Products February 7, 2005

Morningstar Unveils Equity 'Stewardship Grades'

February 7, 2005 (PLANSPONSOR.com) - Morningstar has unveiled an equity grading system to evaluate how often companies align their corporate concerns with shareholders' interests.

Reported by

Fred Schneyer

A Morningstar news release said Morningstar Stewardship Grades are designed to help individual investors evaluate a company’s financial transparency, shareholder friendliness, management incentives and ownership, as well as overall corporate stewardship of investors’ capital.

The announcement said that Morningstar analysts have assigned grades ranging from “A” (best) to “F” (worst) to 500 of the largest and most widely held stocks. Eventually, Morningstar analysts will assign grades to the more than 1,500 stocks.

The Morningstar Stewardship Grade for stocks follows the company’s launch last year of a new grading system for mutual funds designed to help individual investors identify funds that do a good job of aligning their interests with those of fund shareholders.

“Meaningful information about a company’s stewardship practices is very difficult for individual investors to find and interpret,” said Patrick Dorsey, director of stock analysis for Morningstar, in the announcement. “Too often, this kind of research is only available to large institutional investors. Our goal is to give individual investors direct access to the type of information that can help them identify management teams that put shareholders first.”

Morningstar stock analysts base the Stewardship Grades on public filings, previous management actions, conversations with company officials and their own expertise. The grades address three broad categories:

a company’s accounting practices and financial disclosure, aiming to identify firms that provide investors with insufficient or potentially misleading information.
the power of shareholders relative to management, evaluating the firm’s share-class structure and assignment of CEO and board chair roles and noting the existence of any takeover defenses or related-party transactions.
whether management’s incentives are aligned with shareholders’ interests. Morningstar analysts penalize those firms that change management goals midstream, issue too many options, overcompensate executives, or have low levels of equity ownership.