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As if GCs didn’t have enough new responsibilities and obligations to worry about, now there’s something else: their company’s corporate governance ratings. In response to recent scandals, several investor services have begun to grade businesses on whether their internal structures and policies are trustworthy. While shareholder advocates agree that corporate governance is a subject well worth looking at, some question the attempt to score a company on it. Institutional Shareholders Services (ISS) and GovernanceMetrics International (GMI) are the current leaders in the ratings game. Their evaluations are based on the idea that serious structural problems at a company could cause it to become the next Enron Corp. or WorldCom Inc. The services judge a corporation on factors such as director independence, executive compensation, takeover defenses and shareholder rights. Each factor is weighted and then entered into a complex formula that yields a numerical score for the company. EVALUATING A RANGE OF FACTORS Last June ISS, which has been providing proxy services for investors for more than 15 years, added a “Corporate Governance Quotient” to its reports on the 3,000 largest companies in the United States. In its analyses, ISS looks at 61 variables within eight different categories. The service expects to rate another 2,000 corporations worldwide by this summer. “We’ve always felt governance was something that should be incorporated into investment decisions,” says ISS spokeswoman Cheryl Gustitus. “But it fell on deaf ears until big problems hit.” The ISS lists its top ten scorers — including Campbell Soup Co. and PG&E Corp. — on its Web site. To see the rest, investors have to subscribe; so far, 30 institutions have. GMI began its ratings three years ago, during the tech boom, but has expanded the service sharply since then. “We saw a lack of good governance in all the dot-coms that were going public,” says CEO Gavin Anderson. Using data gleaned from regulatory filings, company Web sites, news services and other sources, GMI looks at more than 600 factors within seven broad categories, to give a company a score of one to ten. The mutual funds, money management firms and pension funds that pay to see GMI’s evaluations, Anderson says, have “over $2 trillion worth of assets under management.” With that much at stake, perfect-ten companies such as Johnson Controls Inc., Pfizer Inc., and Sunoco Inc., can breathe easy. Adolph Coors Co. and Sara Lee Corp., however, may be sweating with their “below average” scores (GMI won’t give out their exact grades). Standard & Poor’s, which has been analyzing corporate financial data since the 1940s, also started scoring companies late last year. But where ISS and GMI charge a fee only to investors who buy their information, S&P also requires companies who want to be scored to pay up. CONSIDER? YES. SCORE? NO. While most advisers to investors agree that good governance is important, not all agree that it can be quantified. The Investor Responsibility Research Center (IRRC), for example, evaluates companies on governance, but draws the line at assigning numerical scores. “There’s no single standard for what constitutes good corporate governance,” says Carol Bowie, the center’s director of governance research. IRRC instead uses a “benchmark” to analyze and summarize 70 different governance factors at companies for its client investors. Nell Minow, editor of The Corporate Library, which evaluates company boards of directors, is also a skeptic on governance ratings. “I think board effectiveness will eventually become as important a part of the evaluation of a company as the credit rating,” says Minow. “But there’s no empirical data supporting other particular structural options.” Moody’s Investors Service is beginning to consider corporate governance in its credit evaluations, but likewise won’t play the ratings game. “I’m not satisfied [that] anyone’s identified a scoring approach that’s sufficiently related to the underlying reality,” says Kenneth Bertsch, vice president and director of corporate governance at Moody’s. “Surface things that lend themselves to scoring may or may not be meaningful.” But from a company’s perspective, it may not matter how sound or reliable the ratings are. No business wants institutional investors to think it’s a bad risk because of governance flaws. With that in mind, some services, such as ISS, offer consulting services that promise to show a company how it can improve its governance — and presumably, raise its score. GMI doesn’t consult the corporations it rates, but it will give businesses the chance to submit additional information to be used in their evaluations. GMI, however, charges companies for the extra service — about $50,000. That smacks of extortion to some corporate advocates. “There is a concern among GCs that those who don’t agree to pay for the services of these ratings companies may experience negative ratings as a result,” says Susan Hackett, senior vice president and GC of the American Corporate Counsel Association. “It’s like consulting blackmail.” Maybe so. But if a consultation or “comprehensive evaluation” can boost a company’s score and its share price too, many will find it difficult to refuse the offer.

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