Governance Matters
Corporate Governance Quotient
CGQ
W W W . I S S P R O X Y . C O M
Corporate Governance Ratings
Governance Matters
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Growing interest among investment community
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Quantitative tool for assessing performance
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Several models now available
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ISS’s Corporate Governance Quotient (CGQ) ranks
approximately 7500 companies
EAFE Index coverage starting July 2003
WWW.ISSPROXY.COM
Uses of CGQ Scores
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Equity Research--Predictive Modeling
D&O Insurance--Risk Assessment
Shareholder Activism
WWW.ISSPROXY.COM
Governance Matters
CGQ – General Electric Company
Governance Matters
Two Ratings—Relative to Market Index and Industry Group
WWW.ISSPROXY.COM
General Electric Case Study
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Governance Matters
Improved board/committee independence
Instituted stock ownership guidelines for executives
Prohibited stock option repricing without prior shareholder approval
Disclosed information about CEO succession plan and board
performance reviews
WWW.ISSPROXY.COM
Corporate Governance Quotient (CGQ )
Today, more than ever, investors are concerned about the quality of corporate governance
and how it might affect portfolio performance. This widespread view that ‘governance
matters’ necessitates the creation of metrics that allow investment managers to quickly
and accurately identify the relative performance of companies vis a vis their governance
structures.
Provided by Institutional Shareholder Services, the leading provider of proxy voting and
corporate governance data services, the Corporate Governance Quotient is a rating tool
that assists institutional investors in evaluating the quality of corporate boards and the
impact their governance practices may have on performance.
Ratings are calculated on the basis of eight core categories, including: 1) board of
directors, 2) audit, 3) charter and bylaw provisions, 4) laws of the state of incorporation,
5) executive and director compensation, 6) qualitative factors, 7) ownership, and 8)
director education. ISS analyzes 61 data points to derive each issuer’s rating. 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. Approximately 7500 companies, including
all of the Russell 3000 Index, are scored daily and are ranked relative to market cap and
their industry peer groups.
Source data is derived from public disclosure documents, press releases, and corporate
websites, then reviewed and verified by ISS’s corporate governance analysts. ISS
continually analyzes 61 variables related to the corporate governance structure of each of
the 7500 companies in its CGQ universe. A complete list of CGQ variables is available
at http://www.isscgq.com
ISS encourages issuers to use a specially-designed web portal (http://www.isscgq.com) to
submit any material changes related to corporate governance structure, policies and/or
procedures. All updates submitted by issuers are date-stamped and the information
verified by ISS analysts within two business days.
Corporate Governance Quotient (CGQ )
Today, more than ever, investors are concerned about the quality of corporate governance
and how it might affect portfolio performance. This widespread view that ‘governance
matters’ necessitates the creation of metrics that allow investment managers to quickly
and accurately identify the relative performance of companies vis a vis their governance
structures.
Provided by Institutional Shareholder Services, the leading provider of proxy voting and
corporate governance data services, the Corporate Governance Quotient is a rating tool
that assists institutional investors in evaluating the quality of corporate boards and the
impact their governance practices may have on performance.
Ratings are calculated on the basis of eight core categories, including: 1) board of
directors, 2) audit, 3) charter and bylaw provisions, 4) laws of the state of incorporation,
5) executive and director compensation, 6) qualitative factors, 7) ownership, and 8)
director education. ISS analyzes 61 data points to derive each issuer’s rating. 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. Approximately 7500 companies, including
all of the Russell 3000 Index, are scored daily and are ranked relative to market cap and
their industry peer groups.
Source data is derived from public disclosure documents, press releases, and corporate
websites, then reviewed and verified by ISS’s corporate governance analysts. ISS
continually analyzes 61 variables related to the corporate governance structure of each of
the 7500 companies in its CGQ universe. A complete list of CGQ variables is available
at http://www.isscgq.com
ISS encourages issuers to use a specially-designed web portal (http://www.isscgq.com) to
submit any material changes related to corporate governance structure, policies and/or
procedures. All updates submitted by issuers are date-stamped and the information
verified by ISS analysts within two business days.
ISS Corporate Governance Quotient
Ratings Criteria
Note: Some of the ratings factors are also looked at in combination under the premise that
corporate governance is enhanced when selected combinations of these criteria are adopted.
Board
1
Board Composition
2
3
4
5
6
7
Nominating Committee
Compensation Committee
Governance Committee
Board Structure
Board Size
Changes In Board Size*
8
Cumulative Voting
9
10
11
12
13
14
15
16
17
Audit
18
19
Boards Served On – CEO
Boards Served On – Other Than CEO*
Former CEO’s
Chairman/CEOs Separation
Board Guidelines
Response To Shareholder Proposals
Board Attendance*
Board Vacancies*
Related Party Transactions*
Audit Committee
Audit Fees*
20
Auditor Rotation*
21
Auditor Ratification*
60
Charter/Bylaws
22-27
28-29
30
31
32
33
State of Incorporation
Takeover Provisions Applicable Under
33-40 State Law - Has Company Opted
Out?
Executive and Director Compensation
41 Cost of Option Plans
42-43 Option Re-pricing
44 Shareholder Approval of Option Plans
45 Compensation Committee Interlocks
46 Director Compensation
Pension Plans For Non-Employee
47
Directors
48 Option Expensing*
49 Option Burn Rate*
50 Corporate Loans*
Qualitative Factors
51 Retirement Age for Directors
52 Board Performance Reviews
53 Meetings of Outside Directors
54 CEO Succession Plan
55 Outside Advisors Available to Board
56 Directors resign upon job change
Ownership
57 Director Ownership
Executive Stock Ownership
58
Guidelines
59 Director Stock Ownership Guidelines
Features of Poison Pills
Vote Requirements
Written Consent
Special Meetings
Board Amendments
Capital Structure
Officer and Director Stock Ownership
Director Education
61 Director Education
* = New variables that will be included within CGQ prior to year-end update.
For More Information…
Mark Brockway • 301-556-0404
mark.brockway@issproxy.com