Merger of governance ratings firms

On 2 December 2010 it was announced that The Corporate Library, GovernanceMetrics International (GMI) and Audit Integrity have merged, creating the “independent leader” in global corporate governance ratings and research.  The merged entity provides ratings on an international basis on companies covered by the MSCI world and emerging market indices.


These global ratings agencies are becoming increasingly important in the attractiveness of Australian companies to offshore investors, which currently hold stakes of about 30% in our larger companies.


The merged entity will be known as Governance Metrics International (GMI).


Governance ratings are being increasingly used by institutional investors for various investment purposes, ranging from offering “governance” funds that invest in well run companies, investing in badly run companies with fundamental value propositions, and effecting medium term change, to researching hedge fund strategies to elicit value through quick improvements in company governance.  In addition, there is growing interest in investing in companies for their environmental and social (“ES”) policies, as well as governance (the “G” part of ES&G).


Australia’s equivalent is Regnan – Governance Research and Engagement Pty Ltd, owned by a number of institutional investors.  Goldman Sachs distributes its governance ratings as an optional part of its research platform offerings to institutional investors.


The services offered by these governance raters to institutional investors are distinct from the proxy advisory services offered by ISS (formerly RiskMetrics) and CGI Glass Lewis.  These firms deal with advising institutional investors how to vote their proxies. However ISS in the US also sells governance ratings to companies.  Because most of its revenues are sourced from these services, ISS has been subject to considerable criticism for conflicts of interest because it also advises institutional investors on how to vote on companies that buy its governance services.  But it should be noted that ISS in Australia has been very careful to ensure it is not tainted by conflicts of interest, and only provides services to institutional investors.


GMI’s clients include 300 of the largest institutional investors.  However, it is understood that corporates also subscribe to some of the services provided by the merged entity.  It is not clear from the merger announcement how these conflicts of interest are to be managed going forward.


The various rating instruments used by GMI give poor marks to companies that have an executive chairman.


By the way, did we say that GMI would have an executive chairman?


The release announcing the merger can be seen HERE

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