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Corporate Governance Ratings - Concept, Methodology and Practice

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 Corporate Governance Ratings –
Concept, Methodology and Practice

By
K. Sukumaran
Dean, National Institute of Securities Markets, Vashi, Navi Mumbai

Abstract

Corporate Governance assumes SEBI in February 2000 and with the

significance in the modern competitive
world as organisations are operating in a
more and more deregulated regime. In
such circumstances, governance structure
should be instituted in an organisation to
take care of the various dimensions of
good governance. The important principles
of a good corporate governance system are
responsibilities of board, shareholder
recognition, stakeholder interests, ethical
behaviour, business transparency etc.
“Corporate Governance is the process
whereby people in power direct, monitor
and lead corporations, and thereby either
create, modify or destroy the structures
and systems under which they operate”.
World Bank defines it as “Corporate
Governance is about promoting corporate
fairness, transparency and accountability.”
While companies must focus on their core
objective of earning profits, but the profit
is earned and how it is distributed should
be in aligned with the expectations of
stakeholders. Adoption of distinct
corporate governance practices
distinguishes a company from others and
in this paradigm corporate governance
ratings play a vital role. In Indian context
corporate governance reforms have taken a
new shape with the implementation of the
clause 49 of the Listing Agreement by
enactment of the new Companies Act
2013.
Corporate Governance Rating is an
important component in the overall
governance system. Corporate Governance
Rating is defined as an opinion on a
company’s corporate governance system,
its compliance with the various parameters
deployed for assessment and the rating
differentiates companies in accordance
with their corporate governance quality.
The rating provides vital information to
various stakeholders about the extent of
corporate governance practices
implemented. The rating determines the
relative standing of an entity vis-à-vis
other entities in respect of the best
practices followed on corporate
governance principles.
Corporate Governance Ratings have been
introduced and implemented in countries
to judge the extent of compliance of
corporate governance principles. Corporate
governance ratings and frameworks are in
use in many countries. The rating agencies
– international and national have worked
on a suitable rating methodology on
evaluating the adherence of corporate
governance principles by companies.
Internationally, GMI Ratings, Institutional

Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 1
Shareholder Services (ISS), Standard &
Poor’s etc. are engaged in providing
corporate governance rating services. In
Indian context, Credit Rating Information
Services of India Ltd (CRISIL), ICRA,
and Care Ratings are currently involved in
corporate governance rating. Each
organisation has relied on certain corporate
governance principles and accordingly
devised the ratings.
Objective: This paper traces into the
meaning and concept of the corporate
governance rating, the methodology
involved in construction of the corporate
governance index structure, and how it is
implemented. In analysing these issues –
concept, methodology and practice, both
national and international practices are
probed and documented. The issues and
challenges in implementing the scoring
model are also scribed.
Methodology: The methodology involved
in writing this research paper is literature
review. The literature on governance
ratings appeared in national and
international publications would be
reviewed. Further, the rating methodology
of national and international rating
agencies on corporate governance would
be analysed through looking into their
element of structurising each sub sector
index to the overall corporate governance
score.
Scope: The study would trace out the
corporate governance rating practice
devised by countries and how it is
practised in adhering to corporate entities.
The various methodologies involved in
rating exercise would be helpful for the
corporate entities to look into in advance
Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015
and explore the possibility of putting in
place a right corporate governance
structure. A comparison of corporate
governance ratings, revealed from
secondary data analysis would be helpful
to the students and scholars working on the
theme- corporate governance.
Key Words: Corporate Governance,
Corporate Governance Ratings, Board
Structure, Shareholder Rights
Introduction
Corporate governance has assumed much
significance in all countries across the
globe, thanks to the growing expectations
from the shareholders, stakeholders and
the general public. The liberalization,
competition, privatization and
globalization have thrown many
opportunities to the corporate world to
enter into new areas, diversify the
operations and to seek possible mergers
and acquisitions. In this journey forward,
ethics and corporate governance norms
built in organizations would make the
functioning and expectations moving in
the same direction. Measuring to what
extent the corporate governance norms
have been implemented in organisations is
the concern of the rating agencies. This
paper traces the importance of corporate
governance, the concept and implications
of corporate governance ratings, the
methodology adopted in putting forth a
right corporate governance rating system,
the significance of the ratings etc.
Corporate Governance
Corporate governance refers to the set of
systems, principles and processes by
which a company is governed. It provides
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the guidelines as to how the company is
directed or controlled such that it can fulfil
its goals and objectives in a manner that
adds to the value of the company and
beneficial for all stakeholders. Prof Bob
Ian Tricker is considered as the father of
Corporate Governance and in his book –
‘Corporate Governance’ released in 1984
brought the theme for the first time and
referred it as the way corporate entities are
governed, distinguishing from the
management of the companies. While
putting the corporate governance on a
wider perspective, he distinguishes the role
of board vis-a-vis the management. While
the management runs the enterprises to
meet the various organisational objectives,
the board or governing body ensures that it
is being run well and in the right direction.
Mr. James D Wolfenson, past president of
World Bank defined the concept Corporate
Governance in terms of promoting
fairness, transparency and accountability
in organisations. OECD (1999) defines
corporate governance as a system by
which business corporations are directed
and controlled. Cadbury Report U K
(1992) views corporate governance as a
system of structuring, operating and
controlling a company with the aim of
achieving long term goals and protecting
the interest of all stakeholders.
Confederation of Indian Industry (CII)
defines corporate governance as a means
of maximising long term shareholder value
and towards achieving this objective,
procedures and practices are to be put in
place to take informed decisions. Kumar
Mangalam Birla Committee Report on
Corporate Governance (1999) relates
corporate governance as indispensable for
a resilient and vibrant capital market and
acts as an instrument of investor
Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015
protection. Narayana Murthy Committee
Report on Corporate Governance (2003)
speaks about the rights of shareholders and
governance norms ensure commitment to
values, and ethical business conduct.
Institute of Company Secretaries of India
(ICSI) defines corporate governance in a
more practical sense – “the application of
management practices, compliance of law
in true letter and spirit and adherence to
ethical standards for effective management
and distribution of wealth and discharge of
social responsibility for sustainable
development of all stakeholders”.
Corporate governance is based on the
principles such as
 conducting the business with all
integrity and fairness
 being transparent with regard to all
transactions
 making all the necessary
disclosures and decisions
 complying with all the laws of the
land
 accountability and responsibility
towards the stakeholders and
 commitment to conducting
business in an ethical manner
Corporate governance in organisations is
justified as sound governance norms
contribute to improved corporate
performance, enhanced investor trust,
better access to capital market, reducing
corruption practices, enhancing
shareholder value, reduced risk of
corporate crisis and scandals etc.
In India, the corporate governance
movement in India began in 1997 with a
voluntary code formed by Confederation
of Indian Industry (CII), followed by about
30 largest listed companies accounting
Page 3
over 25 per cent of market capitalization
voluntarily adopting the CII code.
Corporate Governance Rating
The need for adhering to sound
governance norms in organisations is well
recognised and rating and research
agencies have looked into various ways
and means to put in place a mechanism to
measure and interpret how the norms are
complied with. Corporate Governance
Rating (C G Ratings) is an independent
opinion in respect of a company’s
corporate governance system and its
compliance with the standardised norms.
The norms vary from company’s
ownership structure, rights of the owners,
management and control procedures,
disclosure policy, audit etc. The rating
provides information to stakeholders on
the level of corporate governance practices
of the entity.
CARE Ratings views C G Rating as an
opinion on relative standing of an entity
with regard to adoption of corporate
governance practices. It justifies CG
ratings on five parameters. Firstly it
provides information to various
stakeholders about the level of corporate
governance practices of the organization.
Secondly it enables corporates to obtain an
independent and credible assessment of the
quality and extent of their adherence to
governance standards. Thirdly the rating
process determines the relative standing of
the organisation vis-à-vis the best practices
followed in the domestic as well as
international arena. Fourthly, organisations
can deploy the CG ratings as reference and
set benchmark for further improvements.
Fifthly investors get benefited as they are
able to differentiate companies based on
Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015
the adherence to corporate governance
principles.
CRISIL relates CG Ratings to governance
and value creation. CRISIL’s CG Ratings
assess corporate governance practices of a
company with respect to their impact on
all stakeholders who deal with the
company such as employees, suppliers,
shareholders, lenders and society in wealth
creation. The rating provides a clear
picture on existing governance norms, it
helps compare and benchmark with best
practices, and functions as a powerful self-
assessment and self- improvement tool.
ICRA provides Corporate Governance
Ratings (CGR) and Stakeholder Value and
Governance (SVG) rating. Its CGR is
meant to indicate the relative level to
which an organisation accepts and follows
the codes and guidelines of corporate
governance practices. The CGR focusses
on the rules and procedures laid down and
followed for making decisions on
corporate affairs. The SVG rating, on the
other hand is on value creation and value
management for all stakeholders of an
organization besides the organization’s
corporate governance practices. Thus,
ICRA’s SVG rating considers a company’s
actual performance and accrual of the
benefits of such performance among all its
stakeholders.
Tricker (2012) justifies the need for
corporate governance rating as a need to
measure, evaluate and rate corporate
governance standards of companies.
CG Rating Agencies and their
Methodology
Globally, firms that have specialised in the
business of corporate governance ratings
Page 4
are GMI Ratings, Institutional Shareholder
Services (ISS), Standard and Poor’s etc. In
this literature, the methodology of these
international rating institutions along with
three agencies in India involved in
corporate governance ratings are explored.
GMI Ratings: GMI Ratings is formed in
2010 through the merger of three
independent ratings institutions viz.
Governance Metric International (GMI),
Corporate Library, and Audit Integrity.
These institutions were involved in
governance rating business. The focus
areas on governance adopted by GMI are
Board accountability, financial disclosure
and internal controls, executive
compensation, market for control and
ownership base, reputational and socially
responsible investment issues, corporate
behaviour, and shareholder rights. These
resultant variables on these focus areas are
ascertained from data base related to
securities regulations, stock exchange
listing requirements, compliance report to
various corporate governance codes and
principles disseminated by various
governance authorities. GMI Ratings
provide the most extensive coverage of
Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015
governance risks to institutional investors,
issuers and corporate decision makers.
GMI Ratings has specialised in two types
of ratings - ESG Rating and AGR Ratings.
ESG (Environmental, Social and
Governance) rating evaluates the
sustainable investment value of public
companies. The ESG ratings are based on
150 key risk factors organised into six
categories to ensure consistency,
transparency and structural integrity. The
ratings are expressed in two forms viz.
percentile scores ranging from 1 to 100
and as letter grade (A to F) based on the
percentile scores. AGR (Accounting and
Governance Risk) rating scores are based
on risk factors organised into categories
such as revenue recognition, expense
recognition, asset-liability valuation, high
risk events etc. The AGR ratings help
investors and public in predicting adverse
events such as litigation, enforcement
actions etc. Investors can integrate GMI’s
AGR ratings into their financial models to
identify and mitigate portfolio risks. GMI
Ratings publish their ESG ratings on 6400
companies worldwide, while the AGR
ratings are published on 29000 companies.
Page 5
Institutional Shareholding Services
(ISS): Institutional Shareholding Services
started corporate governance rating
business since June 2002 and the rating is
known as ISS Governance Quick Score.
The score provides investors with the tools
and insights they need to assess
governance attributes categorised under
four pillars – Board Structure, Shareholder
Rights, Compensation/Remuneration, and
Audit & Risk Oversights. The score
focuses on qualitative aspects of
governance and allow investors to
understand the issues potentially affecting
company performance and enhance their
analysis of portfolio of companies.

Quick Score uses a numeric, decile based
score that indicates a company’s
governance risk relative to their index or
region. A score of 1 indicates relatively
lower governance risk and a score of 10
indicates relatively higher governance risk.
Under the four pillars there are about 200
factors analysed. Each governance factor is
assigned a weight based on the observation
of team of governance experts.

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Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 6
 BOARD COMPENSATION/ SHAREHOLDER AUDIT
STRUCTURE REMUNERATION RIGHTS PRACTICE
Board Pay for Performance One Share One Vote External Auditor
Composition
Composition of Principle of Equity Takeover Defences Audit controversies
Committees
Board Policies Communications & Voting Issues & Accounting
Disclosure Voting formalities controversies
Related Party Termination Other shareholder Compliance of
Transactions Controversies rights issues audit reports

Standard and Poor’s: In July 2002,
Standard & Poor’s, the leading credit
rating agency in the world announced its
entry into corporate governance ratings.
S&P’s corporate governance score
assesses a company’s governance practices
and policies and the extent to which these
serve the interests of the company’s
stakeholders. The focus areas on
governance rating adopted by Std &
Poor’s are
 Ownership structure and external
influences
 Shareholder rights and stakeholder
relations
 Transparency, disclosure and audit,
and
 Board structure and effectiveness
S&P relies on the OECD principles of
good governance viz. fairness,
transparency, accountability and
responsibility. The methodology used by
S&P is to form a committee of specialists
and conduct interviews for the company
being evaluated. The committee also
would inspect company documentation,
regulatory filings, internal governance
records, meeting minutes etc. Once the
interview and assessment are completed,
the committee will prepare a detailed
Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015
report covering the main elements of the
analysis and arrive at the corporate
governance score. The corporate
governance score is assigned on a scale of
1 (lowest) to 10 (highest).
CRISIL: CRISIL is the leading credit
rating and information services
organisation in India and it has developed
corporate governance ratings – titled
CRISIL GVC i.e. CRISIL Governance and
Value Creation Rating. The broad
objective of corporate governance rating of
CRISIL is to measure governance quality
and provide an indicator to companies so
as to accelerate the pace at which
companies develop and implement best
practices in corporate governance.
The governance rating of CRISIL is
known as CRISIL GVC (Governance &
Value Creation) Ratings. CRISIL GVC
assesses corporate governance practices at
a company in respect of their impact on all
stakeholders – employees, suppliers,
shareholders, lenders, society etc. The
rating indicates the capacity of the
company in creating wealth for all its
shareholders.
Page 7
 CRISIL METHODOLOGY OF GOVRNANCE INDEX

Assessment Factors Description

Equitable treatment  Ownership structure of shareholding
of shareholders  extent of disclosure of shareholding pattern
 Presence of any disproportionate control provision
 System in place to detect and prevent insider trading.
Ownership rights of  Company policies on protecting shareholder rights
shareholders  Voting rights
 Presence of anti-take-over provisions
 Presence of any disproportionate control provisions
 Preferential rights for any sections of shareholders
 Ease and effectiveness of shareholder participation at
meetings.
Transparency &  Timely disclosure of adequate information on company’s
Disclosure operating and financial performance
 Content of public disclosure for completeness
 Independence of auditor
 Adequacy of internal audit and effectiveness of audit
process
 Completeness and functioning of audit committee
 Internal control and risk management functions
Composition of  Composition of Board and sub committee
Board  Protection of interest of all sections in board composition
 Right mix of competent professionals
 Succession policies of board members.
Functioning of Board  Board’s role in providing independence
 Oversight of management performance
 Role and contribution of independent directors.
Management  Reputation, experience, performance and skills of
Assessment management
 Integrity of senior management
 Managing risks
 Managing opportunities
Value creation for Shareholder: Return on invested capital compared to the weighted
various stakeholders average cost of capital, dividend track record and
pay out ratio
Debt holder: Debt protection measures, credit ratings
Customer: Market share, assessment of customer satisfaction
Employee: Absolute salary levels, adjusted growth in average
annual salaries, stock option programmes, attrition
rates and intangible factors like work environment
and facilities provided
Supplier: Credit terms, support provided and transparent
dealings
Society: Social projects taken up by the company, care for
the environment, taxes paid to Government

To make the analysis of corporate meaningful, CRISIL has added two

governance complete and more aspects which are unique to its assessment
Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 8
methodology. The first is an assessment of
management quality, an indicator of value
creation potential. The second is the
analysis of the value created for various
stakeholders. Thus, in addition to a
detailed analysis of corporate governance
practices, CRISIL also evaluates the
benefits of following good governance -
whether it is adding value to the various
stakeholders of the company, and if so to
what extent. CRISIL measures and
captures this element in its analysis to
make it a genuine 360 degree evaluation
rather than an analysis of one aspect alone.
According to CRISIL, the broad areas of
failure on the part of corporate governance
of companies are accounting frauds carried
out in collusion with statutory auditors,
lack of independence of the board, insider
trading practices, disproportionate
compensation paid to executive board
members and senior management, weak
internal control mechanism etc.
ICRA: ICRA is one of the leading credit
rating institutions in India. ICRA
emphasises its corporate governance
ratings on a company’s business practices
and quality of disclosure standards that
address the requirements of the regulators.
ICRA’s governance rating is called
Stakeholder Value and Governance (SVG)
Rating. It indicates the relative level to
which an organisation creates and manages
value for its stakeholders, along with an
opinion on the quality of its corporate
governance practices.
The SVG rating relies on a company’s
actual performance and the accrual of the
benefits of such performance among all its
stakeholders, together with the level of
corporate governance practices. To be
Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015
eligible for a high SVG ratings, an
organisation should provide high level
standards on corporate governance
practices, along with a consistent record of
high level stakeholder value creation.
ICRA’s rating exercise involves evaluation
of both quantitative and qualitative
parameters. Regulatory compliance,
perusal of corporate documents – board
notes agenda papers, minutes of meetings,
submission of statutory returns submitted
to various agencies, annual reports and
disclosures etc. are the areas looked into
on rating process. The rating scale starts
from SVG1 and ends with SVG6 where
SVG1 implies highest quality and SVG6
implies lowest quality. A sign of + may be
suffixed to the rating symbols other than
SVG1 to indicate a relatively higher
standing within the category.
In designing the rating methodology,
ICRA keeps in mind the OECD principles
of corporate governance. It ensures
distribution of rights and responsibilities
among different participants in the
corporation viz. board, executives and
managers, shareholders and other
stakeholders etc.
Page 9
 ICRA’s METHODOLOGY OF GOVERNANCE INDEX

Assessment Description
factors
Wealth creation & Shareholders: Return on Networth, Return on Capital employed;
Management Dividend policy etc.
Debt Holders: Level of credit rating, Indicators for debt service etc.
Financial Business segments and rationale for strategy, return on capital
Discipline employed in each business line, history of equity dilution, reliance
on debt funding, dividend policy, subsidiaries and its rationale etc.
Transparency & Accounting quality and compliance with accounting standards,
Disclosure changes in accounting policies, quality and level of details on loans
Standards and advances, inter corporate advances, contingent liabilities etc.,
transactions with subsidiaries etc.
Stakeholder Conduct of AGMs and extent of disclosures, procedures for transfer
Relations and registration of shares, company’s response to investor
complaints, timeliness of release of any market sensitive
information, history of penalties levied by regulators etc., human
resources and compensation policies, customer satisfaction,
contribution to community development etc.
Shareholding Ownership pattern of shares, extent of cross holdings, extent of
Structure shares held by promoter/promoter groups etc.
Board Structure Compliance of legal and statutory requirements, constitution of
and Processes Board Committees, frequency of board meetings etc.
Governance Clarity in decision making powers of Board, CEO, line managers
Structure & etc.
Management
Processes

CARE: CARE Ratings under their
corporate governance rating exercise
assesses seven key parameters classified
under Board composition & functioning,
Ownership structure, Organization
structure and MIS, Shareholder
relationship, Disclosure & transparency,
Financial prudence, and Statutory &
regulatory compliance.
CARE scrutinises the various documents
of the assesse company like agenda papers,
minutes of the Board and Committee
meetings, minutes of the Annual General
Body Meetings, Annual return and other
documents filed by the company with
regulatory agencies. The assessment team
would also interact with the CEO, key
officials of the company, statutory
auditors, lenders, major shareholders etc.
The assessment exercise is taken keeping
in mind the evaluation to the extent of
value creation and balanced distribution of
wealth.
The process involved in CARE Ratings
begins with the client submitting a request
for rating along with the required
information – operational and financial in
respect of the client company. The
officials of the client company interacts
with the CARE Rating team and responds
to queries and provides additional data
necessary for the analysis. The rating team
within CARE analyses the information and
data, interacts with various stakeholders
and finally the rating committee awards
the rating. The rating is conveyed to the

Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 10
clients and the clients accept the rating or
in certain occasions, appeal for review of
the rating.
A review of the methodologies of the
corporate governance rating practices of
all the six rating agencies reveal that the
rating methodology involves in taking into
account the quantitative indicators as well
as the qualitative aspects of management
of companies. A comprehensive gap
analysis of the governance practices of
companies is undertaken. A reliable and
independent view is taken by the rating
agencies in arriving at the rating. The
rating agencies look at the actual practices
prevalent in the company through an
interactive process instead of conducting
an audit on regulatory compliance. All the
agencies take into account the perspective
OECD Principles
Rights of Shareholders
Equitable treatment of shareholders
Role of Stakeholders
Disclosure & Transparency
Responsibilities of Board
The assessments of corporate governance
standards of companies were based on
publicly available and accessible
information such as annual reports,
corporate websites, circulars etc. The score
card uses two levels of scoring in order to
capture the implementation of good
corporate governance practices. In level
one, the questions deployed are related to
items that are in essence of indicative of
(a) the laws, rules and regulations of the
concerned party and (b) basic expectations
of OECD principles. Level two consists of
(a) positive items reflecting other
Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015
of all stakeholders – shareholders,
debtholders, employees, customers,
suppliers, and society at large. The rating
quotient accorded quantifies the value
created on account of good governance
practice. A good corporate governance
rating recognises the crucial role of
stakeholders in value creation.
ADB Corporate Governance Score
Card: Asian Development Bank has
created the ASEAN Corporate Governance
Score Card in 2011 and the same was
administered on countries – Indonesia,
Malaysia, Philippines, Singapore, Thailand
and Vietnam. The OECD principles of
corporate governance, because of its global
acceptance by policy makers, investors and
other stakeholders were used as the main
bench mark for the score card.
Weightage
10%
15%
10%
25%
40%
emerging good practices and (b) negative
items reflecting actions and events that are
indicative of poor governance.
Sarkar et.al (2012) uses information on
four important corporate governance
mechanisms viz. the Board of Director,
Ownership Structure, Audit Committee,
and the External Auditor to arrive at the
Corporate Governance Index of 500 large
listed firms in Indian corporate sector.
Country Governance Score – India’s
Corporate Governance Score
Page 11
The corporate governance scores of Asian
countries have been evaluated by Asian
Corporate Governance Association and
CLSA, a leading brokerage and investment
group. India’s corporate governance score
has remained seventh on the eleven nation
list, which is topped by Hongkong. India’s
score has improved three percentage points
to 54 in 2014 from 51 in 2012. The
parameters used in the rating process are
practices followed in the countries in
respect of corporate governance rules and
practices, enforcement, political and
regulatory environment, accounting
procedures and corporate governance
culture. Increasing shareholder activism
and stringent disclosure requirements
under the new companies act have helped
India improve its corporate governance
score.
Significance of CG Ratings
Corporate Governance Ratings have come
to stay. Investors and the public at large
are depending on independent scoring of
rating institutions for effective decision
making. The corporates, itself, find in a
positive way to get rated and get
advantage. Strong Corporate Governance
rating maintains investors’ confidence, as a
result companies can raise financial
resources efficiently and effectively.
Further, CG ratings attract foreign capital
as foreign institutional investment is based
on the good governance of companies.
Such investments make a positive
influence on the share price of the
company. Companies can source capital at
a low cost when such companies are rated
high on corporate governance. Corporate
Governance Ratings lays down the
framework for creating long term trust
between companies and the external
Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015
providers of capital. In dealing with
creditors, the companies are in a
comfortable position with sound ratings.
The rating improves strategic thinking at
the top by inducting independent directors
who bring a wealth of experience. The
ratings have long term reputational effects
among key stakeholders – employees,
clients etc. Maintaining a company’s
corporate governance practices is another
way for shareholders and other
stakeholders to keep management honest.
There is evidence that good governance
correlates with increased shareholder value
and bad governance is a red flag for
increased risk. Through providing
benchmarks in corporate governance
criteria, scandals and frauds in companies
can be prevented. Companies with good
corporate governance quotient are widely
accepted by the public on account of the
good disclosure and transparency that
comes with corporate governance. The
companies can track improvements on its
own governance practices. Higher rating
is taken as an additional marketing tool for
investor relations departments. Sarkar et.al
(2012) in their study of 500 large listed
companies in India find that companies
with better corporate governance structure
appear to earn substantially higher rates of
return in the market and conclude that
good governance practices are rewarded
by the market which provides an added
incentive to companies to carry out
governance reforms.
Challenges
The providers of rating services appear to
have a conflict of interest as the rating
service is chargeable from the companies.
To get the business of ratings, it is an
observation from the public and investor
Page 12
community that the CG rating agencies
lure the companies for their business and
in that way even dilute their quality in
rating process.
Bhasin (2009) opines that the CG score
has found good acceptability by national
and international corporates as the score
provides a useful benchmark for the
majority of investors as they often relate
good CG ratings with well-run and well
managed companies. Strongly rated
companies are less prone to cronyism and
its effects on corporate wealth. However, a
study by Stanford law and business faculty
members raises doubts on the value of the
ratings of the governance rating agencies.
The faculty at Rock Centre for Corporate
Governance have conducted an extensive
study of the corporate governance ratings
of four agencies viz. GMI, ISS, Audit
Integrity, and The Corporate Library and
examined more than 15000 ratings of
6,827 firms from late 2005 to early 2007.
In the case of ISS, the results were
shocking as there was no correlation
between its Corporate Governance
Quotient (CGQ) ratings and the key
performance parameters. This raises the
key question that the governance rating
institutions should follow strict code of
conduct and streamline its methodology to
trace out the real worth of governance of
institutions.
Gupta (2013) argues that explicit and
implicit elements in organisations should
be taken in assessing the governance of
institutions. Often explicit information are
viewed and screened by assessing agencies
as these are written documents. Implicit
elements such as behavioural and cultural
issues n organisations also got a say in
arriving at the corporate governance rating.
Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015
Conclusion
The paper has aggregated the meaning and
implications of the concept – corporate
governance as viewed by practitioners. It
is the application of sound management
practices and adherence to ethical
standards and benchmarks to create and
sustain shareholder value and ensuring
sustainable development of all
stakeholders including society. The need
for corporate governance rating in light of
the growing expectations of the society to
treat it as a benchmark in decision making
is well recognised. The methodology of
the corporate governance rating of six
majors in the field – both international and
national is dealt. Each rating agency
brings forth a score card or a quotient to
interpret the extent of complying with
governance standards. The rating agencies
resort to public domain information,
interaction with key functionaries within
the organisation, discussion with auditors
and creditors etc. to arrive at the final
rating. Due weightage is given to each
factor in the score card to arrive at the final
quotient. Generally the factors looked into
by governance rating agencies are Board
structure and accountability, Executive
compensation, Audit practices,
Management control procedures,
Shareholder rights, Disclosure policies etc.
The significance of corporate governance
ratings has been summed up and the issues
and challenges in the rating services are
summarised.
The recent corporate failures witnessed
world over has reinforced the importance
of corporate governance and corporate
governance ratings. It is significant for
stakeholders to differentiate on companies
on the basis of governance principles to
Page 13
 identify good from the bad. Successful directors, the effectiveness of board, the
rating depends on information based on accountability and transparency of the
company’s approach to the rights of company etc.
shareholders, the presence of independent

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Paper presented in the Third National Research Conference organized by Indian Institute of Corporate
Affairs (IICA) at New Delhi during 25-26 February, 2015 Page 14

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