New York – In March, RiskMetrics replaced its old Corporate Governance Quotient (CGQ) product with Governance Risk Indicators (GRIds). According to the most recent “The Directors Letter”, a story by Wachtell, Lipton, Rosen and Katz tyalks about the termination of CGQ was a positive event. However, the publication also takes offense to the GRIds system.
One of the improvements of the GRIds system is that it is somewhat more transparent than was CGQ. As well, it now includes risk levels for components of governance risk related to the board, audits, shareholder rights and compensation issues, rather than the “black box” one score systems of CGQ.
Because RiskMetrics so heavily followed by investors, management and boards will have to follow and understand the GRIds system to be able to respond to any warning signs emitted by the service. Utilizing 60 to 80 variables, the system is designed to permit scenario analysis to model governance structure and assess the impact of any in that structure among the company’s peer group. Additionally, the GRIds system is ment to work closely with the RiskMetrics’ proxy voting service.
There is an element of negative biased in the story related to the feeling of board members that they are best suited to understanding and managing the issues of particular companies. As such, having a score which grades the board’s effectiveness tends to challenge those boards being graded.
It is true that any quantitative system has difficultly with systems that are largely qualitative in scope. But the intent of such systems cannot be assailed by board members, since both the GRIds systems and the board of directors are charged with putting the interests of the shareholder above all else.