Standard & Poor’s Corporate Governance service (CGS)

Standard & Poor’s concept of Corporate Governance Scores (CGS) seeks to express the rating agency’s opinion about the extent to which a company adopts and conforms to codes and guidelines of good corporate governance practices that clearly serve the interests of its financial stakeholders; the rating is on a scale from CGS-10 (highest) to CGS-1 (lowest).

 

Review Mechanisms of Corporate Governance scores (CGS):

 

Scores from 10 (highest) to 1 (lowest) are additionally awarded to the following four individual components that contribute to the overall CGS:
• Ownership Structure
• Financial Stakeholder Relations
• Financial Transparency and Information Disclosures
• Board Structure & Process

 

The Standard & Poor’s Corporate Governance service consists of two parts:

 

1. Company score: Effectiveness of the interaction among the company’s management, Board, shareholders and other stakeholders i.e. internal governance structure and processes, and

2. Country governance classification: The effectiveness of the legal, regulatory informational and market structure.

 

Corporate Governance Ratings:

 

• In India, the ICRA has developed a similar product – it is called Corporate Governance Ratings (CGR).

• CGR indicates ICRA’s current opinion on the relative level to which an organization accepts and follows the codes and guidelines of corporate governance practices.

• The focus of CGR is on corporation’s business practices and the quality of disclosure standards with respect to the requirements of the regulators and interests of the financial stakeholders.

• The rating is mandatory driven. Public ratings are disclosed only on acceptance by the company. The Company may restrict disclosure of Confidential Ratings to select clientele only.

• CGR is based on the OECD’s core principles of Corporate Governance practices i.e. fairness, transparency, accountability and responsibility.

• The ratings fall between CGR1 (highest level of CG) and CGR6 (poor level of CG).

• ICRA also benchmarks the organization against the codes and standards of Corporate Governance as spelt out by SEBI for the listed companies.

• The key variables in the rating process are: regulatory compliance, ownership structure, executive management processes, board structure and processes, stakeholder relations, transparency and disclosures and financial discipline.

• There is usually no direct linkage between CGR and credit ratings.
Suggested Review Mechanisms:

• Parameters of success to be defined: a distinction to be made between commercial failures and corporate governance failures (e.g. Enron, WorldCom. Etc.)

• Six-monthly self-review.

• Annual Review of Board functioning to be done by a committee including RBI representatives (owners), a representative of the Government, experts from ICAI and IIMs, and Directors of other institutions like LIC etc. to get a new direction.

Review Mechanisms of Corporate Governance scores (CGS)

Review Mechanisms of Corporate Governance scores (CGS)

Enabling mechanisms:

 

• Improvement in work / information flow

• Need for modifications in Systems & Procedures

• Strengthening organizational values

• Remuneration

• Training / Exposure to role related requirements

• Division of responsibilities

• Secretarial assistance

 

Penal Provisions:

• Failure on the part of the Board to regulate / supervisor should result in members being held accountable.

• Code of conduct with some outline of proposed action in case of infringement may be put in place to avoid regulatory / legal authorities taking an unduly impractical / harsh view.

 

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About Mohan Manohar Mekap

Mohan Manohar is a blogger from India who founded Ittech back in 2007. He is passionate about all things tech and knows the Internet and computers like the back of his hand.

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