Over the past several years, shareholders have suffered billions of dollars in losses at some U.S. companies where weak corporate governance practices encouraged waste, fraud and abuse. As a result, investors (large and small), market regulators and mainstream business groups (including the American Society of Corporate Secretaries) stepped up pressure on boards to improve their governance practices. Many boards responded by boosting director independence and creating boardroom structures that hold management teams accountable. Sadly, some boards slept through the governance revolution. The absence of meaningful boardroom oversight at these laggards often leads to their market meltdowns.

Spurred by a growing stack of studies that show linkage between good governance and company/stock performance, investors no longer limit their use of corporate governance data to proxy voting and identifying targets for proxy season campaigns. Today, many investors view governance as an issue in making investment decisions as well.

This widespread view that "governance matters" necessitates the creation of metrics that allow investors to quickly and accurately identify the relative performance of companies. To meet this rising demand, Institutional Shareholder Services (ISS)—with input from a panel of advisory board members—spent 18 months developing a tool for monitoring and comparing the corporate governance structures of America’s leading publicly-traded companies.

CGQÔ (shorthand for Corporate Governance QuotientÔ ) ratings appear on the front page of each ISS proxy analysis along with information that provides some context for the rating. A table on the second page of each analysis provides details about the key factors that drive the rating.  ISS also markets a real-time database that allows institutional investors to screen portfolio companies on the basis of their CGQÔ.

Eight core topics comprise the CGQÔ rating: (1) board structure and composition, (2) audit issues, (3) charter and bylaw provisions, (4) laws of the state of incorporation, (5) executive and director compensation, (6) qualitative factors (7) D&O stock ownership, and (8) director education. The score for each core topic reflects a set of key governance variables. The current list comprises 61 of these sub issues. In addition, some variables are analyzed in combination with other provisions. For example, a board with a majority of independent directors and all-independent key board panels (audit, nominating and compensation) receives a higher rating for each of these attributes than it would if it had either one of them in isolation.

ISS hopes CGQÔ will foster progressive governance practices. Many governance experts advocate continuing education for board members, for example, but companies often have little reason to encourage (or pay for) such training. Going forward, directors who participate in "ISS-accredited" director education program will boost the CGQÔ scores for the boards where they serve. Accredited education programs include those offered by the National Association of Corporate Directors, the University of Wisconsin/State of Wisconsin Investment Board, the Wharton/SpencerStuart Directors’ Institute, Dartmouth’s Center for Corporate Governance, and the Stanford Directors’ College, among others.

Disclosure documents (proxy statements, annual reports, prospectuses, etc.) supply most of the required data.  ISS analysts also review corporate web sites and press releases for governance-related information.  Issuers may supplement these filings with additional data in order to create an accurate picture of each company's governance practices. To verify and update ISS governance rating data issuers may use this web site which requires a login and password. 

To establish a new login or if you have forgotten your login or password or if you would like to learn more about CGQÔ, please contact support@isscorporateservices.com.