GMI Releases Global Governance Ratings Improvements seen but governance risks remain.

New York, February 9, 2004. GovernanceMetrics International (GMI), the corporate governance research and ratings agency, today announced new ratings on 2100 global companies. Twenty-two companies – eighteen American, two British, one Australian and one Canadian - received scores of 10.0, GMI’s highest rating (see below). As a group, these companies outperformed the S&P 500 Index as measured by total returns for each of the last one, three and five year periods by 4.3%, 9.2% and 6.9% respectively. Gavin Anderson, GMI’s President and CEO, said “This is another example of a growing body of research suggesting a correlation between corporate governance and portfolio returns when measured across a number of variables and across a multi-year period.”

On a national level, Canadian companies had the highest overall average rating of 7.6, followed by the United States (7.0), Australia (6.9) and the United Kingdom (6.7). Japanese companies had the lowest overall average rating at 3.0. In Europe, companies from Greece (3.8), Austria (4.0), Portugal (4.0) and Denmark (4.0) had the lowest overall average ratings.

Looking just at the two largest markets rated by GMI, the United States and the United Kingdom, the average rating for the top 100 US companies was 8.0 and the top 100 UK companies was 7.8. In the July 2003 GMI ratings release, these numbers were 7.7 and 7.1, respectively. These improvements are indicative of the governance changes taking place in both markets.

Mr. Anderson said, "While US, Canadian, UK and Australian firms had higher average scores than others, it would be a mistake to conclude that there was little governance risk in companies from these markets. Indeed we are still seeing practices in companies in all four markets that warrant significant shareholder concern. Two examples are a US concern which claims it does not control its overseas operations despite controlling 85% of the voting power of the entity. This same company has had two earnings restatements and its outside auditor recently resigned over management misrepresentations of related-party transactions. In the second example, the Chairman, of a Canadian company, who controls the company with a special class of shares, received almost $25 million last year in special fees for "business consulting and development services." Certainly in the latter case, investors have become much more familiar with this kind of activity in the last few months as managements at some controlled companies enriched themselves at the expense of both shareholders and bondholders.

As part of its rating process, GMI identifies issues of concern to investors and "red flags" companies that are undergoing regulatory investigation, have high potential options dilution, unequal voting rights or other practices that represent a risk to equity or debt holders. Parmalat was one such company GMI flagged in July of last year, months before the Italian company imploded and became Europe’s Enron. In its current universe GMI has issued red flags at 675 companies. The market sectors with the highest percentages of red flags are Technology (56%), Media (50%), Telecommunications (45%) and Healthcare (39%). In addition, GMI identified 211 companies that have taken an unusual and non-recurring charge of 5% or more of revenues in the last year, 190 companies that have been cited or found guilty for a breach of law involving non-accounting issues, and 189 companies that have been subject to a regulatory investigation for a material issue other than an accounting matter.

Another area of concern is compensation. While 1835 companies covered by GMI had a compensation committee, in 414 cases an executive sat on the compensation committee. In 59 instances, it was the CEO. Of particular interest today also is director independence, and the question of whether board leadership comes from a combined Chairman/CEO or an independent Chairman or lead outside director. In this latest ratings release, GMI found that in just the last six months there has been a significant shift. While the total number of independent directors increased marginally from 56.1% to 57.5%, the number of combined Chairman and CEO positions fell from 47.3% to 41.6%, the number of independent chairman grew from 13.2% to 21.2% and the change in the number of lead directors jumped from 23.3% to 33.4%. Fifty percent increases in six months is a very significant change and were found not only in the United States, but also in Europe and Australia.

Since initiating its ratings service in December 2002, GMI has seen noticeable changes in the governance practices at companies—particularly in the S&P500 companies, the group that has been monitored the longest. Companies that have moved the most in ratings because of improved practices include: Alberto Culver, Fannie Mae, eBay and UPS. This is not to suggest that improvements still cannot be made at these companies but it is clear that positive change is afoot. Conversely, Bristol Myers Squibb, Symbol Technologies and Halliburton have declined markedly from their first ratings in December 2002. Mr. Anderson noted however that "GMI’s ratings are relative and a company’s score may fall simply because others are making greater changes. Mr. Anderson also said that GMI’s ratings are meant to highlight progressive governance practices as well as governance risk. "Take a look at Pfizer, for example. It was one of the five S&P 500 companies rated 10.0 in GMI’s original December 2002 release. It was one of 18 companies rated 10.0 in our July 2003 release, this time covering 1,610 companies worldwide. In the current release, when compared to an even larger pool of 2,100 companies, Pfizer continues to achieve the highest rating assigned by GMI. In 2003, the company moved to end its poison pill and to elect directors annually rather than in a staggered board structure. While these changes probably do not make Pfizer any more vulnerable – its sheer size serves as a potent takeover defense – they are a clear recognition of the company’s commitment to shareholder rights and progressive governance, and thus reflected in our ratings," said Anderson.

GMI’s rating system incorporates hundreds of data points across six broad categories of analysis: board accountability, financial disclosure and internal controls, executive compensation, shareholder rights, ownership base, takeover provisions, plus corporate behavior and social responsibility. Subscribers to GMI are able to view a company’s overall rating, section ratings and several pages of written analysis. GMI clients include leading pension funds, investment managers, banks, insurance companies, professional service firms in the United States and Europe.

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