Who is watching those who watch (and rate) corporations on governance practices?
Stanford Professor Jeffrey Pfeffer is one, and he writes about the governance ratings rage in Business 2.0 (which Time, Inc. has unfortunately decided to shutter). It’s a big business: one of the leading companies, Institutional Shareholder Services, has 601 employees in nine countries, and was acquired by RiskMetrics for an amount north of $500 million.
Professor Pfeffer (say that three times fast) raises a concern about one aspect of the process:
The first is a kind of “check the box” mentality that has arisen from the process of evaluating boards. ISS has some 65 rules and guidelines – that the board chair and the CEO be different people, for example – and companies that enlist ISS’s services are often tempted to simply conform to these guidelines to raise their scores.
Ask someone who has worked through thorny governance issues, and you may discover this: often the core challenges revolve around interpersonal relationships (board/CEO or CEO/C-level executives), the flow of timely information, and interpreting lofty goals in concrete terms. Voluminous policies and practices can help, but don’t guarantee that personnel won’t be tempted by short-term pressures to make the wrong long-term decisions.
Ratings can bring a needed focus on governance. But right after covering all the bases with your program, you still need to focus on the daily dance of doing the right thing.