Whose Company Is It, Anyway?

To get the answer, ratings agencies and several shareholder groups have devised corporate governance metrics. But will the benchmarking tools catch on?

Today, executives at the New York Stock Exchange announced new rules for improving corporate governance for NYSE-listed companies. The proposal, which still must be approved by the Securities and Exchange Commission, requires companies on the exchange to maintain a majority of independent directors on their boards, conduct regular meetings among non-management directors, and get investor approval for all equity-based compensation plans.

The announcement from the NYSE comes on the same day that rival Nasdaq submitted its own set of governance standards to the SEC. (For an indepth look at the Nasdaq proposal, click here). The Nasdaq proposal contains similar provisions tightening up governance standards for publicly listed companies.

It’s hardly surprising that the major stock exchanges would come out with more stringent governance requirements. These days, investor confidence in the U.S. capital markets is about as low as it gets — slammed by months of high-profile bankruptcies, revenue restatements, and financial scandals.

Institutional investors are none-too-pleased with current corporate governance and disclosure, that’s for sure. In a survey of U.S. institutional investors released in late December, more than 76 percent of the 89 survey fund managers said they expect pressure from institutional investors on corporations related to corporate governance matters to increase this year. One common complaint: More than 70 percent of the respondents said they are unhappy about the rising quantity of stock options being issued to employees — and their potential dilutive effect.

But some observers say tougher listing standards is only part of the governance solution. To truly restore faith in U.S. corporates — and the managers who run them — they say investors need to be able to gauge if companies are committed to good governance, or merely committed to paying lip service to the concept.

And in fact, a number of organizations have recently come out with governance metrics. Standard and Poor’s for instance, has developed what it calls a Corporate Governance Score (CGS). Likewise, Institutional Shareholder Services (ISS), a provider of proxy services for institutional investors, just this week began including a Corporate Governance Quotient (CGQ) in its proxy reports for Russell 3000 companies. In addition, The Corporate Library and GovernanceMetrics International, a privately-held global corporate governance ratings agency, will release a governance metric later this year.

“In light of the new standards that have been issued by the New York Stock Exchange,” says Nell Minow, editor of The Corporate Library, “these metrics will really help shareholders distinguish between companies that are paying attention and those that aren’t.”

Who’s the Boss?

And that’s the idea. Afterall, as the COO at a publicly traded midwest manufacturer, says: “Senior managment may run this company, but investors own the joint.”

The new slew of governance metrics are designed to show if officers and directors truly understand that concept.

Standard and Poor’s corporate governance score has been in the works for almost four years. It began as an emerging market service to help gauge governance in some lesser developed capital markets. But the recent fracturing of U.S. investor confidence — triggered initially by the collapse of Enron Corp. — prompted S&P to roll out the service to U.S. and European companies.


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