The Construction of a Corporate Governance Rating System for a Small Open Capital Market: Methodology and Applications in the Greek Market

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The need of institutional investors to evaluate the corporate governance (CG) practices of the listed companies resulted in many attempts to construct CG rating methodologies. This paper, in response to this situation, presents an attempt to quantify the compliance of large capitalisation Greek companies with international best practices. The methodology consisted in the creation of a questionnaire reflecting the Greek CG code, which basically replicate the OECD Principles. Other, well-regarded CG codes were taken into account. Then, we constructed a rating system based on CG indicators and we applied it for the years 2001 and 2003. The total rating results for the years 2001 and 2003 demonstrated a relatively satisfactory improvement. The highest compliance is in the category of shareholder rights, while weak compliance appears in the last category, which incorporates commitment to CG, CSR and the relations with shareholders. The exercise, using practically all agreed principles of the OECD, could demonstrate a reasonable degree of compliance of the average company rated. Its limitation in that respect is that it could not satisfy investigations on convergence. The indicators used were highly pertinent to measure compliance, but not convergence, which was not within the initial targets and would need a longer time series analysis. Our methodology applies in a small open economy and may have significant implications in other similar capital markets. Methodologically, the merit of the exercise lies in its approach toward the creation of collectively subjective weightings, and is valuable to institutional investors, policymakers, regulators and academics.