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Lifting The Lid: New Study Takes Aim At Governance Grades

Publication Date: 
July 03, 2008
Martha Graybow

Reuters reports that a new study by Stanford University's Rock Center for Corporate Governance questions whether governance ratings provided by firms have any real value. Professor Robert M. Daines, co-author of the study, is quoted:

The raters are the equivalent of "the 2,000 pound, good governance gorilla, and they have a lot of pull in the market," said Robert Daines, a Stanford professor and one of the study's authors.

"Our paper suggests that their rankings don't produce useful information," he added.

Governance research firms have taken issue with the study, saying it only looked at a limited time frame and that ratings are not designed to be the only factor investors consider.

The study, a working paper yet to be published, is called "Rating the Ratings: How Good Are Commercial Governance Ratings?" It analyzed whether the 2005 governance scores for more than 6,500 companies forecast company outcomes such as lawsuits or financial restatements in 2006 and 2007.


In the case of RiskMetrics, the Stanford study also found there was little relation between its governance ratings and another service the company offers providing recommendations to shareholders on things such as how to cast their ballots in board of director elections.


The Stanford study cites a number of inconsistencies in the 2005 ratings it analyzed, such as poor ratings given to General Electric Co (GE.N: Quote, Profile, Research, Stock Buzz) and AT&T Inc (T.N: Quote, Profile, Research, Stock Buzz) from the Corporate Library while at the same time they received top scores from RiskMetrics.

Discrepancies have emerged more recently, such as reports on brewer Anheuser-Busch Cos Inc BUD, whose governance has been put in focus after its board spurned a takeover offer. The company received an "F" rating -- the worst possible -- in 2007 from The Corporate Library, while its latest RiskMetrics rating ranked it better than 75.4 percent of S&P 500 Index companies and better than 91.9 percent of peers in its sector.

"We found little agreement as to what counted as good or bad governance. These are not small companies that they are disagreeing on," Daines said. "These are big, prominent, really well-covered firms."