A recent Stanford University study casts doubt on the validity of the corporate governance ratings provided by Institutional Shareholder Services (ISS) and its principal competitors.
Governance rating firms seek to measure the effectiveness of a public company’s corporate governance. They maintain that this rating is predictive of the company’s future performance.
Stanford’s study claims to be the first objective analysis of the predictive value of corporate governance ratings. It examined more than 15,000 ratings of 6,827 separate companies from 2005 to 2007.
For each of the four rating firms examined, the study found only a substantively weak correlation between its ratings and any of five basic performance metrics: accounting restatements, shareholder lawsuits, return on assets, Q Ratio (i.e., a measure of stock value determined by comparing the total market value of a company to the replacement value of its assets), and Alpha (i.e., a measure of performance on a risk-adjusted basis). In the case of ISS, the study found no significant correlation between ISS’ corporate governance quotient (CGQ) and any of the five metrics. In addition, the study found no relation between the CGQ and either ISS’ voting recommendations on shareholder proposals (which can influence 20% to 30% of the vote on a contested matter) or the actual votes by shareholders.
The study concludes that "the time and money spent by public companies on improving governance ratings does not appear to result in significant value for shareholders."
For a copy of Stanford University’s press release concerning this study, which contains a link to the full text of the study: "How Good Are Commercial Corporate Governance Ratings?"
For further information on corporate governance ratings, please contact Peter M. Menard at (213) 617-5483.