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Does Your Corporate Governance Rate?

By Matthew S. Brown
September 30, 2004

Why are companies and their boards, more than ever, aiming to assure investors of their commitment to best corporate governance practices? Significant new mandates by the SEC and stock exchanges regarding disclosure, governance, and accounting procedures are the legacy of Tyco, Enron, WorldCom, etc. Also, corporate governance issues have become matters of regular media reports and new publications focused on governance. Once passive institutional and retail shareholders have become increasingly vocal and successful on shareholder ballots. There is also an increasing amount of empirical data to support the position that better governance correlates to better shareholder value.

In the context of these developments, there have been established published rating systems that rank on an absolute basis, and analyze and compare the relative corporate governance practices of public companies. Directors should address the implications of the ratings programs and the criteria they use.

Why Should Directors and Executives Care About Corporate Governance Ratings?

  • Bad Press. Given the widespread media focus on corporate governance recently, it is clear that bad ratings can make good press. Ratings, including ones in investment firms' analyst reports, are now widely published.
  • Empirical Data. Although still not certain, empirical evidence is mounting that good governance correlates with increased shareholder value, and particularly bad governance sounds alarms for increased risk. These include recent studies jointly sponsored by ratings services to support the proposition that ratings are a valuable investment management tool.
  • Shareholder Activism. Irrespective of any empirical support for better corporate governance, directors and management cannot afford to dismiss the surge of shareholder activism at recent stockholder annual meetings. Shareholder resolutions are achieving unprecedented success and boards of directors are listening. For example, as of early July 2004, boards had taken steps to implement more than 70 majority votes on shareholder proposals calling for such measures as an end to poison pills and declassifying the board.

New Regulations Favoring Shareholder Governance

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