The existence of strong internal controls and adequate oversight of management are just as important to creditors as they are to equity investors.
These days, more and more people are asking: "What role does corporate governance play in credit ratings?" Generally speaking, corporate governance is thought of as a way to ensure the rights and address the concerns of equity holders, not creditors. Holders of a company's debt obtain their rights and
remedies through contractual terms used to create a debt instrument. Shareholders' rights, although formally dependent upon the provisions of a company's charter and bylaws, are made truly effective through the quality of the board of directors' oversight of management--the core subject matter of
corporate governance. But effective corporate governance is just as important for creditors that have as significant an interest in the existence of strong internal controls, adequate oversight of management, and appropriate incentives as equity investors, because these factors all serve to ensure the long-term stability of the enterprise.
Consequently, Standard & Poor's Ratings Services is interested in the changing ownership profiles of rated companies, the independent strength of a company's board of directors, their awareness of management's risk appetite, and attentiveness to the various constituencies that contribute to a balance
sheet--each of which will have their own preferences for power and influence over corporate decision making. Standard & Poor's overall approach to corporate governance is rooted in twin beliefs: that analysis of governance should be wholly integrated into credit ratings and that it should be viewed on a risk-adjusted basis.
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