ses and graphs help to construct knowledge about the rela-
tionship between the governance standard of a company
and its pro?tability or valuation relative to that of the
other company in the same industry. This knowledge
may potentially provide investors with some input to
make stock selection decisions.
For instance, Grant et al. (2004) adopted ‘governance-
to-pro?tability’ analyses to compare the investment
potential of two general retailers, namely, Signet Group
Plc and Burberry Group Plc. They used ROA as a measure
of pro?tability and developed a ‘corporate governance vs.
ROA’ graph (see Graph 4). The horizontal axis of this graph
shows the governance scores that analysts have issued to
companies in the general retailers sector, and the vertical
axis measures the ROA of these ?rms. The horizontal line
in the middle indicates that the average ROA for companies
in this sector was approximately 10% in 2003. The vertical
line in the middle indicates that the average governance
score for this sector was about 54% in 2003.
Corporate governance and ROA were perceived to be
positively correlated. Analysts considered that a company
whose governance score is above the sector average would
have an above sector average ROA, and that it would
appear in the top right rectangle of the graph. A company
whose governance score is below the sector average would
have a below sector average ROA, and it would appear in
the bottom left rectangle. For these two scenarios, the gov-
ernance assessment and the broader investment thesis
may be seen to align with each other. When a company
appears in the top left or bottom right part of the graph,
Graph 4. Figure 59 from Grant et al. (2004: 64).
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 379
analysts tended to view the governance assessment of the
?rm and its broader investment thesis to be mis-aligned.
According to Graph 4, Signet is located in the top right
rectangle. This suggests that the governance standard of
Signet was aligned with its pro?tability measured by ROA
in 2003. The governance score of Signet and its ROA both
exceeded the sector averages. However, Burberry appears
in the top left part of the graph. This indicates that the gov-
ernance standard of Burberry and its pro?tability did not
align with each other. The quality of the governance proce-
dures of Burberry was signi?cantly below the sector aver-
age, although it achieved an above sector average ROA in
2003. Together with the similar insights revealed from
the other ‘governance-to-pro?tability’ analyses utilising
ROE and EBITDA Margin as measures of pro?tability,
Grant et al. (2004: 64) noted:
‘‘[. . .] on a governance-to-pro?tability measurement
[. . .] when compared to Burberry Group Plc, Signet
Group Plc offers similar levels of pro?tability for a lower
corporate governance risk.’’
Accordingly, analysts suggested that Signet shall be the
target for ‘long investing’ and Burberry for ‘short invest-
ing’.
20
This investment strategy is further reinforced by the
results of the ‘governance-to-valuation’ analyses. Grant
et al. (2004) considered three measures of valuation: P/E
ratio, P/CF ratio, and P/BV ratio. The logic behind these anal-
yses is exactly the same as that of the ‘governance-to-prof-
itability’ analyses. The ‘governance-to-valuation’ analyses
reveal that, for both Signet and Burberry, their governance
standards were inconsistent with their share valuations in
2003. As Grant et al. (2004: 65) commented:
‘‘Signet Group Plc trades at a signi?cant valuation dis-
count to the sector on a P/E and P/BV basis while enjoy-
ing a much lower governance risk factor than the
average company in the sector. Conversely, Burberry
Group Plc trades at valuation rates that are much richer
than the sector average while having a higher corporate
governance risk than the sector average.’’
As these analysts have demonstrated, based on the
results from the ‘governance-valuation-pro?tability’ analy-
ses, investors who ‘long’ the shares of Signet and ‘short’
those of Burberry would potentially generate a positive
return. This investment strategy is informed simulta-
neously by the governance assessment and the broader
investment thesis driven by pro?tability and equity
valuation.
In summary, the ‘governance-valuation-pro?tability’
analyses and graphs bring governance information and
?nancial information together and render the integration
of governance criteria into investment analyses opera-
tional. Both corporate governance and ?nancial metrics
are inscribed into a form that companies as potential
investment objects could be evaluated and compared.
Clearly, the ‘governance-valuation-pro?tability’ analyses
and graphs are put into place by analysts. As ‘theorizing
agents’, analysts have managed to transform the notion
of ‘corporate governance integration’ from an idea, aspira-
tion, and agenda into a bundle of material, concrete, and
tangible tools and devices. It is through this assemblage
formed between ideas, aspirations, tools, and devices that
the expertise of analysts in corporate governance integra-
tion may be seen to have gradually been formed.
Recognition of and concern about the corporate governance
integration performed by analysts
As illustrated above, analysts have turned the agenda
for exploring the integration of corporate governance into
investment analyses into practice. They appear to have
translated ideas and discourses pertaining to corporate
governance integration into material, concrete, and tangi-
ble inscriptions. The expertise of analysts in this new
domain, namely, corporate governance integration, is seen
to start being developed. In a recent report issued by The
UN Global Compact (2009: 8 & 23), analysts were praised
for their achievement
‘‘[. . .] in developing the analytical frameworks and dem-
onstrating the rationale for [corporate governance]
integration in investment research [. . . and analysts]
have demonstrated that quantifying ?nancial impacts
of [environmental, social, and governance] issues [. . .]
is absolutely within the reach of the analysts’
profession.’’
Despite the recognition gained so far, concern about the
corporate governance integration performed by analysts
has been expressed. As indicated in a report of the
European Centre for Corporate Engagement (2007: 2):
‘‘[. . .] the lack of a universally accepted methodology for
quantifying ESG data makes it dif?cult to incorporate
extra-?nancial information into their analyses.’’
Similarly, in a report issued jointly by The UNEP FI and
Mercer (2007: 52), a consulting ?rm, sell-side research on
governance and other extra-?nancial issues has been
scrutinised:
‘‘[. . .] the systematic translation of ESG factors into
quantitative inputs and ?nancial ratios used in invest-
ment appraisals is [still] less developed.’’
Regarding sell-side research on corporate governance
issues more speci?cally, other commentators have
claimed:
‘‘Research on governance issues progressed somewhat
both in quantity and in quality. However, [. . .] gover-
nance is still greatly under-covered relative to its
importance.’’ (EAI, 2008: 6)
To summarise, so far, analysts employed within special-
ist teams at brokerage ?rms appear to have conducted sys-
tematic analyses to seek to incorporate governance criteria
into investment analyses and gradually developed their
expertise in this new domain. This has been recognised
by other ?nancial market participants. Nevertheless, the
20
For ‘long investing’, according to Grant et al. (2004), the stocks of a
company with above sector average governance assessment, improving
momentum, and low valuation are bought by investors. For ‘short
investing’, investors may sell the stocks of a company whose governance
risk is high and that trade at a valuation premium.
380 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
corporate governance integration that analysts have
attempted to perform is ultimately an emerging form of
economic calculation. The nature and quality of their
expertise in this new domain is still open to interpretation.
Discussion and conclusion
Integrating corporate governance into the investment
process is an emerging form of economic calculation and
an immature ?eld of practice that may leave room for
expertise to develop. This study has examined how sell-
side ?nancial analysts have come to develop their exper-
tise in this new domain, with particular attention to the
calculative ideas and calculative devices through which it
is achieved. This paper has traced certain ideas and aspira-
tions shaping and articulating corporate governance inte-
gration. It has attended to the arguments and discourses
that constructed analysts as the ‘specialists’ in performing
this particular form of economic calculation. The paper has
also examined the tools and devices deployed by analysts
that render corporate governance integration operational.
The expertise of analysts in performing corporate gover-
nance integration, that is to say, has been built as these
ideas, discourses, aspirations, tools, and devices have
assembled.
Some existing research has considered mainly the
expertise of traditional sell-side investment research
(Beunza & Garud, 2007; Fogarty & Rogers, 2005; cf.
Preda, 2007). The issue of how analysts develop expertise
to operate in a new domain has not been systematically
examined. This paper has addressed this limitation in the
literature. Particularly, it is shown that analysts appeared
to develop their expertise in a new ?eld, namely, corporate
governance integration, at a time when the quality of their
traditional ?nancial analysis work was questioned and
thrown into doubt.
21
As discussed previously, in the early
2000s, traditional sell-side research was problematised and
subject to regulatory scrutiny. Almost at the same time,
the aspiration of incorporating governance and other
extra-?nancial issues into the investment process started
to be articulated within the institutional investment com-
munity. Analysts were encouraged to integrate governance
criteria into investment analyses, as this was seen to be a
step forward for the transformation of sell-side research.
More importantly, not only the CFA Institute, but also insti-
tutional investors and fund managers, have considered that
corporate governance integration is imperative for analysts
to conduct and that analysts possess the knowledge and
credibility to do so.
Analysts, however, have not appeared to intend to
achieve ‘enclosure’ over their expertise in corporate gover-
nance integration (Power, 1992; Rose & Miller, 2010). At
least an intention to achieve enclosure has not been
re?ected in the discourses of the analyst professional asso-
ciation. In other words, analysts may not prepare to
involve themselves in contest with other professions for
the ‘jurisdiction’ of corporate governance integration (cf.
Abbott, 1988). Meanwhile, institutional investors and fund
managers have not claimed that analysts are the only
experts in this new domain. When the aspiration of corpo-
rate governance integration was set out initially, effort was
called for from different functions along the investment
chain, including asset management, securities brokerage
services, and buy side and sells side investment research
(The UN Global Compact, 2004: 1). Integrating governance
criteria into the investment process, that is to say, requires
cooperation and collaboration between different profes-
sions (cf. Gendron et al., 2007), even though the contribu-
tion made by sell-side analysts may potentially be
signi?cant. These unique insights from this paper are
meant to add to those already contained in the existing lit-
erature on professional expertise in economic sociology
and the sociology of accounting, particularly enhancing
our understanding of the wider social context in which
professional expertise is developed.
This study has built on the literature on economic cal-
culation that addresses both the ‘programmatic’ and the
‘technological’ dimensions. The paper has attended to the
‘calculative ideas’ attached to corporate governance inte-
gration. First, it has traced ideas and discourses about the
potential link between corporate governance and ?nancial
performance articulated in academic research, public pol-
icy making, and institutional investment in the last three
decades of the 20th century. Second, the paper has exam-
ined the ideal of integrating governance criteria into the
investment process that started to be articulated in the
institutional investment community in the early 2000s.
Meanwhile, this study has analysed the ‘calculative
devices’ deployed by analysts. These include portfolio,
event, and regression analyses, ‘governance-valuation-
pro?tability’ analyses, and various graphs. This paper has
taken one step further and attended speci?cally to one of
the consequences of the assemblage formed between cal-
culative ideas and calculative devices as a developmental
process over time, that is, the constitution of calculative
expertise. This assemblage formed might be temporary
and fragile (cf. Miller, 1986). As this paper has illustrated,
the expertise constituted is contingent upon certain histor-
ical conditions and may by no means be stable forever. This
analysis of corporate governance integration and the
expertise developed in performing this form of economic
calculation has shed new light on our understanding of
the constructive nature of professional expertise.
Aligned with the ‘governmentality’ literature, this study
has attended to the role of expertise as ‘relay’. Given the
limitation of this literature of not addressing properly
how expertise stabilises linkages between programmes
and speci?c technologies (Gendron et al., 2007: 103), this
paper has articulated more fully the ‘relay’ aspect at issue
here by referring to the notions of ‘carrying’ and ‘theoriza-
tion’ drawn from neo-institutional analyses. In light of
these concepts, analysts have been viewed in this paper
to serve as a link between calculative ideas and calculative
devices. Speci?cally, when processing ideas related to the
potential link between corporate governance and ?nancial
performance, analysts ‘theorize’ and represent these ideas
discursively as well as with the deployment of material
21
Gendron et al. (2007: 124) also report that the Of?ce of the Auditor
General of Alberta constructed expertise in measuring government perfor-
mance ‘‘in a climate of scepticism and self-doubt’’.
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 381
tools and devices. Analysts have attempted to combine the
governance assessment of a company with its broader
investment thesis. As this paper has illustrated, this is also
a theorization process where analysts normatively develop
certain principles and mechanisms to seek to render corpo-
rate governance integration operational. The theorization
by analysts, as demonstrated in the paper, is part and par-
cel of the process of constructing their expertise in corpo-
rate governance integration. Without this theorization,
corporate governance integration may not be presented
in ways that make it receptive to the claims of a particular
form of expertise, that of analysts.
This study has several implications for future research.
First, the paper has focused mainly on analysts who work
for specialist teams in the equity research divisions of bro-
kerage ?rms. The extent to which and ways in which the
outputs generated by these analysts are utilised by their
counterparts in the equity research divisions, namely, ana-
lysts who value stocks and offer investment recommenda-
tions, and by institutional investors and fund managers,
deserve further investigation. Also, as shown in this paper,
the credibility granted to analysts to explore corporate
governance integration has been re?ected to a great extent
in the views of other ?nancial market participants, such as
asset owners and fund managers. For future research, one
may examine howthese other constituents of the investing
public actually interact with the expertise of analysts in
corporate governance integration. Equally, it would be
valuable to interview analysts to ?nd out how they per-
ceive the knowledge they have developed in corporate
governance integration and to what extent they actually
see themselves as experts in this domain.
Furthermore, this paper has demonstrated that the cal-
culative devices deployed by analysts construct knowledge
about the link between corporate governance and ?nancial
metrics. One may further argue that the inscribing of such
link is a process of ‘performativity’ that helps to make this
link ‘become true’ (Mackenzie, 2006). For future research,
one may investigate to what extent and how the discourse
of corporate governance, and the calculative devices that
have enabled its assessment as part of the investment pro-
cess, have made its importance self-ful?lling. Nevertheless,
one may take a critical stance on the corporate governance
integration undertaken by analysts. Future research may
question the extent to which the corporate governance
analysis conducted by analysts is essentially ritualistic in
nature and whether the involvement of analysts in corpo-
rate governance integration is purely for marketing
purposes.
Whilst this future research is important, this paper has
investigated how analysts become to be recognised as pos-
sessing expertise to operate in a new domain, namely, cor-
porate governance integration. This expertise is not given,
but gradually constructed. It is through the ensemble
formed over time between certain ideas, discourses, aspi-
rations, arguments, tools, and devices that this particular
form of expertise has come to be developed. This way of
conceptualising the construction of professional expertise
may inform our understanding of the rise of expertise in
other ?elds of calculative practice. Empirically, this study
has added new insights into shifts into a new role for cor-
porate governance consideration in the thinking and prac-
tice of analysts. The paper may also serve as a starting
point for investigation into further issues related to corpo-
rate governance integration performed by analysts or by
other ?nancial market participants.
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384 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
doc_785764639.pdf
This study analyses an emerging form of economic calculation in financial markets,
namely, the integration of corporate governance into investment analyses undertaken by
sell-side financial analysts. It examines how the expertise of these analysts in corporate
governance integration is constructed, with particular attention to the calculative ideas
and calculative devices through which it is achieved. Corporate governance integration is
shaped by certain ‘calculative ideas’. These relate to ideas about the potential link between
corporate governance and financial performance and the ideal of incorporating governance
criteria into the investment process. This paper suggests that these calculative ideas have
constituted the discursive conditions under which analysts sought to build their expertise
in a new domain. The paper also shows that at a time when the quality of traditional sellside
research was scrutinised, the investment professional association and constituents of
the investing public, through their arguments and discourses, constructed analysts as the
‘specialists’ having the imperative and credibility to perform corporate governance integration.
Furthermore, as the paper demonstrates, analysts have sought to ‘theorize’ calculative
ideas. They have normatively deployed certain ‘calculative devices’ to make corporate governance
integration operational. Corporate governance integration is conducted in ways
that make it receptive to the claims of a particular form of expertise, that of analysts. This
paper suggests that it is through the assemblage formed over time between the ideas and
aspirations on the one hand, and the tools and devices on the other, that the expertise of
analysts in corporate governance integration has gradually been formed.
The construction of calculative expertise: The integration
of corporate governance into investment analyses by sell-side
?nancial analysts
q
Zhiyuan (Simon) Tan
?
Department of Management, King’s College London, Franklin-Wilkins Building, 150 Stamford Street, London SE1 9NH, United Kingdom
a b s t r a c t
This study analyses an emerging form of economic calculation in ?nancial markets,
namely, the integration of corporate governance into investment analyses undertaken by
sell-side ?nancial analysts. It examines how the expertise of these analysts in corporate
governance integration is constructed, with particular attention to the calculative ideas
and calculative devices through which it is achieved. Corporate governance integration is
shaped by certain ‘calculative ideas’. These relate to ideas about the potential link between
corporate governance and ?nancial performance and the ideal of incorporating governance
criteria into the investment process. This paper suggests that these calculative ideas have
constituted the discursive conditions under which analysts sought to build their expertise
in a new domain. The paper also shows that at a time when the quality of traditional sell-
side research was scrutinised, the investment professional association and constituents of
the investing public, through their arguments and discourses, constructed analysts as the
‘specialists’ having the imperative and credibility to perform corporate governance integra-
tion. Furthermore, as the paper demonstrates, analysts have sought to ‘theorize’ calculative
ideas. They have normatively deployed certain ‘calculative devices’ to make corporate gov-
ernance integration operational. Corporate governance integration is conducted in ways
that make it receptive to the claims of a particular form of expertise, that of analysts. This
paper suggests that it is through the assemblage formed over time between the ideas and
aspirations on the one hand, and the tools and devices on the other, that the expertise of
analysts in corporate governance integration has gradually been formed.
Ó 2014 Elsevier Ltd. All rights reserved.
Introduction
A number of high pro?le corporate governance failures
occurred in the early 2000s, such as Enron, WorldCom, and
Parmalat. This shook the global business landscape. Since
then, corporate governance has been perceived as ‘an area
of risk’ that may have material impacts on ?nancial perfor-
mance and shareholder value (Dallas & Patel, 2004;
Solomon, 2010). Integrating corporate governance into
the investment process has become an ideal to be sought
within the investing public (The UN Global Compact,
2004, 2005, 2009; The UNEP FI, 2004). Whilst progresshttp://dx.doi.org/10.1016/j.aos.2014.05.003
0361-3682/Ó 2014 Elsevier Ltd. All rights reserved.
q
This paper is based on my doctoral thesis that I completed at the
London School of Economics (LSE). The ?nancial support from the
Department of Accounting at the LSE is acknowledged. I am very grateful
to Peter Miller for his academic support throughout this study. Earlier
versions of the paper have been presented at the Accounting, Organisations
and Society Seminar at the LSE, The 2011 British Accounting and Finance
Association Annual Conference, The 34th European Accounting Association
Annual Congress, and The 2012 Interdisciplinary Perspectives on Accounting
Conference. I am grateful to the editor, David Cooper, and the two
anonymous reviewers, who have helped to improve the paper consider-
ably. I also wish to thank Richard Laughlin, Colin Clubb, Alex Preda, Jill
Atkins, and Hanna Silvola for having read earlier versions of the
manuscript and provided extremely useful comments.
?
Tel.: +44 (0)2078483626.
E-mail address: [email protected]
Accounting, Organizations and Society 39 (2014) 362–384
Contents lists available at ScienceDirect
Accounting, Organizations and Society
j our nal homepage: www. el sevi er. com/ l ocat e/ aos
has been made, a common understanding of how to incor-
porate governance criteria into the investment process is
yet to be developed (The UN Global Compact, 2004: 1).
Corporate governance integration is thus an immature
?eld of practice which may leave room for expertise to
develop (cf. Power, 1997a). This study analyses the integra-
tion of corporate governance into investment analyses
conducted by sell-side ?nancial analysts. Speci?cally, the
paper focuses on examining how the expertise of these
analysts in performing corporate governance integration
is constructed, with particular attention to the calculative
ideas and calculative devices through which it is achieved.
Sell-side ?nancial analysts (analysts thereafter) work in
the equity research divisions of brokerage ?rms. They are
commonly perceived as experts in investment analysis
and stock valuation. Research on governance and other
extra-?nancial issues, however, has been driven mostly
by specialist teams rather than individual analysts (EAI,
2008). In the early 2000s, major brokerage houses, such
as Deutsche Bank, Citigroup, Goldman Sachs, JP Morgan,
Merrill Lynch, and UBS, established dedicated teams to
investigate corporate governance and other extra-?nancial
issues. Analysts employed in these specialist teams are
sometimes called corporate governance analysts, socially
responsible investment (SRI) analysts, or environmental,
social, and governance (ESG) analysts. These analysts may
not offer investment recommendations directly to inves-
tors. Nevertheless, they have taken the initiative to explore
ways in which issues such as corporate governance may be
integrated into investment analyses, and have devoted con-
siderable effort into seeking to demonstrate the importance
of corporate governance in determining shareholder value.
This paper examines how the expertise of analysts in
this particular form of economic calculation has been
formed out of a set of calculative ideas and a related set
of calculative devices. The ‘calculative ideas’ at stake here
include ideas and discourses related to the potential link
between corporate governance and ?nancial performance,
which have been articulated in academic research, public
policy making, and institutional investment. They also
include the ideal and aspiration of bringing corporate gov-
ernance into the investment process that surfaced in the
institutional investment community in the early 2000s.
These ideas, discourses, and aspirations have constituted
the discursive conditions of possibility for analysts to build
their expertise in a new domain. Meanwhile, at a time
when the quality of traditional sell-side research was scru-
tinised, i.e. in the early 2000s, the investment professional
association and constituents of the investing public,
through their arguments and discourses, constructed ana-
lysts as the ‘specialists’ having the imperative and credibil-
ity to perform corporate governance integration.
As specialists, analysts have sought to develop their own
interpretation of the link between corporate governance
and ?nancial metrics. They have developed and deployed
certain ‘calculative devices’, such as portfolio, event, and
regression analyses, and the associated graphs, to make this
link newly visible, measurable, and calculable. More impor-
tantly, analysts have attempted to combine the assessment
of the governance of a company with its broader invest-
ment thesis. They have normatively developed certain
principles and mechanisms (e.g. the ‘governance–valua-
tion–pro?tability’ analyses and graphs) to ful?ll the objec-
tive of incorporating governance criteria into investment
analyses. It is through the assemblage formed over time
between the ideas and aspirations on the one hand, and
the tools and devices on the other, that the expertise of ana-
lysts in corporate governance integration has gradually
been formed. Fig. 1 summarises these key insights.
This study seeks to contribute to the literature along
three dimensions. First, this paper ?lls a gap in the litera-
ture that has failed to address how analysts develop exper-
tise concerning a new domain in their investment advice.
Prior research has considered mainly the expertise of tradi-
tional sell-side investment research (Beunza & Garud,
2007; Fogarty & Rogers, 2005). The issue of how analysts
build expertise to operate in a new domain has not been
systematically examined. This paper addresses this limita-
tion by investigating how the expertise of analysts in
corporate governance integration is formed, particularly
at a time when the quality of their traditional work has
been questioned. This paper also shows that analysts do
not appear to aim to achieve enclosure over their expertise
in this new ?eld of practice. These important empirical
insights add to those already contained in the literature
on professional expertise in economic sociology and the
sociology of accounting (Gendron, Cooper, & Townley,
2007; Power, 1992, 1997a; Preda, 2002, 2007).
Second, this paper adds to the ‘governmentality’ litera-
ture by making the role of experts and expertise more
explicit. Accounting scholars whose research is informed
by the ‘governmentality’ literature argue that economic
calculation is constituted along two dimensions, the
‘programmatic’ and the ‘technological’ (Mennicken,
Miller, & Samiolo, 2008; Miller, 2008b; Power, 1997b). This
study builds on these arguments by examining the ideas
articulating and the devices operationalising corporate
governance integration. The paper has taken one step fur-
ther and attended speci?cally to one of the consequences
of the assemblage formed over time between calculative
ideas and calculative devices, that is, the constitution of
calculative expertise. This particular approach to analysing
corporate governance integration and the expertise
developed sheds new light on our conceptualisation of
the constructive nature of calculative expertise.
Third, aligned with the ‘governmentality’ literature, this
paper attends to the role of expertise as ‘relays’, i.e. inter-
preting calculative ideas and creating calculative devices,
in the forming of particular modes of economic calculation
(Miller & Rose, 1990). This literature, however, fails to
address properly how expertise stabilises linkages
between programmes and speci?c technologies (Gendron
et al., 2007: 103). To address this limitation, this paper
articulates more fully the ‘relay’ aspect at issue here by
viewing experts as ‘theorizing agents’, a notion that is
drawn from neo-institutional analyses (Sahlin-Andersson
& Engwall, 2002; Strang & Meyer, 1993). Analysts, the
‘theorizing agents’ under investigation, are viewed to link
up the ideas and the devices of a particular form of
economic calculation. The ‘theorization’ by analysts, as
the paper also demonstrates, is part and parcel of the
process of constructing their calculative expertise.
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 363
The rest of the paper is structured as follows. Sec-
tion ‘Economic calculation, expertise, and theorization’
outlines the relevant literature and theoretical lenses that
inform this study. Section ‘Data and methods’ introduces
the various textual documents that provide the empirical
material and discusses how these documents were
collected and analysed. Section ‘Sell-side ?nancial ana-
lysts: status, expertise, scepticism, and regulatory reform’
provides a background discussion of sell-side ?nancial ana-
lysts, highlighting their status in ?nancial markets, their
expertise in securities valuation, scepticism over their
work, and the regulatory reforms directed at them. The
analysis of the construction of the expertise of analysts in
corporate governance integration is then performed in
three steps. Section ‘Corporate governance integration:
ideas, discourses, and aspirations’ traces the calculative
ideas that constituted the discursive conditions under
which analysts have sought to develop their expertise in
corporate governance integration. Section ‘Exploring cor-
porate governance integration by analysts: pressure and
credibility’ examines the ways in which the analyst profes-
sional association and constituents of the investing public
discursively constructed analysts as experts in this new
domain. Section ‘Theorizing and operationalising corporate
governance integration’ demonstrates how analysts, with
the deployment of calculative devices, sought to theorize
calculative ideas and ful?l the objective of integrating gov-
ernance criteria into investment analyses. The ?nal section
provides some concluding discussion and re?ects upon the
contributions of the paper.
Economic calculation, expertise, and theorization
To explore how the expertise of analysts in corporate
governance integration is constituted, this paper draws
upon and aims to contribute to three relatively distinct
yet overlapping sets of literature: ?rstly, the literature that
has addressed ideas and devices of economic calculation;
secondly, the literature on the development of professional
expertise in economic sociology and the sociology of
accounting; and thirdly, the literature on neo-institutional-
ism, in so far as this has addressed the ‘carrying’ and ‘the-
orization’ of ideas. Each of these is considered below.
Economic calculation: ideas and devices
Economic calculationhas beenanobject of enquiryinthe
sociological analysis of the economy since the late 1970s
(Mennickenet al., 2008; Miller, 1994). Scholars fromvarious
disciplines, including those in accounting, have demon-
strated that the operation of particular ways of calculating
is implicated within speci?c social and cultural settings
(Burchell, Clubb, Hopwood, Hughes, & Nahapiet, 1980;
Hacking, 1975; Hopwood, 1983). Some have focused specif-
ically on the interrelation amongst economic calculation,
economic policy, and economic discourse (Burchell, Clubb,
& Hopwood, 1985; Miller & Rose, 1990; Thompson, 1986).
Economic sociologists turned their attention to the
impact of calculative practices in the late 1990s (Callon,
1998). Following the science and technology studies (STS)
tradition, economic calculation is considered as ‘‘distrib-
uted amongst human actors and material devices’’, where
‘material devices’ include tools, equipment, technical
devices, and algorithms (Callon & Muniesa, 2005: 1245).
Although conjoint analyses of human actors and material
devices are performed,
1
‘the material reality of calculation’
Fig. 1. Summary of Key Insights.
1
Beunza and Stark (2004), for instance, examine the links between
traders and instruments, such as trading robots, telephones, and pricing
tools, in a trading room at a Wall Street investment bank.
364 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
has been given most attention (Callon, 1998: 5). This strong
focus on the ‘technological infrastructures’ of economic cal-
culation has been labelled a ‘technological turn’ in economic
sociology (Mennicken et al., 2008). Recently, the notion of
‘market devices’ has been coined as a way of referring to
the material instruments and models that represent and
intervene in the construction of markets (Muniesa, Millo, &
Callon, 2007).
The role of inscriptions is important here (Latour, 1987;
Latour & Woolgar, 1986; cf. Hacking, 1992). Latour (1987)
views inscription as a material textual translation of any
setting that is to be acted upon. Similarly, Robson (1992:
689) regards inscriptions as ‘‘the various techniques of
‘marking’ an object or event that is to be known – writing,
recording, drawing, [and] tabulating’’ (cf. Chua, 1995;
Ezzamel, Lilley, & Willmott, 2004; Preston, 2006; Qu &
Cooper, 2011; Quattrone, 2009). Inscriptions translate a
setting into graphs, diagrams, photographs, equations,
models, and written reports, inscriptions. They render the
realm visible, measurable, comparable, and calculable.
Inscribing may be seen to create ‘knowledge’ about a
domain. ‘Knowledge’ in this formulation is ‘‘an outcome
of the practical procedures of inscription [and] of the tech-
nologies for inscribing the world’’ (Robson, 1992: 689).
Whilst the importance of inscriptions has been empha-
sised, the ‘technological turn’ in economic sociology has
downplayed the role of programmes, ideas, and rationales
that shape particular ways of calculating (Mennicken et al.,
2008; Miller, 2008a,b). These elements, however, are
stressed particularly by accounting scholars whose work
is informed by the ‘governmentality’ literature (Miller &
Rose, 1990, 2008; Rose & Miller, 2010). Accounting, a par-
ticular form of economic calculation, is viewed as being
constituted along two dimensions, the ‘programmatic’
and the ‘technological’ (Mennicken et al., 2008; Miller,
1991, 2008b; Power, 1997b). The ‘programmatic’ dimen-
sion, as Power (1997b: 6) explains, relates to ‘‘the ideas
and concepts which shape the mission of the practice
and which [. . .] attach the practice to [. . .] broader policy
objectives’’. The ‘technological’ refers to ‘‘the more or less
concrete tasks and routines which make up the world of
practitioners’’ (ibid.). These two dimensions often go
hand-in-hand with each being the condition of operation
for the other (Miller, 2008b: 25).
In light of this governmentality literature inspired con-
ceptualisation, this paper addresses both the ideas and the
devices populating the domain of economic calculation
under investigation. Put somewhat schematically, ‘calcula-
tive ideas’ correspond to what governmentality scholars
have termed the ‘programmatic’ realm. It is those dis-
courses and ideals that shape, articulate, and give signi?-
cance to the corporate governance integration performed
by analysts. ‘Calculative devices’, meanwhile, can be
viewed as the material tools and mechanisms that seek
to make corporate governance integration operational.
Professional expertise
Economic calculation relies in large part on the legiti-
mated expertise of certain professionals. In the economic
sociology and sociology of accounting literatures, issues
on how expertise is constituted, the nature of expert
knowledge, and how experts make claims to expertise in
new domains have been explored. It is commonly found
that expertise is constructed conjointly by experts them-
selves and its users and audiences.
Preda (2007), for instance, reports that technical ana-
lysts adopted certain persuasion strategies to distribute
their expert knowledge and persuade the users, i.e. brokers
and investors, to adopt it. Reciprocally, the users were pre-
con?gured in the body of expert knowledge they
employed. Power (1992) reports that accountants and
other professionals used certain ‘credentializing strategies’
to assert their authority of expertise in brand valuation in
Britain. These strategies, it is considered, were necessary to
establish networks of support for the particular practices.
Power (1997a) also analyses the representational strate-
gies by which accountants attempted to develop claims
to expertise in environmental audit. As Power (1997a:
124) suggests, ‘‘even the [. . .] most procedural elaboration
of practical guidance [. . .] is part of a wider normative dis-
course which constructs and presents the ?eld in ways
which make it receptive to the claims of a certain form of
expertise rather than another’’.
Similarly, Gendron et al. (2007) analyse how govern-
ment auditors in Alberta in Canada promoted its claim to
expertise in measuring government performance, and
how targeted audiences, government and public servants,
responded to it. They take one step further, however, by
demonstrating that the promotion of auditor expertise
was linked to the endorsement of the performance mea-
surement project under the broader agenda of New Public
Management (ibid., 125). This indicates, more generally,
that discourses and rationales articulated in wider econ-
omy and society may form the discursive conditions of
possibility for particular expertise to develop, whilst
experts are crucial players in operationalising broader
aspirations.
This way of conceptualising the development of
expertise is consistent with that in the ‘governmentality’
literature. Expertise is referred to in this literature as a
‘‘complex amalgam of professionals, truth claims and tech-
nical procedures’’ (Miller & Rose, 1990: 8). The governmen-
tality literature, as Miller and Rose (2008: 12) proffer,
attends to the way in which ‘‘expertise had been formed,
the historical emergence of the problems which seemed
to call for professional ‘know-how’, the new domains and
enclosures that began to form around such issues, and
the ways in which that expertise itself made it possible
to conduct conduct in new ways’’. Given this historical
focus, the rise of expertise is seen to be linked to transfor-
mations in both rationalities and technologies of
government (Rose & Miller, 2010: 285).
Accordingly, when analysing economic calculation, the
development of calculative expertise may be seen to be
linked to transformations in calculative ideas and calcula-
tive devices. Experts may realise claims to expertise as
rationales, discourses, ideals, tools, and mechanisms have
been assembled. This paper considers ideas related to the
link between corporate governance and ?nancial perfor-
mance and the ideal of integrating governance criteria into
the investment process as forming the discursive
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 365
conditions of possibility for analysts to develop their
expertise in corporate governance integration. It also anal-
yses the arguments and discourses used by the investment
professional association and constituents of the investing
public that construct analysts as having the imperative
and credibility to operate in that domain. Meanwhile, the
calculative devices deployed by analysts are seen in this
study to make corporate governance integration receptive
to their particular expertise.
Experts as carriers and theorists
Expertise is considered in the ‘governmentality’ litera-
ture to play the role as ‘relay’. As Rose and Miller (2010:
285–286) explain, experts ally themselves with political
authorities and translate political concerns into expert lan-
guages. Experts also seek to form alliances with individual
persons and organisations, translate their problems into a
language claiming the power of truth, and offer to teach
them the techniques needed to ful?l their aspirations.
Accordingly, for economic calculation, expertise may be
argued also to play the role as ‘relay’. It is experts who
elaborate upon calculative ideas and who deploy devices
to make calculation operational. Experts may be seen to
provide a link between calculative ideas and calculative
devices. However, the governmentality literature is said
to pay insuf?cient attention to the role of expertise in
stabilising linkages between programmes and speci?c
technologies (Gendron et al., 2007: 103). To better under-
stand how expertise links up calculative ideas and calcula-
tive devices, neo-institutional analyses of the ‘carrying’ and
‘theorization’ of ideas help articulate more fully the ‘relay’
aspect at issue here.
Neo-institutionalists concern the diffusion of institu-
tional elements (Scott, 2008). Early studies tended to exam-
ine the mechanical movement of elements from one place
to another (ibid., 133). As informed by constructionism in
STS (Latour, 1987), some institutionalists have advanced
that institutional ideas are modi?ed by ‘carriers’ in trans-
mission (Czarniawska & Joerges, 1996; Sahlin-Andersson
& Engwall, 2002; Scott, 2003, 2008). Carriers contribute to
the framing, packaging, and circulating of ideas. They in?u-
ence signi?cantly the nature of the elements transmitted
(Scott, 2003: 879). The form, focus, and content of the origi-
nal elements are subject to transformation in the ‘carrying’
process. The notion of ‘carrying’ is relevant here, as it
reminds us that analysts may constantly unpack, interpret,
and construct calculative ideas when processing them.
Carriers often ‘theorize’ ideas (Ezzamel, Robson, &
Stapleton, 2012; Greenwood, Suddaby, & Hinings, 2002;
Sahlin-Andersson & Engwall, 2002; Scott, 2008; Strang &
Meyer, 1993). Theorization involves the ‘‘development
and speci?cation of abstract categories and the formula-
tion of patterned relationships such as chains of cause
and effect’’ (Strang & Meyer, 1993: 492). It may lead to
the formulation of either simple concepts and typologies,
or highly abstract, complex, and rich models (ibid., 493).
Carriers, such as management consultants and other pro-
fessionals, may be seen as ‘theorists’ or ‘theorizing agents’
(Greenwood & Hinings, 2006; Sahlin-Andersson & Engwall,
2002; Strang & Meyer, 1993). With the deployment of a
particular language, theorists interpret and normatively
develop the issue under investigation. They may also seek
to convert abstract ideas into concrete apparatuses that
can be seen and touched (Czarniawska & Joerges, 1996;
Czarniawska & Sevon, 2005).
In light of these insights from neo-institutional
analyses, this paper examines the ‘theorization’ by analysts
of ideas related to the potential link between corporate
governance and ?nancial performance. It investigates
how analysts combine the governance assessment of a
company with its broader investment thesis. This process
is to be conceptualised also as ‘theorization’ where ana-
lysts normatively develop certain mechanisms to make
corporate governance integration operational. Further-
more, theorization is to be viewed as part and parcel of
the process whereby the expertise of analysts in corporate
governance integration is developed.
Before turning to a discussion of sell-side ?nancial
analysts, Section ‘Data and methods’ introduces the various
textual documents that this study draws upon as empirical
material and discusses how these documents were
analysed.
Data and methods
Textual documents are used intensively to provide key
empirical data in research in the social sciences (Bryman,
2008). As Laughlin (2004) proffers, empirical research in
accounting, no matter if it is positivist, interpretive, or crit-
ical, draws on textual documents to provide important
empirical insights. This paper deploys a diverse set of tex-
tual documents as empirical material.
Based on the ‘governmentality’ literature, it is through
the deployment and elaboration of a particular language
or vocabulary that ideas and aspirations take shape in
‘‘government reports, White Papers, Green Papers, papers
from business, trade unions, ?nanciers, political parties,
charities and academics’’ (Miller & Rose, 1990: 4). Sec-
tion ‘Corporate governance integration: ideas, discourses,
and aspirations’ examines the calculative ideas that consti-
tuted the discursive conditions of possibility for analysts to
develop their expertise in corporate governance integra-
tion. To trace discourses about the link between corporate
governance and ?nancial performance in academic
research and public policy making, academic publications
and of?cial documents issued by regulatory bodies were
referred to. To trace ideas and aspirations surrounding cor-
porate governance integration, reports of asset manage-
ment ?rms and networks formed between them, The UN
Global Compact, and industry research organisations, and
the ?nancial press were analysed. Similarly, for
Section ‘Exploring corporate governance integration by
analysts: pressure and credibility’, reports of the Chartered
Financial Analyst Institute and other ?nancial market par-
ticipants were analysed to examine how analysts were
constructed discursively as having the imperative and
credibility in performing corporate governance integration.
This paper also draws on analyst reports as empirical
material. This is consistent with some sociological studies
that attend speci?cally to the work products of analysts
366 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
(Beunza & Garud, 2007; Fogarty & Rogers, 2005). These
studies indicate that one may look indirectly into the work
products generated by analysts in order to infer what they
do. Section ‘Theorizing and operationalising corporate
governance integration’ examines how analysts ful?l the
objective of integrating governance criteria into invest-
ment analyses. It refers mainly to analyst reports that
address the link between governance and ?nancial metrics
and that document corporate governance integration.
These reports were obtained from the Investext Plus
database accessed through the British Library until early
2009.
2
Five reports written by analysts based in the US
and Britain before 2009 are considered relevant. The number
of relevant reports is relatively small given the infancy of
corporate governance integration at that time. These reports
were written by analysts based mainly in specialist corpo-
rate governance, ESG, or SRI teams at brokerage ?rms when
they were published.
For data analysis, ‘constant comparative method’ (Flick,
2009; cf. Glaser, 1969) was adopted to compare issues
articulated in one document with those in the others. Text
passages derived from the documents were grouped and
coded in relation to certain themes. The development of
these themes was informed theoretically by notions such
as ‘calculative ideas’, ‘calculative devices’, and ‘theoriza-
tion’ discussed previously. The material from documents
that are not analyst reports was analysed in relation to
the interpretations of the link between governance and
?nancial performance by academics, policy makers, and
asset owners and managers; the desires attached to corpo-
rate governance integration; and the views regarding the
role of analysts in this domain. Analyst reports were also
compared to identify the vocabularies, mechanisms, and
tools developed by analysts in theorizing the link between
corporate governance and ?nancial metrics and in oper-
atonalising corporate governance integration. Material, in
the forms of selective quotes, tables, and graphs, is taken
from the documents to illustrate the themes developed
from the data analysis, focusing on demonstrating the
construction of the expertise of analysts in corporate gov-
ernance integration through calculative ideas and calcula-
tive devices. The selection of material from the documents
was on the basis of those chosen providing signi?cant
empirical ampli?cation of theoretical points of relevance.
Whilst this is intentionally selective, similar themes are
apparent in the other documents, but they are not as clear
as the ones referred to in this paper.
Sell-side ?nancial analysts: status, expertise, scepticism,
and regulatory reform
Sell-side ?nancial analysts are key players in capital
markets. Traditionally, they are employed in the equity
research divisions of brokerage ?rms. They specialise by
industries and study companies in a speci?c sector. In prin-
ciple, analysts attend to the strategy and fundamentals of
corporations, evaluate the investment potential of compa-
nies, and offer investment recommendations. Analysts
document the results of their research mostly in equity
research reports that are utilised normally by institutional
and retail investors. According to the ‘All-American’ ana-
lyst rankings compiled by Institutional Investor magazine
in 2003, the arguments articulated in analyst reports were
seen by investors to be more helpful than the brief num-
bers represented in the form of investment recommenda-
tions and price targets (Beunza & Garud, 2007).
Sell-side analysts are accorded with important roles in
?nancial markets. They are viewed as ‘critics’, assessing if
a company conforms to their model of how ?rms in a given
industry should be structured (Zuckerman, 1999). Analysts
are depicted as ‘gatekeepers’, monitoring companies and
scrutinising opportunistic corporate behaviour (Coffee,
2006). Analysts may be considered to act like ‘status
groups’ who are granted with the legitimacy to make
claims in the market place (Preda, 2005). All these roles
appear to re?ect the unique position that analysts capture
in ?nancial markets. As Fogarty and Rogers (2005: 338)
put, analysts ‘‘span the boundary between those that need
capital and those that have it’’ and ‘‘provide the former
with access to resources [. . .] and the latter with some
degree of con?dence about their decision’’. Accordingly,
analysts are in?uential and their research reports are often
given great consequence by market participants (Beunza &
Garud, 2007; Fogarty & Rogers, 2005).
Whilst the securities analyst occupation is not a classic
profession, movement towards professionalisation has
been made
3
(Fogarty & Rogers, 2005). The ?rst analyst
professional association, the New York Society of Security
Analysts, was established in 1937. In 1948, the National Fed-
eration of Financial Analyst Societies was formed, function-
ing as a national network of local American societies. The
1990s saw the worldwide expansion of analyst associations
and internal differentiation (Preda, 2005). A more signi?cant
step towards professionalisation of analysts was the creation
of the credential, the ‘Chartered Financial Analyst’ (the
‘CFA’), by the end of the 1950s
4
(Coffee, 2006: 248).
However, what ‘‘furnished the intellectual construct that
energized the rise of securities analysis as a profession’’
was the publication of the book Security Analysis by Graham
and Dodd in 1934 (Coffee, 2006: 254). This book, for the ?rst
time ever, codi?ed the basic techniques and methodology of
fundamental valuation analysis.
Analysts are supposed to perform an expert analysis of
corporate information. There appears to be a mechanism
whereby analyst can generate insight into future corporate
fortune based on the information assembled. Such a mech-
anismis saidto dependontheir graspof theory of microeco-
nomic behaviour and their skill to assess the implications of
accounting information (Fogarty &Rogers, 2005: 338). Also,
analysts are seen to develop ‘calculative frames’. These are
‘‘interpretive devices’’, including ‘‘categories, metrics and
analogies, that yield the necessary estimates which go into
2
The British Library terminated subscription to Investext Plus in early
2009.
3
Coffee (2006) provides an in-depth discussion of the history of the
securities analyst occupation.
4
A CFA credential is not required for a securities analyst, although it
seems to become the norm, at least for the younger generation (Coffee,
2006: 248).
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 367
the valuation of a company’’ (Beunza & Garud, 2007: 26 &
35). They commonly take the forms of texts, tables, ?gures,
and numbers in analyst reports, and Excel spreadsheet ?les.
Accordingly, what analysts generate may be seen as ‘infor-
mation knowledge’, involving interpretation, calculation,
and explanation
5
(Knorr Cetina, 2010: 172).
The assumed objective, independent, and technical nat-
ure of the work of analysts, however, has been questioned.
As Fogarty and Rogers (2005: 349) claim, there is ‘‘a loose
coupling between the espoused technology of ?nancial
analysis and the actual output’’ generated. Bruce (2002:
201) even suggests that the advice from analysts is ‘‘a com-
plex mix of wishful thinking and self-serving hype’’. This
hints towards the con?icts of interest existing in the
relationship between analysts and other ?nancial market
participants. These include investment bankers working
for the same brokerage ?rms as analysts, institutional inves-
tors and fund managers who are clients of sell-side analysts,
and the ?nancial media that publicise analyst performance,
amongst others (Coffee, 2006; Hayward & Boeker, 1998;
Imam, Barker, &Clubb, 2008; Swedberg, 2005). The con?icts
of interest between analysts and their investment banking
counterpart
6
appear to be the most prevalent and are seen
to have contributed to the downfall of Enron and WorldCom
in the early 2000s (Coffee, 2006; Healy & Palepu, 2003).
Indeed, in the late 1990s and early 2000s, the stock
market crash and the corporate failures drove down
investor con?dence with the integrity of capital markets.
The way in which sell-side research was traditionally per-
formed, particularly the issue of con?icts of interest, was
viewed to contribute to this loss of investor con?dence at
that time (Donaldson, 2003; Nazarethi, 2003). Accordingly,
regulatory reforms were proposed to transform the way in
which sell-side research was organised and conducted. In
the US, the Global Analyst Research Settlement (SEC, 2003)
proposed structural reforms of brokerage ?rms, aiming
particularly to mitigate the in?uence of investment bank-
ing on equity research.
7
Similarly, in Britain, new regula-
tions were enacted to address analyst con?icts of interest,
an issue being seen to have undermined investor con?dence
with the integrity of the UK ?nancial markets (FSA, 2004).
Since the enactment of these regulations, analysts have been
forced to work within a more regulated environment.
These regulatory reforms caused new problems. The
question who would subsidise sell-side research has been
raised, given that it was henceforth required to be sepa-
rated from investment banking (Coffee, 2006: 267). Also,
since the enactment of the Global Settlement, the size of
sell-side research departments and the number of compa-
nies covered by analysts have been reduced (Davis, 2004).
This indicates that supply of sell-side research has been
squeezed. Demand for it, however, has not weakened
(Coffee, 2006). Instead, ‘‘more relevant, more original and
better-targeted’’, and ‘‘innovative’’ sell-side research was,
and is still highly sought after by asset owners and manag-
ers (EAI, 2004; Hunt & Williams, 2003). This request for
improving sell-side research coincided with the initial
articulation within the investing public of the ideal of
incorporating corporate governance and other extra-?nan-
cial issues into the investment process in the early 2000s
(The UN Global Compact, 2004). What underlies this
agenda is the idea that corporate governance and ?nancial
performance are potentially linked. It is to this issue that
the paper now turns.
Corporate governance integration: ideas, discourses,
and aspirations
During the past three decades, ideas and discourses
related to the potential link between corporate governance
and ?nancial performance have been articulated in three
arenas: academic research, public policy making, and insti-
tutional investment. Such a link appears to be based on
agency theory, which has served as a ‘meta-programme’
where corporate governance and ?nancial performance
have become connected. Also, from the early 2000s, the
ideal of incorporating corporate governance and other
extra-?nancial issues into the investment process started
to emerge within the institutional investment community.
All these ideas, discourses, and aspirations have endowed
the corporate governance integration undertaken by ana-
lysts with broader signi?cance. They have also constituted
the discursive conditions of possibility for analysts to build
their expertise in this new domain.
Academic research
The ?rst academic study of the link between corporate
governance and ?nancial performance can be traced back
to the 1950s when Vance (1955) related board structure
to ?rm performance. It was not until the 1980s that aca-
demic studies of this link started to gain momentum.
Dalton, Daily, Ellstrand, and Johnson (1998) systematically
reviewed 54 empirical studies of board composition and 31
of board leadership structure and their relationships with
?nancial performance. A majority of them were published
in the 1980s and 1990s and in academic journals from var-
ious disciplines. As Dalton et al. (1998: 269 & 270)
commented:
‘‘There is a distinguished tradition of conceptualization
and research arguing that boards of directors’ composi-
tion and leadership structure [. . .] can in?uence a vari-
ety of organisational outcomes. This attention
continues to be apparent in the academic literature.’’
Agency theory, formulated by Jensen and Meckling
(1976), informed a majority of the studies reviewed by
Dalton et al. (1998). This theory advocates the ‘shareholder
value’ model of the ?rm (Dobbin & Jung, 2010). It suggests
that outside directors, small focused boards, and indepen-
dent chairmen could help to monitor executive behaviour,
improve corporate performance, and promote shareholder
interests in the long-term. Empirical studies informed by
5
Knorr Cetina (2010: 172) speaks of the notion ‘information as
knowledge’. She suggests that ‘‘information may be treated as uninter-
preted data’’, but information knowledge as ‘‘involving interpretation,
calculation, accounts, and explanation’’.
6
There exists evidence that ‘‘analysts at underwriting ?rms appear to
in?ate their estimate of ?rm clients, and higher investment banking fees
correlate with more positive predictions’’ (Coffee, 2006: 251).
7
For details, seehttp://www.sec.gov/news/speech/factsheet.htm.
368 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
agency theory have reported that outside director repre-
sentation and separating the chairman and the CEO are
correlated positively with ?rm performance (Baysinger &
Butler, 1985; Ezzamel & Watson, 1993). However, some
research has found no association between these variables
(Chaganti, Mahajan, & Sharma, 1985; Daily & Dalton,
1992). Some other studies have claimed that inside direc-
tors and joint leadership structure may be associated with
better ?rm performance
8
(Donaldson & Davis, 1991; Kesner,
1987). As Dalton et al. (1998: 269–270) remarked:
‘‘[. . .] guidance from the academic literature as to the
superiority of speci?c board composition con?gurations
or board leadership structures is unclear, especially
with respect to ?rm performance.’’
Since the turn of this century, the problematisation by
academics of the link between corporate governance and
?nancial performance has continued. Abdullah and Page
(2009) reviewed over 40 empirical studies of this link that
were published mostly in the late 1990s and early 2000s.
These studies analysed the relationships between board
structure, board size, board independence, ownership
structure, and managerial ownership, and ?nancial perfor-
mance. The corporate scandals breaking out in the early
2000s and the regulatory reforms followed seemed to have
motivated academics to further examine the link between
corporate governance and ?nancial performance (ibid.).
Some research ?ndings have even challenged regulatory
ideas and appeared to cast doubt on what agency theory
suggests. As Cole, Daniel, and Naveen (2008: 352) argued:
‘‘In the context of the recent scandals at Enron, World-
Com, and Qwest, as the role of boards in the governance
of corporations comes under increased scrutiny, and as
Congress, TIAA-CREF, CALPERS, the NYSE, Nasdaq, and
others weigh in on governance, our [. . .] evidence casts
doubt on the idea that smaller boards with fewer insid-
ers are necessarily value-enhancing.’’
Academics have also explored the impact of shareholder
activism on ?rm performance. It is assumed that strong
monitoring of corporate behaviour by activist shareholders
can contribute positively to ?nancial performance, which is
aligned with the dictate of agency theory (Becht, Franks,
Mayer, &Rossi, 2008; Goranova &Ryan, 2014). Results from
empirical studies, however, have been contradictory
(Karpoff, 2001). Nesbitt (1994), for instance, found that
shareholder activism has a positive impact on the ?nancial
performance of companies targeted by the California Public
Employees’ Retirement System. In contrast, Faccio and
Lasfer (2000) reported that pension funds in Britain do not
add value to the companies where they hold large stakes.
Since the early 2000s, the availability of commercial
corporate governance ratings has expanded the scope of
academic research into the link between corporate gover-
nance and ?nancial performance. Academics have explored
the relationship between the overall quality of the
governance procedures of a ?rm, captured by a single gov-
ernance metric, and ?nancial performance (Brown &
Caylor, 2004; Daines, Gow, & Larcker, 2010). Similar to
prior studies, this more recent research has generated
inconclusive ?ndings. Nevertheless, the agenda for explor-
ing the relationship between corporate governance and
?nancial performance has been consolidated further
within the academic community. The idea that corporate
governance and ?nancial performance are potentially
linked has been articulated within academia once again.
Public policy making
Ideas related to the potential link between corporate
governance and ?nancial performance have appeared in
the public policy making arena approximately since the
1980s. Albeit implicitly, prescriptions from agency theory,
such as outside directors, small focused boards, indepen-
dent chairmen, and promotion of shareholder interests,
appeared to have informed policy making in corporate
governance.
In the US, governance reforms in the early 1980s initi-
ated by the Securities and Exchange Commission and the
American Law Institute (1982) were informed by the per-
ception that corporate governance and ?nancial perfor-
mance are potentially linked. As Baysinger and Butler
(1985: 103) revealed:
‘‘[T]he reform movement is based on the idea that
shareholder welfare is enhanced by boards of directors
which are capable of monitoring management, render-
ing independent judgments on managerial performance
[. . .] ?rms with more independent boards should per-
form better; changes in board composition toward the
reformers’ prescriptions should improve performance.’’
Since the late 1980s and early 1990s, corporate gover-
nance has become a salient issue in the UK, US, and global
business community. This was triggered by the outbreak of
some corporate scandals, such as Bank of Credit and Com-
merce International and Maxwell, and the Asian ?nancial
crisis. Corporate governance then started being subject to
on-going regulatory intervention. Starting with the
Cadbury Report (1992), a number of governance codes
and principles have been developed in Britain, the US,
and transnationally. These regulations appeared to be
formulated in light of the belief that corporate governance
and ?nancial performance are potentially linked. For
instance, when setting out the responsibilities of the board,
the Organisation for Economic Co-operation and Develop-
ment (OECD) stated in its Principles of Corporate Governance
(OECD, 1999: V):
‘‘Together with guiding corporate strategy, the board is
chie?y responsible for monitoring managerial perfor-
mance and achieving an adequate return for sharehold-
ers, while preventing con?icts of interest and balancing
competing demands on the corporation.’’
An assumption underlying this statement is that a
responsible corporate board can monitor managerial
actions effectively, which may in turn bring about
enhanced investment return to shareholders.
8
This line of research is consistent with stewardship theory (Donaldson
& Davis, 1991).
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 369
Similarly, it was considered that the Hampel
Report(1998) , published in Britain, was aligned with the
belief that active institutional shareholders may contribute
positively towards ?nancial performance. As Solomon and
Solomon (2004: 131) indicated:
‘‘It is clearly an implicit assumption of the Hampel
Committee and other proponents of shareholder activ-
ism that institutional investors’ intervention in investee
companies produces higher ?nancial returns.’’
Despite the increased scrutiny of governance processes,
the scandals continued. The outbreak of the corporate fail-
ures in the early 2000s, such as Enron, WorldCom, Global
Crossing, and Parmalat, further increased the salience of
the issue of corporate governance. These corporate failures
were considered to be caused, at least partially, by the mis-
application of some aspects of agency theory by corpora-
tions (Dobbin & Jung, 2010). It was said that corporate
boards only gained symbolic independence, with more
outsiders and smaller sizes, and became more responsive,
but they did not discipline management because they
remained under the thumb of the chief executive of?cer
(ibid.).
In response to the outbreak of the scandals in the early
2000s, a new wave of governance reforms took place. The
idea that corporate governance and ?nancial performance
are potentially linked continued to underlie policy docu-
ments issued at that time. As stated in the Higgs Report
(2003):
‘‘Good corporate governance [. . .] is an integral part of
ensuring successful corporate performance, but of
course only a part. [. . .] successful entrepreneurs and
strong managers, held properly to account and sup-
ported by effective boards, drive wealth creation.’’
Similarly, the OECD called for a survey to assess the
Principles of Corporate Governance issued in 1999 before
revising this regulation. When reporting the assessment
results, the OECD stated that it reviewed a body of ‘‘empir-
ical work showing the importance of corporate governance
in determining company performance and economic
growth’’ (OECD, 2004: 4). This indicates that the idea that
corporate governance and ?nancial performance are
potentially linked was acknowledged publicly by the
OECD, even if it might not have explicitly informed the for-
mulation of the updated Principles. The dictate of agency
theory continued to shape governance reforms, although
some regulatory proposals were seen to still fail to address
the failures in the implementation of this theory by com-
panies
9
(Dobbin & Jung, 2010).
Institutional investment
Agency theory is said to have a more thorough effect on
the corporate world than any other theory from academia
(Dobbin & Jung, 2010: 36; cf. Guillen, 1994). This theory
succeeded because it was promoted directly by institu-
tional investors and fund managers (Dobbin & Jung,
2010: 35). For instance, institutional investors have pro-
moted speci?cally the notion of board monitoring under
agency theory (ibid., 45). Correspondingly, they have
shared the belief that corporate governance and ?nancial
performance are potentially linked.
Such link has been articulated by institutional investors
in conjunction with their activism towards corporations
that emerged in the mid-1980s and ?ourished in the
1990s.
10
Shareholder activism, as Smith (1996: 227)
explained, aims ‘‘to bring about changes in the organisa-
tional control structure of ?rms [that is] not perceived to
be pursuing shareholder-wealth-maximising goals’’. The for-
mation of the Council of Institutional Investors (CII) in the
US in 1985 marked the beginning of shareholder activism
by institutional investors (Gillan & Starks, 1998). The Coun-
cil was formed on the part of large public pension funds to
lobby for shareholder rights and hold investee companies
accountable.
One primary assumption underlying shareholder activ-
ism is considered to be the promotion of sound governance
practices as a means to improve ?nancial performance and
shareholder value (Eisenhofer & Levin, 2005). This means,
active shareholders believe that corporate governance
and ?nancial performance are positively linked. As Dale
Hanson (1993), former chief executive of the California
Public Employees’ Retirement System (CalPERS), a pioneer
of shareholder activism, stated:
‘‘CalPERS has no motives other than to improve corpo-
rate performance so that investment value is increased
[. . .]. We seek a return to corporations being account-
able to their shareholders. If accountability exists, we
are con?dent that corporate performance will follow.’’
Alastair Ross Goobey, former chief executive of Hermes
Pensions Management in Britain, further elucidated that
shareholder activism may potentially lead to enhanced
investment return:
‘‘We see corporate governance [. . .] as part of our ?du-
ciary duty to our clients in identifying the business risks
[. . .] to enhance our investment process accordingly
[. . .] Hermes believes that an active shareholder
involvement can help release the higher intrinsic value
of the company.’’ (Quoted in Sparkes, 2002)
Institutional investors became more concerned about
corporate governance after the outbreak of the corporate
scandals in the early 2000s (Tricker, 2009; Young, 2003).
They have perceived more strongly the link between cor-
porate governance and ?nancial performance. According
to a survey conducted by McKinsey & Company (2002),
investors believed that corporate governance can make a
9
For instance, Dobbin and Jung (2010) argue that the Sarbanes–Oxley
Act has failed to lead to true ‘board independence’.
10
Before the mid-1980s, individual activists and religious groups in
America challenged corporations on social or moral issues (Hendry,
Sanderson, Barker, & Roberts, 2007). Shareholder activism by institutional
investors, particularly by public pension funds, emerged ?rst in America in
the mid-1980s. From the early 2000s, especially in Britain, ‘new share-
holder activism’ by mainstream institutional investors (e.g. wholesale and
retail asset management funds, pension funds, and the investment arms of
life assurance companies) started to surface (ibid.). This paper refers to
activism that is exerted by mainstream institutional investors.
370 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
difference to the bottom line of a ?rm. It was reported that
the majority of investors surveyed would be prepared to
pay 12% more for the shares of a well-governed UK com-
pany and 14% more for the shares of a well-governed US
company, compared to the shares of companies with sim-
ilar ?nancial performance but poorer governance. As
Mallin (2004: 74) commented on the survey results:
‘‘It is [. . .] the investor’s [. . .] belief that corporate gover-
nance is important and that belief leads to the willing-
ness to pay a premium for good corporate governance.’’
Almost in parallel, i.e. since the early 2000s, a group of
institutional investors have come to view corporate gover-
nance, which is part and parcel of the notion of ‘ESG’ or
‘extra-?nancial issues’, as potentially having material
impacts on ?rm performance and shareholder return over
the long-term
11
(EAI, 2004). For instance, in its Global Prin-
ciples of Accountable Corporate Governance, the CalPERS
(2009: 17) stated that it
‘‘[. . .] believes that environmental, social, and corporate
governance issues can affect the performance of invest-
ment portfolios (to varying degrees across companies,
sectors, regions, and asset classes through time.)’’
Other constituents of the investment community have
echoed institutional investors regarding the potential link
between governance and other extra-?nancial issues and
long-term ?nancial performance. For instance, fund man-
agement ?rms, insurance companies, and investment
banks taking part in the Financial Sector Initiative Who
Cares Wins overseen by The United Nations Global Com-
pact claimed:
‘‘[. . . We] are convinced that in a more globalised, inter-
connected and competitive world the way that environ-
mental, social and corporate governance issues are
managed is part of companies’ overall management
quality needed to compete successfully. Companies that
perform better with regard to these issues can increase
shareholder value [. . .].’’ (The UN Global Compact,
2004: i)
This emerging thinking about the link between corpo-
rate governance and long-term ?nancial performance is
consistent with the spirit of agency theory. Under agency
theory, executive interests are supposed to align with the
long-term interests of shareholders (Dobbin & Jung,
2010). However, agency theory seemed to have been
misapplied in the business world. For instance, boards
compensated executives for increasing share price in the
short-term. This has led to the widespread view that
executive interests were aligned more with those of fund
managers who focused on increasing portfolio value in
the short-term than with long-term shareholder interests
(ibid.). The emerging idea that corporate governance and
long-term ?nancial performance are linked seems to
constitute an important step towards correcting some per-
ceived mistakes in the application of agency theory in the
corporate world.
Institutional investors and fund managers not only have
articulated the idea that corporate governance and ?nan-
cial performance are potentially linked. Compared to aca-
demics and policy makers, they have also taken one step
further and explicitly called for the integration of corporate
governance and other extra-?nancial issues into asset
management, securities brokerage services, and buy-side
and sell-side research functions. As Kay Carberry, director
of the Trade Union Congress Superannuation Society in
Britain, stated:
‘‘There is a growing recognition amongst pension funds
and fund managers that the management of extra ?nan-
cial or intangible issues by companies is essential for
their long-term performance [. . .]. Without comprehen-
sive analysis of these issues, investors will continue to
base investment decisions on a partial view.’’ (Quoted
in EAI, 2005)
The incorporation of governance criteria into the invest-
ment process has even been considered capable of helping
to achieve some broader aspirations and objectives in
economy and society. It was suggested:
‘‘[. . .] a better consideration of environmental, social
and governance factors will ultimately contribute to
stronger and more resilient investment markets, as well
as contribute to the sustainable development of socie-
ties.’’ (The UN Global Compact, 2004: i)
Accordingly, integrating ESG criteria into the invest-
ment process has become an ideal to be sought and an
agenda to be pursued within the institutional investment
community. Instead of treating environmental, social, and
governance issues as undifferentiated, a report issued by
the European Centre for Corporate Engagement (2007: 2)
suggested that corporate governance forms ‘‘a separate
category’’. As the report explained:
‘‘[. . .] corporate governance should not be bundled
together with other ESG factors. [. . .] corporate gover-
nance has a much more direct effect than any of the
other factors on the company’s bottom line and perfor-
mance; in particular, its ability to promote effective
managerial decision making and to prevent opportunis-
tic behaviour that decreases ?rms’ value.’’ (ibid., 9)
The distinctiveness of governance issues has also been
highlighted in a report issued by The United Nations
Global Compact (2009: 24):
‘‘[There is a] need to differentiate between E, S and G in
assessing progress in investment research [. . .].’’
In short, corporate governance integration is part and
parcel of the overall agenda for incorporating extra-?nan-
cial issues, or ESG criteria, into the investment process.
Given the special nature of governance issues perceived
by ?nancial market participants, corporate governance
integration has become a stand-alone calculative practice
11
This was triggered largely by the adoption of the idea of ‘socially
responsible investment’ (SRI) in the institutional investment community in
the US and UK (Sparkes, 2002). SRI used to be a fringe activity of some unit
trusts and mutual funds. Since the late 1990s, it has become an important
consideration by mainstream institutional investors. The terms ‘ESG’ and
‘extra ?nancial issues’ are adopted mostly by members of the institutional
investment community to capture factors that may have material impact
on ?rm performance and shareholder value in the long-run.
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 371
that has attracted special attention. As the next section
demonstrates, analysts have not only been put under pres-
sure to engage in corporate governance integration, but
also seen to be the specialists in doing so.
Exploring corporate governance integration by analysts:
pressure and credibility
The initial articulation within the investing public of the
aspiration of incorporating governance and other extra-
?nancial issues into the investment process in the early
2000s coincided with the need to transform sell-side
research at that time. Sell-side research that considers
ESG issues became to be viewed as more relevant, innova-
tive, and valuable (EAI, 2004; Hunt & Williams, 2003).
Some asset owners and managers created informal net-
works to collectively encourage analysts to integrate gov-
ernance and other extra-?nancial issues into investment
analyses.
12
As Thamotheram (2005), former Chair of the
Steering Committee of the Enhanced Analytics Initiative
(EAI), one notable industry-led network formed in 2004,
commented on sell-side research on extra-?nancial issues:
‘‘Good analysts much prefer doing interesting and intel-
lectually challenging work than the repetitive, mecha-
nistic commentary on last quarters ?gures. [. . .] at a
time when the analyst business model is being squeezed
by regulatory attention [. . .] EAI represents a clear state-
ment by a growing pool of international clients who are
clear about what they are happy to pay for!’’
Similarly, as mentioned in a report issued jointly by the
World Business Council for Sustainable Development
(WBCSD) and The United Nations Environment Programme
Finance Initiative (UNEP FI), Colin Monks, the then Head of
European Equity Research at HSBC, stressed the impor-
tance of sell-side research on ESG criteria:
‘‘It is becoming clear that sustainable development will
be one of the major drivers of industrial change over the
next ?fty years and that there is a growing demand
from both companies and institutional investors to
understand its ?nancial impacts. It follows therefore
that the successful brokers will be those that anticipate
this demand, respond to it with robust ?nancially
relevant research and thereby differentiate themselves
in an increasingly crowded marketplace.’’ (WBCSD and
The UNEP FI, 2004: 3)
The increased demand from the investing public for
more relevant and innovative sell-side research came at a
timely occasion when the analyst business model was sub-
ject to regulatory scrutiny and reform viewed to be neces-
sary. Performing research on ESG criteria, where corporate
governance is an important element, and incorporating
them into investment analyses, could become a step
forward for the transformation of sell-side research.
Undertaking ESG research may offer a new opportunity
for brokerage ?rms to re-conceptualise the way in which
sell-side research could and should be conducted. Whilst
traditional sell-side research was in doubt, analysts were
viewed to have the imperative to engage in a new domain,
namely, corporate governance integration.
Without addressing directly the problem associated
with sell-side research, other ?nancial market participants
have also considered integrating ESG issues into invest-
ment analyses to be an imperative for analysts. As the
twenty ?nancial institutions (including mostly asset man-
agement ?rms, insurance companies, and investment
banks) have jointly expressed in the reports issued by
The United Nations Global Compact:
‘‘Analysts should improve their understanding of the
link between ESG performance and value creation and
more actively communicate with companies on these
issues.’’ (The UN Global Compact, 2004: 33)
and
‘‘[. . .] developing and integrating environmental, social
and governance (‘‘ESG’’) issues in investment is inevita-
bly becoming an obligation for mainstream analysts
and decisions makers.’’ (The UN Global Compact,
2005: iii)
The Chartered Financial Analyst (CFA) Institute, a global
association of investment professionals, has suggested the
need to integrate ESG criteria into investment analyses:
‘‘[. . .] ?nancial professionals worldwide have a duty to
act in the best interests of their clients and ultimate
bene?ciaries. There is an increasing recognition of the
need to include the analysis of ESG factors in order to
more completely ful?ll this duty [. . .].’’ (CFA Institute,
2008: 3)
It appears that analysts have been put under pressure to
integrate corporate governance into investment analyses.
Their work in this area has indeed been perceived to be sig-
ni?cant for the investment community as a whole. As the
report issued jointly by the WBCSD and The UNEP FI
(2004: 3) has articulated:
‘‘Analysts’ views on environmental, social and gover-
nance issues are critical to sustainability. [. . .] Securities
analysts produce forecasts, valuations and opinions on
the securities they track. This research is in?uential
throughout the investment world, with investors, asset
managers and rating agencies among the clients relying
on this information. The extent to which analysts incor-
porate [ESG] issues into their assessments in?uences
whether markets reward or penalise companies’ perfor-
mance in these areas.’’
More importantly, analysts havebeenseentopossess the
expertise in performing the task of corporate governance
integration and been granted with the credibility to do so.
When the proposal for incorporating ESG criteria into
investment analyses was set out initially, a consistent
understanding of how to do it was not seen to have been
developed (The UN Global Compact, 2004: 1). How gover-
nanceissues couldandshouldbe integratedintoinvestment
analyses was yet to be explored. Amongst actors in the
12
The other evidence that the work of analysts is client driven is provided
by Imam et al. (2008). They ?nd that the recent popularity of discounted
cash ?ow models used by analysts re?ects the preferences of fund
managers and institutional investors.
372 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
investment chain, including fund managers, brokers, and
buy-side and sell-side analysts, sell-side analysts have been
viewed as ‘‘the specialists best placed to show how ESG
issues impact company and investment value’’ and to play
a ‘‘leading role’’ in exploring corporate governance integra-
tion (ibid., 37). Analysts were also believed to have the
capacity:
‘‘[. . .] to take an active role in testing and re?ning the
investment rationale for ESG integration in research
and investment decisions [. . . and to] further develop
the necessary investment know-how, models and tools
in a creative and thoughtful way [to] better deal with
qualitative information and uncertain impacts related
to ESG issues’’ (ibid., ii, 10 & 28)
Fund management ?rms and the asset management
departments of investment banks that constituted the
Asset Management Working Group under The United
Nations Environment Programme Finance Initiative also
considered:
‘‘[. . . analysts to be able] to identify speci?c [corporate
governance and other extra-?nancial] criteria likely to
be material for company competitiveness and reputa-
tion [. . . and] to the extent possible to quantify their
potential impact on stock price.’’ (The UNEP FI, 2004: 4)
The CFA Institute played a crucial part in attempting to
equip its members with the knowledge and tools to deal
with ESG issues. To provide investors and securities
analysts with a way to assess the governance policies of
companies and the associated risks, the CFA Institute Cen-
tre for Financial Market Integrity published The Corporate
Governance of Listed Companies: A Manual for Investors. As
indicated in the Manual:
‘‘It is our hope that all Investors – be they existing
Shareowners, potential Investors, or analysts – can use
this information as part of their analyses and valua-
tions, in light of their particular investment perspec-
tives, objectives, and risk-tolerance levels, to evaluate
a Company.’’ (CFA Institute, 2005: 1)
At some brokerage ?rms, analysts deal with governance
issues primarily on an individual and piecemeal basis
within the sector teams to which they belong (EAI, 2005).
However, in the early 2000s, major brokerage houses such
as Deutsche Bank, Citigroup, Goldman Sachs, JP Morgan,
Merrill Lynch, and UBS, amongst others, established dedi-
cated research teams within their equity research divisions
to focus attention on governance and other extra-?nancial
issues.
13
Analysts working in these specialist teams took the
initiative to explore systematically the integration of ESG
criteria into investment analyses and seek to demonstrate
the importance of extra-?nancial issues in determining
shareholder value. As the CFA Institute has acknowledged:
‘‘[. . .] a number of investment banks already employ
dedicated ‘‘ESG teams’’ who are charged with
evaluating relevant issues and incorporating them into
the larger equity analysis processes.’’ (CFA Institute,
2008: 3)
To summarise, analysts have been put under pressure
to integrate governance and other extra-?nancial issues
into investment analyses and perceived to be able to
develop the know-how to accomplish this task. The issues
of how analysts interpret ideas related to the potential link
between corporate governance and ?nancial performance
and what devices they have deployed to render corporate
governance integration operational will be addressed in
the next section. That section also reveals how these activ-
ities performed by analysts may further contribute to the
development of their expertise in corporate governance
integration.
Theorizing and operationalising corporate governance
integration
Analysts working within specialist ESG or SRI teams at
brokerage ?rms have advanced an agenda for exploring
ways in which corporate governance may be integrated
into investment analyses. In this process, ideas related to
the potential link between corporate governance and
?nancial performance are ‘theorized’ by analysts, particu-
larly with the aid of certain material tools and devices
(Greenwood & Hinings, 2006; Sahlin-Andersson &
Engwall, 2002; Strang & Meyer, 1993). Furthermore, ana-
lysts have attempted to combine the assessment of the
governance of a company with its broader investment the-
sis. This is also a theorization process where analysts
develop normative mechanisms and models to ful?l the
objective of incorporating governance issues into the
investment process.
The agenda of analysts for exploring corporate governance
integration
Consistent with the perception that a consistent
approach to incorporating governance into the investment
process has not been formulated (The UN Global Compact,
2004: 1), analysts have considered their work in this
domain to be exploratory. Analysts may be seen to build
their expertise in an emerging, but immature ?eld of prac-
tice. They have proffered an agenda for exploring ways in
which governance issues may be integrated into invest-
ment analyses:
‘‘[. . .] we identify some of the potential implications of
corporate governance to the investment process. [. . .]
We identify the facts and behavioural differences
impacting a company’s governance standards and
explore ways to integrate theminto the investment pro-
cess in a systematic way.’’ (Grandmont, Grant, & Silva,
2004: 6)
Meanwhile, the work performed by analysts appears to
be shaped strongly by ideas related to the potential link
between corporate governance and ?nancial performance
13
The specialist teams in some brokerage ?rms, including Citigroup, JP
Morgan, Deutsche Bank, and Merrill Lynch, were discontinued in the end of
2008. Commentators attributed these incidents to the ?nancial crisis that
was sparked in 2007 (Wheelan, 2008). The ?nancial crisis forced brokerage
?rms to reduce cost by cutting headcounts, including cutting staff
employed in the specialist teams.
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 373
that have been articulated in academic research, public
policy making, and institutional investment. As revealed
from an analyst report:
‘‘[. . . We] believe that the quality of corporate gover-
nance can affect the volatility of the price of risk, at
the level of market, sector, and company, and therefore,
can affect the performance of investment portfolios.’’
(Hudson & Morgan-Knott, 2008: 3)
Other analysts also shared similar interpretations of the
potential link between corporate governance and ?nancial
metrics. Agency theory, advocating the ‘shareholder value’
model of the ?rm, appears to underlie some of these inter-
pretations, even though this theory is not acknowledged
explicitly by analysts. For instance, as indicated by
Grandmont et al. (2004: 14):
‘‘We hypothesize that corporate governance standards
affect the way a company is run and, consequently, its
pro?tability. It is logical to predict that companies and
boards that are focused on maximizing shareholder
value tend to be better run and have better returns.’’
Furthermore, as consistent with the views of some com-
mentators (Dallas & Patel, 2004), analysts have framed cor-
porate governance as a risk factor in the investment
process. For instance:
‘‘[. . . C]orporate governance is potentially a signi?cant
source of risk at the level of country, sector, and com-
pany.’’ (Hudson & Morgan-Knott, 2008: 17)
and
‘‘It is now increasingly accepted that corporate gover-
nance and extra-?nancial risk metrics encompassing
environmental and social factors are components of a
company’s equity risk premium [. . .] Incorporating
these risk metrics into the investment decision-making
process is a necessary – and ultimately – pro?table step
for portfolio managers.’’ (Grant, 2005: 1)
Ideas related to the potential link between corporate
governance and ?nancial metrics and the belief that corpo-
rate governance is a risk factor, it may be argued, rational-
ise the corporate governance integration conducted by
analysts. However, the potential link between governance
and ?nancial performance has not been accepted by ana-
lysts at face value. Instead, some analysts have expressed
their mis-trust in the link. Hudson and Morgan-Knott
(2008: 4 & 15), for instance, stated that they
‘‘[. . .] do not believe the governance rating would neces-
sarily explain potential performance in isolation [. . .] it
is unlikely to be very easy to make a direct association
between governance and share price performance.’’
Consequently, to pursue the agenda for exploring cor-
porate governance integration, ?rst of all, some analysts
draw upon some tools and devices to seek to further theo-
rize the relationships between corporate governance and
?nancial metrics, even though they have been studied by
others, such as academics. With these relationships being
examined by analysts themselves, they explore ways in
which governance criteria may be considered in relation
to ?nancial information in the investment process. This
approach to exploring corporate governance integration
has been set out explicitly by some analysts:
‘‘We quantify and measure corporate governance stan-
dards and explore the relationships between corporate
governance and risk (e.g. volatility) and their implications
for pro?tability, stock price performance and equity valua-
tion. With these links we can start to evaluate companies
and equity portfolios by comparing their inherent corpo-
rate governance risks.’’ (Grandmont et al., 2004: 6)
Quanti?cation of corporate governance
Before examining the link between corporate gover-
nance and ?nancial metrics, analysts attempt to get gover-
nance issues measured and quanti?ed. Some analysts
make use of the quanti?cation provided by corporate
governance rating ?rms, such as the GovernanceMetrics
International (GMI). Others develop their own measure-
ment of the governance procedures of companies.
To quantify governance issues, some analysts focused on
corporate governance factors that ‘‘represent international
best practices as well as being indicators of equity risk’’
(Grant, 2005: 5). These analysts identi?ed a total of 50 cor-
porate governance factors and treated them as 50 data
points. Each data point was weighed depending on whether
it was consideredbyanalysts as a ‘primary’, ‘secondary’, ‘ter-
tiary’, or ‘information’ issue of corporate governance best
practice (see Tables 1 and 2). For example, according to
Table 1, ‘Independent Chairman’ is treated as a ‘primary’
issue. A ‘primary’ issue, based on Table 2, is referred to as
‘‘a deliberate stance to disadvantage minority investors or
a factor identi?ed as price/valuation sensitive’’ and given
‘3x weight’ in the generation of a governance score.
For each company examined, an overall assessment
score was sought to be generated. This score was presented
on an ‘absolute scale’, ranging from0% to 100%.
14
For exam-
ple, Burberry was givena score of 38%, whilst BHP BillitonPlc of
82%(Grant, Grandmont, &Silva, 2004: 17 &31). This indicates
that the governance system of BHP Billiton Plc appears to be
superior to that of Burberry by 44%. Additionally, the change
inthe qualityof the governance procedures of companies over
time has been considered by analysts. Such change is mea-
sured by the ‘momentum score’. It was generated, as
highlighted in analyst reports, through ‘‘compare[ing] each
company’s underlying current governance data to its own
available historical data’’ (Grandmont et al., 2004: 9).
In short, quanti?cation of corporate governance is an
essential step towards the theorization of the link between
governance criteria and ?nancial metrics and the com-
bined assessment of corporate governance and ?nancial
performance conducted by analysts. Through the mecha-
nism of quanti?cation, qualitative information about
corporate governance is transformed into quantitative
information, differences between the governance proce-
dures of different companies are transformed into
14
Analysts did not describe in their reports how they actually derived the
absolute scores based on the 50 data points and the weights. This does not
affect the current empirical analysis. Here, it is the mechanism adopted by
analysts of quantifying governance criteria that is of interest.
374 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
magnitudes, and a common metric, namely, the corporate
governance score, is generated.
Theorizing the link between corporate governance and
?nancial metrics
Due to their mis-trust in the link between governance
and ?nancial performance, some analysts have set out to
investigate this link and seek to develop their own ‘theori-
zation’ of the link (Greenwood & Hinings, 2006; Sahlin-
Andersson & Engwall, 2002; Strang & Meyer, 1993). This
theorization is characterised by the deployment by ana-
lysts of certain material tools and devices, which may be
viewed as inscriptions (Latour, 1987). These ‘calculative
devices’ render the link between corporate governance
and ?nancial metrics newly visible, measurable, and calcu-
lable. They also help to construct knowledge about the link
(cf. Robson, 1992).
First, ‘portfolio analyses’ have been performed by ana-
lysts. These analyses are considered to be the use of:
‘‘[. . .] ?nancial metrics to compare best from worst per-
formers for a given set of [. . .] corporate governance cri-
teria against existing stock portfolios. The comparison
helped [to] evaluate the ?nancial impact of chosen cri-
teria.’’ (The UNEP FI, 2004: 7)
Some analysts constructed two equally weighted portfo-
lios fromthe US S&P500 index based only on corporate gov-
ernance criteria (Grandmont et al., 2004; Grant, 2005; Grant
et al., 2004). The ?rst portfolio consists of stocks of compa-
nies with above average
15
absolute governance scores and
positive momentum scores
16
between 07/02/2001 and 30/
06/2003. The second portfolio comprises stocks of companies
with belowaverage absolute scores and negative momentum
scores for the same period. These analysts plotted the price
performances of the two portfolios over the two-year period
in a graph (see Graph 1). This graph reveals that the ?rst port-
folio (darker trajectory) has a higher average market price
than the second portfolio (lighter trajectory). Given this
observation, these analysts claimed:
‘‘[C]ompanies with above average assessment & posi-
tive momentum outperformed those with below aver-
age assessment & negative momentum [. . .]
investments in companies with the highest quality of
governance structures and behavior have signi?cantly
Table 1
Figure 13 from Grant et al. (2004: 38) Source: PIRC, Deutsche Bank estimates and company data.
Director independence Information disclosure
Chairman Information Directors state compliance with Combined Code Primary
CEO Secondary Individual directors attendance is disclosed Secondary
Independent Chairman Primary Compensation /policy changes fully explained Secondary
Number of board members Tertiary Fully independent audit com w/at least 3 memb Primary
Number of independent directors Primary Total non-audit fees as% of total fee Secondary
CEO other directorships/positions Secondary Number of audit committee meetings last FY Tertiary
No director attends more than 4 board meetings Secondary Audit Com has right to engage outside advisors Tertiary
Directors attend more than 4 boards Secondary Audit Com includes at least 1 ?nancial expert Secondary
Number of board meetings in last FY Secondary Political contributions (GBP) Information
Number of directors with 9+ years tenure Tertiary Process for board appraisal is disclosed Secondary
There is a named senior independent director Tertiary Process for succession planning is disclosed Secondary
% independence: Audit, Nom., Remun. Comt. Primary Transparent recruiting system for new directors Secondary
Shareholder treatment Corporate compensation
Each ordinary share has equal voting rights Primary CEO appointment year Information
Other share type Tertiary CEO’s last FY salary Information
Authorised/Issued shares Secondary CEO’s last FY bonus Information
All directors face election every year Primary CEO’s other emoluments Information
There is no controlling shareholder Secondary CEO’s share option gains Information
No persons have right to designate directors Secondary CEO’s LTIP gains Information
All new LTIPs/ESOs are put to vote Tertiary CEO’s pension gains Information
All voting conducted equitably and by poll Tertiary CEO total compensation Information
Issued shares under option Primary All components of salary are fully disclosed Secondary
Directors required to build up sig. equity stake Secondary Comp. liability on termination of contract stated Tertiary
Directors interests Primary All directors with 1+ year of service own stock Secondary
No director has a contract in excess of 1 year Secondary Maximum potential awards are disclosed Tertiary
Modi?ed from: Grant et al. (2004: 38).
Table 2
A table modi?ed from Grant et al. (2004: 37)
Primary issues 3 Â weight A deliberate stance to disadvantage minority investors or a factor identi?ed as price/valuation sensitive
Secondary issues 2 Â weight A failure to follow international best practice standards
Tertiary issues 1 Â weight A failure to follow pro-active corporate governance policies
Information issues No weight Of relevance to institutional investors but not scored
Modi?ed from: Grant et al. (2004: 37).
15
This ‘average’ is the average governance absolute score computed by
analysts for companies in the US S&P500 index.
16
A positive momentum score means that a ?rm improves its governance
standard over time. A negative momentum score signals that the gover-
nance standard of a company deteriorates.
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 375
outperformed those with the weakest governance’’
(Grandmont et al., 2004: 10).
By constructing two portfolios based only on gover-
nance criteria, tracking their price performances, and
revealing the price performance differential through a
graph, knowledge about the link between corporate gover-
nance and share price has been constructed. Thanks to the
portfolio analysis, which involves the use of both ?nancial
and governance information, and the graph, the way in
which the link between corporate governance and share
price may be looked at has been transformed. This link is
now rendered newly visible, material, and tangible.
Portfolios constructed based on corporate governance
criteria have also been deployed in ‘event analyses’.
Analysts, such as Grant (2005: 16), investigated whether
companies from the UK FTSE350 index announcing posi-
tive governance reforms around the annual general meet-
ing (AGM) date would outperform companies disclosing
deteriorating governance standards. Grant built two
equally weighted portfolios for companies ‘‘with the most
identi?able momentum – top and bottom 5% of [the UK
FTSE350] index’’.
17
The price performances of these two
portfolios were plotted in a graph (see Graph 2). According
to this analysis, Grant (ibid., 17) argued that the portfolio
of companies disclosing deteriorating governance standards
(lighter trajectory) underperformed the portfolio of compa-
nies announcing positive governance reforms (darker trajec-
tory) over the 90-day analysis period around the AGM date.
This event analysis constructs further knowledge about
the link between corporate governance and ?nancial met-
rics. That is, change in the governance of companies may
have an impact on share price. This knowledge is con-
structed through the building of two portfolios based only
on governance criteria, the tracking of their price perfor-
mances over time, and the visualisation of the price perfor-
mance differential in a graph. Once again, with the
deployment of certain inscriptions by analysts, the poten-
tial link between corporate governance and ?nancial met-
rics has been rendered into a newly visible and material
form.
Similar to academics, analysts have adopted regression
analyses to investigate statistically the relationships
between the governance standards of companies presum-
ably captured by governance scores and ?nancial metrics
such as share price, valuation, and accounting performance
(Hudson & Morgan-Knott, 2008: 15). Some analysts argued
that ‘‘corporate governance standards affect the way a
company is run and, consequently, its pro?tability’’
(Grandmont et al., 2004: 14). They examined the relation-
ship between corporate governance and pro?tability for
companies within the UK FTSE350 index. Three measures
of pro?tability were considered: ‘Return on Equity’ (ROE),
‘Return on Assets’ (ROA), and ‘Earnings Before Interests,
Tax, Depreciation and Amortisation Margin’ (EBITDA Mar-
gin). The quality of the governance procedures of compa-
nies was measured by the absolute governance scores
that these analysts have developed. To investigate the
association between corporate governance and ?rm pro?t-
ability in a statistical manner, regressions were run, with
pro?tability being the dependent variable and corporate
governance being the independent variable. The regression
model appears to be
18
:
Profitability ¼ a þb Corporate Governance þe
Graph 1. Figure 6 from Grant et al. (2004: 10).
17
This means that one portfolio comprises stocks of companies whose
momentum scores are higher than those received by 95% of the companies
in the UK FTSE350, and the other includes stocks of companies whose
momentum scores are lower than those received by 95% of the companies
in the same index.
18
Compared to academics, analysts deploy a relatively simple model.
Without comparing the technical pro?ciency of the two approaches,
academics at least seek to control for non-governance effects, i.e. they
appear to challenge the effect of governance on performance more strongly
than analysts. It is beyond the scope of this paper to compare the work of
analysts in this area with that of academics in detail.
376 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
These analysts found that the governance scores
received by companies are positively correlated to all three
measures of pro?tability. For instance, for the relationship
between corporate governance and ROE, the regression
result is ROE = 0.2518Corporate Governance + 0.1128,
where the coef?cient for the independent variable is posi-
tive (Grandmont et al., 2004: 14). The relationships
between each pro?tability measure and corporate gover-
nance were also represented in graphs. As revealed from
the graph depicting the result from the regression between
ROE and corporate governance (see Graph 3, the regression
line is upward sloping. This con?rms that ROE and corpo-
rate governance tend to be positively correlated. With
the use of regression analyses, the link between corporate
governance and ?rm pro?tability is established statisti-
cally. This link has also been visualised with the regression
lines being plotted in graphs. Another new visibility of the
link between corporate governance and ?nancial metrics
has been created. This link has once again been trans-
formed into a material and tangible form.
Nevertheless, the link between corporate governance
and ?nancial metrics cannot always be established as
expected. For instance, although corporate governance
and the price earnings ratio have been perceived to be
positively correlated, one analyst noted:
‘‘[. . .] within the UK life insurance sector there appears
to be a decreasing relationship between the governance
rating and price earnings ratios (P/E), although there is
no statistically signi?cant data to back up this conclu-
sion.’’
19
(Walker, 2008: 1)
Accordingly, the results from the investigation into the
link between corporate governance and ?nancial metrics
have been viewed by analysts to be sector-speci?c. The
results are also seen by analysts to depend on the level of
analysis, namely, individual ?rm level, industry level, or
market level. The examination conducted by some analysts
of the relationship between corporate governance and
stock valuation for companies within the US S&P500 index
clearly demonstrates this. Here, three measures of valua-
tion were considered: Price to Earnings (P/E), Price to Book
Value (P/BV), and Price to Cash Flow (P/CF). The relation-
ships between each of these measures and the governance
scores developed by analysts were studied. It was noted:
‘‘[. . .] while for the Food & Staples Retailing sector the
relationship shows that companies with higher gover-
nance standards trade at higher valuation multiples,
the same cannot be said for the Capital Goods sector.’’
(Grandmont et al., 2004: 22)
When further re?ecting upon their results, Grandmont
et al. (2004: 23) remarked:
‘‘[. . .] there is no US market-wide correlation between
corporate governance and equity valuations.’’
In summary, analysts have sought to theorize the link
between corporate governance and ?nancial metrics. In
this theorization process, the calculative devices deployed
by analysts render this link newly visible, measurable, and
calculable. Knowledge about this link is produced. ‘Knowl-
edge’ in this formulation is an outcome ‘‘of the technolo-
gies for inscribing’’ the link (Robson, 1992: 689). Analysts
have gradually been building their expertise in discovering
this link. The deployment of portfolio, event, and regres-
sion analyses and the graphs has allowed analysts to
Graph 2. Figure 23 from Grant (2005: 17).
19
Walker (2008) examined only seven UK life insurance companies.
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 377
perform systematic investigations into the link between
corporate governance and ?nancial metrics, and to develop
their own interpretations of this issue. What analysts have
produced may also be viewed as ‘information knowledge’
about the link as it involves some degrees of ‘‘interpreta-
tion, calculation, accounts, and explanation’’ (Knorr
Cetina, 2010: 172).
Not all perceived relationships between corporate gov-
ernance and ?nancial metrics can be ascertained. However,
the associations between these two categories that have
been con?rmed by analysts appear to reinforce the idea
that governance criteria need to be incorporated into the
investment process. They also rationalise the corporate
governance integration conducted by analysts. Some ana-
lysts have even considered the weak correlation between
corporate governance and market valuation of some com-
panies as being induced by the inability of investors to
incorporate governance assessments into valuation models
on a timely basis due to lack of effective tools (Grandmont
et al., 2004: 24). It is for this particular reason that these
analysts have claimed to develop certain frameworks to
help portfolio managers and investors ‘‘incorporate gover-
nance systematically throughout stock selection’’ (Hudson
& Morgan-Knott, 2008: 1).
Combining corporate governance with ?nancial metrics
The development of frameworks by analysts to help
investors ‘‘incorporate governance systematically through-
out stock selection’’ is also a ‘theorization’ process. In this
process, certain principles and mechanisms are norma-
tively developed by analysts to seek to bring corporate
governance into the investment process. Speci?cally, ana-
lysts have sought to combine the assessment of the gover-
nance of companies with the assessment of their
investment thesis driven by pro?tability, equity valuation,
and stock price performance mainly on a case-by-case
basis. The overarching principle is to seek an alignment
between the governance assessment of a ?rm and its
broader investment thesis.
Such an alignment occurs, according to analysts, when a
company whose governance rating is above sector average
achieves above sector average pro?t, market valuation, and
stock price performance, or vice versa. When the ?nancial
performance of a company and its governance pro?le are
not aligned with each other, as analysts suggested, further
investigation is needed to determine whether the company
is worthy of being chosen for investment. This principle of
‘alignment’ is informed largely by the positive link
between corporate governance and ?nancial metrics that
has been discovered by analysts. This principle is adopted
irrespective of how the governance assessment is per-
formed. Hudson and Morgan-Knott (2008: 23), who uti-
lised the governance ratings of the GMI, stated:
‘‘[. . . We] look for an alignment between the overall
governance rating according to GMI, and the broader
thesis driven by fundamentals, valuation, and/or share
price performance, as appropriate.’’
Hudson and Morgan-Knott (2008) have provided some
illustrations of the combined analysis of corporate gover-
nance and ?nancial metrics by focusing on companies in
the UK beverage sector. As they noted, Britvic was given
high scores by the GMI. From a ?nancial perspective,
DeRise, an equity research analyst who values the stocks
of Britvic, suggested that ‘‘Britvic is cheap and defensive’’
(Hudson & Morgan-Knott, 2008: 23). Accordingly, Hudson
and Morgan-Knott (2008) considered the governance
assessment for Britvic as aligning well with its broader
investment thesis. They viewed the low governance risk
of Britvic to be in line with the ‘buy’ recommendation pro-
vided by DeRise. As Hudson and Morgan-Knott (ibid.)
commented:
‘‘Britvic is not only ‘‘cheap and defensive’’, but also
brings the additional comfort of a strong governance
pro?le.’’
Graph 3. Figure 16 from Grant et al. (2004: 14).
378 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
Nevertheless, inconsistencies between governance
assessment and broader investment thesis appear. Whilst
Carlsberg was given very low scores by the GMI, DeRise still
recommended investors to buy its shares. DeRise provided
a justi?cation for the ‘buy’ recommendation that Hudson
and Morgan-Knott (2008: 5) endorsed and re-produced
in their own report:
‘‘Though Carlsberg has a low governance rating, we con-
tinue to recommend the stock as Buy. [. . .] we believe
Carlsberg’s growth story from S&N cost synergies and
ongoing restructuring of the ‘‘old’’ Carlsberg business
is compelling and not factored into the current share
price.’’
A similar approach is adopted by other analysts in their
attempt to integrate corporate governance into investment
analyses, but with some additional tools and devices
deployed. For instance, Grant et al. (2004) have sought to
demonstrate the mechanisms through which corporate
governance information could be used in conjunction with
?nancial information in the selection of stocks for invest-
ment. As these analysts explained:
‘‘Our objective is to incorporate the corporate gover-
nance risk factor into the investment decision making
process [. . .] we add corporate governance information
as a further layer to traditional fundamental analysis
in order to select stocks for inclusion (or exclusion)
from portfolios. [. . .] This analysis allows us to identify
companies whose governance-valuation-pro?tability
measures are [. . .] inappropriately priced by the mar-
kets, allowing us to generate long and short stock
ideas.’’ (Grant et al., 2004: 57)
The ‘governance-valuation-pro?tability’ analyses devel-
oped by these analysts may be seen as the theorized mech-
anisms through which governance criteria may be brought
into investment analyses. They involve combined assess-
ment of corporate governance and ?rm pro?tability, or
corporate governance and equity valuation. These analyses
are performed with the deployment by analysts of speci?c
inscription devices, namely, the ‘governance-to-pro?tabil-
ity’ and ‘governance-to-valuation’ graphs. In this way, the
ideal of corporate governance integration is materialised
and transformed into concrete and tangible apparatuses
(Czarniawska & Joerges, 1996; Czarniawska & Sevon,
2005). Also, the ‘governance-valuation-pro?tability’ analy-
ses and graphs help to construct knowledge about the rela-
tionship between the governance standard of a company
and its pro?tability or valuation relative to that of the
other company in the same industry. This knowledge
may potentially provide investors with some input to
make stock selection decisions.
For instance, Grant et al. (2004) adopted ‘governance-
to-pro?tability’ analyses to compare the investment
potential of two general retailers, namely, Signet Group
Plc and Burberry Group Plc. They used ROA as a measure
of pro?tability and developed a ‘corporate governance vs.
ROA’ graph (see Graph 4). The horizontal axis of this graph
shows the governance scores that analysts have issued to
companies in the general retailers sector, and the vertical
axis measures the ROA of these ?rms. The horizontal line
in the middle indicates that the average ROA for companies
in this sector was approximately 10% in 2003. The vertical
line in the middle indicates that the average governance
score for this sector was about 54% in 2003.
Corporate governance and ROA were perceived to be
positively correlated. Analysts considered that a company
whose governance score is above the sector average would
have an above sector average ROA, and that it would
appear in the top right rectangle of the graph. A company
whose governance score is below the sector average would
have a below sector average ROA, and it would appear in
the bottom left rectangle. For these two scenarios, the gov-
ernance assessment and the broader investment thesis
may be seen to align with each other. When a company
appears in the top left or bottom right part of the graph,
Graph 4. Figure 59 from Grant et al. (2004: 64).
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 379
analysts tended to view the governance assessment of the
?rm and its broader investment thesis to be mis-aligned.
According to Graph 4, Signet is located in the top right
rectangle. This suggests that the governance standard of
Signet was aligned with its pro?tability measured by ROA
in 2003. The governance score of Signet and its ROA both
exceeded the sector averages. However, Burberry appears
in the top left part of the graph. This indicates that the gov-
ernance standard of Burberry and its pro?tability did not
align with each other. The quality of the governance proce-
dures of Burberry was signi?cantly below the sector aver-
age, although it achieved an above sector average ROA in
2003. Together with the similar insights revealed from
the other ‘governance-to-pro?tability’ analyses utilising
ROE and EBITDA Margin as measures of pro?tability,
Grant et al. (2004: 64) noted:
‘‘[. . .] on a governance-to-pro?tability measurement
[. . .] when compared to Burberry Group Plc, Signet
Group Plc offers similar levels of pro?tability for a lower
corporate governance risk.’’
Accordingly, analysts suggested that Signet shall be the
target for ‘long investing’ and Burberry for ‘short invest-
ing’.
20
This investment strategy is further reinforced by the
results of the ‘governance-to-valuation’ analyses. Grant
et al. (2004) considered three measures of valuation: P/E
ratio, P/CF ratio, and P/BV ratio. The logic behind these anal-
yses is exactly the same as that of the ‘governance-to-prof-
itability’ analyses. The ‘governance-to-valuation’ analyses
reveal that, for both Signet and Burberry, their governance
standards were inconsistent with their share valuations in
2003. As Grant et al. (2004: 65) commented:
‘‘Signet Group Plc trades at a signi?cant valuation dis-
count to the sector on a P/E and P/BV basis while enjoy-
ing a much lower governance risk factor than the
average company in the sector. Conversely, Burberry
Group Plc trades at valuation rates that are much richer
than the sector average while having a higher corporate
governance risk than the sector average.’’
As these analysts have demonstrated, based on the
results from the ‘governance-valuation-pro?tability’ analy-
ses, investors who ‘long’ the shares of Signet and ‘short’
those of Burberry would potentially generate a positive
return. This investment strategy is informed simulta-
neously by the governance assessment and the broader
investment thesis driven by pro?tability and equity
valuation.
In summary, the ‘governance-valuation-pro?tability’
analyses and graphs bring governance information and
?nancial information together and render the integration
of governance criteria into investment analyses opera-
tional. Both corporate governance and ?nancial metrics
are inscribed into a form that companies as potential
investment objects could be evaluated and compared.
Clearly, the ‘governance-valuation-pro?tability’ analyses
and graphs are put into place by analysts. As ‘theorizing
agents’, analysts have managed to transform the notion
of ‘corporate governance integration’ from an idea, aspira-
tion, and agenda into a bundle of material, concrete, and
tangible tools and devices. It is through this assemblage
formed between ideas, aspirations, tools, and devices that
the expertise of analysts in corporate governance integra-
tion may be seen to have gradually been formed.
Recognition of and concern about the corporate governance
integration performed by analysts
As illustrated above, analysts have turned the agenda
for exploring the integration of corporate governance into
investment analyses into practice. They appear to have
translated ideas and discourses pertaining to corporate
governance integration into material, concrete, and tangi-
ble inscriptions. The expertise of analysts in this new
domain, namely, corporate governance integration, is seen
to start being developed. In a recent report issued by The
UN Global Compact (2009: 8 & 23), analysts were praised
for their achievement
‘‘[. . .] in developing the analytical frameworks and dem-
onstrating the rationale for [corporate governance]
integration in investment research [. . . and analysts]
have demonstrated that quantifying ?nancial impacts
of [environmental, social, and governance] issues [. . .]
is absolutely within the reach of the analysts’
profession.’’
Despite the recognition gained so far, concern about the
corporate governance integration performed by analysts
has been expressed. As indicated in a report of the
European Centre for Corporate Engagement (2007: 2):
‘‘[. . .] the lack of a universally accepted methodology for
quantifying ESG data makes it dif?cult to incorporate
extra-?nancial information into their analyses.’’
Similarly, in a report issued jointly by The UNEP FI and
Mercer (2007: 52), a consulting ?rm, sell-side research on
governance and other extra-?nancial issues has been
scrutinised:
‘‘[. . .] the systematic translation of ESG factors into
quantitative inputs and ?nancial ratios used in invest-
ment appraisals is [still] less developed.’’
Regarding sell-side research on corporate governance
issues more speci?cally, other commentators have
claimed:
‘‘Research on governance issues progressed somewhat
both in quantity and in quality. However, [. . .] gover-
nance is still greatly under-covered relative to its
importance.’’ (EAI, 2008: 6)
To summarise, so far, analysts employed within special-
ist teams at brokerage ?rms appear to have conducted sys-
tematic analyses to seek to incorporate governance criteria
into investment analyses and gradually developed their
expertise in this new domain. This has been recognised
by other ?nancial market participants. Nevertheless, the
20
For ‘long investing’, according to Grant et al. (2004), the stocks of a
company with above sector average governance assessment, improving
momentum, and low valuation are bought by investors. For ‘short
investing’, investors may sell the stocks of a company whose governance
risk is high and that trade at a valuation premium.
380 Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384
corporate governance integration that analysts have
attempted to perform is ultimately an emerging form of
economic calculation. The nature and quality of their
expertise in this new domain is still open to interpretation.
Discussion and conclusion
Integrating corporate governance into the investment
process is an emerging form of economic calculation and
an immature ?eld of practice that may leave room for
expertise to develop. This study has examined how sell-
side ?nancial analysts have come to develop their exper-
tise in this new domain, with particular attention to the
calculative ideas and calculative devices through which it
is achieved. This paper has traced certain ideas and aspira-
tions shaping and articulating corporate governance inte-
gration. It has attended to the arguments and discourses
that constructed analysts as the ‘specialists’ in performing
this particular form of economic calculation. The paper has
also examined the tools and devices deployed by analysts
that render corporate governance integration operational.
The expertise of analysts in performing corporate gover-
nance integration, that is to say, has been built as these
ideas, discourses, aspirations, tools, and devices have
assembled.
Some existing research has considered mainly the
expertise of traditional sell-side investment research
(Beunza & Garud, 2007; Fogarty & Rogers, 2005; cf.
Preda, 2007). The issue of how analysts develop expertise
to operate in a new domain has not been systematically
examined. This paper has addressed this limitation in the
literature. Particularly, it is shown that analysts appeared
to develop their expertise in a new ?eld, namely, corporate
governance integration, at a time when the quality of their
traditional ?nancial analysis work was questioned and
thrown into doubt.
21
As discussed previously, in the early
2000s, traditional sell-side research was problematised and
subject to regulatory scrutiny. Almost at the same time,
the aspiration of incorporating governance and other
extra-?nancial issues into the investment process started
to be articulated within the institutional investment com-
munity. Analysts were encouraged to integrate governance
criteria into investment analyses, as this was seen to be a
step forward for the transformation of sell-side research.
More importantly, not only the CFA Institute, but also insti-
tutional investors and fund managers, have considered that
corporate governance integration is imperative for analysts
to conduct and that analysts possess the knowledge and
credibility to do so.
Analysts, however, have not appeared to intend to
achieve ‘enclosure’ over their expertise in corporate gover-
nance integration (Power, 1992; Rose & Miller, 2010). At
least an intention to achieve enclosure has not been
re?ected in the discourses of the analyst professional asso-
ciation. In other words, analysts may not prepare to
involve themselves in contest with other professions for
the ‘jurisdiction’ of corporate governance integration (cf.
Abbott, 1988). Meanwhile, institutional investors and fund
managers have not claimed that analysts are the only
experts in this new domain. When the aspiration of corpo-
rate governance integration was set out initially, effort was
called for from different functions along the investment
chain, including asset management, securities brokerage
services, and buy side and sells side investment research
(The UN Global Compact, 2004: 1). Integrating governance
criteria into the investment process, that is to say, requires
cooperation and collaboration between different profes-
sions (cf. Gendron et al., 2007), even though the contribu-
tion made by sell-side analysts may potentially be
signi?cant. These unique insights from this paper are
meant to add to those already contained in the existing lit-
erature on professional expertise in economic sociology
and the sociology of accounting, particularly enhancing
our understanding of the wider social context in which
professional expertise is developed.
This study has built on the literature on economic cal-
culation that addresses both the ‘programmatic’ and the
‘technological’ dimensions. The paper has attended to the
‘calculative ideas’ attached to corporate governance inte-
gration. First, it has traced ideas and discourses about the
potential link between corporate governance and ?nancial
performance articulated in academic research, public pol-
icy making, and institutional investment in the last three
decades of the 20th century. Second, the paper has exam-
ined the ideal of integrating governance criteria into the
investment process that started to be articulated in the
institutional investment community in the early 2000s.
Meanwhile, this study has analysed the ‘calculative
devices’ deployed by analysts. These include portfolio,
event, and regression analyses, ‘governance-valuation-
pro?tability’ analyses, and various graphs. This paper has
taken one step further and attended speci?cally to one of
the consequences of the assemblage formed between cal-
culative ideas and calculative devices as a developmental
process over time, that is, the constitution of calculative
expertise. This assemblage formed might be temporary
and fragile (cf. Miller, 1986). As this paper has illustrated,
the expertise constituted is contingent upon certain histor-
ical conditions and may by no means be stable forever. This
analysis of corporate governance integration and the
expertise developed in performing this form of economic
calculation has shed new light on our understanding of
the constructive nature of professional expertise.
Aligned with the ‘governmentality’ literature, this study
has attended to the role of expertise as ‘relay’. Given the
limitation of this literature of not addressing properly
how expertise stabilises linkages between programmes
and speci?c technologies (Gendron et al., 2007: 103), this
paper has articulated more fully the ‘relay’ aspect at issue
here by referring to the notions of ‘carrying’ and ‘theoriza-
tion’ drawn from neo-institutional analyses. In light of
these concepts, analysts have been viewed in this paper
to serve as a link between calculative ideas and calculative
devices. Speci?cally, when processing ideas related to the
potential link between corporate governance and ?nancial
performance, analysts ‘theorize’ and represent these ideas
discursively as well as with the deployment of material
21
Gendron et al. (2007: 124) also report that the Of?ce of the Auditor
General of Alberta constructed expertise in measuring government perfor-
mance ‘‘in a climate of scepticism and self-doubt’’.
Zhiyuan (Simon) Tan/ Accounting, Organizations and Society 39 (2014) 362–384 381
tools and devices. Analysts have attempted to combine the
governance assessment of a company with its broader
investment thesis. As this paper has illustrated, this is also
a theorization process where analysts normatively develop
certain principles and mechanisms to seek to render corpo-
rate governance integration operational. The theorization
by analysts, as demonstrated in the paper, is part and par-
cel of the process of constructing their expertise in corpo-
rate governance integration. Without this theorization,
corporate governance integration may not be presented
in ways that make it receptive to the claims of a particular
form of expertise, that of analysts.
This study has several implications for future research.
First, the paper has focused mainly on analysts who work
for specialist teams in the equity research divisions of bro-
kerage ?rms. The extent to which and ways in which the
outputs generated by these analysts are utilised by their
counterparts in the equity research divisions, namely, ana-
lysts who value stocks and offer investment recommenda-
tions, and by institutional investors and fund managers,
deserve further investigation. Also, as shown in this paper,
the credibility granted to analysts to explore corporate
governance integration has been re?ected to a great extent
in the views of other ?nancial market participants, such as
asset owners and fund managers. For future research, one
may examine howthese other constituents of the investing
public actually interact with the expertise of analysts in
corporate governance integration. Equally, it would be
valuable to interview analysts to ?nd out how they per-
ceive the knowledge they have developed in corporate
governance integration and to what extent they actually
see themselves as experts in this domain.
Furthermore, this paper has demonstrated that the cal-
culative devices deployed by analysts construct knowledge
about the link between corporate governance and ?nancial
metrics. One may further argue that the inscribing of such
link is a process of ‘performativity’ that helps to make this
link ‘become true’ (Mackenzie, 2006). For future research,
one may investigate to what extent and how the discourse
of corporate governance, and the calculative devices that
have enabled its assessment as part of the investment pro-
cess, have made its importance self-ful?lling. Nevertheless,
one may take a critical stance on the corporate governance
integration undertaken by analysts. Future research may
question the extent to which the corporate governance
analysis conducted by analysts is essentially ritualistic in
nature and whether the involvement of analysts in corpo-
rate governance integration is purely for marketing
purposes.
Whilst this future research is important, this paper has
investigated how analysts become to be recognised as pos-
sessing expertise to operate in a new domain, namely, cor-
porate governance integration. This expertise is not given,
but gradually constructed. It is through the ensemble
formed over time between certain ideas, discourses, aspi-
rations, arguments, tools, and devices that this particular
form of expertise has come to be developed. This way of
conceptualising the construction of professional expertise
may inform our understanding of the rise of expertise in
other ?elds of calculative practice. Empirically, this study
has added new insights into shifts into a new role for cor-
porate governance consideration in the thinking and prac-
tice of analysts. The paper may also serve as a starting
point for investigation into further issues related to corpo-
rate governance integration performed by analysts or by
other ?nancial market participants.
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