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Study Hits Governance Ratings’ Effectiveness

Publication Date: 
July 01, 2008
Source: 
Pensions & Investments
Author: 
Barry Burr

Professor and Co-Director of the Arthur and Toni Rembe Rock Center for Corporate Governance Robert Daines is quoted in a Pensions & Investments article about a Rock Center study on the effectiveness of corporate governance ratings:

Corporate governance ratings have little success in predicting the performance of a company, according to a study by faculty members at the Arthur and Toni Rembe Rock Center for Corporate Governance, a joint center of Stanford Law School and the Stanford University Graduate School of Business.

The study “casts strong doubt upon the value and validity of the ratings of governance advisory firms” — RiskMetrics Group, Audit Integrity, Governance Metrics International and The Corporate Library — “that compile indexes to evaluate the effectiveness of a publicly held company’s governance practices,” according to a statement from Rock Center about the study.

Robert Daines, Stanford Law School professor, co-director of the Rock Center and an author of the study, said in an interview the research looked largely at the firms’ 2005 ratings to assess how well they predicted outcomes in subsequent years.

“Our results indicate that the level of predictive validity for these ratings are well below the threshold necessary to support the bold claims made for them by these commercial firms,” the study said.