Commercial Corporate Governance Research Articles

How useful are commercial corporate governance ratings? Evidence from emerging markets

A central issue in evaluating the effects of firm-level corporate governance (FLCG) is how to measure it. We focus here on emerging markets (EMs). One common approach to measuring FLCG uses country-specific (CSIs), tailored to each country's laws and institutions. Several studies report that CSIs can predict firm outcomes in a panel data framework with two-way (firm and time) fixed effects (TWFE). An alternate approach uses commercial CG ratings (CCGRs) that apply the same or similar elements across many countries. We assess the three best available CCGRs covering EMs (Asset4, Thomson Reuters, and MSCI), and find that they do not predict firm outcomes with TWFE in EMs. We also provide evidence that the likely cause for CCGRs' lack of performance is their poor construction rather than the inability of FLCG measures to predict outcomes. CSI-based studies suggest that disclosure (beyond country-mandated minimums) is the FLCG aspect that most consistently predicts firm outcomes in EMs. Yet, these CCGRs have no or minimal measures of disclosure. Other important limitations of the CCGRs include the use of elements that are U.S.-centric; reflect firm outcomes rather than CG; are implausible measures of good FLCG, or are vaguely or subjectively defined. We also attempt, but fail, to use element-level information from CCGRs to construct sound measures of FLCG.

How Useful are Commercial Corporate Governance Ratings in Emerging Markets?

How Useful are Commercial Corporate Governance Ratings in Emerging Markets?

Do Corporate Governance Ratings Change Investor Expectations? Evidence from Announcements by Institutional Shareholder Services*

Abstract This paper examines empirically the announcement effect of commercial corporate governance ratings on share returns. Rating downgrades by Institutional Shareholder Services (ISS) are associated with negative returns of –1.14% over a 3-day announcement window. The returns are highly correlated with the proprietary analysis of ISS and are decreasing in agency costs, consistent with ratings providing independent information on underlying corporate governance quality. We thus show that the influence and impact of ISS extends beyond proxy recommendations and subsequent voting outcomes. Our findings contrast with the insignificant price impact of Daines, Gow, and Larcker (2010), whose analysis we replicate and successfully reconcile to ours by pooling upgrades and downgrades together.

Measuring the Quality of Corporate Governance – A Review of Corporate Governance Indices**

The aim of this paper is to provide an insight in to the world of corporate governance quality as well as to shed light on efforts in measuring the quality of corporate governance through an overview of relevant academic and commercial corporate governance indices by. As the paper will show, measuring the quality of corporate governance is still a relatively new concept. The construction of the index for measuring the quality of corporate governance still comes down to simplification of standards or criteria which mainly revolve around three dimensions - compliance, performance and accountability. In contrast to the level of compliance with good governance standards, scientific assessment of the quality of corporate governance remains a mystery.

Measuring Corporate Governance: Lessons from the 'Bundles Approach'

This paper reviews recent studies that analyse and criticise existing academic and commercial corporate governance (CG) indices. Most of these ‘rating the ratings’ papers reach the conclusion that encompassing composite measures of CG are ineffective and suggest therefore to return to simpler measures. This paper draws on the 'configurational' - or 'bundles approach' to CG and argues that, while the criticisms made by the 'rating the ratings' papers are justified, their recommendations are misguided. Based on four central insights derived from the 'bundles approach', the paper shows that reverting to simpler measures of firm-level CG practices is a step in the wrong direction, in that it eliminates information about interactions between different corporate governance mechanisms. This is particularly consequential for comparative CG research that aims to identify differences in country-specific CG systems. Alternative solutions are developed to improve corporate governance measures, which take into account insights from the 'bundles approach'.

An Empirical Examination of the Relationship between Corporate Governance Ratings and Listed Companies’ Performance

This study examines the relationship between corporate governance ratings and firm performance, includingboth a global measure of corporate governance and four sub-indices corresponding Audit, Board Structure,Shareholder Rights and Compensation, provided by Institutional Shareholder Services (ISS). The corporategovernance ratings represent a proper approximation of the quality of corporate governance practices from insidethe companies. This fact determines the investors which seek to hold shares in certain companies for a long termto be interested in the quality of corporate governance practices related to those companies. Using thecross-sectional multiple linear regression model for a random sample of 155 U.S. companies listed at New YorkStock Exchange, NASDAQ and NYSE Amex Equities, belonging to twenty industries, in 2011, our researchemphasizes a negative relationship between corporate governance global rating and firm performance. Also, wefind a negative relationship between corporate governance sub-indices and firm performance, with someexceptions. However, when we removed the companies from financial and real estate sectors, respectively 29companies, resulting another sample of 126 companies, the results support the same findings. This study revealsthat the commercial corporate governance ratings, like Governance Risk Indicators (GRId), provided byInstitutional Shareholder Services (ISS) are affected by measurement errors. This research is important to theshareholders and investors globally, who are using commercial corporate governance ratings, in order to identifyand quantify the risks of their investments. Our study suggests that shareholders and investors should not baseentirely on commercial corporate governance ratings in their investment decisions, because they couldn’t takethe proper investment decision each time.

Commercial corporate governance ratings: an alternative view of their use and impact

The rise in the popularity of commercial corporate governance ratings is at once a source of dismay and a cause for alarm: the former because they do not appear to give accurate predictions of corporate performance and the latter because they add to the pressure on corporations to adapt their governance structures to a benchmark model that takes no account of the conditions in which they operate. This paper gives an alternative view of the potential use and impact of the commercially marketed governance ratings. It argues that their importance to institutional investors lies in providing them with information that accurately summarises corporate loyalty to shareholders rather than accurately predicts corporate performance. It goes on to argue that the commercial governance ratings can bring benefits to an economy by contributing to a new type of managerial control mechanism that is not only more efficient than hostile takeovers and stock options but also helps to reduce the governance role of these instruments.

The Usefulness of Corporate Governance Ratings

This paper investigates the usefulness of commercial corporate governance ratings from a market perspective. For two large European economies, Germany and the UK, we document a positive association of ISS governance ratings with firm value. However, when we decompose the rating into its two components, publicly available governance information, and information added through the rating vendor’s proprietary rating technology, only the former component turns out significant in the firm value regressions. This finding is not moderated by the institutional diversity of our setting, i.e., the German stakeholder-oriented system versus the UK shareholder-oriented system, and leads us to rule out that our findings are driven by measurement error on behalf of the rating agency. Rather, our results suggest that the economic vindication of governance rating agencies may not derive from their expertise in converting public data into aggregated ratings, but, e.g., from comparative advantages in collecting governance data, or from other factors.

Rating the Ratings: How Good are Commercial Governance Ratings?

Proxy advisory and corporate governance rating firms play an increasingly important role in U.S. public markets. Proxy advisory firms provide voting recommendations to shareholders on proxy proposals and sometimes take an active role persuading management to change governance arrangements. Corporate governance rating firms provide indices to evaluate the effectiveness of a firm's governance and claim to be able to predict future performance, risk, and undesirable outcomes such as accounting restatements and shareholder litigation. We examine these claims for the commercial corporate governance ratings produced for 2005 by Audit Integrity, RiskMetrics (previously Institutional Shareholder Services), GovernanceMetrics International, and The Corporate Library. Our results indicate that the level of predictive validity for these ratings are well below the threshold necessary to support the bold claims made for them by these commercial firms. Moreover, we find no relation between the governance ratings provided by RiskMetrics with either their voting recommendations or the actual votes by shareholders on proxy proposals.

Management, Decision-Making and Supervision of Belgian State Owned Enterprises: An Inefficient Patchwork?

In April 2005 the OECD published its guidelines on the corporate governance of state-owned enterprises (S0E). Its first guideline reads that . . . SOEs should not be exempt from the application of general laws and regulations . . . the legal and regulatory framework should allow sufficient flexibility for adjustments in the capital structure of SOEs. In 1991, long before the corporate governance discussions hit the European coasts, Belgium developed a proper regulatory governance framework for autonomous state-owned enterprises, including specific checks and balances. The general commercial company code is applicable for the remaining issues. However, due to constitutional developments and divergent views on industrial policy, federal and regional Parliaments modified the applicable rules of a large number of SOE's, pushing the checks and balances to the edge. This paper assesses the 1991 corporate governance framework for Belgian autonomous SOE's, compares governance features of these entities and considers the differences with the commercial corporate governance practices. The paper starts with a brief introduction of the Belgian federal state and concludes with some thoughts for future developments.