Corporate Governance Rating - Explained
What is a Corporate Governance Rating?
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What is a Corporate Governance Rating?
Corporate governance is defined as a set of rules, mechanisms and practices that inform how a corporation is being operated or managed. Essentially, corporate governance drives transparency, fairness and accountability between a company and its customers, shareholders, suppliers, financiers, executives, government and the community. A corporate governance rating refers to the status of a company with respect to the adoption of corporate governance practices. This rating is the final opinion regarding the important a corporation attached to corporate governance by looking at the information they provide to stakeholders, relationship with financiers, customers, suppliers, the community and others.
How is a Corporate Governance Rating Used?
A corporate governance rating is provided by a rating entity after deriving information about the adoption of corporate governance by an institution through the reports of analysts. There are many sources where information can be gathered about the relative standing if an entity with respect to corporate governance. This means a rating agency may or may not actively conduct an audit of an entity before the rating is provided. Given that corporate governance rating is dependent on the information provided on a corporation, it can be modified, suspended r withdrawn if counter information is provided. Some of the processes adopted by rating agencies before coming up with corporate governance rating are macro and microanalysis, crucial data such as proceedings of shareholders meetings, minutes of board meetings, cases filed bu consumers, suppliers among others.
Academic Research on Corporate Governance Rating
- The effects of corporate governance on firms' credit ratings, Ashbaugh-Skaife, H., Collins, D. W., & LaFond, R. (2006). The effects of corporate governance on firms credit ratings. Journal of accounting and economics, 42(1-2), 203-243. We investigate whether firms with strong corporate governance benefit from higher credit ratings relative to firms with weaker governance. We document, after controlling for firm-specific risk characteristics, that credit ratings are negatively associated with the number of blockholders and CEO power, and positively related to takeover defenses, accrual quality, earnings timeliness, board independence, board stock ownership, and board expertise. We also provide evidence that CEOs of firms with speculative-grade credit ratings are overcompensated to a greater degree than their counterparts at firms with investment-grade ratings, thus providing one explanation for why some firms operate with weak governance.
- Corporategovernance ratings and company performance: a crossEuropean study, Renders, A., Gaeremynck, A., & Sercu, P. (2010). Corporategovernance ratings and company performance: a crossEuropean study. Corporate Governance: An International Review, 18(2), 87-106.
- Corporate governance, corporate ownership, and the role of institutional investors: A global perspective, Gillan, S., & Starks, L. (2003). Corporate governance, corporate ownership, and the role of institutional investors: A global perspective. We examine the relation between corporate governance and ownership structure, focusing on the role of institutional investors. In many countries, institutional investors have become dominant players in the financial markets. We discuss the theoretical basis for, history of, and empirical evidence on institutional investor involvement in shareholder monitoring. We examine cross-country differences in ownership structures and the implications of these differences for institutional investor involvement in corporate governance. Although there may be some convergence in governance practices across countries over time, the endogenous nature of the interrelation among governance factors suggests that variation in governance structures will persist.
- Corporate governance, accounting outcomes, and organizational performance, Larcker, D. F., Richardson, S. A., & Tuna, I. (2007). Corporate governance, accounting outcomes, and organizational performance. The accounting review, 82(4), 963-1008.
- Corporate governance: measurement and determinant analysis, Khanchel, I. (2007). Corporate governance: measurement and determinant analysis. Managerial Auditing Journal, 22(8), 740-760.
- Corporate governance indices and firms' market values: Time series evidence from Russia, Black, B. S., Love, I., & Rachinsky, A. (2006). Corporate governance indices and firms' market values: Time series evidence from Russia. Emerging Markets Review, 7(4), 361-379. There is increasing evidence that broad measures of firm-level corporate governance predict higher share prices. However, almost all prior work relies on cross-sectional data. This work leaves open the possibility that endogeneity or omitted firm-level variables explain the observed correlations. We address the second possibility by offering time-series evidence from Russia for 1999-present, exploiting a number of available governance indices. We find an economically important and statistically strong correlation between governance and market value both in OLS and in fixed effects regressions with firm-index fixed effects. We also find large differences in coefficients and significance levels, including some sign reversals, between OLS and fixed effects specifications. This suggests that cross-sectional results may be unreliable. We also find significant differences in the predictive power of different indices, and in the components of these indices. How one measures governance matters. This prepublication version is substantively the same as the published version, except that this version includes results for subindices and results with firm-index random effects, which were omitted from the published version due to space constraints.
- Corporate governance and corruption: A crosscountry analysis,, Wu, X. (2005). Corporate governance and corruption: A crosscountry analysis. Governance, 18(2), 151-170. Because the empirical literature on the causes of corruption has focused primarily on the demand side of corruption, that is, the corrupt officials who receive bribe payments, the role of the private sector as the supply side of corruption has not been examined thoroughly in this literature. In this article, it is argued that corporate governance is among the important factors determining the level of corruption. Using a crosscountry data set, hypotheses that explicitly link various measures of corporate governance to the level of corruption are tested. The results show that corporate governance standards can have profound impacts on the effectiveness of the global anticorruption campaign.
- Do institutional shareholder services (ISS) corporate governance ratings reflect a company's operating performance?, Epps, R. W., & Cereola, S. J. (2008). Do institutional shareholder services (ISS) corporate governance ratings reflect a company's operating performance?. Critical Perspectives on Accounting, 19(8), 1135-1148. Little is known about the relation between the actual governance rating received by a firm and the firm's performance. In this study, we examine the relation between the actual corporate governance rating received by a firm and the firm's performance during the years 20022004. We use the institutional shareholder services (ISS) corporate governance quotient (CGQ) rating of a firm's corporate governance structure and analyze this rating in relation to the firm's operating performance. We compare the institutional shareholder services CGQ rating to two measures of the firm's operating performance, return on assets (ROA) and return on equity (ROE). Based upon our results, we do not find statistical evidence suggesting that the firms operating performance is related to the firms ISS corporate governance rating.
- Corporate governance, principalprincipal agency conflicts, and firm value in European listed companies, Renders, A., & Gaeremynck, A. (2012). Corporate governance, principalprincipal agency conflicts, and firm value in European listed companies. Corporate Governance: an international review, 20(2), 125-143.
- Towards an impartial and effective corporate governance rating system, Donker, H., & Zahir, S. (2008). Towards an impartial and effective corporate governance rating system. Corporate Governance: The international journal of business in society, 8(1), 83-93.
- Rating the ratings: How good are commercial governance ratings?, Daines, R. M., Gow, I. D., & Larcker, D. F. (2010). Rating the ratings: How good are commercial governance ratings?. Journal of Financial Economics, 98(3), 439-461. Proxy advisory and corporate governance rating firms (such as RiskMetrics/Institutional Shareholder Services, GovernanceMetrics International, and The Corporate Library) play an increasingly important role in U.S. public markets. They rank the quality of firm corporate governance, advise shareholders how to vote, and sometimes press for governance changes. We examine whether commercially available corporate governance rankings provide useful information for shareholders. Our results suggest that they do not. Commercial ratings do not predict governance-related outcomes with the precision or strength necessary to support the bold claims made by most of these firms. Moreover, we find little or no relation between the governance ratings provided by RiskMetrics with either their voting recommendations or the actual votes by shareholders on proxy proposals.