Corporate Governance Rating-UNIT5.pptx

It gives a detailed description of the term corporate governance. It also helps us to understand the phenomenon of corporate governance. This topic comes under arts and sciences which is available to study or research.

1. Corporate Governance Rating

2. UNIT V   What is a Corporate Governance Rating? Corporate governance is defined as a set of rules, mechanisms and practices that inform how a corporation is being operated or managed. Essentially , corporate governance drives transparency, fairness and accountability between a company and its customers, shareholders, suppliers, financiers, executives, government and the community . A corporate governance rating refers to the status of a company with respect to the adoption of corporate governance practices. This rating is the final opinion regarding the important a corporation attached to corporate governance by looking at the information they provide to stakeholders, relationship with financiers, customers, suppliers, the community and others. 

3. The following key points are considered for corporate governance rating: Board composition and functioning;   Ownership structure ; Quality of Management Information System; Shareholders ' profile; Disclosure and transparency; Financial prudence; Statutory and regulatory compliance .

4. How is a Corporate Governance Rating Used? A corporate governance rating is provided by a rating entity after deriving information about the adoption of corporate governance by an institution through the reports of analysts . There are many sources where information can be gathered about the relative standing if an entity with respect to corporate governance. This means a rating agency may or may not actively conduct an audit of an entity before the rating is provided. Given that corporate governance rating is dependent on the information provided on a corporation, it can be modified, suspended r withdrawn if counter information is provided.

5. Some of the processes adopted by rating agencies before coming up with corporate governance rating are macro and microanalysis, crucial data such as proceedings of shareholders meetings, minutes of board meetings, cases filed by consumers, suppliers among others.  Corporate Governance Rating (CGR) is an opinion on the relative position of an organisation in respect of adoption of corporate governance practices. It indicates to the stakeholders about the level of corporate governance practices prevailing in the organisation.

6. Significance (importance) of CG Ratings Investors and the public at large are depending on independent scoring of rating institutions for effective decision making. The corporates , itself, find in a positive way to get rated and get advantage. Strong Corporate Governance rating maintains investors’ confidence, as a result companies can raise financial resources efficiently and effectively. Further, CG ratings attract foreign capital as foreign institutional investment is based on the good governance of companies. Such investments make a positive influence on the share price of the company. Companies can source capital at a low cost when such companies are rated high on corporate governance.

7. Corporate Governance Ratings lays down the framework for creating long term trust between companies and the externalproviders of capital. In dealing with creditors, the companies are in a comfortable position with sound ratings. The rating improves strategic thinking at the top by inducting independent directors who bring a wealth of experience. The ratings have long term reputational effects among key stakeholders – employees, clients etc. Higher rating is taken as an additional marketing tool for investor relations departments.

8. Maintaining a company’s corporate governance practices is another way for shareholders and other stakeholders to keep management honest. There is evidence that good governance correlates with increased shareholder value and bad governance is a red flag for increased risk . Through providing benchmarks in corporate governance criteria, scandals and frauds in companies can be prevented. Companies with good corporate governance quotient are widely accepted by the public on account of the good disclosure and transparency that comes with corporate governance. The companies can track improvements on its own governance practices. Sarkar et.al (2012) in their study of 500 large listed companies in India find that companies with better corporate governance structure appear to earn substantially higher rates of return in the market and conclude that good governance practices are rewarded by the market which provides an added incentive to companies to carry out governance reforms

9. CGR Process The CGR process of Infomerics involves perusal of various documents like agenda papers and minutes of Board and Board committees, Annual return and other documents filed by the bank with ROC, SEBI, stock exchanges (domestic and international) and all other regulatory bodies, prospectus (if applicable), offer documents, minutes of the Annual General Meeting and Extraordinary general meeting . It also involves meeting with top management including CEO, independent directors & whole-time director(s), bankers, Statutory Auditors, Internal Auditors and so on.

10. Key parameters which are considered: Board composition & functioning; Ownership structure; Quality of Management Information System; Shareholders ’ profile; Disclosure & transparency; Financial prudence; and, Statutory and regulatory compliance.

11. Good Corporate governance also helps ensuring that corporations take into consideration the interests of a wide range of constituencies, as well as of the communities within which they operate . Good corporate governance aims at value creation for its stake holders. Evaluation of the extent of value creation and balanced distribution of wealth is ascertained in this exercise which involves assessment of wealth creation and distribution parameters in addition to the parameters evaluated under CGR. Wealth creation by a company based on sound business strategy and practices adopted by its management as also maintaining financial and operational discipline would promote enhancing stakeholder value

12. CG Rating Agencies and their Methodology Globally, firms that have specialised in the business of corporate governance ratingsare GMI Ratings, Institutional Shareholder Services (ISS), Standard and Poor’s etc . In this literature, the methodology of these international rating institutions along with three agencies in India involved in corporate governance ratings are explored.

13. GMI Ratings: GMI Ratings is formed in 2010 through the merger of three independent ratings institutions viz. Governance Metric International (GMI), Corporate Library, and Audit Integrity. These institutions were involved in governance rating business. The focus areas on governance adopted by GMI are Board accountability, financial disclosure and internal controls, executive compensation, market for control and ownership base, reputational and socially responsible investment issues, corporate behaviour, and shareholder rights. These resultant variables on these focus areas are ascertained from data base related to securities regulations, stock exchange listing requirements, compliance report to various corporate governance codes and principles disseminated by various governance authorities . GMI Ratings provide the most extensive coverage ofgovernance risks to institutional investors, issuers and corporate decision makers. GMI Ratings has specialised in two types of ratings - ESG Rating and AGR Ratings.

14. ESG (Environmental, Social and Governance) rating evaluates the sustainable investment value of public companies. The ESG ratings are based on 150 key risk factors organised into six categories to ensure consistency, transparency and structural integrity. The ratings are expressed in two forms viz. percentile scores ranging from 1 to 100 and as letter grade (A to F) based on the percentile scores. AGR (Accounting and Governance Risk) rating scores are based on risk factors organised into categories such as revenue recognition, expense recognition, asset-liability valuation, high risk events etc. The AGR ratings help investors and public in predicting adverse events such as litigation, enforcement actions etc. Investors can integrate GMI’s AGR ratings into their financial models to identify and mitigate portfolio risks. GMI Ratings publish their ESG ratings on 6400 companies worldwide, while the AGR ratings are published on 29000 companies.

15. Institutional Shareholding Services (ISS): Institutional Shareholding Services started corporate governance rating business since June 2002 and the rating is known as ISS Governance Quick Score. The score provides investors with the tools and insights they need to assess governance attributes categorised underfour pillars – Board Structure, Shareholder Rights, Compensation/Remuneration, and Audit & Risk Oversights. The score focuses on qualitative aspects of governance and allow investors to understand the issues potentially affecting company performance and enhance their analysis of portfolio of companies.Quick Score uses a numeric, decile based score that indicates a company’s governance risk relative to their index or region. A score of 1 indicates relatively lower governance risk and a score of 10indicates relatively higher governance risk. Under the four pillars there are about 200 factors analysed. Each governance factor is assigned a weight based on the observation of team of governance experts.

16. Standard and Poor’s: In July 2002, Standard & Poor’s, the leading credit rating agency in the world announced its entry into corporate governance ratings. S&P’s corporate governance score assesses a company’s governance practices and policies and the extent to which these serve the interests of the company’s stakeholders. The focus areas on governance rating adopted by Std& Poor’s are  Ownership structure and external influences  Shareholder rights and stakeholder relations  Transparency, disclosure and audit, and  Board structure and effectiveness S&P relies on the OECD principles of good governance viz . fairness, transparency, accountability and responsibility. The methodology used by S&P is to form a committee of specialists and conduct interviews for the company being evaluated. The committee also would inspect company documentation, regulatory filings, internal governance records, meeting minutes etc. Once the interview and assessment are completed, the committee will prepare a detailedreport covering the main elements of the analysis and arrive at the corporate governance score. The corporate governance score is assigned on a scale of 1 (lowest) to 10 (highest).

17. CRISIL: CRISIL is the leading credit rating and information services organisation in India and it has developed corporate governance ratings – titled CRISIL GVC i.e. CRISIL Governance and Value Creation Rating. The broad objective of corporate governance rating of CRISIL is to measure governance quality and provide an indicator to companies so as to accelerate the pace at which companies develop and implement best practices in corporate governance. The governance rating of CRISIL is known as CRISIL GVC (Governance & Value Creation) Ratings. CRISIL GVC assesses corporate governance practices at a company in respect of their impact on all stakeholders – employees, suppliers, shareholders, lenders, society etc. The rating indicates the capacity of the company in creating wealth for all its shareholders.

18. ICRA : ICRA is one of the leading credit rating institutions in India. ICRA emphasises its corporate governance ratings on a company’s business practices and quality of disclosure standards that 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 eligible for a high SVG ratings, an organisation should provide high level standards on corporate governance practices, along with a consistent record of high level stakeholder value creation.

19. ICRA’s rating exercise involves evaluation of both quantitative and qualitative parameters. Regulatory compliance, perusal of corporate documents – board notes agenda papers, minutes of meetings, submission of statutory returns submitted to various agencies, annual reports and disclosures etc ., are the areas looked into on rating process. The rating scale starts from SVG1 and ends with SVG6 where SVG1 implies highest quality and SVG6 implies lowest quality . A sign of + may be suffixed to the rating symbols other than SVG1 to indicate a relatively higher standing within the category. In designing the rating methodology, ICRA keeps in mind the OECD principles of corporate governance. It ensures distribution of rights and responsibilities among different participants in the corporation viz. board, executives and managers, shareholders and other stakeholders etc.

20. CARE : CARE Ratings under their corporate governance rating exercise assesses seven key parameters classified under Board composition & functioning, Ownership structure, Organization structure and MIS, Shareholder relationship, Disclosure & transparency, Financial prudence, and Statutory & regulatory compliance. CARE scrutinises the various documents of the assesse company like agenda papers, minutes of the Board and Committee meetings, minutes of the Annual General Body Meetings, Annual return and other documents filed by the company with regulatory agencies. The assessment team would also interact with the CEO, key officials of the company, statutoryauditors , lenders, major shareholders etc. The assessment exercise is taken keeping in mind the evaluation to the extent of value creation and balanced distribution of wealth.

21. The process involved in CARE Ratings begins with the client submitting a request for rating along with the required information – operational and financial in respect of the client company . The officials of the client company interacts with the CARE Rating team and responds to queries and provides additional data necessary for the analysis. The rating team within CARE analyses the information and data, interacts with various stakeholders and finally the rating committee awards the rating. The rating is conveyed to theclients and the clients accept the rating or in certain occasions, appeal for review of the rating.

22. Benefits of Corporate Governance Ratings Corporate Governance Rating enables corporate entities to obtain an independent and credible assessment of the quality and extent of their corporate governance. The rating process also determines the relative position of the entity vis-à-vis the best practices followed. Organisations can also use these ratings as reference and set bench marks for further improvements. Investors and other stakeholders benefit as they are able to differentiate companies with varying degree of corporate governance.