Rating corporate governance

2003

Standard & Poor's, who provide investment research, indices and credit ratings to the world's financial markets, has assigned its first corporate governance score (CGS) to a US company.

Washington-based Federal National Mortgage Association (Fannie Mae), the USA’s largest provider of housing finance, and its second-largest company by assets, scored a CGS of 9.0, indicating that the company’s governance practices are judged to be very strong.

The CGS scale runs from CGS-1 (lowest) to CGS-10 (highest). The scores reflect Standard & Poor's assessment of a company's corporate governance practices and policies and the extent to which these serve the interests of the company's financial stakeholders, with an emphasis on shareholders' interests.

Standard & Poor's introduced Corporate Governance Scores in the US market in late 2002. It has been conducting corporate governance evaluations globally since 2000. These are carried out in the context of criteria that are globally relevant, but which also can accommodate local governance philosophies and conditions in individual jurisdictions.

"This score marks an important development in bringing greater transparency about corporate governance to US investors," said Andrea Esposito, Managing Director for Governance Services at Standard & Poor's in New York.

"In the wake of last year's governance breakdowns, investors are recognizing increasingly that corporate governance is an important risk factor, and are demanding higher governance standards and the ability to have a clearer understanding of the relative strengths and weakness of individual companies' governance practices.”

By being the first US company to publish its governance score from Standard & Poor's, Fannie Mae is not only demonstrating its own strong governance practices, but is also showing leadership in the US with regard to providing greater openness and disclosure about its corporate governance standards."

Fannie Mae scored strongly or very-strongly in each of the four areas Standard & Poor's reviews as part of the Corporate Governance Scoring process: ownership structure and influence; financial stakeholder rights and relations; financial transparency and information disclosure; and board structure and process.

The company scored highest for its board structure and processes; it has a highly independent board, with strong and recently formalized leadership for its non-executives and notable strengths among its committees. In the area of financial disclosure, despite the company's historical exemption from registering and filing disclosures with the SEC, Fannie Mae's voluntary disclosures generally meet and in some cases exceed those of its SEC-registered peers.

Under ownership rights and stakeholder relations, the company's strengths include an unclassified board, a positive shareholder proposal policy, and shareholder-friendly provisions that allow owners to convene special shareholder meetings. Weaknesses include shareholders' inability to vote for the five Presidentially appointed directors given the company's unique corporate status as a government-sponsored entity.

Finally, Fannie Mae's ownership structure and influence was judged strong because, as a widely held company with small management and director shareholdings, conflicts of interest or undue influence from stakeholders were assessed as unlikely.

The entire analytical process involved considerable interactive discussions with Fannie Mae's senior executive management and board directors.

Standard & Poor's CGS scores are comparable on a global basis, as they reflect the actual governance practices of companies, irrespective of law, securities and other regulations, and accounting requirements. Companies may choose to adopt governance practices that exceed those required by the SEC or the exchange, and this is reflected in the scores.

Companies that contract Standard & Poor's to undertake a corporate governance evaluation can decide whether or not to make the score public.

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