NEW YORK -- UK companies continue to lead the way in terms of best practices in corporate governance and Canadian firms are a close second, according to recent ratings from New York-based Governance Metrics International (GMI).

Twice a year GMI looks at the corporate governance practices of 3,200 companies worldwide and rates them on scale from one to ten. As was seen in March, which is the last time GMI did this study, UK companies hold the top position with an overall governance average of 7.33. Similarly, Canadian firms continue to rank second with an average score of 7.31 and US companies come in third with a score of 7.

Notably, GMI's rankings suggest a link between good practices in corporate governance and shareholder returns. It finds that top-rated companies outperformed the S&P500 index by 15.19 percent in terms of total shareholder returns over a five-year period ending September 1, 2005.

The agency also compares the performance of US companies that received top grades (nine or above) to poor performing companies (three and below) in four out of the six studies they have conducted over the last three years. GMI discovers that firms that are consistent low scorers had an average shareholder return of 8.7 percent whereas well-governed companies achieved an average return of 15.9 percent over three years. During the same time period, the S&P500 had an average return of 11.9 percent.

Gavin Anderson, GMI's CEO, explains that companies with poor governance scores were more likely to have restated earnings and been subject to accounting investigations by regulators. 'These firms reported more related-party transactions involving senior officers and directors,' he says. 'They were more likely to have multiple classes of voting stock and their boards had fewer independent directors than companies with consistently good ratings.'

As part of this research, GMI also looks at the governance practices of controlled companies, which are identified as firms where a single entity holds at least 50 percent of the voting power. For this section, GMI analyzes 390 controlled firms including 152 from North America, 156 European companies and 82 headquartered in the Asia-Pacific region. It finds that, as a group, controlled companies achieve an average rating of five, significantly lower then the average score of widely held firms (6.5).

GMI also shows that controlled companies with the poorest results are mostly located in Asia and Europe. Out of the controlled firms achieving a rating of four or lower, 65.4 percent were from Europe, 25.6 percent from Asia Pacific, and 9 percent from North America. The most common governance issue for controlled firms is lack of independent directors on the board.

Some controlled companies strive to attain best practices in corporate governance, GMI finds. Examples from its rankings include Talbots (8.5), UnionBanCal (8.5), Genworth Financial (8), Interactive Data (8), Kraft Foods (8) and Telstra (8.5).

IROs should take note of findings linking best governance practices to shareholder returns, says Anderson. 'It is clear that there is some correlation between governance and performance and while corporate governance screening is not number one, and should not be the most important aspect of investment research, it is nonetheless an area that should be looked at as part of the overall research process,' he concludes.