What factors are considered by services that assign corporate governance ratings?

Question

What will be an ideal response?

Answer 1

For a look at the factors considered by services that assign corporate governance ratings, consider S&P's Corporate Governance Score. This score is based on information attained both privately and publicly and includes interviews with managers and knowledge attained from its credit rating of the corporation's debt. The score takes into consider the following factors. First is the ownership structure and external influences. This factor includes the transparency of ownership structure and the concentration and influence of ownership and external stakeholders. Second factor involves shareholder rights and stakeholder relations. This factor consists of shareholder meetings and voting procedures, ownership rights and takeover defenses and stakeholder relations. The third factor is transparency, disclosure, and audit that include content of public disclosure, timing of and access to public disclosure, and the audit process. The fourth factor is the board structure and effectiveness that consists of the board structure and independence, the role and effectiveness of the board, and the director and senior executive compensation.

Based on S&P's analysis of these four key factors, its assessment of the company's corporate governance practices and policies and how its policies serve shareholders and other stakeholders is reflected in the Corporate Governance Score. The score ranges from 10 (the highest score) to 1 (the lowest score). In addition to corporate governance, credit analysts look at the quality of management in assessing a corporation's ability to pay.

Although difficult to quantify, management quality is one of the most important factors supporting an issuer's credit strength. When the unexpected occurs, it is a management's ability to react appropriately that will sustain the company's performance. Assessment of management's plans in comparison with those of their industry peers can also provide important insights into the company's ability to compete, how likely it is to use debt capacity, its treatment of its subsidiaries, its relationship with regulators, and its position vis-à-vis all fundamentals affecting the company's long-term credit strength.

In assessing management quality, Moody's tries to understand the business strategies and policies formulated by management. The factors Moody's considers are: strategic direction, financial philosophy, conservatism, track record, succession planning, and control systems.