New RiskMetrics Ratings System to Rely on Companies for Accuracy
12 March 2010
RiskMetrics Group has announced it is replacing its highly criticized Corporate Governance Quotient ratings system with one it says will evaluate the governance-related risk of U.S. companies. Under the new Governance Risk Indicators (“GRId”) system, which is effective for reports published starting March 17, 2010, each U.S. company will be evaluated on 63 questions across four broad areas: compensation, audit, board composition, and shareholder rights. Each question will be scored on a scale from -5 to 5, and RiskMetrics will identify the level of concern (low, medium or high) for each area based on the answers. The ratings are absolute, rather than relative to peers, and are based upon RiskMetrics’ benchmark voting policies. RiskMetrics will provide companies access to their ratings, and companies are expected to verify and indicate corrections to the assessment prior to publication of the final analysis If any factual errors are identified after the proxy analysis is published, “a corrected report will be published as long as the shareholder meeting date has not passed.” For companies with annual meetings in the spring, this will require a very quick turnaround, as the assessments may become available shortly before the meeting. In the past, there has been considerable disagreement between RiskMetrics and companies regarding what constitutes a factual error. The Association's Center On Executive Compensation will be evaluating the new system and providing feedback to RiskMetrics.