Lifting the Lid: New study takes aim at governance grades

By Martha Graybow

NEW YORK, July 3 (Reuters) - The corporate watchdogs that assess how companies are run have just been given their own report card from a group of academic critics who say the services have a long way to go to provide meaningful governance ratings.

Governance ratings -- which look at issues such as board independence and executive pay -- became a hot business after the Enron fraud and other accounting scandals. Subscribers include investors, insurers who write policies for boards of directors and lawyers. But critics say it is hard to take the reports seriously because the ratings can vary widely depending on who is doing the scoring.

Now, the new study by Stanford University's Rock Center for Corporate Governance questions whether ratings provided by firms such as RiskMetrics Group Inc (RMG.N) and GovernanceMetrics International have any real value.

It concludes the ratings are not closely linked with a company's future financial performance or whether the company is likely to be hit with shareholder lawsuits or accounting problems. The study's authors also suggest that, while governance is important, companies that change their practices to boost their grades might not want to bother.

The raters are the equivalent of "the 2,000 pound, good governance gorilla, and they have a lot of pull in the market," said Robert Daines, a Stanford professor and one of the study's authors.

"Our paper suggests that their rankings don't produce useful information," he added.

Governance research firms have taken issue with the study, saying it only looked at a limited time frame and that ratings are not designed to be the only factor investors consider.

The study, a working paper yet to be published, is called "Rating the Ratings: How Good Are Commercial Governance Ratings?" It analyzed whether the 2005 governance scores for more than 6,500 companies forecast company outcomes such as lawsuits or financial restatements in 2006 and 2007.