Corporate governance rating: A tough task

Written by Sandeep Singh | Updated: Jan 11 2013, 06:23am hrs
Credit rating of corporate governance is a highly unusual concept for India, which the Securities and Exchange Board of India has brought on to the table in its consultation paper on the subject.

Rating of corporate governance has its share of controversy. Abroad, companies like GMI Ratings and Moodys do social and environmental governance ratings. Their work is principally derived from the UN initiative on the Principles for Responsible Investment. The UN Compact tries to bring together affirmative action on climate change and development goals with the demands of shareholders to maximise a companys performance. The Sebi proposal is also in line with Sarbanes-Oxley Act of USA, which has made certain aspects of corporate governance mandatory regulation.

But because the goals they attempt to measure are difficult to define, the ratings often get criticised. For instance if among two companies, one has more women on the board and another from the shop floor, which has done a better job If other factors are weighed in, the quality of measurement of the board room gets vitiated. The Sebi proposal says credit rating agencies will monitor the adherence to compliance of norms by companies, which means that if it is accepted, then all listed companies will have to mandatorily get rated again by a rating agency on corporate governance.

Once it is made mandatory, there will be around 5,000 listed companies that will have to be rated, a stiff challenge in terms of maintaining quality. Also if the regulator defines the benchmarks that such ratings may be tested against, it could introduce a bias. A methodology developed by ICRA says the ultimate objective of CG is to create and maximise shareholder value, (it) therefore focuses on factors that are within the companys control, and which, in ICRAs opinion, impact the shareholder value that a company is able to generate in the long run a difficult principle to adopt.

Sandeep is a Senior Assistant Editor based in Mumbai.