On March 12, Standards & Poor’s posted a request for comment as it proposes to score companies as “Strong/Fair/Adequate/Weak” in the area of management & governance in an effort to enhance transparency. A few details to note:
- Stage One would be to evaluate “Management & Governance” and assign a score. Stage Two (likely to come later this year) would be to directly link this score to a credit rating, which commentators have noted has the ultimate objective of taking the most qualitative part of S&P’s analysis and removing any mystery.
- The Management & Governance analysis would consolidate their currently separate analyses of governance, accounting aggressiveness, operational capabilities, organizational effectiveness, risk management (ERM), and strategy. The proposed criteria do not address financial policy, which commentators note will likely come later.
- S&P analysts will base their assessments on publicly observable track records of management and boards as well as observations from meetings with management.
Commentators have noted that if S&P adopts this framework, it will be the only rating agency to explicitly assess corporate governance from a credit perspective. While Moody’s used to publish ratings separately on governance, that agency currently uses its trained governance analysts to factor governance into its “normal” ratings as it deems appropriate (i.e., when governance red flags arise) rather than on a separate basis.
See the full request for comment here.