Ways to Discern Good Corporate Governance

In a previous post, we discussed the potential pitfalls of investing in companies with poor corporate governance structures. But how can an investor protect himself? There are two basic ways. First of all, the investor can become knowledgeable about what makes for good corporate governance, and then study up on each company in which he is interested in order to make sure it follows practices in accordance with sound corporate governance. The second method is to take advantage of the information published by the companies that specialize in rating and reporting on the governance practices of public companies.

A full discussion of what makes for good corporate governance is beyond the scope of what can be provided in this one article, and we have covered some of the basic points in previous articles on corporate governance. Therefore, this article will focus on what's available for those interested in pursuing the second method.

Governance Metrics International (GMI) is a company that has developed a proprietary corporate governance rating model that it has applied to over 4000 companies. The premise behind the company is that firms with superior corporate governance practices generate superior returns. GMI can be contacted for those who wish to receive a sample report.

Standard and Poor's also produces a Corporate Governance Score (CGS), based on the following criteria:

1. Ownership structure
2. Shareholder rights
3. Transparency and disclosure
4. Board effectiveness

Based on how a company is rated in the above four factors, it is given a CGS rating between 1 and 10. A sample report of S&P governance can be viewed here.

While it's easy to gloss over corporate governance elements, the wisest investors always keep them top of mind. With the first rule of value investing being "Never Lose Money", ensuring sound corporate governance practices can increase the likelihood of being able to follow that rule successfully.

Comments

[Gem Hudson]

International Monetary Funds IMF is to keep the world grease in its money but when it come to its balance of payments, the liabilities from its net capital ouflow need to inflow so that they can outflow. Building up wealth is to build up more than a fleet of green cars that never did became an assets. That is because they are not selling. The primary income is only acredit not to debit that sub priming their mortgages and the gold standard is to hyperinflate more of that now international world reserve currency.

2009 Apr 03 10:13 AM

[optionsgirl]

The "little" investor relied on S&P, Moody's, etc. for ratings information and information regarding transparency. The relationship between the ratings agencies and the companies they rate, who pay them for the service, build in a bias to begin with-- add that to the fact that some of the "greatest" business leaders routinely deliver obtuse and misleading statements, and you have to conclude that the little guy is again, a patsy. Apple delivers a good product and is profitable, yet the stock was whipsawed when Steve Jobs became ill (again) and assured the stockholders that he is fine. Of course, this is nothing compared to how the banks operated. Simply put, it was fraud, and the ratings agencies were right there, in bed with them.

2009 Apr 03 11:24 AM