Including corporate governance scores within credit ratings is changing how companies are managed. Experts at the credit rating agencies speculate that companies with poor governance practices will see an increase in their cost of funds and a dramatic change in their access to credit.
Since the Enron debacle, the credit rating agencies have determined that there is more to sound financials than just numbers. News stories divulging tales of outrageous executive compensation packages or unethical self dealings have sounded an alarm for many investors and for the agencies that provide ratings. "I think everyone has really had a wake-up call in terms of what they need to delve into," said executive vice president Kent Wideman of Dominion Bond Rating Service.
Some credit rating agencies provide corporate governance scores, some do not. However, all recognized rating agencies - Moody's Standard & Poor's, Fitch Ratings and Dominion - have introduced or renewed their focus on corporate governance in the scoring process for public companies.
Given the subjective nature of governance issues, there is much at stake for corporations when credit ratings depend on positive reviews from the agencies. Experts at the rating agencies speculate that companies with poor governance practices will see an increase in their cost of funds and a dramatic change in their access to credit, which appears to be agencies' support for a link between corporate governance practices and credit default risk.
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