Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences

13. Corporate Governance Ratings

Governance ratings are a relatively new industry in which consulting companies develop quantitative metrics that claim to measure the effectiveness of a company’s governance system. The inputs in these models are based on governance attributes that we have discussed throughout this book, including the structure of the board, elements of the executive compensation plan, antitakeover provisions, and similar features. Interviews with firms suggest that both executives and board members feel pressured to change their policies to increase their governance ratings. However, the question remains whether this industry improves governance outcomes or creates value for shareholders.

In this chapter, we discuss the methodology ...