Institutional Investors Value Corp Governance, Wary of Rating Systems

January 3, 2003 ( - Many institutional investors say corporate governance issues are a strong influence on their investment decisions, but are wary of new services designed to measure and rate governance of public companies, according to a new survey.

More than 80% of institutional investors surveyed by Gregory FCA, an Ardmore, Pennsylvania investor relations and public relations agency, said that a corporation’s quality of corporate governance would influence an investment decision. Those that did not agree were not necessarily disputing the value of good corporate governance, only that “such ratings are subjective at best,” according to FCA.

Just as firmly, those who valued good governance said a corporate governance rating alone would not make them buy or sell a stock. Nor was anyone ready to pay for such information until its value is proven.  In fact, there were many suggestions on what needed to be added to the evaluation including an examination of offshore subsidiaries and conflicts of interest involving friends and/or family

Overall, investors did not feel that good corporate governance added significant costs. As one respondent said it will not increase costs “and it will save you a hell of a lot on D&O insurance.” Others cited savings in legal costs.  Investors, normally adverse to more regulation, were largely hopeful, yet doubtful, that higher voluntary standards on corporate governance would keep regulators away. Dissenters felt increased regulation might be the only answer.

“That is the second time in a year that an institutional investor survey of ours found support for more regulation. If you need evidence as to how deeply investors want change, this is it,” said David Evanson, President of Investor Relations for FCA.  The FCA said their survey results suggest that rating systems are interesting and, possibly valuable, but that they will not, by themselves, form the basis for institutional investor decisions.

ISS Survey

However, companies such as Standard & Poor’s and Institutional Shareholder Services (ISS) have come forth with ways to measure corporate behavior.   ISS has recently introduced a corporate governance checklist as a way to measure the quality of corporate governance at a public company. 

The ISS checklist, called a Corporate Governance Quotient, rates public companies on corporate governance issues.

The checklist includes factors that influence a company’s rating in both a positive and negative direction. Noted as a positive in the sample ISS Survey are such factors as:

  • There are 7 directors serving on the board
  • The positions of Chairman and CEO are not held by the sameperson, or the company has designated a lead director
  • Shareholders may call special meetings at the request of 50% ofthe outstanding shares
  • Options have not been repriced without shareholder approvalduring the past three years
  • All stock-based incentive plans have been approved by shareholders
  • Directors receive all or a portion of their compensation in theform of equity
  • Non-employee directors do not participate in the company’spension plan

Conversely, viewed as a negative in the sample ISS Survey are factors including:

  • The company does not have board guidelines that have beenpublicly disclosed
  • A 67% vote is required to amend certain provisions of the charter or bylaws
  • The company is subject to a control share acquisition statute
  • Option repricing is permitted without prior shareholder approval
  • Outside directors meet only when the CEO is present
  • Directors are not subject to stock ownership guidelines
  • Officers and directors beneficially own 13.10% of the outstanding stock.

“The ISS checklist is a great start and would serve public companies very well if they used it before they made certain decisions. If you’re about to initiate any change in corporate governance, you’re better off knowing the ramifications of that inevitable disclosure while you can still reconsider. We review the ramifications of corporate governance decisions all the time, but too often it’s in the damage-control phase,” Evanson said.