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13 Dec. 2010 | Comments (0)

There’s a three-letter acronym that stands for a company that focuses on corporate governance ratings and research that public companies and their boards should become familiar with in the next year. (No. I’m not talking about the powerful ISS.) It’s GMI, as in GovernanceMetrics International. GMI, the global corporate governance research, ratings and risk analysis provider that announced a merger with The Corporate Library this summer, grew a little more this month. It has merged with Audit Integrity, an independent research firm that rates nearly 20,000 public companies. As a result of the latest merger, the new company will take on the GMI name and introduce a single governance rating that will also take into account environmental, social and governance (ESG) issues. “The single rating will capture each of the three predecessor firms’ unique approaches to evaluating governance risk, and the integrated platform will enable a modular approach to product subscriptions,” according to a company statement. The new company plans to unveil the new single governance rating on July 1, 2011. Richard Bennett, who becomes executive chairman of the new company, stressed the reason for the merger is to provide investors and other stakeholders with the most comprehensive corporate governance ratings and risk services. “Our goal in merging these businesses is to establish the clear leader for corporate governance services,” Bennett said in a statement at the time of the merger announcement. “We recognize the growing importance of corporate governance and the broader set of ESG factors to investors especially.” Following its merger with The Corporate Library in July, GMI updated its ratings metrics for environmental and sustainability issues by addressing such questions as:
  • Does the company specifically disclose its Greenhouse Gas (GHG) emissions?
  • Are specific targets for reducing environmental exposures (e.g. GHG emissions, water use, hazardous waste, toxins, landfill, degradation, spills, etc) disclosed?
  • Does the company have in place a code of conduct (or equivalent) on environmental issues?
  • Has it been alleged by a responsible party that the company caused or substantially contributed to serious environmental damage within the last three years?
These questions are in addition to the 18 the company would routinely ask when coming up with a company’s ESG rating. [For the full GMI rating metrics, click here.] GMI’s approach to integrating ESG and corporate governance issues in one rating may be unique, but it doesn’t mean that others like Institutional Shareholder Services and Glass Lewis are ignoring ESG. In fact, ISS has offered social responsibility investing (precursor to ESG) voting guidelines since 2002 and Glass Lewis has had a working relationship with an SRI research firm since 2006. But to understand the potential impact of the merger of The Corporate Library with GMI and Audit Integrity, you have to understand what it could mean to the governance research and rating marketplace. It could be argued that it would be like ISS and Glass Lewis coming together in the proxy advisory area. Except in the case of this merger, it could be a direction-changer since it could force boards and companies to look more closely at their ESG and risk oversight issues. The reason I say this is that the combination of the progressive Corporate Library with the international cache of GMI with the systems and processes of a forensic accounting risk analysis expertise of Audit Integrity could give ISS and Glass Lewis a true third competitor in the governance research and ratings arena. Of course, ISS and Glass Lewis have gained their reputations primarily as proxy advisors, while GMI sticks to ratings and research. Paul Hodgson, a senior research associate with The Corporate Library, recently compared the merger to the creation of a super rock band, or as he called it the antithesis of the breakup of Phil Collins- and Peter Gabriel-led Genesis band of the 1970s and 1980s. [Read his blog post here.]
“Real fans of British prog rock band Genesis out there will know that that’s when Genesis went catastrophically downhill. Chart success regardless. Phil Collins is all very well, but you can’t lose Steve Hackett AND Peter Gabriel without fatally injuring a group’s talent base. With The Corporate Library, however, the direct opposite is the case. We were two with GMI, and then there were three with Audit Integrity. And if you add Audit Integrity’s international forensic accounting analysis and accounting risk models, tools and technology to the international ESG data and analysis of GMI to The Corporate Library’s domestic capabilities, talent base, and research capabilities then you have a winning combination.”
The interesting issue for companies and boards is that all three governance research and ratings companies have different ratings metrics. The challenge for companies will be whether or not the new GMI can capture more of the marketplace to change the viewpoint of many directors that ISS is the one powerful player to worry about. That has been the mantra at many corporate governance conferences I have attended: “Beware ISS, they may vote you off the board if you abide by their policy voting guidelines.”
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin

     

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