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Corporate Governance Ratings: A step towards better

Corporate Governance.
Overview:
In this research paper researcher’s attempts to present the concept of Corporate Governance Ratings
(CGR) and various aspects related to it such as the phases involved in CGR, issuers of CGR and
investigates if such ratings can surely improve the CG standards.

Introduction:
 Corporate governance has become an important agenda around the globe, since last two decades for
policy makers because of corporate scandals and increasingly importance for CG around the world.
 According to OECD (Organization for Economic Cooperation and Development) Principles of
CG states:

"Corporate governance involves a set of relationships between a company’s management, its board,
its shareholders and other stakeholders. Corporate governance also provides the structure through
which the objectives of the company are set, and the means of attaining those objectives and
monitoring performance are determined."

 The Failure of corporate giants such as (Enron, Satyam, WorldCom, and Tyco) is the major
cause that shifted the attention of world towards governance of the corporation. The failure of ‘best
governed’ companies such as Satyam has shaken the trust of the investors. Ramanlinga Raju
shocked the world by confessing that Satyam’s accounts have been manipulated by US$ 1.47
billion.
 After that many changes have been introduced in the system to avoid and detect such frauds and
several codes, standards, and laws have come into force which aims to improve the governance
standards of the corporation. One of the rising trend is corporate governance ratings (CGR).
 Companies are themselves getting careful with their business practices. With growing level of
awareness among investors
 Good governance practices and observing ethical behavior can help companies sustain a profitable
business in long run. High CGR helps the companies to assure the investors that company is
governed properly.
Corporate Governance Rating:
 The Corporate Governance Ratings is a judgment on relative standing of an entity with regard to
adoption of corporate governance practices.
 Corporate Governance Ratings (CGR) evaluates the governance practices of companies. Investors
and other stakeholders get benefited as they are able to differentiate companies based on degree of
corporate governance.
 Companies can also use these ratings as reference and set benchmarks for further improvement.
 The process of commercial (CGR) is consisted of five phases.
 Collect Data regarding CG.
 Aggregate the data collected.
 Process the data and translate into rating.
 The output of processed data is-Rating.
 Update the rating pertaining to the previous four phases.

Benefits of corporate governance rating:


 CGR is supposed to benefit the company as well as stakeholders.

Benefits related to companies.

 Highlights the effectiveness of corporate governance practices to investors.


 Allows benchmarking against best governance practices in industry.
 Creates visibility across all stakeholders.
 Enhances appeal of the company to long-term investors.

Benefits related to investors and other stakeholders.


 Evaluates treatment of various stakeholders by management.
 Understands the way a company operates, and compares its governance standards with
those of other companies.
 Understands the relative degree of transparency, and enhances involvement with the
company.
 Obtains additional information, while making investment decisions.

Issuers of Corporate Governance Rating:


 ISS, GMI, CRISIL, CARE and Brickworks are the rating agencies which measure the corporate
governance practices of the companies and rate them.
 Following parameters are used by these rating agencies while giving corporate governance rating.
ISS GMI CRISIL CARE BRICKWORKS
(Quick score2.0) (GVC)

Equitable Board Board


Board structure. Board accountability. treatment of composition & Composition and
shareholders. functioning. Effectiveness.

Shareholders Financial disclosure Ownership rights Ownership Management


Rights. and internal controls. of shareholders. structure. Transparency,

Organization
Executive Transparency & structure and Ownership
Compensation/ Shareholder rights. disclosure. Management Structure.
Remuneration. Information
System.
Audit related Executive Composition of Shareholder Shareholders’
practices. compensation. Board. relationship. Rights.

Market for control Functioning of Disclosure & Financial


xx and ownership base. Board. transparency. Fairness.

Corporate behavior Management Financial


xx and corporate social assessment. prudence. xx
responsibility issue.
Value creation for Statutory and
xx xx various regulatory xx
stakeholders. compliance.

Can Corporate Governance Rating ensure better corporate governance?


 Examination of companies’ disasters discloses that they are largely attributable to shortcomings in
corporate governance practices. The main causes of failure are:
 Accounting frauds carried out in collusion with statutory auditors.
 Lack of independence of the board with board members having significant financial
linkages with the companies.
 Insider trading.
 Disproportionate compensation paid to executive board members and senior
management.
 Fiduciary failure by the board to exercise care and diligence in approving proposals,
even though all the information was provided by the management.
 Weak internal control mechanisms and lack of supervision corporate governance has
thus become a critical area of focus for various market participants and stakeholders.
 In order to ensure that company functions smoothly, the Board must function effectively. If the
Board members are corrupt, the company will fail ultimately. This is the reason that probably every
rating agency is taking into account the Board effectiveness and its remuneration.
 Another focus area of CGR’s is Shareholder participation. The companies around the world are
taking steps to increase shareholders participation in decision making and they are been appreciated
for it too by the rating agencies.
 Analyzing the public information declared by company is used for rating them. Constitution of
audit committee, nomination committee and other board committees do not guarantee that they are
functioning properly
 In short, one cannot assure if the company has good governance practices on the paper, it is
followed in spirit. So the CGR may not reflect the reality if depth analysis of governance practices
is been undertaken.

Conclusion:
 Corporate governance is about commitment to values and ethical business conduct. Good corporate
governance is reflected in fair, transparent and responsible interactions between a company's
management, its board of directors, shareholders and other stakeholders
 CGR ratings should be given by independent agencies and should reflect the reality of corporate
governance quality of the company.
 There should be standard rating standards and symbols to make them understandable and
comparable.
 CGR should be made mandatory to disclose which will ensure greater accountability and make
the ratings more valuable.
 In order to get higher ratings, corporate governance standards should be increased.
 Companies should move beyond the tick box approach and genuinely be involved good
governance practices.
 This will surely help in improving the corporate climate and ensure greater accountability and
responsibility on the corporates.

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