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.
• Improvement in work / information flow
• Need for modifications in Systems & Procedures
• Strengthening organizational values
• Training / Exposure to role related requirements
• Division of responsibilities
• Secretarial assistance
• 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.