In the wake of scandals such as Enron and WorldCom, there has grown a vast industry of expensive box-tickers who report on corporate governance and decide if a company passes the necessary tests and reaches the right standards. They also advise shareholders, particularly in the United States, on how to vote at annual meetings. As I said, this is big business; the biggest watchdog changed hands a couple of years ago for half a billion dollars. Executives ignore them at their peril.
Unfortunately, a rather detailed piece of research from one of America's leading business schools suggests that these ratings are almost completely worthless. A team at Stanford Graduate School of Business tracked them against the future performance of the companies being judged. These ratings are claimed to be put together using the most rigorous scientific methods, but the study found “only a tenuous link” between them and future performance. Worse, there seemed to be no relation at all between the governance ratings and the way that shareholders were told to vote. As the report notes drily: “This study is likely to be controversial.”
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