Corporate Governance Rating
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RATING THE RATINGSAn efficient study on; How Good are Commercial
Governance Rating
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Introduction to CGR
CGR Agencies
CGR Relevance
CGR Criticisms
Conclusion
AGENDA
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What is CGR ?
The system by which
corporations are directed
and controlled.
The valuation of those
systems done by several
organizations
Corporate Governance Corporate Governance Rating
Characteristics: •CG Ratings are set by different independent rating agencies •CG Ratings are valuated by investors when taking investment decisions
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The rising importance of
good governance
(OECD principles)
Higher concern
regarding CG quality.
The recent
corporate scandals
Why is CGR important?
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Potential Users of CGR Governance
consulting firmsSmall
investors
Executive search firms
Accounting firms
Institutional investors
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Why are institutional investors the primary users of CGR?
Destruction of the bank myth
Growing awareness of fiduciary duty mainly among institutional investors
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Introduction to CGR
CGR Agencies
CGR Relevance
CGR Criticisms
Conclusion
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CG Rating Agencies Institutional Shareholders Service (ISS) Governance Metrics International (GMI)
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is a leading provider of proxy voting and corporate governance services to institutional investors
ISS governance scoring tools
ISS Corporate Governance Quotient, 2002
Government Risk Indicator (GRID), 2010
ISS Quick Score since 2013
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is a quantitatively-driven data solution designed to identify governance risk within portfolio companies.
ISS Governance QuickScore is designed to help institutional investors:
identify and monitor potential governance risk
drill down on companies with governance risk
identify companies with which to engage on governance issues
access detailed data to inform their own investment models
advance compliance on mandates
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ISS Governance QuickScore Coverage
4,100 companies in 25 markets, the largest 3,000 U.S. and 250 Canadian companies plus UK, Europe, Japan and Asia Pacific companies
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ISS Governance Quick Score Methodology A quantitatively-driven approach Governance attributes Company level deciles scores A regionalized scoring approach
Anglo Region – United Kingdom, Australia, Ireland and New Zealand Asia Pacific Region – Hong Kong and Singapore Western European Region— Belgium, Luxembourg, Netherlands and France Nordic Region – Denmark, Finland, Norway and Sweden Southern European Region – Italy, Spain, Cyprus and Greece Germanic Region – Germany, Austria and Switzerland
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The Corporate Library (1999) was a leading independent provider of research and ratings designed to help institutional investors evaluate corporate governance practices as an element of overall investment risk.
Governance Metrics International (2000) developed in-depth coverage of governance risk profiles of 4,200 companies, including the complete MSCI World Index and extensive Emerging Market coverage.
Audit Integrity (2002) developed Accounting and Governance Risk
(AGR®) ratings for approximately 18,000 public companies worldwide.
was formed in 2010 through the merger of three independent companies
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GMI Environmental, Social and Governance (ESG) ratings
• GMI Accounting and Governance Risk (AGR) ratings
Forensic Alpha Model (FAM)
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GMI’ Environmental, Social and Governance (ESG) Ratings
Key characteristics
Fall 2013 6,000 companies worldwide 150 carefully selected risk factors organized
into six categories two forms: as percentile scores ranging from 1
to 100, and as a letter grade (“A” to “F”)
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GMI Accounting and Governance Risk Rating Key characteristics
19,000 companies worldwide based on discrete risk factors organized into
categories such as revenue recognition expense recognition asset-liability valuation governance risks and high-risk events
two ways: as a percentile score ranging from 1 to 100, and in corresponding categories ranging from Conservative to Very Aggressive
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Introduction to CGR
CGR Agencies
CGR Relevance
CGR Criticisms
Conclusion
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Corporate Governance Criteria
CG Ratings…
Rights and duties of shareholders assesses the position of a shareholder in a company in terms of rights and obligations
Range of takeover defenses shows an objective mathematical approach for checking the probability to resist a hostile bid
Disclosure on corporate governance assess the level of transparency on a company’s corporate governance
Board structure and function assesses the accountability, independence and functioning of the governing bodies
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Good CG Rating Vs. Weak CG Rating= improves profits and
increases company valuations
= greater access to financing
= lower cost of capital= better performance
= more favourable treatment of all
stakeholders
= poor firm performance
= risky financing patterns
= makes firms susceptible to
macroeconomic crises
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Shareholders (Majority and Minority) Majority Shareholders • •To understand how management is promoting the interests of
the shareholders. • •To understand the relative degree of transparency at a firm • •To guide existing and new investments: both strategic and
portfolio investment
Minority Shareholders •To appreciate how management treats minority shareholders vis-
a-vis majority Creditors (Counterparties, Investors, Lenders) • To use as a guide or as conditionality for lending decisions • To understand how management promotes the interests of
financial stakeholders • To guide rollover or new lending decisions
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Board Directors • To understand the relative standing of existing governance
practices as a form of self assessment • To use as benchmarks for improvement • To reduce directors’ liability insurance premia • To provide additional information to attract new directors
to join the board • To help orient new directors about a company’s
governance processes Managers • To understand the relative standing of existing governance
practices • To use as benchmarks for improvement • To communicate governance standards as an investor
relations tool (annual reports, websites, advertising, etc)
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Introduction to CGR
CGR Agencies
CGR Relevance
CGR Criticisms
Conclusion
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CGR Criticisms How reliable is the underlying theory of CG, in
particular the relation between good CG practices and higher performance?
Are the cultural and contextual differences between companies, taken into consideration by CGR agencies?
There is a correlation between the different ratings system?
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CGR Criticisms –CGR & Stock value
Good governance practices
Higher
stock value
Focus on short or long-term
stock performance?
There is an ideal time frame?
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CGR Criticisms – Definition of ´´good´´ Governance
What is ´´good´´
Governance?
How should factors be weighted?
What factors constitute good
Governance?
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CGR Criticisms – Ratings´ value
The value of the ratings were
confirmed by studies sponsored by CGR
agencies
Little correlation among the different
rating agencies
ISS changed recently it´s rating system
Uniform scale for assessing a firm´s
governance
CGR have either limited or no success
in predicting firm performance
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Introduction to CGR
CGR Agencies
CGR Relevance
CGR Criticisms
Conclusion
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Conclusion How reliable is the underlying theory of CG, in
particular the relation between good CG practices and higher performance?
Not 100% reliable. Are the cultural and contextual differences between
companies, taken into consideration by CGR agencies? No, they are not. There is a correlation among the different ratings
system? Recent studies showed small correlation.
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References • Corporate governance rating- by Dario Lo & Karina • Gawer, Joseph “Corporate Governance Scores and Long Term
Performance”, December 2012 https://umsbe.wufoo.com/cabinet/m7z8a3/BDVBV9KqC24=/corporate_ governance_scores_and_long_term_performance_2013_gawer.pdf
• GMI Ratings website, http://www3.gmiratings.com • Institutional Shareholder Services Inc. ISS Governance QuickScore,
January 2013 http://issgovernance.com/files/ISSGovernanceQuickScoreTechDoc.pdf
• Keisuke Nitta. ´´Corporate Governance Rating (CGR)- A More Efficient Approach to Corporate Monitoring, ´´Financial Research Group, 2013. http://www.nliresearch.co.jp/english/economics/2002/eco020613.html
• Khanna, Vikramaditya. "Corporate Governance Ratings: One score, two scores, or more?” University of Pennsylvania Law Review ,Vol. 158: 39 PENNumbra, 2009. http://www.pennlawreview.com/responses/index.php?id=80
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Conclusion Different studies in Corporate governance rating and firm
performance lead to different results
CG rating can not give an accurate forecast about firm
performance
Investors should not base entirely on commercial CGR in their
investment decision
More time needs to be invested into the perfection of
governance rating databases
Need for greater use of qualitative research method, like
directors interviews
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THANK YOUARYA ABISHEK