RATING THE RATINGSAn efficient study on; How Good are Commercial

Governance Rating

Introduction to CGR

CGR Agencies

CGR Relevance

CGR Criticisms

Conclusion

AGENDA

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

The rising importance of

good governance

(OECD principles)

Higher concern

regarding CG quality.

The recent

corporate scandals

Why is CGR important?

Potential Users of CGR Governance

consulting firmsSmall

investors

Executive search firms

Accounting firms

Institutional investors

Why are institutional investors the primary users of CGR?

Destruction of the bank myth

Growing awareness of fiduciary duty mainly among institutional investors

Introduction to CGR

CGR Agencies

CGR Relevance

CGR Criticisms

Conclusion

CG Rating Agencies Institutional Shareholders Service (ISS) Governance Metrics International (GMI)

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

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

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

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

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

GMI Environmental, Social and Governance (ESG) ratings

• GMI Accounting and Governance Risk (AGR) ratings

Forensic Alpha Model (FAM)

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”)

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

Introduction to CGR

CGR Agencies

CGR Relevance

CGR Criticisms

Conclusion

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

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

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

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)

Introduction to CGR

CGR Agencies

CGR Relevance

CGR Criticisms

Conclusion

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?

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?

CGR Criticisms – Definition of ´´good´´ Governance

What is ´´good´´

Governance?

How should factors be weighted?

What factors constitute good

Governance?

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

Introduction to CGR

CGR Agencies

CGR Relevance

CGR Criticisms

Conclusion

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.

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

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

THANK YOUARYA ABISHEK