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VERSACE: Utilizing nonfinancial data in investment choices
Question of the Day
One of the more common comments I hear when it comes to investing money - be it in stocks, mutual funds, or other investments - is "but it's cheap." My response more often than not is "it's cheap for a reason."
I bring this up because numbers, metrics and benchmarking are all good and help the decision-making process when it comes to selecting a security to buy or sell, but they are not the only factor to consider. There are strategic factors, cost factors, competitor actions and changing economic and foreign exchange issues that all have an impact on a company and subsequently its stock price.
One area that more are looking to examine is "corporate." One company focusing on this is InvesGuard (www.invesguard.com), which uses its own proprietary models to examine more than 100 assessment points to grade a company on its corporate governance, the influence of its board of directors and the company's social impact. I recently had the chance to speak with Tejus Trivedi, one of the founders of InvesGuard.
Question: Tejus, tell us more about InvesGuard. What service does it provide and what kind of insight can investors glean from it?
Answer: InvesGuard researches and grades nonfinancial information on public companies. For years, academic research has proved that a public company's level of governance can be related to long-term corporate performance. Recent events in the financial world have also served as a catalyst to validate the role nonfinancial information can play in an investment decision. However, this information has unfortunately been available only to a select few and, by and large, the average investor has been ignored.
InvesGuard aims to fill in this gap by providing analyzed and easily digestible nonfinancial information for all. Our aim is not only to present such information in an easily understandable format but also to raise awareness and educate small investors on the relevance of nonfinancial factors while making an investment decision.
One of the chief areas that we analyze within nonfinancial information is the actual role that the board of directors and its committees play within a public company. The board's primary function is to protect shareholder interests but very often different indicators point toward a weaker, ineffective board. It is these indicators that go unnoticed for extended periods of time and surface only on the company's imminent collapse. We track and analyze such data and present it for the benefit of our subscribers. Besides categorizing our data in three levels, we also present this data within a downloadable widget that will automatically update itself each time the user is connected to the Internet. We are also working on a phone app so that users can check company ratings on the go.
Q: I understand that InvesGuard's model tracks a number of assessment points. What are some of them, where do you find them and how often is the data updated?
A: InvesGuard tracks a number of assessment points, especially those that showcase poor corporate governance as well the social and environmental impact of that company. Our model divides these data points into three levels such that the user can dig deeper within each successive level. At the topmost layer we have what we call the "Rolled Up" level - board of directors, internal control environment and social-environmental impact.
Within each of these "Rolled Up" levels we have "Core" subcategories. These include board effectiveness, board independence, conflict of interest, audit committee effectiveness, energy efficiency, emissions and lending practices. The best part of our model is that we have tried to stay relevant to each industry. For instance, in case of the banking industry, we comment on the lending practices of the company especially to minorities and the socially disadvantaged and the extent of such disclosures in their reporting process.
At the lowest level, we have "subterranean" data points that include information related to each "Core" subcategory. These include:
- Suitability of directors holding critical board committee positions such as the board finance committee or risk committees;
- Compensation elements including unreasonable perquisites;
- Transactions between senior management, directors or their associated firms and the public company;
- Directors and officers who have pledged company stock;
- Percentage of outside directors versus inside directors;
- Whether board members, particularly audit committee members, are overstretched in terms of the public company directorships they hold.
Our model also examines the tools and frameworks that set the tone for the public company's governance practices such as quality of the audit committee charter, audit committee report as well as the level of disclosures in the Corporate Social Responsibility Report related to carbon emissions, recycling efforts, waste management, etc.
Data is collected from public company filings as well as information that is published by the company itself. We track all the changes related to the companies in our database and every week the database is updated with all the changes for that week. We publish the date on which changes were last updated for each company.
Q: How do you see this fitting in with the rest of the homework that an investor, individual or institutional needs to do before making a buy or sell decision?
A: Financial figures, ratios and the rest have their role in making an investment decision. A layer of nonfinancial information over and above the basic financial analysis of a company can yield optimal results for an investor. Investors would do well to remember that nonfinancial information, like financial information, is just one piece of the investment puzzle. Used in conjunction with each other, they can shed more light on what is usually a complex decision.
Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston. He can be reached at firstname.lastname@example.org. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.
About the Author
Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
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