GovernanceMetrics International
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June 16, 2008
GMI Releases New Ratings for All Rated Companies
Dear Colleague,
This is to let you know that GMI has just released new ratings and rating reports for our entire universe of 4,170 companies, including 615 from emerging markets.
Today’s release includes two product enhancements. One concerns Red Flags and the other GMI Pay Alignment Rankings SM.
Red Flags
GMI uses a red flag system to highlight new developments and corporate governance practices which we think raise the risk of lower market valuations. Flags are assigned to companies as part of each scheduled quarterly rating release and on a weekly basis as events so warrant. Clients also receive a weekly e-Alert when we post non-scheduled red flags or re-rate a company based on new developments.
Many of our clients have told us they find the weekly e-Alerts and red flags an important part of the GMI service, especially as the market focuses more and more on risk management. Starting with today’s release, we have changed the presentation of all GMI Rating Reports in order to make the flagged items much more prominent and highlight companies that have multiple flags in the same section of the report.
Pay Alignment Rankings
GMI introduced its Summary CEO Compensation Report and Pay Alignment Rankings (PAR)SM in September 2007. The PAR compares compensation changes for the CEO and Total Shareholder Returns within specific market sectors for most of the US companies we monitor. It was designed to give investors a straightforward top-level view of how well compensation committees have done in aligning CEO pay and performance. The summary compensation reports provide additional top-level graphs and statistics that assist in understanding trends in CEO compensation arrangements.
Starting with today’s release, we have added additional data to the summary compensation reports in order to convey the average total compensation and shareholder returns over the last three fiscal years in addition to the most recent fiscal year. Importantly, the PAR also has been recalculated to reflect the average for the least three years rather than the most recent fiscal year. We think this will provide investors with a better sense of how well compensation committees have done in aligning CEO remuneration with performance as it smoothes out the impact of annual grants and one-off stock and option gains, which typically are quite substantial. It’s also consistent with growing shareholder interest in seeing companies develop a more sustainable, long-term remuneration strategy. Please click here for a sample Summary CEO Compensation and PAR Report.
The new approach to calculating PAR will also be of interest to shareholders looking to cast a vote on executive remuneration plans – better known as “say on pay” proposals. For example, a majority of shareholders voted in favor of non-binding resolutions to adopt say on pay policies at Lexmark International (NYSE: LXK), South Financial Group (NASDAQ: TSFG) and Tech Data (NASDAQ: TECD), among other US companies so far this year. The PAR for these companies, calculated on a scale of 0 to 100%, were as follows: Lexmark – 4.2%; South Financial Group – 7.7%; and Tech Data – 17.3%.
Clients will see these changes the next time you log onto the GMI subscriber site. FTP sites will be updated overnight.
Chairman / CEO
One of the many issues brought to the fore by the current credit crisis has been that of board leadership. In the last few months we have seen a number of banks move to separate the position of Chairman and CEO in order to allow the CEO the time needed to address immediate concerns while letting the Chairman address ongoing board and corporate governance issues.
Having an independent chairman separate from the CEO is one of approximately 400 variables we examine when calculating GMI ratings and we, along with many others, consider it best practice. For one thing, leading a board and managing a business are different and distinct jobs. Separating the two positions enhances the board’s oversight function. And as separating the two positions seems especially beneficial in a crisis situation, it’s fair to ask why wait for a crisis to develop rather than plan ahead.
Given the current environment we thought it would be interesting to see what the current practice was among different sectors and regions. Please click here for a breakdown of companies covered by GMI that have a combined Chairman / CEO based on the most recent data in our global database.
It may come as no surprise that the market where the two positions are most often combined is the US. Many observers have noted a similarity between US corporate governance and the US political system, focused on a president with strong centralized powers. But even within the US the trend is clear. Three years ago, 62 percent of the US companies covered by GMI had a combined Chairman / CEO, compared to 52 percent today.
In closing, we want to be clear that while we consider the separation of Chairman and CEO an important aspect of corporate governance, so are many others, including overall corporate behavior. In general, we have found companies that rate high in corporate governance overall are rewarded with a lower cost of capital and superior shareholder returns compared to those that have governance deficiencies. We have also found that better governed companies also tend to achieve higher ROE, ROA and ROC.
Please feel free to contact us for additional information.