Companies and institutional investors take note: RiskMetrics Group
is launching the successor to its Corporate Governance Quotient
on proxy research reports, dubbed Governance Risk Indicators (GRId)
Instead of scoring companies on governance relative to their industry and index as with CGQs, the new methodology will give an absolute score based on an assessment of four dimensions of corporate governance: board structure; compensation/remuneration; shareholder rights; and audit issues. The change means companies are assessed entirely on their own governance practices.
The methodology will also be updated annually in conjunction with RiskMetrics' policy updates.
"There will be alignment between what drives voting decisions and what drives the level of concern up or down," says RMG Special Counsel Pat McGurn.
Under the new system, companies will be scored on various factors that constitute the four categories, and the scores will be weighted to indicate a low, medium, or high level of concern for each category.
Governance Risk Indicators will be published on proxy research reports and available at Yahoo Finance beginning in early March. CGQ scores will be frozen in early March and retired completely at the end of June 2010.
McGurn says the new methodology reflects changes in thinking about governance since RMG launched CGQ in 2002.
"We listened to how our clients build their internal screens and built that functionality into a new platform," he says.
The underpinnings of the new methodology will be made available in a technical document in early March so that market participants will be able to replicate GRId assessments for any company. McGurn says the idea is to allow people to make suggestions and test theories against it to "help build a better mousetrap over time."
GRId will use a minimum of 70 variables for non-U.S. markets, and roughly 70 variables for rating U.S. and Canadian companies. Companies will be able to check the accuracy of the data used and request updates or corrections through a free data verification tool. Indicators will be updated monthly.
McGurn says the bulk of the new additional factors relate to compensation. Examples include whether named executive officers are entitled to multi-year guaranteed bonuses and whether the company provides tax gross-ups on perks (other than relocation or other broad-based benefits) and/or change-in-control payments.
RMG will no longer evaluate director education programs, and the new indicators won't consider director education as a variable. RMG said the "increasing specialization and professional level" of the programs reduced the need for its accreditation program.
For the first half of 2010, GRId will cover roughly 8,000 companies, with an expansion to additional markets, including Japan and Australia, planned for the second. Initial coverage will include roughly 6,400 U.S. companies, 700 United Kingdom companies, 420 Canadian companies, 240 French companies, 220 German companies, 120 Dutch companies, and 100 Swedish companies.
Resources, including a whitepaper and FAQs for issuers and institutional investors, are available on the GRId microsite