Short of direct shareholder activism, one of the most common methods used to promote corporate governance reform is the creation of rating systems. The notion is that companies will institute changes to rectify a bad rating, or else they will be pressured to do so by institutional shareholders that use the evaluations in their investment decisions.
For this to work, the rating systems need to be able to identify corporate governance shortcomings in a coherent way and be consistent in their evaluations. One might think that the diagnosis is a straightforward matter and that the challenge lies in getting companies to change. Yet a new report issued by the the Rock Center for Corporate Governance at Stanford University apparently finds a wide degree of variation among the ratings offered by different services.
I say “apparently,” because the report, despite being described in some detail in an article posted today by Fortune magazine (which presumably received an advance copy), has not appeared on the Center’s website as of this writing.
According to Fortune, the study found that the ratings of a given company by the leading services—RiskMetrics Group’s ISS Governance Services, The Corporate Library, GovernanceMetrics International (GMI) and Audit Integrity—can vary wildly. For example, pharmaceutical giant Pfizer is said to have received a perfect score of 100 from ISS at one point but a less impressive D from the Corporate Library at the same time. Lockheed Martin got 9.5 out of 10 from GMI but the worst possible grade from the Corporate Library.
Fortune quoted study co-author Robert Daines as saying that “[good] governance is a little bit like porn. I can spot it when I see it, but it is hard to say what it is.” If that’s the case, perhaps institutional shareholders should stop paying hefty fees to the rating services and use their own judgment—or else rely on corporate accountability groups with clear principles rather than black-box systems to determine what’s wrong with the way companies are run.
UPDATE: I’ve now learned that the Stanford study is available online here.