Sunday, April 17, 2005

FTSE and ISS reveil Corporate Governance indices

The six new CGI indices focus on the US, UK, Japan, Europe, the eurozone and the developed world and rank about 2,200 companies. Companies are rated on a scale of one to five, with the higher scores for the best governed. The top five sectors for good governance include oil and gas, while the bottom five sectors include construction and materials, and healthcare.

The FTSE ISS CGI Series contains six regional indexes. The ratings, which cover over 2,200 companies from 24 countries are based on the following five themes of corporate governance:

- Equity structure and anti-takeover devices,
- Structure and independence of the Board,
- Independence and integrity of the audit process,
- Executive and non-executive director stock ownership,
- Compensation systems for executive and non-executive directors.

The world's top five performers are BHP Billiton; Smith & Nephew, a UK medical devices company; utility Scottish Power; UK telecoms company BT
Group; and Cognos.

In the US the top companies are maker of electrical tools and hardware Cooper Industries, car-maker General Motors, bank National City Corp, contract electronics manufacturer Flextronics International and oil and gas producer Occidental Petroleum.

In Europe, top-ranked companies include French cement maker Lafarge and Dutch food group Numico. In Japan, Nomura Holdings is a leader.

In Asia, the top companies are Hong Kong Exchanges & Clearing, Asia Sat Telecom Hldgs, Hysan Development, Parkway Holdings, and Nomura Holdings.

In the UK, top-ranked companies include BHP Billiton, Smith and Nephew, Scottish Power, BT Group and BPB.

Mark Makepeace, chief executive FTSE Group, and John Connolly, ISS chief executive, said: “Until now, quantifying the risk represented by corporate governance practice has posed a challenge for investors. The ratings provide a means to integrate that information into global portfolios.” More on ISS here.

Pressure for stricter corporate governance guidelines has increased in recent years after a series of high-profile corporate collapses, including US energy firm Enron Corp and Italian food company Parmalat.

While the EC has launched a public consultation on shareholders rights, some prefer shareholders vote with their hands and feet. Also the board structure, in particular separating the CEO and Chairman role is part of the debate.

Critics of stricter rules say too much focus on corporate governance could distract top management and lead to higher costs. Also there are doubts about whether check list approaches towards Corporate Governance work work at all.