Professional Documents
Culture Documents
INTRODUCTION
In India, the Satyam saga sounded the alarm bell for the deteriorating quality of corporate
governance amongst Indian corporate and has exposed the extent of the lack of compliance
with corporate governance norms and best practices. Despite the various laws, codes,
regulations, various reforms instituted from time-to-time to propel corporate governance,
India Inc. still lags behind in the effective implementation of corporate governance
principles.1 Corporate governance however complex a concept finds its basic in elementary
principles such as transparency, accountability, fairness, and responsibility all of which are
universal in their application. Yet, as fair as these principles might sound in theory, there is no
control mechanism in place to find out how valued they are to the company as compliances
with the legal norms has, in most cases, been restricted to letter and not spirit.2
Lack of the transparency and accountability in a companys governance practices shakes
investors and customers confidence. In this regard the, empirical research has shown that the
quality of, and levels of compliances with corporate governance norms, is key element in
determining the success of companys performance. While accountability can be said to in
regard of the improvement in decision making , poor performance of governance, or one can
say a corrupt governance would adversely affect the returns on the investments and would
also contribute to larger systematic problems at many levels, i.e. national and regional level.
Thus, the importance of corporate governance in this market cannot be undermined as
countries that forsake corporate governance reform may sooner or later find themselves
Togetacquaintedwiththeconcretegistofthecorporategovernanceratings.
Toanalyzetheneedofsuchratings.
To get a thorough awareness with respect to the salient features of the corporate
governanceratings.
1.3 HYPOTHESES
In order to conduct a research work, some important hypotheses are to be formulated. The
focal points and assumptions are normally available through the formulation of hypothesis.
The major hypotheses developed on the basis of study are as follows:
The ratings which are measured by the organizations are adequate one and such
ratings are really satisfactory for the stake holders.
The ratings given by the organizations, at times mislead the investors when they
invest in some company.
1.4 RESEARCH PROBLEM
Whatisthereasonbehindthefactthattheratingsarenotmonitoredbytherespective
companies?
Researcher has taken up the following problem because lot of problems could be observed
regarding the ratings provided by the specialized organizations.
1.5 SCOPE
The scope of the present research is limited to:
The researcher has confined his scope to the ratings of the governance practice in India only
and its relevancy in corporate governance and the need of ratings for the corporate
governance practice.
Looking at the vastness of the project the researcher has confined the scope of the study to
analyze the topic. The researcher has tried to cover the aspects connected with the said topic
and analyze them in an elaborative manner.
1.6 RESEARCH METHODOLOGY
The quality and value of research depends upon the proper and particular methodology
adopted for the completion of research work. Looking at the vastness of the research topic
doctrinal Legal research methodology has been adopted. The researcher has adopted
both the primary and secondary sources.
Chapter II
CONCEPT OF CORPORATE GOVERNANCE
2.1
Importance of Governance
Chapter III
CORPORATE GOVERNANCE RATINGS
3.1
Corporate governance is about commitment to values and ethical business conduct. Good
corporate governance is reflected in fair, transparent, and responsible interactions among a
company's management, board of directors, shareholders, and other stakeholders. Ratings
assess corporate governance practices at a company with respect to their impact on all
stakeholders who deal with the company, such as employees, suppliers, shareholders, lenders,
and society. 12
A rating indicates the capability of the entity with respect to creating wealth for all its
stakeholders, while adopting sound corporate governance practices. The rating measures the
balanced creation of value among all stakeholders using a judicious mix of qualitative and
quantitative parameters.13
The agencies assess corporate governance practices at companies with respect to their impact
on all stakeholders who deal with the company such as employees, suppliers, shareholders,
lenders and society.
Rating agencies analysis of corporate failures reveals that they are largely attributable to
shortcomings in corporate governance practices. The broad areas of failure are14:
Lack of independence of the board with board members having significant financial
linkages with the companies
Insider trading
Fiduciary failure by the board to exercise care and diligence in approving proposals,
even though all the information was provided by the management
Weak internal control mechanisms and lack of supervision corporate governance has
thus become a critical area of focus for various market participants and stakeholders.
Looks at actual practices through an interactive process, thereby going much beyond
the scope of audit of regulatory compliance
Takes into account the perspectives of all stakeholders (shareholders, debt holders,
employees, customers, suppliers, and the society at large)
3.2
Corporate governance ratings can be defined as an indication of the relative level to which a
corporate organization accepts and follows the codes and guidelines of corporate governance
practices.16 Though there are some who feel that the corporate governance is about ethics and
15 Ibid
7
cannot be forced by the checkbox exercise17, yet it forms as a device to keep a check on the
functioning of the board by the numbers it rewards.18
Understanding the Importance of Corporate Governance Ratings
Companies should promise for CGR as it would assist them in developing a credible opinion
on its management quality and responsiveness towards the interest of all its financial
stakeholders. Improved investor perception may in turn influence its valuation and facilitate
capital mobilization at favourable terms.19 Investors only invest money in any company if
they think and believe that it would definitely give them good returns out of it.
Through the mechanism of the CGR, the shareholders will empower with more information
and be able to express individual and collective opinions on corporate process and thus raise
an expectation from the companies to respond to their viewpoints. In a competitive market,
companies will be driven to provide more and better interactive communication with their
shareholders. Investors will be in a position to understand how the management treats the
interests of shareholders, including of minorities. Subsequently, it would follow that
companies which have been given good CGRs will in turn increase qualitative competition in
the industry and influence it peers to improve their corporate governance in an effort to be in
the good books of the industry20. So by this one could say that the companies which would
get better CGRs would certainly try their best to serve the stakeholders in a qualitative way so
that the companies can stand in the eyes of the stakeholders i.e. external and internal
stakeholders.
3.3
Since inception, rating agencies have protected the interests of stakeholders by upholding the
principles of transparency, fairness, disclosure and accountability. They continue to adopt the
best global practices in corporate governance and disclosure standards, thus enhancing
shareholder value.
G N Bajpai, chairman of the Stock Exchange Board of India is bullish on corporate
governance ratings. Two rating organisations in India ICRA and Crisil have developed
well-thought-out criteria for measuring corporate governance practices and value creation for
all stakeholders. These take into account ratings on wealth creation, wealth management and
wealth sharing, and are based not only on data published in the public domain, but also
detailed interviews with management and stakeholders.21
In order to better understand the notion of CGR, it would be imperative to understand the
practical degrees of CGR as the system currently exists. Most of the agencies that rate the
corporate governance standards are prominent credit rating agencies themselves such as
ICRA, CARE, CRISIL, etc. These agencies assign a particular level of rating or grading to
indicate how well the rated entities are in particular level of rating or grading to indicate how
well the rated entities are in compliances with the corporate governance standards and norms.
For example, CRISIL awards Governance and Value Creation (GVC) ratings which range
from CRISIL GVC Level-1(highest) to CRISIL GVC Level-8 (Lowest), indicating the
respective capability of the rated entity with regard to corporate governance and value
creation for all stakeholders.22 Similarly, credit rating agency CARE rates the corporate
governance practices of an entity from CARE CGR-1 (Highest) to CARE CGR-6 (Poor),
which certainly reflects CAREs opinion as to the level of comfort the rated entitys corporate
governance practices provide to its shareholders.23
21 Available at http://www.businessstandard.com/india/news/debate-should-corporate-governance-ratings-bebanned/148656/ last visited on 23rd September, 2012.
See
CARE,
Governance
Ratings
(Banking
and
Financial
Institutions)Available
at
CRISIL's ratings process is designed to ensure that all ratings are based on the highest
standards of independence and analytical rigour.
From the initial meeting with the management to the assignment of the rating, the rating
process normally takes three to four weeks. However, CRISIL has sometimes arrived at
rating decisions in shorter timeframes, to meet urgent requirements. The process of rating
starts with a rating request from the issuer, and the signing of a rating agreement. CRISIL
employs a multi-layered, decision-making process in assigning a rating.24
ICRAs Process
ICRAs Corporate Governance Rating (CGR) is meant to indicate the relative level to
which an organisation accepts and follows the codes and guidelines of corporate
governance practices. The corporate governance practices prevalent in a company reflect
the distribution of rights and responsibilities among different participants in the
organisation such as the Board, management, shareholders and other financial
stakeholders, and the rules and procedures laid down and followed for making decisions on
corporate affairs.
The emphasis of ICRAs CGR is on a corporate business practices and quality of disclosure
standards that address the requirements of the regulators and are fair and transparent for its
financial stakeholders. The emphasis of ICRAs Stakeholder Value and Governance (SVG)
Rating, on the other hand, is on value creation and value management for all stakeholders
of a company, besides the companys corporate governance practices. An SVG Rating
considers a companys actual performance and the accrual of the benefits of such
performance among all its stakeholders, apart from the quality of the companys corporate
governance practices. It is the combined assessment of stakeholder value creation and
management and the quality of corporate governance practices that determines the SVG
Rating25.
ICRAs CGR and SVG Ratings may help the Rated corporate entity in raising funds; listing
on the stock exchange; dealing with third parties like creditors; providing comfort to
regulators; improving image/credibility; improving valuation; and bettering corporate
governance practices through benchmarking.26
ISS Corporate Governance Quotient Ratings:
The ISS Corporate Governance Quotient ratings are relative and are reported on a
percentile basis ranging from zero to 100 per cent. A companys Corporate Governance
Quotient rating will appear on the first page of each ISS proxy analysis. Each company
receives two ratings. The first score compares the companys corporate governance
practices against a relevant index the S&P 500, the S&P (mid-cap) 400, the S&P (smallcap) 600 or the remainder of the Russell 3000.27
The second score compares the companys corporate governance practices against its
industry peers using S&Ps 23 sector groupings.
The ratings comprise eight core topics:
board structure and composition;
charter and bylaw provisions;
audit issues;
anti-takeover practices;
25 Available at <http://www.icra.in/rating.aspx?
ck=Al1zZU0jCxnnNzwL5uegv1FywzqWlG7XXo1LFd139RXYzgMYK9S57yAVElNeyt/XaTZKAvxm5n3QF
NK78Qi6AxxtsNfhtNkvqsN02qKn1Jns2J8e/K/etZMxYh5901190113wgX visited on 19th September, 2012>
26 Ibid.
27 Available at http://www.globalcorporategovernance.com/n_namericas/080_093.htm visited on 19th
September, 2011.
11
28 Ibid
12
3.5
CGR, like accounting information, look into the past as it reflect the past performance of a
company and cannot accurately predict accounting restatements, litigation and future
performance.30
To counter this drawback, it has been suggested that the ratings agencies be required to
disclose their success at predicting future outcomes by providing additional disclosures about
the predictive power of their ratings.31 Thus for one, they should also have a futuristic
approach. These ends can be easily established through the system of trend analysis.
One important criterion that is missing from the current CGR methodologies is an evaluation
of managerial behavior and their ethics by the employees. Undoubtedly, it can be said that the
employees are the worst hit of all the stakeholders of a company hit by corporate governance
failure.32 This should be considered as crucial since employees can be considered as a persons
who have the best access to corporate executives actual decision making process and
behavior, and also since employees constitute a distinct source of non-public behavior about
managerial performance.33 By promoting the use of employees assessment of managerial
practices, CGR practices will further the oversight on corporate integrity.34
Thirdly, unlike the IPO process which is a one time activity, corporate governance is an
outgoing activity, and in a going concern, it is of utmost importance. This gives rise to the
need of evaluating or rating corporate governance standards on a continual basis. The
mechanism will help in keeping a constant check on the activities of the board and keep the
stakeholders updated on their activities as the ratings agencies will also be required to
disclose the rationale that they have followed in arriving at the ratings.
Though it may be true that even these ratings may not be completely fool proof, yet they form
a bearing of an inextricable link in the corporate governance chain. A major question that
30 Sanjiv Agarwal, Corporate Governance Concept & Dimensions (Mumbai: Snow White
Publications) 1st Ed. 2003, Pg 28.
31 See Supra Note 14 at Pg. 29.
32 News Report, Clueless Satyam Staff Left Shamefaced, Economic Times, 08.01.09
33 Ibid.
34 Ibid.
14
arises in todays scenario concerns the independence of the rating agency. Since the true of an
agency is often questioned, their ratings pose a problem to the acceptance of CGR as an
evaluation technique. The solution to this lies in the process of allotting CGR, wherein the
ratings are done by an independent party the board of which consists of representatives from
competitors as well as the government. 35 Quite naturally, there will be an interest of the
competitors as well, and they will try to break down any kind of collusion or wrongful rating
that could be accorded to the company in question.
Chapter IV
CONCLUSION
35 See Supra note 9.
15
OUTCOME OF HYPOTHESES:
The first hypotheses taken up by the researcher is:
The ratings which are measured by the organizations are adequate one and such
ratings are really satisfactory for the stake holders.
This does not stands correct because various organizations, at times, on taking a ransome
amount of money from the companies, give fake ratings to the business of the company and
hence indirectly forcing public to invest in a particular company which may not be financially
sound but appears very strong on papers because of the ratings given to them by the
organizations.
The second hypotheses taken up by the researcher is:
The ratings given by the organizations, at times mislead the investors when they
invest in some company.
This hypotheses stands correct because it is true that the false ratings given by an
organization to a company may mislead public to invest in that company on account of great
goodwill of the company in the market.
The Satyam Case is the best example which could be cited here to prove the above stated
hypotheses as correct.
governance since it cannot be expected from all the investors to gain substantial insight into
the corporate governance practices of a company as they may not have sufficient resources to
do the same. Hence, CGR is one of the best available tools that can help all stakeholders
evaluate corporate governance of a particular entity.
A feather in the cap furthering the case for CGR is the Narayan Murthy Committee report
which stated that CGR is desirable and would provide a process of independent appraisal. 36
It would be important to note that there are corporations that follow excellent corporate
governance standards, which need to be communicated to the outside the world. This can be
facilitated through verification by an independent body such as credit rating agency.
Finally, while there is strict need of implementing the CGR as there are lot tribulations of the
lack of corporate transparency and accountability on the companies. This will definitely get
back the deficit trust of the public on companies.
Thus, corporate failures today are increasingly pressure on all the corporate to improve the
standards of accountability and transparency in all the aspect of the governance affairs and so
there will be proper need of such mechanism to check the progress of the respective
companies.
Overall, CGR systems provide a useful indication of the corporate governance environment
prevailing in the industry. Rating corporate governance will provide a useful benchmark fro
those investors who identify good corporate governance with a well- run and well managed
company.
However, while rating corporate governance is growing in importance, it is equally essential
to know that not all the aspects of corporate governance can be rated. Indeed, the human
dynamics aspects of corporate governance like trust, honesty, leadership, character cannot be
rated, being attributes that have to emanate from within, that is, to be instilled from within, by
our corporate leaders.
BIBLIOGRAPHY
Books Referred:
Gopalswami N. A Guide to Corporate Governance (New Delhi: New Age Pvt. Ltd)
2006.
Rani Geeta, Mishra. R K. Corporate Governance Theory and Practice 1st Edition.
Articles Referred:
Aashish Virmani and Jayant Raghu Ram, Corporate Governance Ratings: Towards
Available at
http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN023826.pdf,
last visited on 22nd September, 2012.
Available at http://www.careratings.com/Content/creditratings/Corporate
%20Governance.pdf visited on 23rd September 2012.
Available at http://www.icra.in/rating.aspx?
ck=Al1zZU0jCxnnNzwL5uegv1FywzqWlG7XXo1LFd139RXYzgMYK9S57yAVEl
Neyt/XaTZKAvxm5n3QFNK78Qi6AxxtsNfhtNkvqsN02qKn1Jns2J8e/K/etZMxYh59
01190113wgX visited on 19th September, 2012.
18
Available at http://www.globalcorporategovernance.com/n_namericas/080_093.htm
visited on 19th September, 2012.
News Report:
News Report, ICRA to Rate Companies For Corporate Governance, The Hindu,
Business Line, 23.06.01.
News Report, Clueless Satyam Staff Left Shamefaced, Economic Times, 08.01.09
19