GovernanceMetrics
International
FOR IMMEDIATE RELEASE: |
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GMI Releases New Global Governance Ratings
Small caps weaker in governance. Director independence and accountability on the rise but compensation and anti-takeover provisions still a problem. UK, US,
Canada and Australia lead in governance practices with notable improvement
in the Netherlands.
New York, March 6th, 2005 - GovernanceMetrics International(GMI),the corporate governance research and ratings agency, today announced new ratings on 3,220 global companies. Thirty-four companies – twenty-seven American, three Canadian, three British and one Australian - received scores of 10.0, GMI’s highest rating. As a group, these companies outperformed the S&P 500 Index as measured by total returns for each of the last one, three and five year periods by 11.13%, 9.9% and 15.93%, respectively, as of February 28, 2005.
The current ratings include for the first time the constituent companies of the US S&P SmallCap 600 Index. Gavin Anderson, GMI President and CEO, said that the “S&P 600 companies as a group have governance profiles that are weaker than their large cap brethren. Their average ratings are almost twenty percent lower than the S&P 500 companies, they have the largest number of “red flags” that we issue for governance concerns, and proportionally they represent a greater number of low scoring companies. Their inclusion in our coverage has resulted in a decline of the average score of all US companies from 7.23 last September to 7.03 today. This is not to say that all small cap companies have poor governance characteristics - we found exceptions to the rule - nor that there are no problem areas at larger companies, where we also found problems, but it does seem to confirm the conventional wisdom that there is a market cap difference in governance characteristics at corporations”.
This market cap difference is borne out elsewhere. GMI looked at small cap companies in the United Kingdom and Japan where we cover in excess of 350 companies in each and found similar results. In the United Kingdom, the 50 lowest market cap companies had an average score of 6.70 versus the average of 7.40, and in Japan a similar number of companies had an average score of 3.10 versus the country average of 3.50. The average market cap of these 100 companies was $644 million
Interestingly, in the United States, the Securities and Exchange Commission has just established a new advisory panel (the Committee on Smaller Public Companies) to study the impact of the Sarbanes-Oxley Act on smaller companies but it is not known what market cap cutoff this panel has decided upon.
Director Independence and professionalism.
While small cap companies may have comparatively weaker governance structures than large cap concerns overall, their larger cousins are not immune to problems; indeed the major corporate scandals of late have mainly been at very large corporations such as Enron, Fannie Mae and Marsh & McLennan. This has led to increasing attention worldwide by institutional investors on the independence of directors, the separation of chairman and CEO roles and the degree to which boards are taking their responsibilities more seriously.
The number of directors that GMI considers independent has risen from 52 percent of the total universe in 2003 to 55 percent today. This trend is not confined to the US but is evidenced in just about every one of the 23 countries GMI examines. Furthermore, considering that we monitor more than 33,000 individual directors, a three per cent improvement equates to a significant number.
At the same time we are seeing fewer companies with combined chairman and CEO roles. In July 2003 47 percent of the companies GMI covered had a combined chairman and CEO whereas today the number is 39 percent. Also of interest is the degree to which boards are now undertaking self evaluations. While not conclusive, it does provide an indication of a more professional approach to the role of a board and may be a measure of increased sense of responsibility on the part of directors. During the two research periods covered from August 2004 to February 2005, GMI rated a total of 2,538 global companies at least once in each cycle. For each period, GMI looked at board performance evaluation on three different levels:
From a global perspective, GMI saw an aggregate increase in all three measures within its universe of rated companies.
Among the larger markets covered by GMI, the UK showed the most notable improvement. Across all three metrics, UK companies respectively recorded period-to-period increases of between 15 and 80%. Australia was not far behind, with respective increases of between 10 and 32%. Though not as eye-catching, the US nonetheless registered modest improvement of between 2 and 15%, and Canada 1 to 3% across all three metrics. In the US, the lower rate of change is probably due in part to the already phased in adoption of governance reforms by most companies. In Canada, many companies have already been following the recommended governance practices as set forth by the TSX. Interestingly, Japanese companies exhibit little inclination towards change in this area. Of the 354 Japanese companies rated in both research periods, only three periodically evaluated board performance. There were no others that either evaluated directors individually or undertook committee self-evaluation.
Most of the smaller markets covered by GMI exhibited nominal increases across all measures. Most European markets had little change from one period to the next. Canada, Australia and the U.S. have the strongest practices with regard to board evaluation. For the companies covered in the February 2005 research period, 98% of Canadian boards evaluated their own performance, 68% performed some sort of individual director evaluation, and 73% had at least one committee that undertook a self-evaluation. For Australia these numbers were respectively 92%, 78% and 48% and for the US, 91%, 27% and 9%. Most striking was that 497 companies undertook all three measures of evaluation.
Red Flags – Remuneration in the US and anti- takeover provisions in Europe.
While growth in independent and more professional directors is encouraging, governance concerns still abound at many companies. As part of its service, GMI assigns red flags to companies where an important governance issue has been identified. Red flags are issued for a number of matters but include such things as: unequal voting rights; regulatory and criminal investigations; large potential options dilution and significant related party transactions involving amounts greater than one percent of revenues of the company. Thirty-six percent of the GMI universe or 1,163 companies received red flags in this ratings release with 202 receiving two or more.
The GMI category that received the largest number of red flags was Remuneration; this was also the most frequent category for US companies. It accounted for 31 percent of US red flags versus only 6 percent in Europe and 5 percent in the Asia Pacific nations. The second most frequent category for red flags was GMI’s Market for Control section, which screens for ownership concerns and anti-takeover provisions. Here European companies were responsible for the vast majority of flags, accounting for 15 percent of the total versus 6 percent in the US and only one percent in Asia. The chart below indicates the spread of GMI red flags across our six rating categories as measured by the number of companies flagged in each section.
Noteworthy Country Ratings - Anglo Saxon leadership and a Dutch surprise.
On a national level, UK companies had the highest overall average rating (7.39), followed by Canada (7.14), United States (7.03) and Australia (6.99). At the other end of the scale, Greek companies had the lowest overall average rating (2.37), followed by Japan (3.49). In Europe, companies from Belgium (3.93), France (4.05) and Portugal (4.35) had the lowest overall average ratings. Thirty-two companies received GMI’s lowest global rating of 1.0. Thirteen of the 32 are located in Japan, 7 in Greece, 5 in Belgium, 4 in France and 1 each in Denmark, Hong Kong and the United States. In the last GMI release the US had the highest overall average score but this declined partly because of the inclusion of small cap companies.
In the two years that GMI has been conducting global ratings the countries that repeatedly have had the highest average scores have been the UK, US, Canada and Australia. These are all known for strong legal systems with property right enforcement mechanisms, high levels of disclosure and large and sophisticated institutional investment communities. However, compared to our first global ratings in July 2003 the country with the most significant change has been The Netherlands, where the average company score rose from 4.20 in July 2003 to 6.45 today. Last year the Dutch legislature provided a statutory basis for the voluntary Tabaksblat Code which was first published in December 2003. From the 2004 financial year onwards, Dutch listed companies have to include in their annual report a section on their corporate governance and compliance with the Code and have to explain any non-compliance. Key provisions of the Code are term limits for management and board members; the requirement that they disclose conflicts of interest; and the requirement that the supervisory board meet on an annual basis without management to discuss strategy and review the performance of the individual board members. Only one supervisory board member may be deemed not independent and at least one member must be designated as a financial expert. Shareholders have the responsibility for approving option and stock plans at the AGM and companies must disclose an overview of their remuneration policy. Departing management board members cannot receive more than one year’s salary in the event of dismissal and loans can no longer be granted to management board members. Additionally, companies are now required to develop a publicly disclosed “whistle blowing” policy and to disclose biographical details of supervisory board members. Finally, the outside auditor must be assessed every four years and this assessment must be communicated to the company’s shareholders.
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 social responsibility. Subscribers to GMI are able to view a company’s overall rating, section ratings and several pages of written analysis. GMI clients include leading pension funds, investment managers, regulatory agencies, banks, insurance companies, professional service firms and companies.
Companies with a global score of 10 (our highest rating) are:
