U.S. Governance: Good, When You Compare

Among 1,600 global companies, 15 of the 17 with the top governance scores are based in the States. Also: Dissatisfaction with the HR department (they'll get back to you...); two more pleas at HealthSouth; and more.

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Despite the recent rash of high-profile frauds and accounting scandals, U.S. companies fared pretty well in the most recent governance ratings of 1,600 global companies compiled by GovernanceMetrics International (GMI), an independent governance ratings agency.

The United States ranked third among 15 countries, behind Canada and the United Kingdom, and 15 of the 17 companies that received the highest possible score are based in the States. Canadian, U.K., U.S., and Australian businesses accounted for virtually all the companies with above-average ratings.

Japanese companies had the lowest governance performance overall, while France ranked lowest in continental Europe.

Under GMI’s system, companies are scored relative to each other rather than against some theoretical standard. Companies with a perfect score are therefore not “perfect”; their governance and disclosure are better than that of their counterparts, says Gavin Anderson, GMI’s chief executive officer.

“Conversely, companies with a low overall governance rating may demonstrate a potential risk,” he added in a press release. In GMI’s first ratings release last December, Anderson notes that he identified Freddie Mac and Siebel Systems as governance risks well before they became the subject of newspaper stories.

Globally, the highest-scoring industries were utilities, energy, and insurance; the poorer performers were construction, autos, and media. Not surprisingly, more-regulated industries tended to have better governance practices overall, although GMI said it would have expected financial services to have a better overall rating for that very reason.

GMI’s rating system incorporates more than 600 data points across seven broad categories of analysis: board accountability, disclosure, executive compensation, shareholder rights, ownership base, takeover provisions, and corporate behavior and social responsibility.

GMI found noticeable differences from country to country in particular governance categories.

Japanese companies scored well regarding potential dilution, since stock options are generally not a feature of compensation practices in that country. On the other hand, of the 483 rated companies with potential options dilution of 15 percent or more, all but 7 were American.

Regarding financial disclosure, Japanese and European companies tended to score lower than U.S., Canadian, U.K., and Australian companies because of fewer disclosure requirements. In addition, 21 percent of the rated companies do not report their accounts under U.S. GAAP or under International Accounting Standards, only under purely local standards. These companies are based mostly in Japan and continental Europe.

Regarding shareholder relations, however, European companies scored higher. And regarding environmental, labor, and social matters, European companies have far better practices and disclosure policies than U.S. companies and consistently score better in this category, the report pointed out. “This is not surprising given the greater attention to those issues by European investment houses, governments, and communities,” it added.

A number of countries, including the United States, Japan, Australia, and in Europe, have taken legislative and regulatory steps to strengthen corporate governance and increase shareholder protection. Anderson — although he won’t name names — gives these examples of corporate abuse where the other guys are still a step ahead:

A chairman and president who were forced to resign because of bid rigging, but have now been re-hired as advisors; directors who sit on as many as 14 public company boards as well as several committees; one director who collects a $600,000 annual consulting fee on top of his director fees; and one firm that does not designate either executive directors or a CEO, and so is able to sidestep regulations relating to directors’ compensation.

“What our ratings help determine is the culture of accountability and integrity at companies,” adds Anderson. “We know from a number of studies that shareholders will pay a premium for companies with good corporate governance.”

The 15 U.S. companies that attained a “perfect” score (listed here in alphabetical order) are Allstate, ChevronTexaco, Chubb, Colgate-Palmolive, E.I. DuPont de Nemours, Eastman Kodak, Exxon Mobil, Gillette, McDonald’s, Occidental Petroleum, PepsiCo, Pfizer, Pinnacle West Capital, Praxair, and SLM.

The two Canadian companies with perfect scores are Alcan and BCE.

From the bottom up, 10 of the 16 companies with the lowest ratings are Japanese; that group also includes one U.S. company, King Pharmaceuticals.

Unhappy with HR? They’ll Get Back to You…

Dissatisfied with your human resources department? You’re not alone.

According to an Accenture survey of 150 U.S. senior executives 47 percent were dissatisfied or neutral with the overall performance of their HR departments.

Response time was the reason most often stated for dissatisfaction. Among reasons that executives were satisfied with their HR department, personal attention and access to information topped the list.

Fully 85 percent of executives say they outsource one or more human-resource functions. (Accenture, of course is a major player in HR outsourcing.) The most-outsourced HR functions, according to Accenture, are 401(k) administration (88 percent), pension administration (57 percent), recruitment (40 percent), training and professional development (29 percent), payroll (23 percent), health and safety (10 percent), and performance evaluation (1 percent).

Lower costs (88 percent) and access to greater expertise (82 percent) were cited as the principal reasons for outsourcing, followed by a desire to free up HR to focus on broader company issues (66 percent), gaining access to more information (64 percent), and receiving quicker responses (58 percent).

Accenture also pointed out that the survey found little difference in satisfaction levels between HR services being provided in-house and those being outsourced.

Elsewhere, a global research study commissioned by EDS and conducted by Harris Interactive found that senior-level international executives are not even rigorously evaluating their companies’ HR functions.

The study found that 90 percent of the surveyed U.S., Canadian, and European companies evaluate their human resource functions primarily using just three criteria — employee retention/turnover, corporate morale/employee satisfaction, and HR expense as a percent of operational expense. About half of the senior executives who were surveyed believe that there are critical dimensions of human resource department performance that are not currently being adequately measured.

According to the survey, the highest-performing areas of HR involve transactional and administrative functions such as payroll and compliance. But in those HR areas that are measured, notes EDS, methodology and data reliability are questionable, and there appears to be no real linkage to overall corporate performance.

For instance, less than 50 percent of companies utilize measurements such as revenue per employee or return on human capital.

Causes of poor HR performance include operational inefficiencies in both processes and technology. One contributor is inadequate funding and resources for ongoing administration, which was deemed by respondents as the least valuable part of the work done by HR departments, according to EDS.

Two More Pleas at HealthSouth

Two more former HealthSouth Corp. executives agreed to plead guilty to criminal fraud charges on Thursday, according to Reuters, citing prosecutors.

This brings to 14 the number of company officials who have entered guilty pleas or will soon plead guilty for their roles in the massive accounting fraud, said the wire service.

Richard Botts, the senior vice president for finance, tax, was charged with securities fraud and mail fraud for filing and mailing false state and federal tax statements involving company income and assets. His case marks the first time that the Internal Revenue Service was involved in securing pleas in the scandal.

Will Hicks, formerly vice president of investments, was charged with conspiracy to make false statements to auditors and maintain false books and records.

Both agreed to cooperate with investigators.

Last week Reuters reported that prosecutors are seeking to delay the sentencing of four HealthSouth executives who pleaded guilty, claiming it is not fair to sentence them while their bosses are not yet held accountable.

Angela Ayres, Cathy Edwards, Rebecca Kay Morgan and Virginia Valentine were among the 12 former HealthSouth executives who agreed to plead guilty to fraud charges before Thursday, but U.S. Attorney Alice Martin wants to get “a fuller picture of the fraud,” according to the report.

“These defendants were directed [to commit fraud] by employees who were senior,” Martin reportedly said. “Those higher up were paid sizeable bonuses and stock options. We may want the court to hear what they did. The court has only heard a small amount of the allocutions and a fuller picture of the fraud will show what these four did in relation to what others did.”

Short Takes

  • Comcast Corp. said it will lay off 2,000 more employees than previously forecast, bringing the total to about 7,000.
  • GDP grew at a better-then-expected 2.4 percent annual rate in the second quarter, according to the Commerce Department. One main reason: A surge in defense spending.

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