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.
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
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.
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."
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
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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