Rating The Corporate Governance Raters
July 8, 2008
Corporate governance attracts much public attention since it purportedly involves the economic-financial health of corporations and society in general. However, corporate governance is poorly defined because it typically is composed of differing mix of policies, procedures, internal practices all surrounded by laws and regulations.
Simply put -
…the overall purpose of corporate governance, which is to align as nearly as possible the interests of individuals, corporations and society.
Theories of Corporate Governance Edited by Thomas Clarke
OK maybe that’s too simple. Here is a definition from Investopidia –
“Good corporate governance is a situation in which a company complies with all of its governance policies and applicable government regulations (such as the Sarbanes-Oxley Act of 2002) in order to look out for the interests of the company’s investors and other stakeholders.
The corporate need to be in compliance with corporate governance has shaped an industry of advisers, rating firms and other services with an estimated 2008 sales of $52 billion (corp-integrity.com). Perhaps the most influential of these companies are the rating agencies. These firms - which include the Corporate Library and RiskMetrics Group’s ISS Governance Services and S&P - analyze companies against their own criteria and rate whether a company is well governed or not.
These ratings may influence a company’s cost of capital, equity share price and shareowner relations. As such, the companies that compile these ratings have achieved a significant presence in world financial markets. But, there are some problems — extensive studies indicate these ratings bear little relation to actual corporate performance. A recent Fortune article summarized a Stanford University study widely different ratings for individual companies.
The Stanford researchers summarized their findings–
We examine these claims for the commercial corporate governance ratings produced
for 2005 by Audit Integrity, RiskMetrics (previously Institutional Shareholder Services),
GovernanceMetrics International, and The Corporate Library. Our results indicate that the level of predictive validity for these ratings are well below the threshold necessary to support the bold claims made for them by these commercial firms.(Emphasis added) Moreover, we find no relation between the governance ratings provided by RiskMetrics with either their voting recommendations or the actual votes by shareholders on proxy proposals.
Rating the Ratings: How Good Are Commercial Governance Ratings? Rock Center for Corporate Governance Stanford University
A summary of this report is available. The Stanford study is one of a number of other similar studies that question the value of these ratings agencies. Some common themes in these studies include –
- Over reliance on quantitative accounting/financial criteria
- “You can’t legislate compliance”
- More emphasis needed on observable qualitative criteria, such as corporate culture, drivers of employee behavior and corporate integrity practices.
This post only touches the surface of this important subject. Future posts will cover additional aspects of Corporate Governance ratings and related topics. In the meantime, here is a Canadian company that just might be a model of effective Corporate Governance practices –
Note the focus on Integrity, the public display of an “Integrity Hotline” and a clear display of compliance documents. Criteria the rating agencies miss.
If you're new here, and have enjoyed what you've read, you may want to subscribe to my RSS feed. Thanks for visiting!
Focusing on Standing Out
June 30, 2008
Corporations that cater to the every day consumer are always looking for business-smart ways to stand out and become more noticeable. They may choose to do this by offering a product or service that is so amazing that it creates a consumer buzz. Or, maybe they choose to stand out by offering massive savings on their product or service just to get new customers and keep the old ones. Whichever route they choose, the end goal is to make their name a possible household name for consumers. They want to be sure to stand out.
Think about this: Have you ever asked for a “Coke” in a restaurant instead of asking for a soft drink? Or maybe your kids have asked for “Corn Flakes” before when they really want a bowl of cereal. Name recognition like this is what most companies dream of having happen with their merchandise. They want to have you come to their product when you think of the name. They want to stand out.
In this age of Internet-savvy consumers, there is still competition for customer dollars when it comes to Internet search engines, keywords and rankings. Everyone wants to get to the stop, stay at the top and have consumers refer to them over and over again when it comes to their product or service. Creating a consumer buzz about a company’s merchandise takes careful planning, strategic marketing and perhaps even an outstanding product, although not always. However, in some instances, the product alone is not necessarily what attracts the consumer. Rather, in some cases it is the choices that are offered to consumers that keep them coming back for more. Wondering what and how? When consumers are presented with choices on how they can spend their consumer dollars, they feel more in control, more open. They like deciding which way to spend their dollars on broader choices rather than being given a couple of choices and then told which way to spend.
The buzz that companies want to create with consumers is getting them to talk about their experiences and to share those experiences with someone else. Most companies have achieved that goal when it comes to certain aspects of their company. Take for instance the movie rental company, Netflix. Netflix offers their customers multiple choices on a myriad of available movies to choose from for their viewing preferences. Netflix boasts a library of over 100,000 movies in stock. All genres are available for most every consumer’s taste and style choices. It is conceivable that almost every type of customer can be satisfied with the movies made available through Netflix. Compare this freedom of choice to the traditional brick-and-mortar companies like Lou’s Movie Rental or the Movie Gallery and you will notice a marked difference. You will see that these chain movie houses offer incredibly limited choices that can send customers leaving the store shaking their head in disappointment, or worst, settling for any available movie on the shelf. The business model that Netflix has and the way that they market to the public is what has made them so instantly famous and almost a household name. Also, don’t forget the added convenience that Netflix offers by bringing your selected movies right to your front door. That also makes it very hard to compete with them in customer satisfaction.
Customers that seek specific products want to be able to find what they need without feeling overwhelmed or frustrated. Limited choices can do this and can help businesses to lose customers. Companies like Netflix and those that cater to the every day consumer are diligent in their efforts to offer choices, and varied choices, to the consumer and keep their dollars coming back. Instead of the customer settling, they have control over their decision. Netflix and those that follow that type of business model are strong in consumer relations and can look forward to profitable relationships. When large corporations make their services readily available to the average consumer, they are establishing a solid customer base that spawns loyalty, faithfulness and the coveted word-of-mouth advertising that so many companies simply dream about.
What’s On The Minds of CEOs (Part 2)
June 27, 2008
This post will outline two more CEOs surveys –
- PricewaterhouseCoopers’(PWC) “11th Annual Global CEO Survey”
- The Center For Creative Leadership’s “Ten Trends”
PWC
In an increasingly connected world, what differentiates the business that thrives from that which merely survives? Our 11th Annual Global CEO Survey explores the impact of global connectivity on the sources of growth and risk, the way in which companies work and their relations with their stakeholders.
What’s On The Minds Of CEOs (Part 1)
June 24, 2008
I must admit, I have a strange hobby. I like to collect surveys of CEOs. But there is a benefit, I learn what issues CEOs say they are confronting. Now I would like to share some learnings from my hobby.
I will present summary results from four current surveys and indicate where you may obtain copies of the full surveys. Finally I will discuss items common in the surveys. Because of the length of the content, there will be two parts. This post will cover surveys from IBM and Forum consulting. The second post will cover PWC’s and CCL’s surveys and will include a summary review.
- IBM’s “Global CEO Study”
- Forum Consulting’s “Growth, Talent, and the Three C’s: A Review of Global Business Trends
- PricewaterhouseCoopers’ “11th Annual Global CEO Survey”
- The Center For Creative Leadership’s “Ten Trends”
Whistling For Attention
June 20, 2008
Somewhere around the time British Rail was privatised there was a wonderful quote from one of the presiding ministers: “Only 90% of passenger trains reach an eventual destination”.
Ever since then I’ve been deeply concerned about the remaining 10%. Are they lost out there somewhere, haunted by howling commuters, doomed forever to search for the Shangri-La of an “eventual destination”?
As well as showing how important it is for our leaders to think before speaking, this tale also demonstrates the inherent danger in relying upon statistics to prove a point.
So here’s another equally dubious one: less than 2% of UK companies encourage employees to raise their concerns if they believe their employer is breaking the law.
The rest, by definition, are either happy for such employees to approach the media, or are certain their employees will simply stay schtum.
Read more
