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Corporate Governance Ratings - Concept, Methodology and Practice

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 Corporate Governance Ratings –
Concept, Methodology and Practice

By
K. Sukumaran
Dean, National Institute of Securities Markets, Vashi, Navi Mumbai

Abstract

Corporate Governance assumes SEBI in February 2000 and with the

significance in the modern competitive enactment of the new Companies Act
world as organisations are operating in a 2013.
more and more deregulated regime. In
such circumstances, governance structure Corporate Governance Rating is an
should be instituted in an organisation to important component in the overall
take care of the various dimensions of governance system. Corporate Governance
good governance. The important principles Rating is defined as an opinion on a
of a good corporate governance system are company’s corporate governance system,
responsibilities of board, shareholder its compliance with the various parameters
recognition, stakeholder interests, ethical deployed for assessment and the rating
behaviour, business transparency etc. differentiates companies in accordance
with their corporate governance quality.
“Corporate Governance is the process The rating provides vital information to
whereby people in power direct, monitor various stakeholders about the extent of
and lead corporations, and thereby either corporate governance practices
create, modify or destroy the structures implemented. The rating determines the
and systems under which they operate”. relative standing of an entity vis-à-vis
World Bank defines it as “Corporate other entities in respect of the best
Governance is about promoting corporate practices followed on corporate
fairness, transparency and accountability.” governance principles.
While companies must focus on their core
objective of earning profits, but the profit Corporate Governance Ratings have been
is earned and how it is distributed should introduced and implemented in countries
be in aligned with the expectations of to judge the extent of compliance of
stakeholders. Adoption of distinct corporate governance principles. Corporate
corporate governance practices governance ratings and frameworks are in
distinguishes a company from others and use in many countries. The rating agencies
in this paradigm corporate governance – international and national have worked
ratings play a vital role. In Indian context on a suitable rating methodology on
corporate governance reforms have taken a evaluating the adherence of corporate
new shape with the implementation of the governance principles by companies.
clause 49 of the Listing Agreement by Internationally, GMI Ratings, Institutional

Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 1
Shareholder Services (ISS), Standard & and explore the possibility of putting in
Poor’s etc. are engaged in providing place a right corporate governance
corporate governance rating services. In structure. A comparison of corporate
Indian context, Credit Rating Information governance ratings, revealed from
Services of India Ltd (CRISIL), ICRA, secondary data analysis would be helpful
and Care Ratings are currently involved in to the students and scholars working on the
corporate governance rating. Each theme- corporate governance.
organisation has relied on certain corporate
governance principles and accordingly Key Words: Corporate Governance,
devised the ratings. Corporate Governance Ratings, Board
Structure, Shareholder Rights
Objective: This paper traces into the
meaning and concept of the corporate Introduction
governance rating, the methodology
involved in construction of the corporate Corporate governance has assumed much
governance index structure, and how it is significance in all countries across the
implemented. In analysing these issues – globe, thanks to the growing expectations
concept, methodology and practice, both from the shareholders, stakeholders and
national and international practices are the general public. The liberalization,
probed and documented. The issues and competition, privatization and
challenges in implementing the scoring globalization have thrown many
model are also scribed. opportunities to the corporate world to
enter into new areas, diversify the
Methodology: The methodology involved operations and to seek possible mergers
in writing this research paper is literature and acquisitions. In this journey forward,
review. The literature on governance ethics and corporate governance norms
ratings appeared in national and built in organizations would make the
international publications would be functioning and expectations moving in
reviewed. Further, the rating methodology the same direction. Measuring to what
of national and international rating extent the corporate governance norms
agencies on corporate governance would have been implemented in organisations is
be analysed through looking into their the concern of the rating agencies. This
element of structurising each sub sector paper traces the importance of corporate
index to the overall corporate governance governance, the concept and implications
score. of corporate governance ratings, the
methodology adopted in putting forth a
Scope: The study would trace out the right corporate governance rating system,
corporate governance rating practice the significance of the ratings etc.
devised by countries and how it is Corporate Governance
practised in adhering to corporate entities.
The various methodologies involved in Corporate governance refers to the set of
rating exercise would be helpful for the systems, principles and processes by
corporate entities to look into in advance which a company is governed. It provides

Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 2
the guidelines as to how the company is protection. Narayana Murthy Committee
directed or controlled such that it can fulfil Report on Corporate Governance (2003)
its goals and objectives in a manner that speaks about the rights of shareholders and
adds to the value of the company and governance norms ensure commitment to
beneficial for all stakeholders. Prof Bob values, and ethical business conduct.
Ian Tricker is considered as the father of Institute of Company Secretaries of India
Corporate Governance and in his book – (ICSI) defines corporate governance in a
‘Corporate Governance’ released in 1984 more practical sense – “the application of
brought the theme for the first time and management practices, compliance of law
referred it as the way corporate entities are in true letter and spirit and adherence to
governed, distinguishing from the ethical standards for effective management
management of the companies. While and distribution of wealth and discharge of
putting the corporate governance on a social responsibility for sustainable
wider perspective, he distinguishes the role development of all stakeholders”.
of board vis-a-vis the management. While
the management runs the enterprises to Corporate governance is based on the
meet the various organisational objectives, principles such as
the board or governing body ensures that it  conducting the business with all
is being run well and in the right direction. integrity and fairness
Mr. James D Wolfenson, past president of  being transparent with regard to all
World Bank defined the concept Corporate transactions
Governance in terms of promoting  making all the necessary
fairness, transparency and accountability disclosures and decisions
in organisations. OECD (1999) defines  complying with all the laws of the
corporate governance as a system by land
which business corporations are directed  accountability and responsibility
and controlled. Cadbury Report U K towards the stakeholders and
(1992) views corporate governance as a  commitment to conducting
system of structuring, operating and business in an ethical manner
controlling a company with the aim of
achieving long term goals and protecting Corporate governance in organisations is
the interest of all stakeholders. justified as sound governance norms
Confederation of Indian Industry (CII) contribute to improved corporate
defines corporate governance as a means performance, enhanced investor trust,
of maximising long term shareholder value better access to capital market, reducing
and towards achieving this objective, corruption practices, enhancing
procedures and practices are to be put in shareholder value, reduced risk of
place to take informed decisions. Kumar corporate crisis and scandals etc.
Mangalam Birla Committee Report on In India, the corporate governance
Corporate Governance (1999) relates movement in India began in 1997 with a
corporate governance as indispensable for voluntary code formed by Confederation
a resilient and vibrant capital market and of Indian Industry (CII), followed by about
acts as an instrument of investor 30 largest listed companies accounting
Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 3
over 25 per cent of market capitalization the adherence to corporate governance
voluntarily adopting the CII code. principles.

Corporate Governance Rating CRISIL relates CG Ratings to governance

and value creation. CRISIL’s CG Ratings
The need for adhering to sound assess corporate governance practices of a
governance norms in organisations is well company with respect to their impact on
recognised and rating and research all stakeholders who deal with the
agencies have looked into various ways company such as employees, suppliers,
and means to put in place a mechanism to shareholders, lenders and society in wealth
measure and interpret how the norms are creation. The rating provides a clear
complied with. Corporate Governance picture on existing governance norms, it
Rating (C G Ratings) is an independent helps compare and benchmark with best
opinion in respect of a company’s practices, and functions as a powerful self-
corporate governance system and its assessment and self- improvement tool.
compliance with the standardised norms.
The norms vary from company’s ICRA provides Corporate Governance
ownership structure, rights of the owners, Ratings (CGR) and Stakeholder Value and
management and control procedures, Governance (SVG) rating. Its CGR is
disclosure policy, audit etc. The rating meant to indicate the relative level to
provides information to stakeholders on which an organisation accepts and follows
the level of corporate governance practices the codes and guidelines of corporate
of the entity. governance practices. The CGR focusses
on the rules and procedures laid down and
CARE Ratings views C G Rating as an followed for making decisions on
opinion on relative standing of an entity corporate affairs. The SVG rating, on the
with regard to adoption of corporate other hand is on value creation and value
governance practices. It justifies CG management for all stakeholders of an
ratings on five parameters. Firstly it organization besides the organization’s
provides information to various corporate governance practices. Thus,
stakeholders about the level of corporate ICRA’s SVG rating considers a company’s
governance practices of the organization. actual performance and accrual of the
Secondly it enables corporates to obtain an benefits of such performance among all its
independent and credible assessment of the stakeholders.
quality and extent of their adherence to
governance standards. Thirdly the rating Tricker (2012) justifies the need for
process determines the relative standing of corporate governance rating as a need to
the organisation vis-à-vis the best practices measure, evaluate and rate corporate
followed in the domestic as well as governance standards of companies.
international arena. Fourthly, organisations
can deploy the CG ratings as reference and CG Rating Agencies and their
set benchmark for further improvements. Methodology
Fifthly investors get benefited as they are Globally, firms that have specialised in the
able to differentiate companies based on business of corporate governance ratings

Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 4
are GMI Ratings, Institutional Shareholder governance risks to institutional investors,
Services (ISS), Standard and Poor’s etc. In issuers and corporate decision makers.
this literature, the methodology of these GMI Ratings has specialised in two types
international rating institutions along with of ratings - ESG Rating and AGR Ratings.
three agencies in India involved in ESG (Environmental, Social and
corporate governance ratings are explored. Governance) rating evaluates the
sustainable investment value of public
GMI Ratings: GMI Ratings is formed in companies. The ESG ratings are based on
2010 through the merger of three 150 key risk factors organised into six
independent ratings institutions viz. categories to ensure consistency,
Governance Metric International (GMI), transparency and structural integrity. The
Corporate Library, and Audit Integrity. ratings are expressed in two forms viz.
These institutions were involved in percentile scores ranging from 1 to 100
governance rating business. The focus and as letter grade (A to F) based on the
areas on governance adopted by GMI are percentile scores. AGR (Accounting and
Board accountability, financial disclosure Governance Risk) rating scores are based
and internal controls, executive on risk factors organised into categories
compensation, market for control and such as revenue recognition, expense
ownership base, reputational and socially recognition, asset-liability valuation, high
responsible investment issues, corporate risk events etc. The AGR ratings help
behaviour, and shareholder rights. These investors and public in predicting adverse
resultant variables on these focus areas are events such as litigation, enforcement
ascertained from data base related to actions etc. Investors can integrate GMI’s
securities regulations, stock exchange AGR ratings into their financial models to
listing requirements, compliance report to identify and mitigate portfolio risks. GMI
various corporate governance codes and Ratings publish their ESG ratings on 6400
principles disseminated by various companies worldwide, while the AGR
governance authorities. GMI Ratings ratings are published on 29000 companies.
provide the most extensive coverage of

Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 5
Institutional Shareholding Services four pillars – Board Structure, Shareholder
(ISS): Institutional Shareholding Services Rights, Compensation/Remuneration, and
started corporate governance rating Audit & Risk Oversights. The score
business since June 2002 and the rating is focuses on qualitative aspects of
known as ISS Governance Quick Score. governance and allow investors to
The score provides investors with the tools understand the issues potentially affecting
and insights they need to assess company performance and enhance their
governance attributes categorised under analysis of portfolio of companies.

Quick Score uses a numeric, decile based indicates relatively higher governance risk.
score that indicates a company’s Under the four pillars there are about 200
governance risk relative to their index or factors analysed. Each governance factor is
region. A score of 1 indicates relatively assigned a weight based on the observation
lower governance risk and a score of 10 of team of governance experts.

Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 6
 BOARD COMPENSATION/ SHAREHOLDER AUDIT
STRUCTURE REMUNERATION RIGHTS PRACTICE
Board Pay for Performance One Share One Vote External Auditor
Composition
Composition of Principle of Equity Takeover Defences Audit controversies
Committees
Board Policies Communications & Voting Issues & Accounting
Disclosure Voting formalities controversies
Related Party Termination Other shareholder Compliance of
Transactions Controversies rights issues audit reports

Standard and Poor’s: In July 2002, report covering the main elements of the
Standard & Poor’s, the leading credit analysis and arrive at the corporate
rating agency in the world announced its governance score. The corporate
entry into corporate governance ratings. governance score is assigned on a scale of
S&P’s corporate governance score 1 (lowest) to 10 (highest).
assesses a company’s governance practices
and policies and the extent to which these CRISIL: CRISIL is the leading credit
serve the interests of the company’s rating and information services
stakeholders. The focus areas on organisation in India and it has developed
governance rating adopted by Std & corporate governance ratings – titled
Poor’s are CRISIL GVC i.e. CRISIL Governance and
Value Creation Rating. The broad
 Ownership structure and external objective of corporate governance rating of
influences CRISIL is to measure governance quality
 Shareholder rights and stakeholder and provide an indicator to companies so
relations as to accelerate the pace at which
 Transparency, disclosure and audit, companies develop and implement best
and practices in corporate governance.
 Board structure and effectiveness
The governance rating of CRISIL is
S&P relies on the OECD principles of known as CRISIL GVC (Governance &
good governance viz. fairness, Value Creation) Ratings. CRISIL GVC
transparency, accountability and assesses corporate governance practices at
responsibility. The methodology used by a company in respect of their impact on all
S&P is to form a committee of specialists stakeholders – employees, suppliers,
and conduct interviews for the company shareholders, lenders, society etc. The
being evaluated. The committee also rating indicates the capacity of the
would inspect company documentation, company in creating wealth for all its
regulatory filings, internal governance shareholders.
records, meeting minutes etc. Once the
interview and assessment are completed,
the committee will prepare a detailed
Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 7
 CRISIL METHODOLOGY OF GOVRNANCE INDEX

Assessment Factors Description

Equitable treatment  Ownership structure of shareholding
of shareholders  extent of disclosure of shareholding pattern
 Presence of any disproportionate control provision
 System in place to detect and prevent insider trading.
Ownership rights of  Company policies on protecting shareholder rights
shareholders  Voting rights
 Presence of anti-take-over provisions
 Presence of any disproportionate control provisions
 Preferential rights for any sections of shareholders
 Ease and effectiveness of shareholder participation at
meetings.
Transparency &  Timely disclosure of adequate information on company’s
Disclosure operating and financial performance
 Content of public disclosure for completeness
 Independence of auditor
 Adequacy of internal audit and effectiveness of audit
process
 Completeness and functioning of audit committee
 Internal control and risk management functions
Composition of  Composition of Board and sub committee
Board  Protection of interest of all sections in board composition
 Right mix of competent professionals
 Succession policies of board members.
Functioning of Board  Board’s role in providing independence
 Oversight of management performance
 Role and contribution of independent directors.
Management  Reputation, experience, performance and skills of
Assessment management
 Integrity of senior management
 Managing risks
 Managing opportunities
Value creation for Shareholder: Return on invested capital compared to the weighted
various stakeholders average cost of capital, dividend track record and
pay out ratio
Debt holder: Debt protection measures, credit ratings
Customer: Market share, assessment of customer satisfaction
Employee: Absolute salary levels, adjusted growth in average
annual salaries, stock option programmes, attrition
rates and intangible factors like work environment
and facilities provided
Supplier: Credit terms, support provided and transparent
dealings
Society: Social projects taken up by the company, care for
the environment, taxes paid to Government

To make the analysis of corporate meaningful, CRISIL has added two

governance complete and more aspects which are unique to its assessment
Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 8
methodology. The first is an assessment of eligible for a high SVG ratings, an
management quality, an indicator of value organisation should provide high level
creation potential. The second is the standards on corporate governance
analysis of the value created for various practices, along with a consistent record of
stakeholders. Thus, in addition to a high level stakeholder value creation.
detailed analysis of corporate governance
practices, CRISIL also evaluates the ICRA’s rating exercise involves evaluation
benefits of following good governance - of both quantitative and qualitative
whether it is adding value to the various parameters. Regulatory compliance,
stakeholders of the company, and if so to perusal of corporate documents – board
what extent. CRISIL measures and notes agenda papers, minutes of meetings,
captures this element in its analysis to submission of statutory returns submitted
make it a genuine 360 degree evaluation to various agencies, annual reports and
rather than an analysis of one aspect alone. disclosures etc. are the areas looked into
on rating process. The rating scale starts
According to CRISIL, the broad areas of from SVG1 and ends with SVG6 where
failure on the part of corporate governance SVG1 implies highest quality and SVG6
of companies are accounting frauds carried implies lowest quality. A sign of + may be
out in collusion with statutory auditors, suffixed to the rating symbols other than
lack of independence of the board, insider SVG1 to indicate a relatively higher
trading practices, disproportionate standing within the category.
compensation paid to executive board
members and senior management, weak In designing the rating methodology,
internal control mechanism etc. ICRA keeps in mind the OECD principles
of corporate governance. It ensures
ICRA: ICRA is one of the leading credit distribution of rights and responsibilities
rating institutions in India. ICRA among different participants in the
emphasises its corporate governance corporation viz. board, executives and
ratings on a company’s business practices managers, shareholders and other
and quality of disclosure standards that stakeholders etc.
address the requirements of the regulators.
ICRA’s governance rating is called
Stakeholder Value and Governance (SVG)
Rating. It indicates the relative level to
which an organisation creates and manages
value for its stakeholders, along with an
opinion on the quality of its corporate
governance practices.

The SVG rating relies on a company’s

actual performance and the accrual of the
benefits of such performance among all its
stakeholders, together with the level of
corporate governance practices. To be

Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 9
 ICRA’s METHODOLOGY OF GOVERNANCE INDEX

Assessment Description
factors
Wealth creation & Shareholders: Return on Networth, Return on Capital employed;
Management Dividend policy etc.
Debt Holders: Level of credit rating, Indicators for debt service etc.
Financial Business segments and rationale for strategy, return on capital
Discipline employed in each business line, history of equity dilution, reliance
on debt funding, dividend policy, subsidiaries and its rationale etc.
Transparency & Accounting quality and compliance with accounting standards,
Disclosure changes in accounting policies, quality and level of details on loans
Standards and advances, inter corporate advances, contingent liabilities etc.,
transactions with subsidiaries etc.
Stakeholder Conduct of AGMs and extent of disclosures, procedures for transfer
Relations and registration of shares, company’s response to investor
complaints, timeliness of release of any market sensitive
information, history of penalties levied by regulators etc., human
resources and compensation policies, customer satisfaction,
contribution to community development etc.
Shareholding Ownership pattern of shares, extent of cross holdings, extent of
Structure shares held by promoter/promoter groups etc.
Board Structure Compliance of legal and statutory requirements, constitution of
and Processes Board Committees, frequency of board meetings etc.
Governance Clarity in decision making powers of Board, CEO, line managers
Structure & etc.
Management
Processes

CARE: CARE Ratings under their auditors, lenders, major shareholders etc.
corporate governance rating exercise The assessment exercise is taken keeping
assesses seven key parameters classified in mind the evaluation to the extent of
under Board composition & functioning, value creation and balanced distribution of
Ownership structure, Organization wealth.
structure and MIS, Shareholder
relationship, Disclosure & transparency, The process involved in CARE Ratings
Financial prudence, and Statutory & begins with the client submitting a request
regulatory compliance. for rating along with the required
information – operational and financial in
CARE scrutinises the various documents respect of the client company. The
of the assesse company like agenda papers, officials of the client company interacts
minutes of the Board and Committee with the CARE Rating team and responds
meetings, minutes of the Annual General to queries and provides additional data
Body Meetings, Annual return and other necessary for the analysis. The rating team
documents filed by the company with within CARE analyses the information and
regulatory agencies. The assessment team data, interacts with various stakeholders
would also interact with the CEO, key and finally the rating committee awards
officials of the company, statutory the rating. The rating is conveyed to the

Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 10
clients and the clients accept the rating or of all stakeholders – shareholders,
in certain occasions, appeal for review of debtholders, employees, customers,
the rating. suppliers, and society at large. The rating
quotient accorded quantifies the value
A review of the methodologies of the created on account of good governance
corporate governance rating practices of practice. A good corporate governance
all the six rating agencies reveal that the rating recognises the crucial role of
rating methodology involves in taking into stakeholders in value creation.
account the quantitative indicators as well
as the qualitative aspects of management ADB Corporate Governance Score
of companies. A comprehensive gap Card: Asian Development Bank has
analysis of the governance practices of created the ASEAN Corporate Governance
companies is undertaken. A reliable and Score Card in 2011 and the same was
independent view is taken by the rating administered on countries – Indonesia,
agencies in arriving at the rating. The Malaysia, Philippines, Singapore, Thailand
rating agencies look at the actual practices and Vietnam. The OECD principles of
prevalent in the company through an corporate governance, because of its global
interactive process instead of conducting acceptance by policy makers, investors and
an audit on regulatory compliance. All the other stakeholders were used as the main
agencies take into account the perspective bench mark for the score card.

OECD Principles Weightage

Rights of Shareholders 10%
Equitable treatment of shareholders 15%
Role of Stakeholders 10%
Disclosure & Transparency 25%
Responsibilities of Board 40%

The assessments of corporate governance emerging good practices and (b) negative
standards of companies were based on items reflecting actions and events that are
publicly available and accessible indicative of poor governance.
information such as annual reports,
corporate websites, circulars etc. The score Sarkar et.al (2012) uses information on
card uses two levels of scoring in order to four important corporate governance
capture the implementation of good mechanisms viz. the Board of Director,
corporate governance practices. In level Ownership Structure, Audit Committee,
one, the questions deployed are related to and the External Auditor to arrive at the
items that are in essence of indicative of Corporate Governance Index of 500 large
(a) the laws, rules and regulations of the listed firms in Indian corporate sector.
concerned party and (b) basic expectations Country Governance Score – India’s
of OECD principles. Level two consists of Corporate Governance Score
(a) positive items reflecting other

Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 11
The corporate governance scores of Asian providers of capital. In dealing with
countries have been evaluated by Asian creditors, the companies are in a
Corporate Governance Association and comfortable position with sound ratings.
CLSA, a leading brokerage and investment The rating improves strategic thinking at
group. India’s corporate governance score the top by inducting independent directors
has remained seventh on the eleven nation who bring a wealth of experience. The
list, which is topped by Hongkong. India’s ratings have long term reputational effects
score has improved three percentage points among key stakeholders – employees,
to 54 in 2014 from 51 in 2012. The clients etc. Maintaining a company’s
parameters used in the rating process are corporate governance practices is another
practices followed in the countries in way for shareholders and other
respect of corporate governance rules and stakeholders to keep management honest.
practices, enforcement, political and There is evidence that good governance
regulatory environment, accounting correlates with increased shareholder value
procedures and corporate governance and bad governance is a red flag for
culture. Increasing shareholder activism increased risk. Through providing
and stringent disclosure requirements benchmarks in corporate governance
under the new companies act have helped criteria, scandals and frauds in companies
India improve its corporate governance can be prevented. Companies with good
score. corporate governance quotient are widely
accepted by the public on account of the
Significance of CG Ratings good disclosure and transparency that
Corporate Governance Ratings have come comes with corporate governance. The
to stay. Investors and the public at large companies can track improvements on its
are depending on independent scoring of own governance practices. Higher rating
rating institutions for effective decision is taken as an additional marketing tool for
making. The corporates, itself, find in a investor relations departments. Sarkar et.al
positive way to get rated and get (2012) in their study of 500 large listed
advantage. Strong Corporate Governance companies in India find that companies
rating maintains investors’ confidence, as a with better corporate governance structure
result companies can raise financial appear to earn substantially higher rates of
resources efficiently and effectively. return in the market and conclude that
Further, CG ratings attract foreign capital good governance practices are rewarded
as foreign institutional investment is based by the market which provides an added
on the good governance of companies. incentive to companies to carry out
Such investments make a positive governance reforms.
influence on the share price of the
Challenges
company. Companies can source capital at
a low cost when such companies are rated The providers of rating services appear to
high on corporate governance. Corporate have a conflict of interest as the rating
Governance Ratings lays down the service is chargeable from the companies.
framework for creating long term trust To get the business of ratings, it is an
between companies and the external observation from the public and investor

Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 12
community that the CG rating agencies Conclusion
lure the companies for their business and
in that way even dilute their quality in The paper has aggregated the meaning and
rating process. implications of the concept – corporate
governance as viewed by practitioners. It
Bhasin (2009) opines that the CG score is the application of sound management
has found good acceptability by national practices and adherence to ethical
and international corporates as the score standards and benchmarks to create and
provides a useful benchmark for the sustain shareholder value and ensuring
majority of investors as they often relate sustainable development of all
good CG ratings with well-run and well stakeholders including society. The need
managed companies. Strongly rated for corporate governance rating in light of
companies are less prone to cronyism and the growing expectations of the society to
its effects on corporate wealth. However, a treat it as a benchmark in decision making
study by Stanford law and business faculty is well recognised. The methodology of
members raises doubts on the value of the the corporate governance rating of six
ratings of the governance rating agencies. majors in the field – both international and
The faculty at Rock Centre for Corporate national is dealt. Each rating agency
Governance have conducted an extensive brings forth a score card or a quotient to
study of the corporate governance ratings interpret the extent of complying with
of four agencies viz. GMI, ISS, Audit governance standards. The rating agencies
Integrity, and The Corporate Library and resort to public domain information,
examined more than 15000 ratings of interaction with key functionaries within
6,827 firms from late 2005 to early 2007. the organisation, discussion with auditors
In the case of ISS, the results were and creditors etc. to arrive at the final
shocking as there was no correlation rating. Due weightage is given to each
between its Corporate Governance factor in the score card to arrive at the final
Quotient (CGQ) ratings and the key quotient. Generally the factors looked into
performance parameters. This raises the by governance rating agencies are Board
key question that the governance rating structure and accountability, Executive
institutions should follow strict code of compensation, Audit practices,
conduct and streamline its methodology to Management control procedures,
trace out the real worth of governance of Shareholder rights, Disclosure policies etc.
institutions. The significance of corporate governance
ratings has been summed up and the issues
Gupta (2013) argues that explicit and and challenges in the rating services are
implicit elements in organisations should summarised.
be taken in assessing the governance of
institutions. Often explicit information are The recent corporate failures witnessed
viewed and screened by assessing agencies world over has reinforced the importance
as these are written documents. Implicit of corporate governance and corporate
elements such as behavioural and cultural governance ratings. It is significant for
issues n organisations also got a say in stakeholders to differentiate on companies
arriving at the corporate governance rating. on the basis of governance principles to

Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 13
 identify good from the bad. Successful directors, the effectiveness of board, the
rating depends on information based on accountability and transparency of the
company’s approach to the rights of company etc.
shareholders, the presence of independent

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Asian Development Bank (2014): ASEAN Corporate Governance Scorecard: Country Report
and Assessments 2013-14, ISBN 978-92-9254-538-3

Bhasin, Madan (2009): Corporate Governance Rating Systems – A Powerful tool of

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Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 14

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