Corporate governance ratings: Case Study Analysis
The practice to publish the ratings of corporate governance was initially started between the years 2000 to 2002. This was primarily based on the high concern over the increased engagement of corporate managers in fraudulent practices for inflating the operating outcomes for an artificial boost of the share prices and to successfully enrich themselves. Such actions or practices tend to be associated with a significant loss of the debtholders and shareholders. Therefore, the core purpose of the government rating organizations was based on the measurement of the governance practices of the organizations and was then ranked depending on their system’s strength.
The organizations responsible for governance ratings mainly included ‘The Corporate Library (TCL), Governance Metrics International (GMI), and Institutional Shareholder Services (ISS). The governance rating criteria of all three organizations differ from one another. Among all the three organizations, ISS was considered as the largest proxy advisory organization worldwide with approximately1700 institutional clients to manage the equity securities of about $25 trillion. Thus, all the ratings tend to be completely based on the information that is available publicly. (Tayan, 2007)
Despite the acceptance of sound policies for the protection of the shareholder’s interest from self-interest corporate managers, many questions had arisen concerning the usefulness of publishing governance ratings. Questions were mainly based on the relevance to summarize the system of governance into single and numerical form. Additionally, there were allegations that the engagement of ISS in a conflict of interest was through the sale of the consulting services to the organization to bring significant improvement in their ratings which led to questioning the objectivity of the process of governance ratings.
Value of Government Ratings:
Considering the wide-ranging flow of investor-relevant information from the organizations responsible for security issuance, it has been difficult for private organizations to keep up with the updated information. Therefore, the organizations that tend to represent the governance ratings are primarily based on the collection and analysis of the information from potential security issuing organizations. The importance of governance ratings lies in the provision of incentives for the boards of the organizations to follow the good practices of corporate governance. The highly relevant dimensions in the transparency process and information disclosure tend to be based on the independence and integrity of suppliers of ratings and the research analysts of the stock market. (Morten Balling, 2013)
Similarly, the classification of corporate governance attributes is known to bring improvement in discrimination based on the quality of governance. On the other hand, the corporate governance ratings allow the business entities to significantly obtain a credible and independent assessment of the extent and quality of their respective corporate governance. It also assists in the determination of the relative position of a particular entity that is known to follow the best corporate governance practices. Such ratings can also be used by different organizations as a reference and set targets serving as a key factor for their improvement. Additionally, investors and other stakeholders demonstrate their capability for the differentiation of organizations with a change in corporate governance. (Officials, 2019)
Preference of rating method:
Considering the differences in the governance rating system of each organization, the rating by TCL for the assessment o the governance risk is based on the use of grade scale ranging from A to F. The grading of the organizational corporate governance tend to be based on the four components i.e. board and succession planning of the organization, compensation practices of CEO, takeover defenses, and concerns over broad-level accounting. Whereas the scoring by GMI tends to be based on 600 discrete variables categorized into six main groups i.e. corporate behavior, the market for control, remuneration, shareholder rights, financial disclosure and internal controls, and board accountability. In contradiction, the score given by ISS to each organization is referred to as Corporate Governance Quotient. The analysis of the organizational information tends to include 65 variables grouped in eight broad categories such as director education, equity ownership by executives and board members, qualitative factors, executive and director compensation, state of incorporation., charter and bylaw provisions, audit, and board of directors…………………………..
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