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October 01, 2012

GMI Licenses Research for Corporate Governance Indexes
    by Robert Kropp

The firm's agreement with the Global Index Group, which will create the first indexes focusing on corporate governance performance, is commended by governance advocate James McRitchie as a very important development for investors.

SocialFunds.com -- Effective corporate governance—encompassing such issues as executive compensation, board independence, and shareowner rights, among others—would seem to be among the lowest hanging fruit for companies intent upon maximizing profitability and establishing long-term outperformance. But as sustainable investors are only too aware, it often seems as if such companies are in the minority.

GMI Ratings has been a leading source of corporate governance evaluations for many years. The firm's regularly updated Risk List highlights corporations with the most glaring governance shortcomings. And a recent example of its research analyzed 180 North American corporations with market capitalizations of more than $20 billion, finding that "five-year shareholder returns are nearly 28 percent higher at companies with a separate CEO and chair."

So it was good news for investors when GMI announced last week that it has licensed its corporate governance metrics to the Global Index Group (GIG), a provider of indexes to institutional investors. GIG will use GMI's research to develop corporate governance indexes. The indexes will be the first to focus exclusively on corporate governance.

"Corporations should have directors who owe their seats on the board to shareholders and who look after shareholder interests as their primary goal," Kelly Haughton, the CEO of GIG, wrote in 2011. "It would have been better if the Enron Audit Committee had figured out that Andrew Fastow was stealing from shareholders and corrected the problem at Enron, rather than requiring government to enact legislation that impacts the entire economy."

Announcing the agreement, James Kaplan, Chief Executive of GMI, stated, "The AGR (Accounting and Governance Risk) rating reflects accounting and governance practices statistically associated with SEC enforcement actions, litigation, and other events likely to cause precipitous contractions of equity value. Therefore, GIGHGI (GIG/GMI High Governance Index) is a logical investment vehicle for asset owners and managers who want to reduce exposure to these risks."

At CorpGov.net, governance advocate James McRitchie wrote, "This is a very important development that could do more to further improvement of corporate governance than most others. If investors can earn higher returns, more companies will feel pressured to initiate reforms in order to obtain capital at lower cost."

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