Amid the plethora of ratings being applied to corporate entities, Standard & Poors just announced that it has started scoring companies according to their level of corporate governance. The penetration of this approach is so far confined to several large European companies, but it is planned to be introduced in North America as an adjunct to other credit reporting measures.
Of course, corporate governance casts a wide net. Primarily, corporate governace is the sum total of policies and procedures put in place to control the profitability of a corporation within the prescibed compliance framework. Companies are likely to be proactive on this front. For example, both Fannie Mae and Freddie Mac are under the scrutiny of legislators, owing to the inherent risks in the mortgage-backed securities business – i.e. having MBS as the primary liabilities and the primary assets of the companies. Both agencies have pre-annouced proactive measures that will control the risk of their operations and hopefully hold off the wrath of the legislators.
As for S&P’s new concept of rating corporate governance, we applaud the business model. Yet we have one question: Shouldn’t this analysis be included in any comprehensive analysis of credit risk in the first place?