CORPORATE GOVERNANCE RATINGS

1
CORPORATE GOVERNANCE RATINGS

• OBJECTIVES
• WHAT SHOULD BE RATED?
• WHO IS DOING THE RATING?
• EXTANT LITERATURE

2
OBJECTIVES

• COMPULSORY GOVERNANCE AUDIT
• CONTINUOUS AUDIT
• MINIMUM BENCHMARK STANDARDS
• RANKING BY BM
• ENTREPRENEURSHIP/ACCOUNTABILITY OR BOTH

3
WHAT SHOULD BE RATED

• PROCESS, STRUCTURE, PERFORMANCE
• THINGS THAT PUT INVESTORS AT MOST RISK AND CANNOT
  BE DETERMINED FROM PUBLIC DOMAIN INFORMATION

4
WHO IS DOING THE RATING

• AGENCY
• FOR A FEE
• REGULATORY AUTHORITY
• RESEARCH CENTRES

5
EXTANT RATINGS

• MANY WHICH ONE TO CHOOSE?
• ACROSS NATIONS (LAPORTA'S ANTI DIRECTORS INDEX,
  1999), CLSA, GOMPERS' INDEX, DEMINOR CG RATING IN
  EU COUNTRIES
• WITHIN NATIONS INDIA, THAILAND, KOREA, GMI,
  GERMANY
• COMPREHENSIVE VS SPECIFIC

6
EXTANT RATINGS CONT'D

• PROFESSIONAL RATING AGENCIES VS EMPIRICAL
  MEASURES
• DISTINGUSIH BETWEEN WEALTH CREATION AND
  ACCOUNTABILITY
• SPECIFIC STUDIES RATINGS AND OUTCOME, AT BEST
  MIXED RESULTS

7
WEALTH CREATION

• LONG TERM EQUITY/STOCK RETURNS
• FIRM VALUATION
• PERFORMANCE EARNINGS AND ACCOUNTING MEASURES
• COST OF BORROWING
• RISK MANAGEMENT USE OF DERIVATIVES
• FAILURES AND INSOLVENT COMPANIES

8
ACCOUNTABILITY

• TRANSPARENCY, CONTINUOUS DISCLOSURES, CORPORATE
  SOCIAL REPORTING
• EARNINGS MANAGEMENT
• EARLY ADOPTION OF ACCOUNTING STANDARDS
• GOOD REPORTING PRACTICE
• DIRECTORS REMUNERATION
• DISMISSAL OF CEO

9
PREDICTING FIRMS' GOVERNANCE CHOICES

• BLACK, JUNG AND KIM (2003)
• LARGE FIRMS ARE BETTER GOVERNED (SIZE)
• RISKIER FIRMS ARE BETTER GOVERNED (RISK)
• MORE PROFITABLE FIRMS ARE WORSE GOVERNED
• 5 SUB-INDICES OF SHAREHOLDERS' RIGHTS,BOARD
  STRUCTURE, BOARD PROCEDURES,DISCLOSURE,OWNERSHIP

10
CADBURY 1997

• STRONG GOVERNANCE INVOLVES BALANCING CORPORATE
  PERFORMANCE WITH AN APPROPRIATE LEVEL OF
  MONITORING
• MODERATING FACTORS E.G. LIFE CYCLE (WRIGHT,
  2000), PATTERN OF ASSETS OWNED (MATOLCSY, 2001),
  CULTURAL DIMENSIONS OF BOARD (HANIFFA AND COOKE,
  2002).

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CONCLUSION

• OVERALL INDEX
• SUBINDICES
• SHAREHOLDERS RIGHTS AND OWNERSHIP PATTERN
• DEGREE OF TRANSPARENCY
• BOARD CHARACTERISTICS
• PERFORMANCE
• NEW REPUTATION INDEX, SCANDAL INDEX

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MOST IMPORTANT QUESTION

• WHAT ARE WE RATING FOR?
• FORM VS SUBSTANCE
• BLACK et al (2003) We do not know yet whether
  private sector rankings measure anything useful
  about firm value or performance
• THANK YOU