Standard and Poor’s Elevates Governance as Credit Factor- TBI Comments

In response to your request for comment on Management and Governance Credit Factors, please consider the following.  We are limiting our comments to governance, because that is the area of our expertise.

We are pleased to see your recognition of governance as a critical factor impacting credit and welcome the increased transparency. We welcome your perspective of the importance of qualitative factors, because board effectiveness is driven by both external and internal factors, many of which are determined by the culture and engagement of the board.  These are qualitative factors that can only be measured inside the boardroom.

We believe there is linkage between good boards and corporate success, and, thus, we will argue that boards can either positively or negatively impact an enterprise, certainly on a par with and probably to a greater degree than the other three factors, all of which the board oversees and to which it adds value.

Corporate governance can make a positive difference.  Therefore, we urge that you rate governance as 1) strong, (2) satisfactory, (3) fair, or (4) weak, just as you propose for the other three factors.  As you note,“ If an enterprise has the ability to manage important strategic and operating risks, then its management plays a positive role in determining its operational success” Since the board of directors is responsible for the management of the enterprise, the board, by definition, also plays a positive role in determining its operational success. .

The most important responsibility of a board is to ensure that the right leadership is in place. Further, the board of directors has direct oversight and influence on the other three factors that you enumerate: Strategic positioning, risk management/financial management and organizational effectiveness. These items are regularly included on board agendas in recognition of their importance at the board level. Thus, if those components have a “positive influence” on success, boards, by definition, do as well, and, arguably, to a greater degree.  As you note, “the board of directors is the ultimate decision-making authority.”

We hear about the bad boards.  We do not hear about the hundreds of good boards, whose members enhance strategy, oversee risk and organizational effectiveness; provide critical introductions, select the CEO, guide management, leverage marketing, drive succession, validate the enterprise to the Street, and contribute in numerous, untold, positive and, often, critical ways to the success of the enterprise

Although they are often confused with governance itself, oversight and compliance are only a portion of a board’s responsibilities.

In the same way a board can “substantially weaken an enterprise’s business risk profile,” with direct responsibility for risk mediation, it can very powerfully and positively impact enterprise success.

One reason the linkage between good boards and success has not been fully authenticated is that, until now, there has not been an independent, comprehensive evaluation solution that reflects candid, 360 degree feedback, gained internally as well as externally.  When considering governance effectiveness, we do not believe it is possible to delink the external, quantitative factors from the internal, qualitative factors that drive board performance.  Clearly boards of directors impact credit in a positive way.

Enron continues to provide the best example of a board that was inappropriately rated excellent, because the ratings were determined by external metrics the company chose to reveal to the public markets.  If an independent, comprehensive, easy to use, secure evaluation solution was available through which the truth could be revealed, perhaps the outcome would have been different.

As we know, good governance cannot be legislated.  It is about the people and the culture. We get what we measure, A key measure of good boards is whether they are conducting comprehensive, independent, inclusive and validated evaluations of their performance, that of their committees, and that of their individual directors.

In sum, we commend your credit rating enhancements and urge you to recognize the potential boards of directors have to influence enterprises for good and bad.  Thus, we urge you to rate governance by 1) strong, (2) satisfactory, (3) fair, or (4) weak.

Please let us know if we can elaborate on any of these comments, provide further information, and/or be a resource in any way.  Thank you for your consideration.
The Board Institute offers unique, independent, customizable, easy to use evaluation and educational tools, developed in cooperation with leading governance experts and select partners, including the foundation of Financial Executives Int’l, the Society of Corporate Secretaries and Governance Professionals, and the Director’s Network. Tools include The Board Index™, The Audit Committee Index™, The Compensation Committee Index™, The Governance Committee Index™ and The Director Index™. Reports provide scores, variances, ranges of responses, best practices, regulatory and legal requirements, and anonymous comments.  They can be administered in-house or with the help of consultants.  www.theboardinstitute.com