June 4, 2005
Grading Corporate Goverance
Individual investors can now get corporate governance grades from two services, Institutional Shareholder Services (ISS), a Maryland firm, and Morningstar, a Chicago research firm. The two services use very different strategies to rank firms and their rankings can conflict. ISS (www.finance.yahoo.com) uses public filings to compare a company with its peers. It bases its ratings on 61 criteria, including executive compensation, audit procedures, and takeover defenses. Morningstar (www.morningstar.com) starts with public data and adds information from interviews with company management and adds governance track record. Morningstar grades are not relative to other firms in the industry but based on an absolute scale.
Morningstar gives Walt Disney, for example, a D and ISS gives the same company a top scope fo 100%.
I view these competiting grading systems as a real public benefit. I hope other services will also appear. There is as yet no data indicating that a high rating will translate into superior performance however. Data will come, however, and the competition among the services will lead to the creation and publication of the data and grade method adjustments for improvements. This is wonderful stuff; no goverment agency could do this.
June 4, 2005 | Permalink
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