Sunday, August 10, 2008

Is Anyone Surprised?

"Since the Enron Scandal, a coterie of corporate-governance firms has emerged as standard-bearers for shareholder rights. In addition to acting as quote machines, the firms--which include the Corporate Library and RiskMetrics Group's ISS Governance Services--are also big businesses that sell, among other things, ratings that say whether a company is well governed or not. But a new study from Stanford University's law and business schools gives mostly dismal grades to four of the biggest rating servies: ISS, the Corporate Library, GovernanceMetrics International (GMI) and Audit Integrity. ... No sophisticated investment manager relies on ratings alone. But the Stanford team found very little or no statistical evidence of links between the ratings and company performance, undermining the firms' very reason for being. ... On average, [ISS's] top-ranked companies were more likely to have class-action lawsuits than its lowest rated companies. ... Patrick McGurn, special counsel at ISS, said ... the ratings are ... not meant to act as a predictor of performance", James Bandler and Doris Burke (B&B) at Fortune, 7 July 2007.

B&B's article does not state if the Stanford study corrected for company size, as a small company with poor "corporate governance" might not have any class-action suits against it as no firm of attorneys thought it could collect a settlement or judgment against such a small firm. That said, the result is no surprise. Assuming McGurn is correct: who needs 'em?

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