New Governance Rating Services: How Does Your Company Score?

Most companies are paying scant attention to reports about the quality of their governance practices. But that may soon change as investor and regulator interest rises.

If corporate executives and directors feel they have too many guns to their head, that's because they're an easy mark. And the pressure is likely to keep intensifying. New rating systems that gauge corporate governance practices at U.S. public companies give shareholders ammunition that could wound businesses in which governance is poor.

Institutional Shareholder Services, GovernanceMetrics International, Standard & Poor's and other agencies review corporate information, then churn out qualitative judgments of an organization's governance practices. (In S&P's case, the scores factor in interviews with key players inside and outside the company.) These ratings target the performance and policies of managers who have been focused during the past six months on Sarbanes-Oxley compliance. CFOs grappling with that law's requirements for auditor independence and internal controls may soon be peppered with questions from investors about their governance ratings.

George Dallas, London-based managing director and global practice leader of the Standard & Poor's governance services unit, which was launched last October, says his group helps investors assess corporate governance as a risk factor. In addition to initiating a process for assigning public U.S. companies what it calls a "corporate governance score" (CGS), S&P offers a standard reporting alternative to treatments such as pro forma, operating and as reported. This "core earnings" methodology, S&P asserts, gives investors a "more complete picture of a company's financial performance and the fundamental strength of its primary business."

Gavin Anderson, CEO of New York City-based GovernanceMetrics International (GMI), which was founded in April 2000 and unveiled its rating service last December, says CFOs should not wait to see how the investment community reacts to these new tools. "There is a huge groundswell of unease in the investor community and the public at large about governance practices," he says. "If I were a CFO at a large U.S. company, I would be trying to stay ahead of the curve and taking initiatives that demonstrate the kind of excellence in governance we all should be aiming for."