Companies Must Seek To Avoid The "junk" Governance Rating

The past year has been marked by the collapse of numerous high-profile public companies that were rocked by accounting scandals.  These developments resulted in the passage of the Sarbanes-Oxley Act of 2002 as well as the Securities and Exchange Commission's and stock exchange's conducting rulemakings that require companies to review and improve their corporate governance practices.  These events have increased the interest of investors in corporate governance issues and have led journalists to report more on actual or apparent cases of corporate governance weakness.  This increasing investor focus on governance also is now resulting in a proliferation of published rating systems or metrics that rank, analyze, and compare the relative corporate governance practices of public companies.

It is unclear what importance corporate governance ratings will ultimately be to investors.  However, if investors begin to use governance ratings as important factors in investment decisions, factors that help or hurt these ratings could become increasingly important to investor sponsorship, particularly while companies are generally transitioning to better corporate governance practices. 

Management or the board should consider the various criteria described in this article that affect a governance rating positively or negatively and may want to consider implementing or changing some practices to improve the company's rating.  It is our hope that alerting our clients to these criteria will help them to assure that their ratings and published governance reports are accurate and free of errors and as strong as they desire.