The new series, which is made up of six equity indices for Europe, the euro zone, Japan, the US, the UK and the developed world, is drawn up from 24 developed markets and will rank firms on a scale of one to five, with higher scores awarded to those that are best governed.

“By creating the CGI series we are taking an important first step in creating an accessible framework to assess corporate governance risk within international portfolios,” says Mark Makepeace, chief executive at FTSE. “By adopting an open and phased approach to creating this series, we hope that listed companies and investors will engage with us to increase transparency about corporate governance practices and contribute to the development of a global market standard.”

But, although the series went live before the Christmas break, full publication of company rankings will not be made available until April this year. “First we have to make sure that companies understand their ratings,” Marianne Huve-Allard, director of communication, strategy and corporate social responsibility at the index provider, told epn. “Indeed, the process of awarding scores takes time, especially when you are ranking more than 2,000 companies. We need to make sure that firms are clear about ISS’s conditions for best practice and that they have time to make their case to ISS if they do not agree with their scores.”

In the initial phase, the best 80 per cent of firms will be included in each sector and the worst 20 per cent will be excluded. Because the indices are calculated by sector then one may have much better corporate governance standards than another, meaning some firms may be excluded even though they are performing better than firms in other groups. FTSE argues this removes sector bias.

In Europe, those companies that failed to make the list included Ahold, BMW, Electrolux and Repsol, while in the UK BSkyB, ITV, Marconi and Northern Rock were all excluded.

Companies will be assessed by eight sets of criteria that cover company charter and by-laws, the board, auditing, takeover provisions, executive and director compensation, ownership, director education and progressive factors.

“Our rating system was designed specifically to help investment managers assess the impact corporate governance practices may have on portfolio performance,” says John Connolly, chief executive at ISS. “By adopting an evolutionary and collaborative approach to the CGI series, we are confident that we can deliver a valuable tool to investors worldwide.”
CN

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