Who's Watching the Watchdogs?
Professor Robert Daines and Professor Dave Larker's new study about the reliability of corporate governance ratings -- published under the auspices of the Rock Center for Corporate Governance -- is the subject of a Fortune magazine article:
SINCE THE ENRON SCANDAL, a coterie of corporate-governance firms has emerged as standard-bearers for shareholder rights. In addition to acting as quote machines, the firms which include the Corporate Library and RiskMetrics Group's ISS Governance Services are also big businesses that sell, among other things, ratings that say whether a company is well governed or not.
But a new study from Stanford University's law and business schools gives mostly dismal grades to four of the biggest rating services: ISS, the Corporate Library, GovernanceMetrics International (GMI), and Audit Integrity.
Statistical tests run by the Stanford academics found little or no correlation between the different services' ratings. Pfizer, for instance, earned a perfect "100" from ISS in 2005, but a "D" from the Corporate Library. Lockheed Martin scored a 9.5 out of ten from GMI, but Corporate Library gave it its worst possible grade, an "F."
All this is not to say that governance doesn't matter; it may just not be easily quantifiable. "[Good] governance is a little bit like porn," says Robert Daines, one of the authors of the study and co-director of Stanford's Rock Center for Corporate Governance, referring to Supreme Court Justice Potter Stewart's famous comment about recognizing obscenity. "I can spot it when I see it, but it is hard to say what it is." Even ISS's McGurn says he hopes research like the Stanford study will lead to more attention to governance.
That is happening: Researchers at the Rock Center are trying to find a way to make hard-to-collect governance data available for free. Let a thousand ratings services bloom.