Brickwork Ratings’ Corporate Governance Rating provides an opinion on the general corporate governance quality of the rated entities for all its stakeholders. It is also an eye opener for individual companies to measure themselves against critical benchmarks.
According to the McKinsey survey, foreign investor would pay a premium for well run efficient Indian companies with good governance. Corporate governance rating of Brickwork could be an important signal for such investors.
The recent corporate failures witnessed world over has reinforced the importance of corporate governance. Particularly for stakeholders, who have suffered at the hands of company’s tainted management and board where poor corporate governance practices were adopted to commit and conceal fraud. It is important for stakeholders to differentiate corporate on the basis of Governance principles to identify good from the bad. After the Asian financial crisis of 1997 and the recent financial turmoil of 2008-09, there have been a number of initiatives to implement governance and disclosures practices in the Indian corporate sector. Undoubtedly, corporate governance is the need of the hour.
Parameters in Corporate Governance Ratings:
Corporate governance issues have fascinated considerable of amount attention, and debate world wide in last two decades. It gained momentum in the wake of some major financial scams and corporate failures. Since, well known corporate in the world not only failed miserably due to poor corporate governance practices but it also inflicted huge losses on stakeholders and market participants.
Brickwork Ratings’ corporate governance (CG) rating provides an objective and independent analysis of corporate governance practices and its influence on corporate fairness in dealing with stakeholders. The rating covers five key areas:
Board Composition and Effectiveness:
An effective corporate board is a powerful center that has ultimate control over strategy, polices and procedures implemented in the corporate and it also plays crucial role as an internal control mechanism. The main task of the board is to monitor and control executive management on behalf of stakeholders. These factors, together with the separation of the roles of chairman and chief executive officer, ensure the clear division of responsibilities at board level so that no individual director has unrestricted authority with regard to decision-making. The ‘board composition and effectiveness’ component will assess whether all material matters affecting the corporate are appropriately considered and will suggest an appropriate balance to significant decision-making.
Management Transparency
Transparency is indeed an important aspect in assessing the quality of corporate governance practiced. The management’s intention to bring Transparency also brings in best practices in the corporate governance. Brickwork has considered management transparency is an integral part of corporate governance.
Ownership Structure:
Ownership pattern component is a significant factor to determine the success of corporate governance practices. Unlike corporations in the developed countries, which have dispersed ownership, corporations in India have mainly family ownership, or control remains with few influential shareholders which may affect implementation of best corporate governance practices. An ownership which ensures the effective implementation of corporate governance practices will provide a better direction to the company’s management to perform efficiently. In corporate governance rating, Brickwork keeps this important aspect in view.
Shareholders’ Rights:
The principle of shareholder equality is one of the significant and influential principles of Indian company law and securities markets legislation, and, therefore a fundamental principle of corporate governance. A shareholders’ participation in corporate governance is external rather than internal, because they do not take part in the day-to-day business management of the company but merely exercises their voting rights at the annual general meeting. Brickwork examines whether the shareholders legal rights/claims have been honored and their grievances addressed timely and appropriately.
Financial Fairness:
Financial fairness is an outcome of internal control mechanisms and it also shown positive results on corporate governance practices. It is evident that companies with better corporate governance have better financial fairness practices than companies with poor corporate governance. This exercise involves assessment of dividend policy, investments, related party transaction etc.
Corporate Governance Rating Methodology
Corporate Governance ratings are becoming a very powerful source of information on a company’s commitment to excellence in its governance practices. Brickwork’s corporate governance rating will reflect the extent to which a company’s corporate governance practices and policies serve the interests of investors, shareholders and other stakeholders.
Brickwork Ratings’ corporate governance rating criteria based on the global best practices on corporate governance. Each single criterion will be examined against the company’s practices using publicly available information such as annual reports, press releases, and regulatory filings. Information will also be sought from the company to understand the existing practices. Interaction with CEO, CFO, directors of the company and senior company officials will be a part of the rating process.
Brickwork Ratings has developed a comprehensive rating model to address the issue of corporate governance practices in the Indian context. Brickwork uses a proprietary scoring method to assess the soundness of governance practices at public corporations for the benefit of creditors, insurers, and other stakeholders.
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