Governance and Risk by George S. Dallas (Editor). This handbook presents the most comprehensive framework for corporate governance as a risk factor that I have ever seen. I have several books on my shelves that compare corporate governance systems in the US, UK, Japan, Germany and France but this one also includes Brazil, China, India, Korea, Russia and Turkey.
I also have plenty of handbooks for directors that describe various duties but Governance and Risk takes the most systematic approach. Each factor is accompanied by instruction, questions, as well as examples of strong and weak profiles.
The premise of rating analysis is that we can isolate and diagnose corporate governance factors that complement traditional credit and equity analysis. This book cites the usual studies, such as Corporate Governance and Equity Prices by Paul Gompers and Andrew Metrick, and a several I had missed, such as Disclosure Practices of Foreign Companies Interacting with U.S. Markets by Tarun Khanna, Krishna Palepu and Suraj Srinivasan.
The most unusual feature of the book is the large number of chapters that lay out the analytical framework used by Standard & Poor’s Governance Services in its governance scoring and evaluation process for individual companies, starting with a thorough discussion of limitations. I was a little surprised to read this, assuming they would keep such information under lock and key.
The scoring methodology evaluates roughly 80 analytical factors. In contrast to a checkbox approach, weightings are not necessarily fixed. For example, share registration with an independent body may be relatively meaningless where common practice, such as in the U.S., but takes on greater weight in Russia, where companies serving as their own share registrars have been known to erase contentious shareholders from their books.
Go to Governance and Risk and use the “search inside” features. You’ll see the Contents drills in to the micro level in chapters such as
- Ownership Structure and External Influences
- Shareholder Rights and Stakeholder Relations
- Transparency, Disclosure, and Audit
- Board Structure and Effectiveness
Other parts cover macro issues and wider themes, various countries, and case studies. I was pleased to see that contrary to CalPERS’ practice, for example, S&P believes it is “inappropriate to mechanically limit individual country assessments by some form of sovereign ceiling.” S&P’s system provides a positive incentive for individual firms to be the best they can be, even if headquartered in a weak country environment. By voluntarily adopting higher standards, such as listing in other countries, such firms can lower funding costs and provide growth opportunities.
The book treats this topic and most others with a fair degree of depth, discussing SEC disclosure requirements (20F filing), presentation of US GAAP accounts, more aggressive enforcement authorities, etc. Now, if I can get the CalPERS board to read this, perhaps they will stop blacklisting foreign companies with good corporate governance. CalPERS should take a country’s risk factors into account but should rate individual companies on one scale and countries on another.
The S&P governance analysis isn’t designed to uncover fraud and the authors write that the outlined evaluation “stops short of being an audit.” Yet, I haven’t seen such a thorough assessment tool elsewhere in book form. Standard & Poor’s Governance Services recently announced they would no longer provide public corporate governance scores for U.S. companies. However, with Governance and Risk as their guide, any company could do its own self-assessment. It may lack the comparison data that S&P has no doubt compiled but those choosing to us this tool will have a laundry list of excellent questions, as well as profiles of effective vs. ineffective practices.
Investors and other stakeholders will find the book a ready reference for factors to consider when investing, voting proxies, or looking up common practices by country. While I am sad to see S&P cease its governance services in the U.S., I am delighted they have left such an important legacy in Governance and Risk. I know that I will be referencing the book for many years to come.