“Governance Risk Indicators”: What Riskmetrics Group’s New Governance Risk Assessment Tool Means To Public Companies

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Over the past decade, U.S. public companies have become familiar with RiskMetrics Group’s “Corporate Governance Quotient,” or CGQ, a system for ranking the governance of companies within an industry peer group on a relative basis against RMG’s benchmark governance standards. In the shareholder activist context, companies and dissidents frequently tout CGQ scores as indicators of sound—or problematic—governance. Companies often labored to improve their scores by conforming their practices to RMG’s standards, unless doing so would require the company to make unacceptable changes to its governance, such as forgoing the services of valued board members or abandoning strategically important takeover defenses.

The “GRId” Risk Assessment Tool

On February 3, 2010, RMG rolled out a successor to CGQ: “Governance Risk Indicators,” or GRId.1 GRId will be considerably broader in scope than CGQ, and will rank U.S. and foreign public companies’ purported level of governance-related risk in four areas: audit, board, compensation/ remuneration, and shareholder rights. GRId will rank companies on an absolute basis against what RMG views as best practices for the relevant jurisdiction, based upon the answers to approximately 70 questions addressing the company’s practices across the four categories. Rankings will identify the level of concern (low, medium, or high) in each category.

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