GovernanceMetrics International
FOR IMMEDIATE RELEASE: |
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GMI Releases New Global Ratings
American, Canadian, British and Australian companies among the leaders. Study
finds that companies with consistently poor ratings as a group pose greater
risks and under-perform the market compared to those companies with
consistently high ratings. Several companies have moved to revamp practices
dramatically leading to significant rating changes. Controlled companies
represent an interesting cohort in themselves.
New York, September 13th, 2005 - GovernanceMetrics International(GMI),the corporate governance research and ratings agency, today announced new ratings on more than 3,200 global companies. Thirty-three companies, including twenty-two American, seven Canadian, two Australian and two British, were rated 10.0, GMI’s highest rating. As a group, these companies outperformed the S&P 500 Index as measured by total shareholder returns for each of the last one, three, and five-year periods ending September 1, 2005, providing excess returns of 11.40%, 6.09% and 15.19% respectively relative to the index. GMI ratings and company reports are used by pension funds, investment advisers, mutual funds, banks, insurance underwriters and regulators to assess governance risk, as well as corporate advisory firms and corporate issuers to benchmark performance and conduct peer comparisons.
Gavin Anderson, GMI’s CEO, said that “with six rating cycles and close to three years of history behind us we can now better see performance patterns associated with governance attributes. With the release of our latest ratings, we chose to examine those US companies that were rated well above average (9.0 or higher) or well below average (3.0 or lower) in at least four of our six ratings cycles. In total, 98 companies fell into one of these two categories. The average rating for the well governed companies was 9.1, compared to 2.3 for the poorly governed companies. The governance attributes of both groups are quite distinctive on a number of measures. Companies that were consistently poorly rated were far more likely to have restated earnings, been subject to accounting investigations by regulatory authorities or found guilty of accounting fraud. As a group they reported more related-party transactions involving senior officers or directors, they were more likely to have multiple classes of voting stock and their boards had fewer independent directors than companies with consistently good ratings. Perhaps most telling is that the average three-year total shareholder return for the consistently poorly rated companies was 8.73% versus 15.93% for the well governed companies through September 1, 2005. During the same period the S&P500 had an average return of 11.91%.” Mr. Anderson added that “while corporate governance is only one aspect of investment research, we have witnessed more and more acceptance of late by hedge funds, large institutional investors as well as the lending side of commercial banks”.
Corporate Governance and Corporate Behavior
Significantly improved
As part of this research GMI also screened for companies that have shown
dramatic improvement since their first GMI rating. Three companies that stand
out are Tyco International, Nomura Holdings in Japan and Koninklijke Numico in
The Netherlands.
Tyco’s rating at the end of 2002 was 1.5 and reflected many of the governance deficiencies associated with the prior leadership. But as often happens when companies are plagued with stewardship scandal, the company’s new leadership instituted a wide series of governance improvements, including the replacement of ten directors with a strong and independent group, significantly improved compliance and reporting mechanisms and governance disclosure that is among the most detailed available. In the current GMI release Tyco is rated 9.0.
In July 2003, Numico, a Dutch food processing company, was rated 1.0, GMI’s lowest rating, but today has an overall global rating of 8.5. The company has instituted a series of substantial governance improvements, including increased disclosure of board processes, introduction of new committees, an employee hotline, and a compliance checklist on its website of how they compare to the new Dutch governance code requirements; all of which in the last two years have helped lift their GMI rating by 7.5 points.
Over the same time period Nomura, Japan’s top brokerage firm, has increased its rating from 2.5 to a 6.5 by adopting several Sarbanes-Oxley type provisions. Nomura also provides detailed disclosure of executive compensation benchmarks and board and committee meeting attendance, both of which are extremely rare in Japan. Moreover, Nomura is also the only Japanese company to expense stock options. While none of these three firms have an overall global rating of 10.0, they each have shown significant advancement in their ratings through substantive governance improvements.
Controlled companies
An interesting subgroup of companies where much room for improvement exists are
controlled companies - defined as companies where a single entity controls at
least 50% of the voting power – a cohort that warrants further attention. GMI
examined a group of these companies to see if their governance practices
differed markedly from widely held firms and also to see whether there were
significant differences among controlled companies. There are 390 such
companies in the GMI universe with 152 in North America, 156 in Europe and 82
in the Asia-Pacific region. As a group, controlled companies have an average
rating below those of widely held concerns (5.0 versus 6.5). More of the lower
rated controlled companies are found in Asia and Europe than North America. Of
the controlled companies that received an overall governance rating of 4.0 or
below, 65.4% were from Europe, 25.6% from Asia Pacific and 9% from North
America. Nonetheless, there were some notable examples of poorly governed
controlled companies in the US as well.
The predominant governance features of controlled companies are a lack of independent directors and/or directors that are appointed by the controlling shareholder; dual or multiple class stock with inferior rights held by common holders; lack of a board-level governance committee to oversee proper governance of the corporation and rights of shareholders; and frequent related-party transactions between the corporation and the controlling shareholder. Compared to widely held companies, the incidence of these attributes shows significant variance, as is seen in the chart below.
In the United States, the NYSE and Nasdaq provide certain listing exemptions for controlled companies in recognition of the significant ownership differences that apply. Despite this, several controlled companies in this market go beyond the requirements and have adopted governance practices that are more often associated with widely-held firms. For example, UnionBanCal has a board with a majority of independent directors and Talbots maintains a dedicated Corporate Governance and Nominating Committee composed of a majority of independent directors. Five of the top six highest rated controlled companies are from the US: Talbots (8.5), UnionBanCal (8.5), Genworth Financial (8.0), Interactive Data Corp. (8.0) and Kraft Foods (8.0). Telstra Corp. (8.5) from Australia also ranks among the top controlled companies, and it maintains a board that is 89% independent. GMI CEO Gavin Anderson said “The above average ratings of UnionBanCal and Talbots are particularly noteworthy because they are controlled by Mitsubishi Tokyo Financial Group and AEON respectively, and both Japanese companies in this instance at least, have better governed subsidiaries than parent companies. As Japanese companies move to a greater equity culture from a bank relationship orientation, governance practices in this market should improve.”
Companies with a global score of 10 (our highest rating) are:
About GMI
GMI’s rating system incorporates hundreds of data points across six broad
categories of analysis: board accountability, financial disclosure and internal
controls, executive compensation, shareholder rights, ownership base and
takeover provisions, plus corporate behavior and environmental, health and
safety issues. Subscribers to GMI are able to view a company’s overall rating,
section ratings, and several pages of written analysis. GMI clients include
pension funds, investment managers, mutual funds, regulatory agencies, banks,
insurance companies, professional service firms and corporate issuers.