Towards an impartial and effective corporate governance rating system

Abstract

Purpose

This paper aims to investigate the most popular corporate governance rating systems and to scrutinize their usefulness to shareholders and the public at large. It proposes to examine whether the advertised good governance scores reflect corporate performance, fraud, lawsuits, and the like.

Design/methodology/approach

The analysis focused on the methodology used by rating agencies to rank corporate governance practices of companies. Analysis of the categories and variables used in the rating systems were also scrutinized and critiqued.

Findings

This research shows that there is a weak relationship between corporate performance and corporate governance rating. Ideas and suggestions have been proposes to remedy the shortfalls of existing rating systems.

Research limitations/implications

Many researchers use corporate governance scores in their studies to investigate the relationship between these single scores and corporate performance. Potential vulnerability and risk are demonstrated using such kind of methodologies. Research should be accomplished with the corporate governance indicators separately.

Practical implications

Several corporate governance ratings systems have been developed and implemented. These systems reduce a complex corporate governance process and related performance into a single score. Such outcome does not in any way reflect the real nature of corporate governance or its performance. Ranking, if it is at all needed, should be interpreted carefully and not be used as a simple measurement of good or bad corporate governance practice.

Originality/value

This paper is the first of its kind to critically evaluate corporate governance systems scores launched by different rating agencies.

Citation

Donker, H. and Zahir, S. (2008), "Towards an impartial and effective corporate governance rating system", Corporate Governance, Vol. 8 No. 1, pp. 83-93. https://doi.org/10.1108/14720700810853428