Polish your presentation: you're being rated; A number of ratings services have sprung up in recent years to rank companies on their corporate governance--a key criteria for investors. But companies have little control over the process, and may not particularly care for the outcome.

• Author: Marshall, Jeffrey

Public companies are fully accustomed to being rated by securities analysts--in fact, many would love more coverage than they're getting these days. But getting rated on their corporate governance is a lot newer idea. While not as high-profile or as meaningful as analyst ratings, these rankings are a corporate equivalent of cod-liver oil--something that may not taste good but is supposed to be good for you.

Without a doubt, the notion of producing corporate governance ratings would have been a non-starter a decade ago. Governance wasn't in the headlines then; apart from dealing with activists focused on, say, social responsibility or board-composition issues, companies didn't face a lot of outside pressure about how they governed themselves. But the scandals that have erupted in the past five years have heightened the attendant scrutiny on governance and boards of directors, and brought demands from investors to know what--and how well--companies are doing.

The governance-ratings process is a lot different from analysts' modeling, and companies have less control over the resulting message. As practiced by Institutional Shareholder Services (ISS), whose Corporate Governance Quotient (CGQ) is the leading index in this area, the ratings are produced by data-crunchers working solely with public information supplied by the companies via their websites, proxies, Securities and Exchange Commission (SEC) filings and other sources. ISS analysts don't go to the companies to seek additional information.

ISS launched its CGQ service in 2002, hard on the heels of the collapse of Enron Corp. and amid the accounting scandals at Worldcom Inc. and Tyco International and the formulation of the Sarbanes-Oxley Act. The Rockville, Md.-based ISS, whose principal clients are institutional investors such as pension and mutual funds, found that there was a hunger for data about which companies might have governance deficiencies and, as a result, represent investment risks.

"We had a lot of institutions using us for proxy voting and research who said they wanted to learn if: one, there could be any indication of implosions that were likely; and two, if there was any way to look at companies across industries on a consistent basis," says John Deosaran, vice president of corporate ratings for ISS.

Currently, ISS has governance ratings out on a huge universe of public companies--over 8,000, with 5,300 of those in the U.S. Most of the rest are in Europe, Canada and Asia. It divides the U.S. rankings into four principal groups: companies in the S & P 500 (large cap), S & P 400 (mid-cap), S & P 600 (small cap) and the Russell 3000. Public access to the ratings is free via the ISS website or through Yahoo! Finance, which carries the ratings in its profiles of individual companies. Canadian companies are drawn from the S & P/TSX Composite Index; other international organizations are listed on the MSCI EAFE and the FTSE All-World indexes.

The CGQ uses 63 different...