Going off the GRId: there are sound reasons why boards should not blindly follow the new RiskMetrics model.

Author:Raymond, Doug
Position::LEGAL BRIEF - Governance risk indicators

MANY CORPORATE BOARDS have been working hard over the last few years to strike the right balance in their governance processes while facing significant economic challenges, increased public skepticism of business, and burgeoning government regulation. In addition, we have seen the increased importance of organizations like Risk-Metrics Group. This spring, RiskMetrics upped the ante when it published its new Governance Risk Indicators[TM] (GRId), a new governance-related matrix comprising 59 to 95 weighted questions that define RiskMetrics' view of good governance.

While GRId incorporates a multifactor approach, it is not as nuanced as the analysis a board should undertake when developing its fully-integrated governance principles, which involves balancing the needs and objectives of the company's various constituencies as well as long-term and short-term perspectives on the issues confronting the company. However, given RiskMetrics' current influence with institutional investors, many boards may automatically fall into step with the new matrix, rather than pursuing a more thoughtful approach.

Methodology: GRId replaces Risk-Metrics' Corporate Governance Quotient, which is being phased out. GRId will be aligned with RiskMetrics' proxy voting policies and regularly updated to reflect policy changes. Initially, Risk-Metrics' GRId will cover approximately 8,000 global public companies, of which about 6,400 are U.S. companies.

RiskMetrics uses GRId to evaluate each company's governance-related risk by comparing the company's practices to the RiskMetrics-defined best practices for the country in which the company is located. This departs from RiskMetrics' previous approach, which gave some weight to a company's peer group.

GRId's methodology comprises a set of questions addressing four categories of governance: Audit, Board Composition, Compensation, and Shareholder Rights (there are 63 questions for U.S. companies), Each category is divided into subsections, and subsections and questions are weighted differently based on the geographic market. Answers are based on the company's public filings and scored on a scale of "-5" to "5", with "0" representing a neutral score (suggesting that the company meets market standards). In many cases, scores are based on specific, prescribed criteria, and do not allow for much "leeway" if a particular company practice differs from the RiskMetrics-defined best practice. GRId results are reported as absolute...

To continue reading