RiskMetrics releases new governance ratings
Feb 16, 2010
The proxy advisory firm scraps CGQ in favor of a more ‘transparent’ measure
Just in time for proxy season, RiskMetrics has unveiled its new governance rating tool and the successor to the Corporate Governance Quotient (CGQ): the Governance Risk Indicators (GRIds). The new system, touted as more transparent and comprehensive than its predecessor, will use answers to more than 70 questions to identify a company’s ‘level of concern’ across four categories: audit, board, compensation and shareholder rights. In a departure from the previous approach, GRIds will rate companies according to their jurisdiction’s best practices, as defined by RiskMetrics, rather than according to their peer group. In another new move slated to increase transparency and facilitate annual updates, RiskMetrics will link GRIds to their proxy voting recommendations.
RiskMetrics has indicated that it will issue the scoring criteria in the next two weeks, and in early March, a data verification site where issuers can review their scores will be accessible. By late March, companies who have not yet held their annual meetings will see their GRIds on proxy research reports as well as Yahoo! Finance and Bloomberg News. Companies with an earlier meeting date will see their scores by June 30th. Given the relatively quick implementation, David Berger, partner at law firm Wilson Sonsini & Goodrich, recommends companies start to familiarize themselves with the risk indicators now. Once company information is available, Berger suggests a prompt and thorough review to ensure accuracy. David Drake, president of proxy solicitation firm Georgeson, seconds the advice to carefully monitor what has been published: ‘Even if the impact of governance ratings on voting is marginal, the ratings are still very public…It makes sense to closely monitor the scores, and the data used to derive them, to make sure that you are not unfairly downgraded in error.’
Despite the marketing buzz, GRIds are not anticipated to substantially increase a recommendation’s weight. ‘Even with the changes, we continue to believe that ratings will have a marginal impact on voting,’ Drake says. Anne Sheehan, director of corporate governance at CalSTRS, affirms Drake’s belief, describing RiskMetrics’ rating as ‘just one piece of data into our own assessments.’ That said, however, both Drake and Berger counsel against completely ignoring the new system. ‘RiskMetrics, for better or for worse, is the dominant player among proxy advisory services, Berger says. ‘It would be fool hardy for a board to put its head in the sand and ignore what RiskMetrics is saying.’ Indeed, given that the governance scores are public, ‘negative ratings can show up in media coverage, and it’s still possible that activist public pension funds may use them as a screening tool to target companies,’ Drake warns.
Although the full impact of GRIds remains to be seen, support for the new system has been measured. Critics of RiskMetrics are not hard to come by; a lack of transparency and a one-size-fits-all approach to governance are oft-heard refrains, and it may not be much of a stretch to imagine GRIds as little more than cleverly disguised CGQs. Michael Ryan, president and chief operating officer at Proxy Governance, however, does admit that with GRIds, RiskMetrics at least appears to be making change: ‘Given their market influence and lack of transparency, I think they’re trying to change [people’s] perception and address concerns.’ Sheehan and her colleague in CalSTRS’ corporate governance group Janice-Hester Amey agree with Ryan, but go on to say that they ‘are optimistic about the changes.’ Berger, on the other hand, questions whether the new system truly moves away from a one-size-fits-all approach to corporate governance or whether ‘the change is more stylistic than substantive. It changes the packaging and the presentation is nice,’ he says, ‘but I think what they have done is more of a marketing effort to avoid some of the criticism they received from the prior system.’ Either way, any alleviation of criticism could be a boon for a company that is up for sale.
By Katie Feuer