S&P Ratings a Zero - The credit rating agency ends its corporate governance evaluation service.

By Rich Duprey
The Motley Fool
Sept. 12, 2005

In the wake of the scandals that ultimately engulfed and ruined investors in Enron and WorldCom, "corporate governance" became the watch phrase of the new millennium. This new attention to corporate governance, the manner in which a public company treats its shareholders, gave us Sarbanes-Oxley, a tough, costly, and perhaps overly burdensome means of keeping a closer eye on corporate management.

Yet the need for oversight was not lost on the private sector, either, as a number of companies and organizations developed criteria for sizing up and grading management behavior. Standard & Poor's, the credit rating agency, set up its own system but is now shutting down the service, which had long been struggling.
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Other ongoing services include the Corporate Governance Quotient (CGQ) that Institutional Shareholder Services (ISS), a proxy service provider, created its for 7,500 companies, including those in the Russell 3000. Individual investors, who are probably already familiar with ISS because of its pronouncements on company mergers, can check out a company's CGQ for free on the profile page at Yahoo! Finance.

The Corporate Library also created standards by which they also could keep tabs on management, as did GovernanceMetrics International, which rates more than 3,200 firms. When GMI released its latest ratings earlier this year, companies as diverse as Air Products & Chemicals(NYSE: APD), Cooper Industries(NYSE: CBE), and twin Inside Value recommendations 3M(NYSE: MMM) and Mattel(NYSE: MAT) had all earned top honors. Of the 34 companies that earned a 10 rating, fully 27 of them were U.S. corporations.

S&P's corporate governance effort was perhaps one of the more notable. Rather than apply a standardized list of metrics to the universe of stocks, S&P created a service whereby the companies requested they be rated. S&P would then go in and analyze those companies based on criteria in four broad categories: ownership structure and influence, financial stakeholder rights and relations, financial transparency and information disclosure, and board structure and process.

The first U.S. company to be rated was Fannie Mae(NYSE: FNM), the national home mortgage enterprise, which earned a corporate governance score (CGS) of 9 out of a possible 10. Interestingly, it was the only U.S. CGS ever made public, and it was also S&P's most controversial. Following Fannie Mae's high score, the government-sponsored enterprise became embroiled in an accounting scandal of a type that the score suggested should not have arisen.

The other U.S. companies -- and there were only a handful -- did not allow their scores to be made available. In January 2002, British firm BP(NYSE: BP) was the first public company to release its S&P score -- a 9.6.

The unique nature of S&P's effort, however, was made untenable because of cost. While a dollar amount was never revealed, a rating was estimated to cost a company between $20,000 and $100,000, depending upon how intensive an analysis was performed. With the advent of Sarbanes-Oxley, and the high cost of compliance associated with that federal regulation, the ability of companies to pay for additional ratings was sorely tested. As a result, S&P also pulled its rating of Fannie Mae, which had fallen as low as CGS-6, reflecting a "deterioration in the timeliness of disclosure as the company works to complete its financial restatement."

S&P's CGS ratings formed a part of its broader credit rating analyses, and the company will roll the service up into that portion of its business. It will still monitor corporate governance issues. Considering that it was up to the end user to decide whether to make S&P CGS ratings public, the ratings' value to the investing public was probably minimal. I mean, what company earning a CGS-1 would actually publicize it? But as one of the earliest efforts in holding management accountable for how it treated shareholders, the S&P system was a worthy effort that should be recognized.

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