Since the enactment of the Sarbanes-Oxley Act US companies have become the best for corporate governance in the world.
Governance Metrics International (GMI), a corporate governance research and ratings agency, says that since its first report in December 2002 US companies have improved by over 10%, leapfrogging the UK and Canada into first place.
The average rating for a US company has risen from 6.5 to 7.2 in the last two years, and of the 26 corporates awarded a perfect 10 this year by GMI, 20 are American. They include 3M, Coca-Cola, Colgate-Palmolive, GM, Gillette, Johnson Controls, Mattel, Pepsi and Eastman Kodak.
There is also a correlation between corporate governance standards and share price performance. The perfect group of 26 outperformed the S&P 500 index as measured by total returns for each of the last one, three and five year periods by 4.9%, 8.3% and 10% respectively. It is unclear, however, where the causation lies ? whether corporate governance helps a company grow or whether innovative companies simply tend to be more up-to-date on governance rules.
Among the changes brought about by SOx in the US are:
? 95% of companies now have a financial expert on their audit committee, compared to 65% in 2002;
? 73% directly try to hire auditors into the company, compared to 14% in 2002;
? 51% have auditor personnel rotation policies, compared to 8% in 2002; and
? 83% of audit committees now perform self-evaluations compared to 17% in 2002.
But more encouragingly, several improvements in corporate governance standards have been made without legislation, including the 90% of companies that now have board evaluation policies compared to 35% in 2002, and the 11% of companies that pay their auditors more for non-audit fees than for audit versus 48% in 2002.
It is not all good news for US corporates, however. American companies still lag behind those in the UK for independent non-executive directors ? 95% in the UK have a separate chairman and CEO, whereas only one-third do in the US ? and European companies engage in fewer related-party transactions ? 11% as opposed to 35% in the US.
Below the US on an average rating of 7.2, Canada on 7.19 and the UK on 7.12 are Australia on 6.73 and the Netherlands on 6.58. At the other end of the scale, Greece has the worst rating with 2.93 followed by Japan on 3.57. Of the 25 companies that received GMI’s lowest rating of one, 13 were Japanese.
GMI’s rating system incorporates hundreds of data points across six broad categories of analysis: board accountability, financial disclosure, executive compensation, shareholder rights, ownership base and social responsibility. A full copy of the report can be found at: https://www.gmiratings.com/(ejpyga55tpy0scadxhjfwn45)/Release20040903.html
